One More Systemic Risk to Worry About

Highly leveraged shadow banks could potentially cause another crisis if interest rates rise. One of them figured out to how to hedge that risk.

Borrowing lots of money overnight to buy long-term assets is a great way to blow up the world economy. That's why everyone from Federal Reserve Governor Jeremy Stein, to the International Monetary Fund, to Financial Times columnist Gillian Tettis worried about the systemic danger posed by mortgage real estate investment trusts, which collectively own about $500 billion in assets, according to the IMF. The good news is that this risk can be reduced with the help of a little financial engineering.

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