OT-derivatives
I'm not sure I see your point. Mortgage-backed securities are collateralized by pools of individual homeowners. Barring an economic meltdown, they simply aren't going to default (and lose their homes) in large numbers. The derivatives are, in turn, collateralized by the mortgage-backed securities.
I'm no expert on derivatives, but I would guess that $50 trillion vastly overstates the potential problem, even in the worst case. "Derivatives" is a generic term for a vast array of financial instruments. No single financial event is going to put more than a fraction of the entire $50 trillion at risk.
Further reducing the risk to the financial system, a lot of these trades are swaps of one kind or another. For example, Bank A and Bank B trade revenue streams based on their opposing beliefs about the future direction of interest rates. They can't *both* be wrong, so if Bank A loses its shirt, Bank B makes a ton of money. Another common use of derivatives is as a hedge, very similar to selling options against a stock position. You might lose money on the derivatives but make money on the underlying security, or vice versa. These kinds of uses of derivatives reduce risk, rather than increase it.
Regarding cash as a hedge against the nightmare scenario, can I assume you have stacks of folding green hidden somewhere? If you really believe that derivatives are going to collapse the financial system (which I don't), money market mutual funds are probably *not* the place to be. Some of these make heavy use of derivatives themselves in the attempt to squeeze every last point of yield out of the securities they own. Read your fund's prospectus.
Katherine |
