CHAPTER 3
Elephants in the Kiddie Pool
Various new financial products aided the 1980s stock boom, one being a new type of unregulated contract called a swap. Negotiated privately between two parties—called the over-the-counter market to differentiate from contracts cleared by an exchange—swaps offered financial mirrors of the contracts traded on the Chicago Board of Trade or other bourses. A key difference was that these contracts were unregulated, giving institutional investors and pensions a way to invest in raw materials without hitting the U.S. Commodity Futures Trading Commission's (CFTC's) limits.
The principle behind a swap is similar to the decision a homeowner makes when choosing an adjustable-rate mortgage or fixed-rate one. In a swap, ...
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