This is why I get so frustrated with this stuff. It's people like this, who just read CNN articles, or a blog, that have no idea, but are mislead so horribly.
I laugh at your "words, so many words". What that tells me is that you have no interest in actually learning, but a lot of interest in propagating bullcrap.
Derivatives are *completely* different from bonds. You need to bifurcate this situation from RMBS.
Unless you do a synthetic CDO/CLO transaction, which uses derivatives, but are *very* rare (probably less than 100bn). The subprime RMBS issue is based off of a projected payment stream, a mortgage, that is then packaged into bonds. The payment stream is as solid as a mortgage payment and there are plenty of legal structures in place for that, assumptions are taken for non-payment (defaults) based on historicals. The historicals are having problems right now because things are so odd. However, for pretty much everything else but the most extreme subprime, the projections are accurate and are being proven true even now.
The mortgage problem is with *mortgages*. I see plenty of other asset classes that are fine.
Now, derivatives, money isn't being moved around, it isn't borrowed against. It's a way to hedge risk, have price discovery, and transact in a commodity. There is no wealth created or lost on the "nominal" amount. Money is transacted in the marginal amounts of "netted" settlements.
I laugh at people who scorn this practice to the largest extent.
But why is there this hugely inflated "notional" value, $500+ trillion, to begin with if that sum isn't real? Do people inflate the values of their transactions? The inflation in that "notional" sum must come from somewhere.
It isn't inflation.
If you read my explanation, you'd realize where it comes from.
For example, lets say I need to sell $100MM in wheat in 6 months, I want to lock in the price today, so I enter into a contract to sell that wheat for $100MM in 6 months. Somebody, who may or may not be looking to buy wheat in 6 months, will take the opposite side of the contract.
Lets say that that person doesn't want the wheat in 6 months, but instead used the wheat contract to hedge against agriculture inflation. At 6 months the price of wheat on the open market is $106, but since the person doesn't want wheat, they settle in cash. Thus, the person who wants to sell the wheat sells it in the open market for $106MM, then pays the person who doesn't want the wheat $6MM.
Thus, what exchanged hands was far smaller than the amount of the "notional" value. Somebody still wanted to hedge exposure to $100MM in wheat and they did, that's why they used it for that amount.
Now, if somebody really wants to hedge against wheat prices *and* wants to take delivery, then they use the contract for that amount.
The notional amount is only an relative value for what you want to hedge or speculate against. Keep in mind that this is a zero-sum game, somebody wins and somebody loses, but the base of the cash transacted will always be $0 in total.
I use interest rated hedges all of the time. I also use currency hedges, which together make up a huge part of the market.
Farmers use derivatives all of the time. Hell, some even use weather derivatives these days to hedge against drought.
The Shiller index has derivatives for people who have taken risks in houses, they use derivatives to hedge against losing money.
Credit Default Swaps are derivatives that can be used to hedge against default events. For example, if I have $100MM at risk against GE that I might lose if they go bankrupt, I could buy a CDS to hedge that risk. If they default I would get paid say $5MM, but the $100MM is only used to index my total exposure, not to transact in the amount.
It's all about what you need to index against, what exposure you need to offset, but the risk inside of that exposure is much smaller than the whole exposure.
http://www.berkshirehathaway.com/reports.html
personally i always like to go to the source, especially buffett whos explains subjects simply, just select the 2002 annual report
he eloquently states the problem namely enron which mistated earnings because derivatives are hard to calculate
and the other problem being connecting companies together due to diversification of risk?? thus how the 2% becomes a problem for others.
it's not so much the simple case as legendkiller states which buffett supports, but miscalculating the risk and leading to the downfall of not only itself but others.
personally i always like to go to the source, especially buffett whos explains subjects simply, just select the 2002 annual report
he eloquently states the problem namely enron which mistated earnings because derivatives are hard to calculate
and the other problem being connecting companies together due to diversification of risk?? thus how the 2% becomes a problem for others.
it's not so much the simple case as legendkiller states which buffett supports, but miscalculating the risk and leading to the downfall of not only itself but others.
Enron had almost nothing to do with derivatives and almost everything to do with using off balance sheet treatments to hide bad debt, derivatives, and bad investments. If there had been no problems with Pre-FAS 140 accounting there'd have been no Enron.
Again, the connecting of companies only matters in the realm of $516TR if that risk is *actually* $516TR. However the risk is only *INDEXED* to $516TR. The actual exposure is *FAR* less than that.
It is that simple.
You seem to have a habit of parading around these forums on your high horse, using verbose and highly technical language to show that you are Grand Master of Finance, and the rest of us are peasant folk. Pardon me for oversimplifying a concept for the 99% of us who have less knowledge and less arrogance than yourself. I will return my money to the safety of my mattress, sir.
The most rational thing you've said so far. The financial industry is very diverse, and each product was at some time designed to be, in some way, more advanced than its predecessors, or structured to target some niche. Mortgage-based products happen to be in the news right now for breaking down, but contrary to the talking heads with the news ticker, of course world+dog are not all losing their shirts.
Aaand you lost it. Kudos to you if you are able to make a living out of it, but complex isn't always better, and few people want the headache.
A lot of people who I talk to use words that I don't understand, or concepts I have no clue about. I don't pretend to tell my friend who has 2 masters degrees in nuclear engineering, that nuclear reactors are all dangerous. I *ask* questions, I probe for answers, if he tells me something I don't know, I ask him to explain it.
I only use verbose language to break things down and explain them well. I also like well-rounded posts, not bullshit one-liners. Excuse me for not adhering to 99% of what idiots post on the internet, I'll try harder to be more half-assed.
If you need something simplified, ASK. However, people like to parade around here thinking they *DO* know a lot and spread a bunch of FUDD that isn't needed. Then, when corrected, STILL parade around like they know what they are talking about. Perhaps to avoid the stigma of a "know it all", I should draw stick figures and treat you like an ape who can't learn on his own?
I don't really care if you put your money in a coffee can, it's your fault for not being educated. What's funny is that that's exactly why you don't understand what I am talking about, yet pretend to be able to speak at any length about it.
There goes LegendKiller missing the forest for the trees again.
The value of derivatives has increased 5 fold in 5 years and unless assets also increased by 5 folds derivatives are a hell of a lot more complex then two parties hedging risk. In fact that maybe the worst model you could come up with. The problem with derivatives is when the counter parties can't pay up and the chain of derivatives blows up.
And there goes smack down trying to interject where he has no knowledge or understanding.
If the market "blows up" the actual exposure is far less than $516tr, it's probably more on the order of 50-100bn in realistic terms.
The mischaracterization of this is akin to people thinking that trillions will be lost in this whole subprime fiasco, when, in fact, the max exposure is probably about 500bn. That's a lot of money, but not world ending.
From LK-
Obviously true, but the amounts involved, even at that, are staggering. Even at 1% of the indexed figure, that's $5.16T, a sum that dwarfs the $200B not-really-a-bailout (if you believe in fairytales) that the Fed is offering up to the banking industry.
Nobody really knows how much of that indexed figure is in real estate hedging, either, where your previous example of .1% interest rate difference loses all meaning when put up against much wider market swings than that, and whole segments of the investment industry are built on leveraged hedging. That's how some hedge funds posted such phenomenal gains in the real estate runup, and why their losses will likely be just as dramatic.
In certain respects, derivatives are like horse racing- the amount wagered on the race can be many, many times the purse of the winner, and can be done on credit, too... rather than mitigating risk, they can amplify it.
Obviously true, but the amounts involved, even at that, are staggering. Even at 1% of the indexed figure, that's $5.16T, a sum that dwarfs the $200B not-really-a-bailout (if you believe in fairytales) that the Fed is offering up to the banking industry.
Nobody really knows how much of that indexed figure is in real estate hedging, either, where your previous example of .1% interest rate difference loses all meaning when put up against much wider market swings than that, and whole segments of the investment industry are built on leveraged hedging. That's how some hedge funds posted such phenomenal gains in the real estate runup, and why their losses will likely be just as dramatic.
In certain respects, derivatives are like horse racing- the amount wagered on the race can be many, many times the purse of the winner, and can be done on credit, too... rather than mitigating risk, they can amplify it.
Nemesis 1
Lifer
- Dec 30, 2006
- 11,366
- 2
- 0
Ya know you learn every day, I just couldn't undrestand why the Fed and rep. Got so excited about the start of this thing. The Feds actions kinda went against the evil bastards I jnow they are. That bothered me. But after reading this . I think I get it. The Fed and other central banks have to capture these derivatives or the black market well leveage them out of THEIR money. Now things are a little more clear . The central banks got bit by there own bug. Leveraging.
This is a change for me . Now I have a horse in this race. GO black market go . Leverage these bastards.
This is a change for me . Now I have a horse in this race. GO black market go . Leverage these bastards.
Nemesis 1
Lifer
- Dec 30, 2006
- 11,366
- 2
- 0
The central banks are going to repackage these things . Trying to get the good stuff for themselves or lose it to a blackmarket that would be gaining strength if this article is true. I hope it is. If the central banks can be exposed to loss and pain. Than we have leverage to bring about obamas change. I am going to look into buying some of these toxic assetts.
If I can steal money from central banks I will do it in a heart beat. If this can be done. Its something I have to follow up. What I have can't hurt them . But if I can hurt them a tiny whinney I will go all in.
If I can steal money from central banks I will do it in a heart beat. If this can be done. Its something I have to follow up. What I have can't hurt them . But if I can hurt them a tiny whinney I will go all in.
I hope none of youse guys are bookies.
As I understand it (which is always subject to debate) potential losses may be in the $3-$4 trillion range but are likely to be 10-20% of that ...
It's still a big chunk of change.
I like WB and his 'Financial WMDs' label but all good bookies 'hedge' their bets ...
As I understand it (which is always subject to debate) potential losses may be in the $3-$4 trillion range but are likely to be 10-20% of that ...
It's still a big chunk of change.
I like WB and his 'Financial WMDs' label but all good bookies 'hedge' their bets ...
It's amazing how the government let these financial products get out of control without doing anything about them.
not sure why more people don't actually learn from LK's posts instead of debate them, but that's the internet for you
LK - wouldn't you say the average 'hedge' on a typical transaction like this is in the 1% range? I'm just curious how you are saying 'only' 500B is truly at risk here.
LK - wouldn't you say the average 'hedge' on a typical transaction like this is in the 1% range? I'm just curious how you are saying 'only' 500B is truly at risk here.
The actual VaR (Value at Risk) is very minimal compared to the indexed value of the security, then you factor in the basic and nakedly truthful fact that for every one security you can have multiple back to back transactions laying off, and taking, risks. Thus, the real VaR is often far less than what the reality of the situation is.
As I have said multiple times, this stuff will mostly work itself out. Warren Buffet is actually making a decent amount of money playing the VaR game right now.
I've thought the same thing. These things don't need to be that complex, they just get more and more complex as companies try to find new innovative smoke and mirror ways to make money.
Madoff is a former chairman of the NASDAQ.
Paulson is a former chairman of Goldman Sachs - as Treasury Secretary, he gave money to Goldman & AIG - some of which AIG turned around & gave to Goldman.
Cheney is a former chairman of Halliburton - who as VP gave no-bid contracts to Halliburton.
eventually it will become less amazing.
Nemesis 1
Lifer
- Dec 30, 2006
- 11,366
- 2
- 0
Obama is helping FED(International bankers) get even more control over AMERICA!
Look out if this happens.
http://www.msnbc.msn.com/id/29847658/
Man the Central banks want these derivatives bad. Hay guys these things might be good insurance policy against the fed and central banks. May buying these things is the smart move. As you can see the Fed wants more power to get hold of these things.
OK an Old saying. Go were the smart money goes. When it comes to money these central bank asswipes do know how to take advantage od situasions. May the public should buy these up. If the central banks want them so bad . Their pushing new power laws threw to get at these so called toxic derivatives. May these things aren't so toxic and infact take leverage away from the central banks. Good for US . Bad for them .
These new pushes for more power by central banks. Goes along with what I been saying . But it never made since until you tie all that leveraging power together. Than you relize . Its the central banls these derivatives are toxic to not US. Its them . If someone else were to attain enough of these TOXIC Wastes Barbage you would have leverage over the central banks. They(Central banks) need to get control of these things . Now for me the puzzle is a bit more clear . but some key piecies still missing.
Look out if this happens.
http://www.msnbc.msn.com/id/29847658/
Man the Central banks want these derivatives bad. Hay guys these things might be good insurance policy against the fed and central banks. May buying these things is the smart move. As you can see the Fed wants more power to get hold of these things.
OK an Old saying. Go were the smart money goes. When it comes to money these central bank asswipes do know how to take advantage od situasions. May the public should buy these up. If the central banks want them so bad . Their pushing new power laws threw to get at these so called toxic derivatives. May these things aren't so toxic and infact take leverage away from the central banks. Good for US . Bad for them .
These new pushes for more power by central banks. Goes along with what I been saying . But it never made since until you tie all that leveraging power together. Than you relize . Its the central banls these derivatives are toxic to not US. Its them . If someone else were to attain enough of these TOXIC Wastes Barbage you would have leverage over the central banks. They(Central banks) need to get control of these things . Now for me the puzzle is a bit more clear . but some key piecies still missing.
TRENDING THREADS
-
Discussion Zen 5 Speculation (EPYC Turin and Strix Point/Granite Ridge - Ryzen 9000)- Started by DisEnchantment
- Replies: 25K
-
Discussion Intel Meteor, Arrow, Lunar & Panther Lakes + WCL Discussion Threads
- Started by Tigerick
- Replies: 24K
-
Discussion Intel current and future Lakes & Rapids thread- Started by TheF34RChannel
- Replies: 23K
-
-
Facebook
Twitter