http://seekingalpha.com/article/996...icle_sb_popular Coming Soon: The 600 Trillion Derivatives Emergency Meeting by: The Prudent Investor October 13, 2008 Toni Straka Here is an update on the size of the derivatives market with the latest official figures (.pdf) [ http://www.bis.org/publ/qtrpdf/r_qa0809.pdf#page=108 ] from the Bank for International Settlements (BIS). Hold your breath, as we are not anymore talking paltry billions but TRILLIONS of whichever fiat currency. Current emergency meetings on banks and markets are still only in the stage where politicians and central bankers are bickering over how to create a few more hundred billions Euros and FRNs. But toxic MBS pale in comparison to the mushrooming growth of the derivatives market. According to figures released in the quarterly review of the BIS (pp A103) [ http://www.bis.org/publ/qtrpdf/r_qa0809.pdf#page=108 ] in September the total notional amount of outstanding derivatives in all categories rose 15% to a mindboggling $596 TRILLION as of December 2007. Two thirds of contracts by volume or $393 TRILLION fell into the category of interest rate derivatives. Credit Default Swaps had a notional volume of $58 TRILLION, seeing the sharpest relative increase after a volume of $43 TRILLION a year earlier. Currency derivatives reached a volume of $56 TRILLION. Oh, and every grand balance sheet comes with a trash can. Unallocated derivatives with a notional amount of $71 TRILLION are looming over the heads of the disintegrating investment community too. However You Look At It, This Is an Accident Waiting To Happen Don't lose your sleep because of these numbers that KO my desktop calculator. In an ideal world - in which we are not - long and short derivatives would net out each other, leaving only a fraction of risk. The BIS tries to assess this net risk with a total of $14.5 TRILLION (2006: 11.1 TRILLION) in gross market value for all contracts but comes up with a second figure. The so called Gross Credit Exposure appears almost moderate at $3.256 TRILLION after $2.672 TRILLION a year earlier. Even when taking the lowest of these figures shudders run down my spine. All emergency talks have so far focused on a few hundred billions in fiat currencies, but the current nervousness demonstrated by hectic talks of finance ministers and central bankers all over the globe should give everybody a vague idea that something here may blow up any day. This pool of so far silent derivatives without a major bust can come to life any day with the failure of a multinational financial firm. The BIS review is a good way to grasp the dimensions long term monetary expansion has brought upon us. A net risk of $14 TRILLION compares with the annual GDP of the USA. Nobody, absolutely nobody can afford this tab in the case of an unorderly unwinding of this market that is roughly 12 times the size of the global economy. I conclude a lot more paper promises will be burnt in the coming derivatives tsunami. As a reminder, most of these contracts have been moved off balance sheets into under capitalized subsidiaries that profited from the good rating of the parent company. But in case of a default it is this nasty, nasty huge notional amount that becomes a liability. As the vast majority of these contracts have no market, failure will come in the form of counterparty risk. This makes all the current emergency meeting a bit more understandable if politicians are already aware of the biggest bubble that may find no other way of deflation than a sudden burst. I base my sense of urgency on the rapid growth of the net risk in only one year, rising a stunning 30% at a time when the first signs of the credit crunch appeared. German chancellor Angela Merkel said ahead of an emergency meeting with French president Nicolas Sarkozy in a TV interview that she would present a rescue package for German banks on Monday. This is also expected from several other European countries. Italian president Silvio Berlusconi went so far as to suggest a concerted stock exchange holiday. It would fit the other crooked nails in the coffin of free markets.
haha, well, Gringo is adept as regurgitating the latest puke from our crumbling academia; therefore, may be a better Dr. Simon Pritchett than a Taggart? Discuss.
Ayn puts the life jacket on her 12 year old daughter and swims them both to safety or dies trying. Alternatively, she would be in a boat designed by a great designer/builder, like Galt, and it would have proper safety provisions etc. Or perhaps Danneskjold would save her ass, haha. After reading Atlas Shrugged, ask yourself: what would Dagny do in XYZ difficult circumstance? And that is what Ayn would do. It is crystal clear what Dagny would do in the 'life jacket' scenario. Reading the Letters of Ayn Rand can give a person excellent insight into her private life and into the question of what was she really like: http://www.amazon.com/Letters-Ayn-R...=sr_1_1?ie=UTF8&s=books&qid=1224343579&sr=8-1
I remember a kid in college who was quite bright, almost a genius. He loved to debate the most arcane points, and had an obsessive need to be right. However, he had a tendency to engage in flights of fantasy. At different times he told us that he flew a 737, was related to the Rockefellers, had a Lotus(always in the shop), and dated a supermodel(who was always in Europe.) He ended up flunking out of college after his second semester, and this being in the 70's, was institutionalized. Nowadays, they rarely institutionalize people, and those people are free to engage in their delusions on the internet. I strongly suspect Gringo is one of these people. Gringo purportedly has all the answers, while a truly wise person would have all the questions. Jeff
Wow! What a post! I emphatically disagree with those who would say there is nothing worthwhile to read on the ET forums. There may not be much, but every once in a while there is a real zinger.
It does worse than that. At some point the people will agree to "almost anything" when offered a bit of relief from their strife. One World Government... One World Currency... One World Bank... One World Gestapo-esq Police State...
This deserves repeating. I made no progress until I accepted that everything depended on asking the right questions. Thank you.