Derivatives the new 'ticking bomb'

[Razorwing]

Thanks for the info on this D. Everyone should read that article then promptly change your shorts.
Derivatives are the new ticking time bomb - MarketWatch

 

[Kieran]

Thanks for the info on this D. Everyone should read that article then promptly change your shorts.
Derivatives are the new ticking time bomb - MarketWatch

I am no expert but i have the layman knowledge of derivates. It is something you have to know. All people who work in offices of major corporations much have a knowledge on this subject.

Anyway it is fully explained on that site. But if we have that type of scenario, all gloves are off guys... The world economy would be just a basket case, with no bread left!

 

[Razorwing]

Here is another article. At the bottom of it you will find more links relating to the same subject. Pay close attention to the fact that most banks keep their derivatives off the books and that is just about nobody in the world understands them. I think what they mean is that since they are kept secret by the banks its impossible to track or see who owns how many so their full impact on a company and on the market is impossible to be analyzed. More after the jump.

George Washington's Blog: The Derivatives Market is Unwinding!

The subprime mortgage crisis is bad, and is hurting many people, and slowing the economy. High oil and food prices are bad, and are hurting many people, and bringing down the economy. But -- according to top insiders -- derivatives are the elephant in the room . . . the single largest threat to the U.S. and world economy.

One reason is that, according to Paul Volcker, the former chairman of the Federal Reserve, the entire modern financial system is based upon derivatives, and the financial system today is entirely different from the traditional American or global financial system because derivatives - a relatively new concept - now underly the entire fabric of the financial system. In short, many of the people who know the most about derivatives say that the current system is a house of cards built upon derivatives.

Moreover, as mentioned above, the subprime and derivatives crises are closely linked. Similarly, Britian's New Statesman newspaper links derivatives and rising food and commodity prices:

"This latest food emergency has developed in an incredibly short space of time - essentially over the past 18 months. The reason for food "shortages" is speculation in commodity futures following the collapse of the financial derivatives markets. Desperate for quick returns, dealers are taking trillions of dollars out of equities and mortgage bonds and ploughing them into food and raw materials. It's called the "commodities super-cycle" on Wall Street, and it is likely to cause starvation on an epic scale.

The rocketing price of wheat, soybeans, sugar, coffee - you name it - is a direct result of debt defaults that have caused financial panic in the west and encouraged investors to seek "stores of value". These range from gold and oil at one end to corn, cocoa and cattle at the other; speculators are even placing bets on water prices."

Hiding the Ball

And yet banks and financial houses have hidden their derivatives exposure off the balance sheets. No wonder almost no one understands derivatives:

"Not only [world's richest man] Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't 'figure out'" the derivatives market.
Indeed, the government may have actively helped to hide the the derivatives mess since at least 2006. For example, according to Business Week:
"President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations."

 

[Rocketsauce]

For what it's worth, my boss who was an economist and used to be the economics editor at a large national publication told me everyone is panicking but with time things will likely settle down. He also said derivatives are very very complicated.

Doesn't mean he's right, but he certainly was an econ expert and doesn't think it's the end of the world.............. yet

 

[Razorwing]

Well one of the things that I find very intriguing is that the housing issue is one that has been brewing since the beginning of this year - at least thats when I first heard of it through popular media. 60 minutes did a piece on this, even the Earthfiles podcast did an episode on this back in February or this year. My point is that this Derivatives issue is been brought forward and should not be ignored but explored and corrected before it has an impact on the market.

I'm finding this one issue so complicated - me not been a financial guy - that I just don't get it. Yet again I'm finding that nobody in the planet seems to understand it also. There is no way to track these transactions, no oversight, no regulations but the impact could be devastating.

Anyone else watching C-SPAN, they are showing the senate hearings on the AIG bailout?

 

[Rocketsauce]

Yeah, it would not surprise me if some of the more complicated finance opportunities like derivatives have much less oversight because most people don't even know what they are.

I had a feeling there was going to be a real estate bubble for the last few years because in the DC area I would see people getting really stupid variable mortgages to a buy a house way out of their price range based on their salary and many people were flipping houses who were taking big risks assuming they could flip a house before their interest rate sky-rocketed. The banks/mortgage lenders should have used way way way more discretion, it was a matter of time. If it's too good to be true, it probably is!

I listened to C-Span radio yesterday and they had the Lehman Brothers former CEO being grilled by congress, I don't think a lot of these guys at the top have any idea how far reaching the ramifications are for doing irresponsible business in the interest of short term profit. I know they have a ton of pressure to increase their stock price so it's hard not to think short term. I think it's a system wide weakness/failure that could have happened in other sectors but it happened to be real estate.

Having said that, my economic expertise is on par with a 13 year old kid though, so my opinion is not an educated one on these issues.