Hi Jay - its cold out there (www.bled.si with autumn colours, snow-powdered mountains...) and it's time off...
check this...
September 25: “The International Swaps and Derivatives Association (ISDA) announced today the results of the 2002 Mid-year Market Survey of privately negotiated derivatives notional amounts outstanding at swap dealers worldwide. Interest rate and currency derivative outstandings are $82.7 trillion, credit derivatives are $1.6 trillion, and equity derivatives, surveyed for the first time, are $2.3 trillion. ‘All swaps in the Survey grew significantly in the first half of 2002, but the growth in credit derivatives exceeded all expectations,’ said Keith Bailey, Chairman of the Board of ISDA. ‘The strong increase in credit swaps is good news both for market participants and for financial markets as a whole,’ said Bailey. ‘Individual market participants are taking advantage of the availability of credit protection, and financial markets are benefiting by spreading credit risks over a wider and deeper market.’ Interest rate and currency derivatives, which consist of interest rate swaps and options and currency swaps, increased over 19% since ISDA’s Year-end Survey in December. Among firms responding to both the Year-End and Mid-Year Surveys for interest rate and currency derivatives, outstandings grew 16%; and among the top ten reporting dealers, outstandings grew nearly 18%. Credit derivatives, which consist of credit default swaps, grew 44% since the end of 2001; among firms responding to both the 2001 Year-End and the 2002 Mid-Year Surveys, outstandings grew 35%. Equity derivatives, which consist of equity forwards, swaps, and options, are the newest addition to the Market Survey.”
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...“Structured finance” has run amuck. And why the high correlation between the numbers of “risk” models in operation and the surprisingly large number of low probability events? Former Fed Chairman Paul Volker, as usual, gets right to the heart of the matter: “A lot of the value-at-risk stuff was invented by mathematicians who don’t know anything about the markets.”
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...the optimistic Chairman Greenspan...[in] ...his Wednesday speech in London: “A major contributor to the dispersion of risk in recent decades has been the wide-ranging developments of markets in securitized bank loans, credit card receivables, and commercial and residential mortgages. These markets have tailored the risks associated with holding such assets to fit the preferences of a broader spectrum of investors. Especially important in the United States has been the flexibility and size of the secondary mortgage market. Since early 2000, this market has facilitated the large debt financed extraction of home equity that, in turn, has been so critical in supporting consumer outlays in the United States throughout the recent period of cyclical stress. This market’s flexibility has been particularly enhanced by extensive use of interest rate swaps and options to hedge maturity mismatches and prepayment risk.” (We certainly take no issue with his assessment of the critical financial and economic role played by mortgage finance!)
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...That Greenspan would this week comment that outsized risk premiums “suggest” the “potential for a far larger world financial system” suggests that he has conveniently sunk to a new low in economic analysis (and that he is deluded). This key issue goes all the way back to the John Law’s great fallacy: that economic wealth can be created simply by providing additional money (“finance”). And in reasoning that either lacks credibility or understanding, Greenspan would like us to believe we can have our cake and eat it too – that more beneficial “finance” can be created that leads to more “wealth” and higher living standards, as long as it is “managed ever more effectively.” ...
my gut feeling - risk is good (just as somebody long time ago said "greed is good") let's securitize just everything from Apples to Zebras and sell it to some mongoose as a X point Y something. Call it security, because it is secure, ie no risk. Oh yes, and if you really care, buy some lotto ticket at wholesaler's against credit default, interest rate, power-outage blah blah blah, swap this, sweep that and dont forget to slap on some lipstick when you're done
And everybody has a share - to quote Milo Minderbender again.
RegZ
dj
PS: quotes from Doug Noland (of course)
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