Derivatives - Threat World Economy (bankruptcy, credit, money, financial)

[Norm Barnes]

An Excerpt from Research done in 2003 -- Credits to Author Last Line:
““FINANCIAL POLICY FORUM ———
DERIVATIVES STUDY CENTER
FINANCIAL POLICY FORUM 1660 L Street, NW, Suite 1200
rdodd@financialpolicy.org Washington, D.C. 20036

Another fundamental point is that market risk can become credit risk, as evidenced by the new data which shows large increases in credit exposure for U.S. banks that act as dealers or market makers in OTC derivatives markets.

Consider the overall numbers on the volume of activity. Total derivatives holdings of U.S. banks reached $65.8 trillion (or $65,800,000,000,000) – up 31.4% from a year ago. Of this total, 96% is held by the largest 7 banks – J.P. Morgan Chase ($33.7 trillion), Bank of America ($13.8 trillion), Citibank ($11 trillion), Wachovia, Bank One, HSBC, and Wells Fargo.

The credit losses by banks on their derivatives trading business – that is default-type losses due to performance failure or bankruptcy – have now totaled $686 million in the two years (eight quarters) since Enron began to collapse in October of 2001. [1] The good news is that such losses have slowed to $55.2 million in the first half of this year after losses of $237 million in 2002 and $395 million in 2001.””

Source: "New Derivatives Data Shows Increased Credit Risk" Author Randall Dodd Director Financial Policy Forum September 17, 2003

Is the Bank Bailout a derivative now being sold to the US Public. It still is positively necessary but let us acknowledge the risk and get away from this speculation or have them offered at a casino at least where we can recognize the level of risk.

[GregW]

I cannot help but marvel at the foolishness of a bank lending any money to this nest of gamblers. That they leant so much is astounding. They literally bet the bank. After a string of wins they lost and lost big. They should have let the gamblers play with their own money not the depositors’.

I thought these guys went to prestigious business schools where they were taught by learned and experienced professors to use the most sophisticated business and economic models to make logical and prudent use of the money they held in trust. What happened? Were these people asleep or were they misinformed. Our business community had better teach the next generation that some favors come at too high a price.

[Nor'Eastah]

Originally Posted by GregW

I thought these guys went to prestigious business schools where they were taught by learned and experienced professors to use the most sophisticated business and economic models to make logical and prudent use of the money they held in trust. What happened?

Computers are what happened. The first generation brought up to learn on computers all through school (what Jim Sinclair calls "the geeks") made up all these computer equations and algorhythms that were thought to be sophisticated at the time. No one had any clue what was actually going on. It was thought too complex for anyone (except a computer) to understand.

Now that complexity is coming back to bite us in the butt. Nobody knows exactly how much money is loose out there (thought to be as much as a $quadrillion), how much of it is good, how much of it is toxic, and how much of the good the toxic will bring down with it.

A fine kettle of stew we are in!

[jimj]

What cracks me up is all the so-called experts that are railing about how they saw this coming but you didn't hear nary a peep out of anyone in the last couple of years. There should have been at least a few of these egg heads screaming from the roof tops that all this was coming.
Had some of these "officials" gone on national news months ago some of this disaster might have been reduced.

[Oildog]

Comes down to greed. Guys who are willing to push/exceed safe limits to get the extra bonus. Along with little fear of punishment or consequence should one fail.

[jimmyP]

Originally Posted by jimj

What cracks me up is all the so-called experts that are railing about how they saw this coming but you didn't hear nary a peep out of anyone in the last couple of years. There should have been at least a few of these egg heads screaming from the roof tops that all this was coming.
Had some of these "officials" gone on national news months ago some of this disaster might have been reduced.

Even someone as smart as Alan Greenspan said that derivatives were actually helping the global economy by spreading risk around to many parties. Even the master of the hyperbole completely missed this one.

[Aro2220]

Warren Buffet was screaming about how these derivatives were economic time bombs.

Only people who bet things on derivatives were going on about how great they are...for obvious reasons.

And if someone went on tv a few months ago about this, it would have just caused an even bigger problem a few months ago.

Right now people are still of the feeling that things will return to normal pretty soon.

The problem is that the underlying problem; these derivatives are still here. And all the money in the world can't pay for them.

HERE COMES INFLATION!

[HappyTexan]

Originally Posted by jimj

What cracks me up is all the so-called experts that are railing about how they saw this coming but you didn't hear nary a peep out of anyone in the last couple of years. There should have been at least a few of these egg heads screaming from the roof tops that all this was coming.
Had some of these "officials" gone on national news months ago some of this disaster might have been reduced.

They were shunned by the MSM. They were dismissed by their peers.
They were the in the minority and pushed off to the side.
They've been warning about this for at least 2 years now.

Notice Roubini is being mentioned alot more these days ?

Here ya go..in 2006. Roubini's predictions were laughed at.
http://www.nytimes.com/2008/08/17/ma...l?ref=business