Refco and Financial Derivatives Market Meltdown.

Discussion in 'Economics' started by SouthAmerica, Oct 17, 2005.

  1. .

    October 17, 2005

    SouthAmerica: Fortune magazine issue dated March 7, 1994 had an excellent article: "The Risk that Won't Go Away,” by Carol J. Loomis about the global financial derivatives market and how some deep crisis at a major dealer that would cause it to default on its contracts and be the instigator of a chain reaction bringing down other institutions and sending paroxysms of fear through a financial market that lives on the expectation of prompt payments.


    On Sunday October 16, 2005 The New York Times published an article by Gretchen Morgensen: “If Refco Isn’t Scary, What Is?

    Quoting from her article: “…It seems incomprehensible that a financial domino this big can topple without making a sound. Refco after all, was one of the largest players in commodities, derivatives and United States Treasury markets, operating in 14 countries and serving more than 200,000 clients.

    Financial market tremors or not, there is plenty to be afraid of in the Refco mess.”


    SouthAmerica: I would like to see as soon as possible on Fortune Magazine an article by Carol J. Loomis giving an update on her article about derivatives published on Fortune’s March 7, 1994 issue.

    The question is can the financial blow out at Refco, combined with the losses caused by Hurricane Katrina and Rita start a chain reaction that will wreck havoc on the financial system and the world economy?

    And things can be compounded by another major terrorist attack in US soil.

    How close are we from a financial derivatives market meltdown?

    Or has Refco started the chain reaction?


    I posted the following information on Brazzil Magazine’s message board in May 2003, and on “PBS” message board on September 2004.

    SouthAmerica: Quoting from my article published in November 2002: “The Big American Lie” - The Brazilian government should learn with the US how to paint a rosy picture when the economy is falling apart, how to live in a world of illusion.

    Here is some further information which I am quoting from the article "The Risk that Won't Go Away,” in Fortune magazine dated March 7, 1994: Financial derivatives are tightening their grip on the world economy. And nobody knows how to control them. Like alligators in a swamp, financial derivatives lurk in the global economy.

    Deriving their value from the worth of some underlying asset, like currencies or equities, these potentially lucrative contracts are measured in trillions of dollars. But they also lie in convoluted layers in a tightly wound market of global interconnections. And that gives them the capacity to bring on a worldwide financial quake.

    “...The lead actors, small in number, are derivative dealers: the big commercial banks, the major securities firms, plus an occasional outlander from insurance. For these players, derivatives have become an imposing source of profits, earned largely on the fastest-growing, most controversial instruments of all: customized, over-the-counter contracts written between a dealer and another party.

    “...Counting everything, including both derivatives traded on the futures and options exchanges and over-the-counter (OTC) derivatives, the notional value of derivative contracts outstanding is today an estimated $16 trillion. That leaves the GDP of the US, at around $6.4 trillion, in the dust. ...Most chillingly, derivatives hold the possibility of systemic risk—the danger that these contracts might directly or indirectly cause some localized or particularized trouble in the financial markets to spread uncontrollably.

    “...An imaginable scenario is some deep crisis at a major dealer that would cause it to default on its contracts and be the instigator of a chain reaction bringing down other institutions and sending paroxysms of fear through a financial market that lives on the expectation of prompt payments.

    Inevitably, that would put deposit-insurance funds, and the taxpayers behind them, at risk."
    That Fortune magazine article also mentioned that the derivatives market was growing at a 40 percent rate per year. That means that on the conservative side, the value of contracts in the derivatives market must have grown by over 300 percent since March 1994, and the estimated value for them at the year end 2002 should be over $ 50 trillion dollars.

    I don't understand why, after such a sharp stock market decline since January 2000, compounded by the economic losses of 9/11, the collapse of the telecom, and airline industries, and massive corporate fraud on corporate America, how come all this did not result in major losses for the banks, insurance companies, hedge funds, and other financial institutions, creating havoc in this derivatives market. Massive losses in this derivatives market can sink the entire US economy.


    SouthAmerica: One of the triggers of the stock market collapse of 1929 was margin call on stock purchased on credit. (In 1929 people could buy a lot of stock on credit with a small amount of cash.)

    Margin calls it was a major problem in the stock market crash of 1929.

    Today, the equivalent to margin calls in 1929 is: "Derivatives."

    The Derivatives market today is estimated to be over 125 trillion US dollars. Lately the news media have mentioned about the treat of the derivatives market getting bust. And based on the latest estimates the current value of the derivatives in force is around 125 trillion dollars. (Estimate from May 2003)

    Remember trillions and not billions. If this market goes bust the entire financial system around the world will be in big trouble.

    This time around, "Derivatives" will be the trigger to a massive stock market collapse.

    Any way, today we are away overdue for a new stock market crash, and worldwide depression.

    Are we approaching: The Big Meltdown?


    Washington Post, March 6, 2003
    Warren Buffett: "derivatives are financial weapons of mass destruction"

    …In the words of Warren Buffett: “Derivatives represent a ticking ‘Nuclear Time Bomb’ that could wreck havoc on the financial system and the economy.”


    Additional quote from Warren Buffett

    ”Trade Deficit at All-Time High of $665.9B”
    Associated Press
    Wednesday March 16, 2005

    …Investor Warren Buffett warned in this year's letter to shareholders of Berkshire Hathaway Inc. that the United States could become a "sharecropper's society" by the continued transfer of U.S. assets into foreign hands. He estimated the country's debt to foreigners could surge to $11 trillion by 2015.

    …But Buffett warned in his letter to shareholders that the growing indebtedness would require annual payments to foreigners to service the debt of around $550 billion by 2015, a transfer of resources that would mean less investment and lower living standards in the United States.

  2. Still another.... moderators can u group all the Refco threads together please?
  3. FredBloggs

    FredBloggs Guest

    as scary as all this may first apear, maybe, just maybe the system is working!! im talking about all the processes put in place like sarbanes oxley, basel 2, sigma 6 or whatever etc etc after worldcom, enron etc.

    ok shit will still happen and people will hide and steal money as long as there is human greed etc.

    yes this should have been spotted before the ipo, but the account segregation issue seems to have worked here.

    the locals clearing with refco down at the merc seem quite calm (according to, as do the members on these boards who trade via rts.
  4. Excellent Commentary

    Legal obligations of leverage which are traded..both publicly and non-publicly have to be guaranteed by some party....

    Right now...with respect to Refco...hopefully some will see this type of transaction risk as an opportunity...and sign the dotted line to overtake responsibility...

    The real question that has yet had to be answered is that when is it that an institution that carries on business which basically passes high levergae ownership...caught holding the 100% liability bag ?

    And if so...when is it no longer ¨legal¨to operate with so called paper asset worth that would create sytemic risk...?

    This is a very gray area in the derivatives or ¨high leverage¨instrument marketplace....and needs to be handled with extreme the leverage impacts may become ¨real¨risks to other businesses who are legally attached who really do have the assets to lose...
  5. .

    Areyoukidding?: Still another.... moderators can u group all the Refco threads together please?


    SouthAmerica: Reply to areyoukidding?

    I used the name Refco on my posting, but the main issue of my posting is the possible collapse on the financial derivatives market.

    I will change the title of my posting if that you make you feel better.
  6. tomhaden


    I think we should group southamerica and mahram together. They can be known as the bad news bears! :)
  7. .

    SouthAmerica: Reply to areyoukidding?

    Sorry, but this message board does not allow me to change the title of the posting after I posted the information.

    I hope you will be able to live with that.

  8. plugger


    South America, peruse previous threads started by areyoukidding. Criticizing your new thread is the pot calling the kettle black. At least your thread was interesting.
  9. .

    FredBloggs: the locals clearing with refco down at the merc seem quite calm (according to, as do the members on these boards who trade via rts.


    SouthAmerica: The point of my posting is that I would like to see Fortune magazine’s Carol J. Loomis write an article updating her article from 11 years ago.

    Most people it doesn’t realize, but the global derivatives market is on automatic pilot – the plane is flying very fast but to where?

    Ms. Loomis has the understanding necessary to be able to write a very interesting article on that subject.

    If it is not Refco, maybe will be something else that can trigger that derivatives meltdown.

    Remember, the next stock market meltdown similar to the one in 1929, will start with a meltdown in the derivatives market, this time around – this is a market that is probably approaching the $ 150 trillion dollar mark today.

  10. Excellent Commentary....

    South America has some of the best postings on ET...

    Whereas ET has an option for those who do not wish to read certain writers postings it is called the "ignore list"..

    There are individuals who such as "areyoukidding?" that do not have the common sense to use this option...

    As I have...after reading "areyoukiddings" file ...just put this idiot who writes with no substance as though they were on cocaine...

    on your IGNORE LIST.........
    #10     Oct 17, 2005