Caveat emptor rules in derivatives too

Sir, Mr Harvey L. Pitt in “Subprime confusion that leads to a lack of confidence” June 18, (graciously?) agrees with “loan modifications” in individual mortgages that allow subprime debtors a better chance to service their mortgages, but lashes out at “market manipulation” that artificially alters the underlying cash flow to credit protection buyers, which could happen either by supplementing or replacing these flows. Mr L. Pitt sounds very much like someone who has just discovered a small print clause that shows there is risk in risk coverage too, and I guess he is just a trailer for the avalanche of surprised investors we will soon see as a consequence of the boom in the hide-and-seek-risks game provided by hedge funds, primarily through derivatives. Since Mr L. Pitt mentions he was a Chairman of the Securities and Exchange Commission (2002-2003) he should be quite familiar with the term Caveat emptor. Next time he takes a position in these derivatives he might choose one that does not allow for these specific set of “market manipulations” but he could then also discover that any risk coverage this way comes with a quite different price tag attached.