Posts filed under “Derivatives”
Via Demonocracy, we see this basic take on derivatives:
A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. Ex- A derivative buys you the option (but not obligation) to buy oil in 6 months for today’s price/any agreed price, hoping that oil will cost more in future. (I’ll bet you it’ll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won’t default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative.”
Where things go mad is when we start to conceptualize the amount of exposure the major banks (and through them you the taxpayer) have. The scale of derivatives these days has becomes so immense as to be nearly unimaginable.
So Demonocracy helps us along with this giant infographic of the 9 biggest banks by their Derivative exposure, both individually and collectively.
Here for example is State Street Bank — note the $1.39 trillion dollar pile of derivatives next to their HQ — as well as Goldman Sachs and their $44.2 trillion dollar derivative pile:
Compare that with Goldman Sachs
Barry Ritholtz Washington Post March 10 2012 ~~~ Last week, Greece officially defaulted on its debt. (Unofficially, it defaulted long ago.) This formal default on about $100 billion triggered payment of $3 billion in credit-default swaps. These are the non-insurance insurance products that pay off in the event of a default.Let’s take a closer look…Read More
I just did a phoner on Bloomberg TV on Goldie, and I suspect this meme has just about run its viral course. To me, the key takeaways are as follows: • Publicly Traded Banks: When firms shifted from Partnerships to publicly traded banks, their priorities changed. • Profits First: Meeting quarterly profit estimates became job…Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at CDS — how they became such a dangerous aspect of the financial firmament. The print version had the full headline Credit-default swaps are masquerading as financial products. They should be regulated as insurance products. (The online version is merely Credit…Read More
In this week’s Barron’s, Alan Abelson looks askance at the non-default default in Greece. All bombast aside, what makes this issue so fascinating to me is not whether or not Greece has or has not technically defaulted. Rather, it is that there is a committee of conflicted interested parties rendering a verdict on that issue….Read More
The EU arranged Greek bailout proceeds apace, as everyone else awaits for the official default date (Greece has already defaulted in my book, but I am in the minority). Hedged sovereign debt investors must feel like they are waiting for their wealthy grandfather to die so they can get to the reading of the will….Read More
Our story thus far: The Commodity Futures Modernization Act of 2000, sponsored by Texas Senator Phil Gramm as a favor to his wife Wendy (who sat on the Board of Directors of Enron, which wanted to trade energy derivatives without oversight) was rushed through Congress in 2000. Unread by Congress or their staffers, it was…Read More
“The International Swaps and Derivatives Association said on Thursday that based on current evidence the Greek bailout would not prompt payments on the credit default swaps.” > Here is a question for the crowd: Exactly how brain damaged, foolish and stupid must a trader be to ever buy one of these embarrassingly laughable instruments called…Read More
This weekend, I saw Margin Call on DVD. Jeremy Irons plays a CEO of a small Goldman Sachs like company. A young analyst at the firm discovers that their highly-leveraged, massive mortgage bets are based on a VAR formula that’s flawed. It failed to consider volatility ranges beyond historical distributions. With the market swinging, his…Read More