Derivatives Meltdown

Discussion in 'Politics & Religion' started by SouthAmerica, Aug 30, 2005.

  1. .

    August 30, 2005

    SouthAmerica: I wonder why The New York Times would publish such an article about North Korea, other than trying to intimidate them with words. The North Koreans are probably laughing about such a strategy.

    I put myself in place of the leaders of North Korea – If I thought that I was going to be attacked by the United States, I would take one of my nuclear warheads – point it to the center of Tokyo – and let it go. (Remember the Bush administration has a policy and is considering a preemptive military attack on North Korea)

    One nuclear warhead hit at the center of Tokyo would put the derivatives market over the edge and we would have a worldwide meltdown in the derivatives market – end of the story.

    The United States would think twice about retaliating with nuclear weapons against North Korea because of the follow up, and potential showdown with China. – China would not be too happy with nuclear weapons exploding right next door.

    That takes care of the silly article published by the NY Times today. Here I quote parts of that article as follows:


    “U.S. Banks on Technology in Revised Military Plan for a Possible North Korea Conflict” By Thom Shanker - Published August 29, 2005 - The New York Times

    CAMP CASEY, South Korea - American commanders are making significant changes in their plans in the event of a military conflict with North Korea, to rely in large measure on a new generation of sensors, smart bombs and high-speed transport ships to deter and, if necessary, counter that unpredictable dictatorship, the senior United States commander in South Korea says.

    The shift in strategy is being undertaken even as the United States cuts the number of troops here by one-third and begins moving the remaining soldiers farther from the demilitarized zone, to improve their chances of surviving any North Korean offensive.

    In a recent interview that provided a detailed public description of the highly classified war-planning process, Gen. Leon J. LaPorte, the commander, described how American contingency plans are being reshaped by new theories of war-fighting and by new military technology.

    As the nation's senior war planners survey the world for potential military rivals, there is no doubt that the most significant state rivals are China and North Korea - and that the nuclear, Communist North Korea is by far the more unpredictable.

    ..Although the tenor of political exchanges between the United States and North Korea depend on the status of talks seeking to dismantle North Korea's nuclear program, the state of readiness maintained by North Korea's conventional military forces has not altered in response to either a sharper tone of criticism from either side or the resumption of six-party negotiations.

    …North Korea has announced that it is a nuclear power. But chemical weapons are a source of concern as well, General LaPorte said. "North Korean doctrine does not see chemicals as a weapon of mass destruction, but as a conventional munition," he said. "Their doctrine is that every third round is a chemical round."

    …The reworking of the war plans, at least those that have been described in public, incorporates advances in technology and combat skills that were successfully executed during the rush to Baghdad in 2003, said Mr. O'Hanlon, an author of "Crisis on the Korean Peninsula: How to Deal With a Nuclear North Korea."

    …In case of war with North Korea, "There are a large number of targets that we have a chance of taking out in the opening days of a battle, but not the opening minutes, because of our precision-strike capabilities and I.S.R.," Mr. O'Hanlon said, using the initials for intelligence, surveillance and reconnaissance. "Even if that artillery is pulled back inside caves, we have a pretty potent capability."

    North Korea is believed to have more than 800 missiles that can strike South Korea and beyond, and more than 12,000 artillery pieces, a large proportion in underground bunkers where they could strike Seoul. The North Korean military is said to number 1.2 million in its standing army, with the ability to mobilize another five million.

    North Korea also has 120,000 special operations forces, whose mission is to infiltrate South Korea for reconnaissance and attacks.
    …The new plans would rely, for example, on being able to move Army units and the service's new Stryker infantry fighting vehicle on C-17 cargo jets from their base at Fort Lewis, Wash., to reinforce South Korea in just 11 hours, General LaPorte said.

    High-speed troop transport ships can bring larger numbers of marines from Okinawa in less than a day. Heavy equipment for arriving troops is already positioned in South Korea in climate-controlled warehouses, the general said.

    Fighter aircraft and bombers based in Japan, Guam and as far away as Alaska, Hawaii and the continental United States also would be put under General LaPorte's command in time of war. Aircraft carriers also could be ordered to steam within striking range.

    A highly visible example of the shift in war plans could be seen in the squadron of F-117 Stealth fighters dispatched in recent weeks to South Korea from their bases in the United States for a series of military exercises.

    The message of their presence could not have been lost on the North Korean leadership, as it was that exact type of aircraft that opened the war with Iraq by slipping past Baghdad's radar network to bomb a suspected hide-out of Saddam Hussein.


    SouthAmerica: The coming worldwide depression will start when the derivatives market blows off. What kind of event can take that market over the edge?

    Who knows?

    The derivatives market is a market that is on automatic pilot – going in which direction?

    Just God knows.

    The meltdown will start with a domino effect in the derivatives market – what will trigger such a meltdown? That will be the subject of case studies after the meltdown catches everyone by surprise.

    There are many scenarios that could trigger such a meltdown. The most basic one would be a natural disaster such as a major earthquake in the center of Tokyo that would cause a massive destruction. That would cause an immediate crash of the US dollar, and a possible meltdown in the derivatives market.

  2. .

    July 18, 2006

    SouthAmerica: It is just a matter of time but eventually the house of cards has to collapse.

    I guess most traders of derivatives are happy that this thread about the Derivatives market has been moved to the Chit Chat Forum.


    “Credit derivatives play a dangerous game”
    By Frank Partnoy and Davis Skeel
    Published: July 17, 2006
    The Financial Times – UK

    As the markets roil, many analysts predict a "flight to safety", warning that investors will pull out of risky stocks and bonds and head for a safer spot. But if investing has become a game of musical chairs, who will be standing when the music stops?

    A clue lies in the nascent but massive market for credit derivatives. Credit derivatives are essentiallyside bets on a company's creditworthiness. You might pay us $1 a year in exchange for our promise to pay you $10 if General Motors defaults on its debt. In such a trade, you buy protection against a default, whereas we sell protection. Thus, credit derivatives resemble insurance.

    There are reports of more than $17,000bn (£9,250bn) of such bets outstanding, about the value of the entire US and UK equity markets combined. But that is almost certainly an understatement. One multinational bank, JP Morgan Chase, has said it holds $2,200bn of credit derivatives.

    Many of JP Morgan's trades, such as those of banks generally, are designed to hedge the risk associated with making loans. If a bank not only makes a loan but also places a credit derivatives side bet that the borrower will default, it might break even, losing on the loan but winning on the bet. If banks that lent money to companies such as Enron, WorldCom, Swissair and Railtrack had not used credit derivatives, some surely would have failed in the wave of defaults that followed.

    While credit derivatives can generate benefits, they present two critical challenges that can precipitate a flight to safety and perhaps a financial crisis. Neither has received much attention.

    First, credit derivatives create "moral hazard" when banks use them to shift risk. Moral hazard occurs when people take on excessive risk because they are insured. Fire insurance is the classic example. Those who have it are more likely to play with matches. Likewise, credit derivatives encourage banks to lend more than they otherwise would, at lower rates, to riskier borrowers.

    Banks with credit derivatives lack incentive to keep a close watch on borrowers. Enron's lenders used an estimated 800 credit derivatives to offload $8bn of risk. Because credit derivatives leave borrowers unmonitored, they fuel the credit expansion. And, as Charles Kindleberger, the late financial historian, noted, unmonitored expansion of credit precipitates the manias that lead to market panics and crashes.

    In theory, the pension funds and insurance companies that sell credit protection should do the monitoring. But because they do not make the loans, they have no relationship with the borrower. The string of contracts runs from borrower to bank to third party. The third-party watchdog does no good outside the fence.

    These risks are related to the second problem: "informational asymmetry" - simply put, the gap between thecomplexities of credit derivatives and what the people who deal in them can understand. Even the savviest investors and regulators are surprised and exasperated by the opacity of these instruments. Warren Buffett, the renowned investor, once described credit derivatives as "financial weapons of mass destruction". If such a wise man cannot understand credit derivatives, what is a typical credit officer to do? And how should an investor evaluate the credit derivatives exposure of a bank or pension fund?

    Credit derivatives contracts are intricate and payouts can depend on legal terms that are not well understood. Nor is information easily availÂÂable. Until recently, parties to a credit derivative felt no need to notify each other, much less the market, if they sold their interest. Some disclosure has improved but the market remains maddeningly opaque, even to insiders. Basic documentation for every big transaction at least should be made publicly available.

    If corporate defaults increase and investors seek safety, likely victims will include not only pension funds and insurance companies but hedge funds, which have a growing share of the credit derivatives market. Because hedge funds take concentrated positions and have sharp incentives to perform, they are better able to evaluate credit derivatives risks than insurance companies or pension funds.

    Their buying and selling creates market pressure that indirectly can do some of the monitoring banks no longer carry out directly. But the growing role of hedge funds also generates risks. Many have placed highly leveraged and unhedged bets on credit derivatives, and tend to act in concert.

    We know from the crisis surrounding the collapse of Long Term Capital Management, the large hedge fund, that liquidity - the ability to find a seller when the music stops - is crucial to the security of financial markets. Markets lately have been awash in liquidity largely because banks are confident they can use credit derivatives to offset the risk of loans. But if the hedge funds and others who have been selling insurance to banks decide to seek safety, the music will end.

    Unfortunately, opinion on the credit derivatives issue is polarised between alarmists who oppose financial innovation and supporters who naively embrace it. The truth is in the middle.

    Credit derivatives help banks reduce risks but in doing so, they create the danger of systemic market failure.Ideally, financial regulation builds confidence by requiring enough disclosure to enable investors to assess risks. The problem with unregulated derivatives markets is that investors learn too late. When they simultaneously lose faith, everyone looks for a seat.


    Frank Partnoy and David Skeel are professors of law at the University of San Diego and the University of Pennsylvania, respectively; their views are drawn from a larger project, The Promise and Perils of Credit Derivatives

  3. Arnie


    So southamerica, how are you going to trade this "meltdown"? You do trade don't you?
  4. .

    Arnie: So southamerica, how are you going to trade this "meltdown"? You do trade don't you?


    July 19, 2006

    SouthAmerica: Cash is king when the shit hits the fan. Then you have the opportunity to buy very cheap the surviving pieces.

  5. SA you are just killing me.

    First, the US may use a preemptive nuke?

    Won't ever happen. Would have happened long ago if we were ever going to do such a thing. I personally don't think there will ever be a nuke used as a first strike except by terrorists, or a complete nut case leader (as in N Korea).

    Second, and this is the really absurd one, the US wouldn't retaliate if N Korea nuked Tokyo? Try again. The response would be immediate, and brutal, so that no one did it again. China wouldn't do shit to protect N Korea if they lobbed a nuke. China would then be a World pariah, they would lose markets across the globe, etc.

    I really wonder where you get this shit.
  6. .

    July 19, 2006

    SouthAmerica: Today the US foreign policy it is better suited for programs such as the “Jon Stewart Show” than anything else. It is a constant comedy of errors and blunders – the only thing the world can do it is laugh about it.

    At the same time that North Korea is testing its long-range missiles and the US is barking like crazy about it – India also tested at that time some long-range missiles built to carry nuclear warheads - and the US gives India its blessings.

    The Bush administration’s foreign policy it is like a bad joke.

    I am not worried about North Korea’s nukes since I believe both Koreas are going to merge into one country in the near future.

    Last weekend during the G-8 meetings in Russia – it was very clear to me that US clout around the world is diminishing at the speed of light. – George Bush was isolated on that meeting and he must felt like he had the plague – his only loyal companion was his lapdog; Tony Blair.

    If you want to lose sleep over nukes - then you should think about Pakistan.


    Ups and Downs of India's Missile
    By GAVIN RABINOWITZ - Associated Press
    July 11, 2006

    NEW DELHI — India's first test firing of a new missile designed to carry nuclear warheads across much of Asia and the Middle East was unsuccessful, the defense minister said.

    Although initially reported as a success by officials, the Agni III missile plunged into the Bay of Bengal short of its target, Defense Minister Pranab Mukherjee told reporters late Sunday.

    Following the failed missile launch, an Indian rocket carrying a satellite for TV broadcasts veered off course and exploded after takeoff yesterday, Indian press outlets reported.

    The missile launch came as President Bush tries to push a civilian nuclear deal with India past a skeptical Congress. The deal permits India to keep making nuclear weapons, and critics say the pact could undermine the Nuclear Nonproliferation Treaty.

    Even though the deal does not cover missiles, a Hindu newspaper reported yesterday that the top American general, Peter Pace, gave Indian officials the green light to conduct the test when he visited India last month.

    The missile test reportedly had been delayed for two years by technical issues and fears of international condemnation.

    Mr. Mukherjee, who witnessed Sunday's missile launch, said India would press ahead with the Agni III program. He termed the failure a snag, but offered no other details.

    Indian press outlets reported that the missile's second stage failed to separate after it was launched from Wheeler Island off the eastern state of Orissa.

    India's current crop of missiles has been largely intended to confront archrival and neighbor Pakistan. The Agni III, by contrast, is to be India's longest-range missile, designed to reach 1,900 miles. That would putting China's major cities well into range, as well as targets deep in the Middle East.

    It's also said to be capable of carrying a 200- to 300-kiloton nuclear warhead.

    "This is going to help in establishing the credibility of India's deterrent profile," an Indian defense analyst, C. Uday Bhaskar, said.

    Still, he dismissed speculation the missile was designed with China in mind.


    US: India missile launch not a surprise
    GG2 News – UK
    July 11, 2006

    The White House on Monday hinted at criticism of India for test-firing a nuclear-capable, long-range missile even though Delhi had made sure that the launch ‘did not come as a surprise.’

    ‘We do not give India a pass,’ said spokesman Tony Snow, who declined to elaborate.

    Still, ‘we were aware and understood that there would be a routine test and the Indian government did notify us in advance, and the Pakistani government also was notified,’ he said. ‘So it did not come as a surprise.’

    Washington has been sharply critical of North Korea for a barrage of test missile firings early last week.

    Earlier, India shrugged off the unsuccessful maiden test of its ambitious rocket, as red-faced defence scientists began trying to work out what went wrong.

    The Agni-III missile, which Indian defence sources say has a range of 4,000 kilometres (2,480 miles), developed problems after a successful take-off Sunday from an island site off India`s east coast.

  7. .

    April 3, 2008

    SouthAmerica: If you want an article to be scared to death then read this article published by the NYT.

    When we have the coming meltdown on the global derivatives market that will be the trigger to the first Great Depression of the 21st century.

    Keep in mind that the over $ 500 trillion dollars Derivatives market is a global unregulated market that it is flying on automatic pilot and it can crash at any time.


    “Leveraged Planet”
    Published: April 2, 2008
    The New York Times

    JUST before JPMorgan Chase announced its initial $2-a-share deal to buy Bear Stearns, Ben Bernanke, the chairman of the Federal Reserve, held an extraordinary impromptu conference call. The participants on the Sunday night call, who got a preview of the deal, were Wall Street’s biggest power brokers: Lloyd Blankfein of Goldman Sachs dialed in from home. John Mack of Morgan Stanley rushed to the office to listen on speakerphone. Richard Fuld of Lehman Brothers, who had been directed to return home from a business trip in New Delhi by none other than Henry Paulson, the Treasury secretary, was patched in, too, among others.

    The half-hour call was a rallying cry for support of Bear Stearns — and more broadly, the financial markets, which, as it was described on the call, were on the verge of a major meltdown if not for the pre-emptive steps that the Fed and JPMorgan took. “It was much worse than anyone realized; the markets were on the precipice of a real crisis,” said one participant. Given that Bear held trading contracts with an outstanding value of $2.5 trillion with firms around the world, “we were talking about the possibility of a global run on the bank.”

    In another era, the participants in the phone call would have been an exclusive fraternity of high-powered Manhattanites. But this conversation was also filled with foreign accents — from UBS, Credit Suisse, Deutsche Bank, HSBC and beyond.

    In truth, though, the call was still more of a courtesy to our foreign neighbors than it was a genuine effort to gather outside views. Call it speakerphone diplomacy. The “possibility of a global run on the bank” may have been real, but the important decisions had been made long before the folks in London, Dubai and Hong Kong were let in on the code-red secret. The chief executives of Wall Street’s top banks had been taking calls from each other and the Fed all weekend.

    So goes the solipsistic world of Wall Street. The Four Seasons crowd may talk a big game about being global — sending lieutenants to start offices halfway around the world — but when it comes to opening up its secret society to foreigners, oddly, doing so is still an afterthought.

    It is not just a problem in business. While the Fed and the Treasury Department often check in with their foreign counterparts, they still sometimes take a view that is more local than global. Mr. Paulson, formerly of Goldman Sachs, can propose a radical plan to regulate the financial industry in the United States, as he did this week, but it doesn’t address the larger problem: we’re now so interconnected with the markets abroad, whether it be Japan or even Brazil, that whatever we do on our own is almost beside the point.

    “We need much tighter global coordination,” Bruce Wasserstein, the chairman of Lazard, told me this week. “It is myopic to look at things in a narrow box. Where we’ve been moving right, the E.U. is moving left. That doesn’t seem sensible.”

    If the United States, for example, were to limit the amount of leverage — or debt — that investment banks or hedge funds could use, that wouldn’t offer any protection from debt-fueled implosions at rival firms abroad. A blowup at a highly leveraged fund in China would still ripple across the system.

    Superleveraged funds have been a major culprit in the latest downturn, because their use of debt to juice returns has amplified the effects on the downside. (Just ask investors in two of Bear Stearns’s now-bankrupt hedge funds.) When things go bad, the fallout doesn’t stop at national borders. A fund in London may be connected to another in Thailand and not even know it. Who would have imagined that dentists in Germany owned subprime mortgages in Texas? (They did, or rather, still do — at a huge loss.)

    The explosion in the use of derivatives has only tightened the global links — and made a worldwide meltdown easier to imagine. Banks and hedge funds across the world are routinely on opposite sides of contracts tied to debt, interest rates or other, more esoteric benchmarks. The collapse of one party (or sometimes just the possibility of a collapse) can be disastrous for the other. Bear’s downfall will very likely induce new calls to address the unnerving problem of “counterparty risk.” To be more than just a public-relations campaign, any such effort will need to have global reach.

    In case there’s a question about how interconnected we really are, just witness the global markets’ near collapse in January when Société Générale, the French bank, blamed what it said was a rogue trader, Jérôme Kerviel, for $7.1 billion in losses.

    Société Générale’s efforts to unwind its positions — before announcing them publicly — came close to creating a market panic. George Soros, who was attending the World Economic Forum in Davos, declared at the time: “This is not a normal crisis. It is the end of an era.”

    The Fed, itself unaware of Société Générale’s ordeal, felt compelled to lower interest rates. But let’s be honest: that didn’t do much, and three months later, we’re in worse shape. As Mr. Soros said then, “I question how far the Fed can go given the reluctance of people to hold dollars.” In the end, he agreed, there will have to be worldwide regulation of some sort. “The financial system needs a global sheriff,” he said.

    A global financial cop is an idea that has been raised before, but it has never taken flight. E. Gerald Corrigan, who worked at the Fed for 25 years — as special assistant to the chairman, Paul Volcker, and later as New York Federal Reserve president — reminisced to me about his efforts to create global standards in the mid-1980s.

    “I can tell you it was very challenging,” Mr. Corrigan said, referring to his work on the Basel Committee on Banking Supervision, an institution created in 1974 by the central bank governors of 10 of the most developed nations.

    “How do you get 10 countries to agree on detailed, word-for-word provisions when there are questions about what’s the definition of capital? Just start there.”

    Still, he said, “While it is fair to say the cross-border consultation process has gotten much better, there is no question we need a better framework for international coordination of our policies.”

    But even the thought of a global oversight committee to develop standards stirs fear in the minds of people who can’t stand the thought of regulation. And the chance that a coalition of countries could ever agree on a set of standards is probably slim.

    Just look at the debate over climate change, a much direr problem without an agreement on a global solution or even a basic set of standards.

    The alternative — a global regulatory patchwork, with havens for leverage junkies — could be just as messy, however.

    You might ask, why do we need any regulation? After all, it doesn’t seem to ever help. Every seven years or so, the markets plummet for one reason or another, followed by hand-wringing and calls for new regulations. Laws get passed in haste and the markets improve again. Then we do it all over.

    We may not repeat the old mistakes, but we have a knack for finding new ones.

    All of this is true. But Wall Street, long thought to be the front-runner in globalization, is actually just catching up. Rules have always been lax, or at least inconsistent. The cowboy culture that created Bear Stearns has been exported to far-off corners of the world.

    The only difference is that the far-off corners aren’t that far off at all.


  8. your lengthy diatribes are becoming the new Jack Hershey

    Many words, little useful content