So is it correct to say that neither of you have ever been a trader for an investment bank? The point I am trying to make is that if you understood the derivatives business from the dealers perspective you'd know that its about making markets not taking directional positions.
Interesting Article Harry ! I'm of the opinion that it's inevitable - one way - or the other ! Native Americans say we are approaching the time of the "Great Cleansing" ( I think they are talkin' about US ) ! I always thought that it was interesting that the Mayan Calendar (written BC and noted for it's accuracy ).. calls......21 Dec 2012.... the last day of the world ! Sincerely, Chicken Little !
No, Bondtrader, neither one of these philosophers really has a clue. And I don't want to post my resume here and waste my time getting into a pissing contest with these mental giants of the industry, when in the final analysis I trade more derivatives in a month than they will trade in a lifetime. Oh, and by the by, in 1997 I was Merril Lynch's biggest institutional customer on the NYMEX floor. And I got more than just a fax from their Research Department.
Egos kicking in.....Just to let you know, being mean to the "little guys" doen't accomplish much, and it doesn't get to the bottom of the issue either. And to make a statement that we have no idea what we are talking about is kind of harsh. Furthermore, it doesn't matter what kind of size you are doing to justify how much integritiy your statements provide. LOOK AT LTCM!!! How do you know that your fund will not go bust just like LTCM? How do you know that the brokerage houses that you trade through will not go bust? Surely you must think about that because you are dealing with a lot of money. If you do not think about that possibility then I would say you are not being a prudent money manager. Anything is possible in financial markets.
Everybody seems to know it Two women were walking through the forest when they heard a voice from under a log. Investigating, the women discovered the voice was coming from a frog: "Help me, ladies! I am an investment banker who, through an evil witch's curse, has been transformed into a frog. If one of you will kiss me, I'll be returned to my former state!" The first woman took out her purse, grabbed the frog, and stuffed it inside her handbag. The second woman, aghast, screamed, "Didn't you hear him? If you kiss him, he'll turn into an investment banker?" The second woman replied, "Sure, but these days a talking frog is worth more than an investment banker!"
1) I have always agreed with Fama and Taleb about fat tails. 2) I am not smart enough to take directional bets in the market. 3) I am smart enough to arbitrage. 4) I have never known a proprietary derivatives desk to run a book like LTCM. Never. 5) Institutions and agencies are by far and away the biggest users of derivatives. These positions are "spreads" against existing credits and liabilities on their books. One offset works against the other. 6) The participants in derivatives markets are so diverse, I can't envisage a scenario that would create a "global meltdown" as you term it, spawned from the derivatives complex. 7) LTCM was a hedge fund. After their customer account funds were liquidated, the additional liabilities were covered by the offsets, or hedges on the market-makers' books. You will observe where positions were not hedged, or hedges did not cover the extent of the losses, claims against insurance were utilized. (Yes, JPM, ML, and GS filed insurance claims). A unique aspect of LTCM was that a few big banks were hedge fund customers, most notably the Swiss. LTCM generated a liquidity crisis. 8) After the bank's prop desks got finished squeezing the living shit out of LTCM and bleeding them dry, everything returned to a normal state of affairs in the derivatives markets.
Once again - you don't understand the business. I agree with bone, I'm not going to post my resume here but suffice it to say, I've been there done that. What does the above quote have to do with perceived exposure to derivatives? If you're referring to the problems with various research & corporate finance departments and the equity markets that is a different topic. Please make comments that are relevant to this thread - focus. Bone- 1) I have always agreed with Fama and Taleb about fat tails. Why not just introduce quantum physics for the rocket scientists in this thread to ponder? But yes, I concur on fat tails 2) I am not smart enough to take directional bets in the market. -Yep 3) I am smart enough to arbitrage. -Yep 4) I have never known a proprietary derivatives desk to run a book like LTCM. Never. Could the distinction between a hedge fund and a dealer be that a hedge fund is a speculative entity while the dealer is a market maker that earns his revenue on spreads? Could this be what the majority fail to see? On that note I apologize, I should be slightly less acerbic as most common folk (and some fear mongers) hold a great misconception in common - that market makers make money on directional bets rather than on the business of making markets. Yes, Virginia, dealers do hedge their books. The problem with all these articles on derivatives exposure is that the authors either consciously or unconsciously infer that the positions in question are prop trades when in fact they are by and large hedged because they were put on to facilitate customer transactions - not to take a flier on direction! Nuff said on this topic.
Agreed, Bondtrader. Well said. Hedge funds are the ones making directional bets, not dealers and bank desks. LTCM was a huge fund with of course a ridiculous amount of exposure, and its' default couldn't bring down the system. The liquidity crisis comes from the unwinding of the monster positions, and every desk on the planet knows which way they're going (or soon finds out).
Did you read Nassim Taleb at the bottom of my posts no directional bets is not risky in NORMAL situation so it is a TAUTOLOGY to say that there is no SYSTEMIC RISK assuming NORMAL situation since SYSTEMIC RISK occurs when market enters ABNORMAL situation. In fact one of the cause of SYSTEMIC risk came from the fact that some don't take risk at all risking others people money. That's what happened in 1929: banks, since they have the power to accord credits to people but also to THEMSELVES, speculate with this credit and when the system collapsed well they just ask for more public finance. You would say that Central Bank had saved the system since it was created in 1913 for that. Well learn that Central Bank, which is a consortium of PRIVATE banks, was too shy to do so, it was a public institution that did so: I don't remember the name but it is for example mentioned in Money history books. Today that's what happened with japan's bank. They had taken risk with public money and after that they ask for more public money when they are bankrupt: I already talked about the finance minister of Japan who was sacked because he said he refused to give people taxes to the banks that had speculated with their clients money. You will say: well why to bother if one can inject public's money ? Well where public's money come from ? From taxes. Moeny injection means adding to PUBLIC DEBT that we have to pay through taxes. And who now owns that debt ? FED said he would buy everything from Gold to governement debt. What does that mean ? That taxes collected from people will be used not for building schools but for interests to FED's banks. Some years, that what reports under Reagan showed, 100% of taxes go for financial interests. Since whn it occurs there is no taxes left for building school government have to borrow even more. That's why situation can only go worst mechanically until the system explode. And historically it explode after a long cycle that last more than even a life of a person that's why people never experiments it until it happens. One can only anticipate it looking at history. If you believe than human behavior is the same then you have to look at history.