The recent speech by Jeremy Stein a Federal Reserve Governor brought on board just last year,received a lot of
attention for its suggestion that monetary tools might be used in addressing credit market-overheating. That is an interesting argument, but I don’t want to deal with that today. Rather, I want to look at Stein’s comments on collateral transformation:
Collateral transformation is best explained with an example.
Imagine an insurance company that wants to engage in a derivatives transaction. To do so, it is required to post collateral with a clearinghouse, and, because the clearinghouse has high standards, the collateral must
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