The Trillion Dollar Secret

Discussion in 'Trading' started by scalpmaster, Jan 29, 2008.

  1. "For the past year or so, the investment world has been wrapped up in their version of a steroid scandal - the sub-prime mortgage mess. Banks are taking write-offs in the tens of billions and estimates are that write-offs will reach as high as $100 billion before long. CEO’s are losing their jobs and having to settle for multi-million dollar pensions. (Don’t you feel bad for them?)

    But there is a secret right in front of everybody that the Fed, Wall Street and the banking industry wants to make sure investors don’t notice. It is the incredible growth in derivatives. If you think the sub-prime problem is big, you ain’t seen nothing yet.

    According to the Comptroller of the Currency, total Derivatives in the top 25 banks in the US amount to about 180 Trillion dollars. Not billion, trillion. 1000 times a billion .....

    To put this in perspective, the US GDP for the 3rd quarter of 2007 was about 11 Trillion dollars. So they are playing a game with a pool of fictional money that is 16 times bigger than our economy.

    Let that sink in. "

    if this one burst, DOW can restart from ground zero.
  2. The derivatives have been noticed and was first called to attention by Buffet. I am no fan of Warren but he did call the problem.

    I trade derivatives, and yet I do not know the extend of the problem. A good friend from University of Chicago told me in 2003 that the US banking System will blow up by 2010 if not sooner due to the Derivatives.

    Banks are so hedged per every reserve dollar that the meltdown will be like non-other.

    What we are seeing in the subprime arena was also signaled in early 2005.

    The question is, can we get a double whammy, i mean three hurricans hit Florida back a few years ago, never happened in the history of the state.

    Point is, the derivatives market will not play out until we see massive failuers in recourse loans, (private loans back by assets), credit card defaults on massive levels and the Down at 9000/10000.

    If that happens, then I would get nervous.....i should say when that happens.
  3. Fool's Money... Isn't that what we all trade with?
  4. in most derivatives, like futures, there is a winner for every loser. It can only result in a shift of wealth not financial destruction. I would guess Goldman comes out on top of that one too.
  5. The public seem to have all of sudden discovered leverage that has been there for a long time.

    Did you know that the capitalization of google is 50 times its earnings? The concept of stock price is a form of leverage. In this case one can argue that it is justified, but one needs to understand that financial markets function on the principle
    of counting future cash flow and projecting them to the present.
    Cash flows take place in the future, and transacted in the present
    via prices. To maintain solvency, position are marked to market in a non-cash accounts and traded in liquid markets.

    Market to market is then central to leveraged positions. The only problem that can cause this to blow up is if the price of those securities are not market to market, and/or the market moves fast for liquidation to be done on time.

    The questions then are: are positions market to market, are there real cash margins behind them, is the marking done with respect to liquid markets or just to a model of the market.

    Do not be impressed by the numbers. It is the unwinding of the
    positions which can be a source of risk. I personal do not know.
    Until I see evidence, it is just hype.

    Cash does not disappear. It is changes hands. You seem to view things as if that cash will just disappear in a hole other than the pocket of a man.

    If they collapse, there will be dead bodies but also rich people will emerge.

    Do yourself a favour and position yourself for that cash to flow to you pocket if you think you are right. If you are wrong, the cash will flow out of your pocket to the pocket of a smarter person who knows where to stand.
  6. piezoe


    The article referenced by the url mentions TIPS as a hedge against inflation, but TIPS should be avoided because of the way the government now computes inflation.

    Some of the better hedges, in my opinion, involve investment in foreign companies based in stable, non-deficit economies that are not too closely tied to the US economy. Some of the Scandinavian companies look attractive in that regard, as do some selective European companies. A few of the Latin American beverage companies are also attractive as relative hedges if situated in countries with improving economies and currencies that are appreciating relative to the dollar.

    I don't like gold. It can keep you from losing in inflationary times, but over the long haul it is hard to make money in gold. In times of crises, as now, its price tends to be pushed well beyond its intrinsic value, leaving one who buys at high prices vulnerable.

    Real estate, when carefully selected and bought right, remains a good long-haul inflation hedge, and a preserver of wealth. It is somewhat more likely to turn a profit in excess of inflation than is gold.

    These comments are from a long-term investor's perspective, not from a short-term trader's perspective, which is quite different.
  7. What happened to money the banks/institutes claimed they lost in leveraged subprime CDOs? Money heaven?:confused:
  8. Papers only boast about the loses. :)
  9. Digs


    ..."Point is, the derivatives market will not play out until we see massive failuers in recourse loans, (private loans back by assets), credit card defaults on massive levels and the Down at 9000/10000. "...

    Shit thats next week...
  10. GS has it!

    How Goldman Won Big
    On Mortgage Meltdown
    A Team's Bearish Bets
    Netted Firm Billions;
    A Nudge From the CFO
    December 14, 2007; Page A1
    The subprime-mortgage crisis has been a financial catastrophe for much of Wall Street. At Goldman Sachs Group Inc., thanks to a tiny group of traders, it has generated one of the biggest windfalls the securities industry has seen in years.
    The group's big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30, according to people familiar with the firm's finances. Those gains erased $1.5 billion to $2 billion of mortgage-related losses elsewhere in the firm. On Tuesday, despite a terrible November and some of the worst market conditions in decades, analysts expect Goldman to report record net annual income of more than $11 billion.
    Goldman's trading home run was blasted from an obscure corner of the firm's mortgage department -- the structured-products trading group, which now numbers about 16 traders. Two of them, Michael Swenson, 40 years old, and Josh Birnbaum, 35, pushed Goldman to wager that the subprime market was heading for trouble. Their boss, mortgage-department head Dan Sparks, 40, backed them up during heated debates about how much money the firm should risk. This year, the three men are expected to be paid between $5 million and $15 million apiece, people familiar with the matter say.
    Under Chief Executive Lloyd Blankfein, Goldman has stood out on Wall Street for its penchant for rolling the dice with its own money. The upside of that approach was obvious in the third quarter: Despite credit-market turmoil, Goldman earned $2.9 billion, its second-best three-month period ever. Mr. Blankfein is set to be paid close to $70 million this year, according to one person familiar with the matter.
    Goldman's success at wringing profits out of the subprime fiasco, however, raises questions about how the firm balances its responsibilities to its shareholders and to its clients. Goldman's mortgage department underwrote collateralized debt obligations, or CDOs, complex securities created from pools of subprime mortgages and other debt. When those securities plunged in value this year, Goldman's customers suffered major losses, as did units within Goldman itself, thanks to their CDO holdings. The question now being raised: Why did Goldman continue to peddle CDOs to customers early this year while its own traders were betting that CDO values would fall? A spokesman for Goldman Sachs declined to comment on the issue.
    The structured-products trading group that executed the winning trades isn't involved in selling CDOs minted by Goldman, a task handled by others. Its principal job is to "make a market" for Goldman clients trading various financial instruments tied to mortgage-backed securities. That is, the group handles clients' buy and sell orders, often stepping in on the other side of trades if no other buyer or seller is available.
    The group also has another mission: If it spots opportunity, it can trade Goldman's own capital to make a profit. And when it does, it doesn't necessarily have to share such information with clients, who may be making opposite bets. This year, Goldman's traders did a brisk business handling trades for clients who were bullish on the subprime-mortgage-securities market. At the same time, they used Goldman's money to bet that that market would fall.
    #10     Jan 30, 2008