I am reading an interesting and timely book on the current credit crisis; The Trillion Dollar Meltdown. I will update with my thoughts on the book when I am done with it, but I wanted to comment on 1 particular element presently…

There have been several theories on why the 1987 crash happened, but it seems that at least 2 books agree that it was due to ‘everybody using Portfolio Insurance’. The other book was Bookstabber’s Demons of our Own Design (which I quite enjoyed). Essentially, some smart folks came up with portfolio insurance. It worked well for them, they started selling it as a service to other firms. Soon enough, everybody was doing it. When the portfolios started hitting their floors, there was a fantastic circular reaction between markets that were now interconnected via portfolio insurance programs all over the street. Downward spiral ensues. Money disappears, etc.

I just thought it was noteworthy that this is the 2nd book that said outright that the basic issue was primarily portfolio insurance.

-Chris

PS - I am wondering if CPPI (zero coupon bonds usually involved) vs the futures technique referred to in the case of the ‘87 crash are the same? Is CPPI an evolution of that portfolio insurance? Always more to learn.

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