I expect most of the derivaties can be sold off piece by piece, if done right, should be for 90 cents on the dollar for most pieces. GS knows who the buyers are.
Why do you believe this? Warren Buffet does not believe that does he? He has said it will take him and charles munger YEARS to close out thier positions no?
business.timesonline.co.uk
In fact, the reinsurance and derivatives businesses are similar: like Hell, both are easy to enter and almost impossible to exit. Another commonality is that both generate reported earnings that are often wildly overstated. That’s because they are based on estimates whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid on “earnings” calculated by mark-to-market accounting. But often there is no real market and “mark-to-model” is utilised. This substitution can bring on large-scale mischief. Of course, both internal and outside auditors review the numbers, but that’s no easy job. General Re Securities at year end (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. The valuation problem is far from academic. Some huge-scale frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. On a micro level, this is often true. Indeed, I sometimes engage in large-scale derivatives transactions to facilitate certain investment strategies.
However, the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal
Futures trading has been in existance since the 12th century - when does global collapse come? Here is a timeline of derivatives scandals.
ex.ac.uk
Keynes on Speculation
"Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not the faces which he himself finds the prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view."
"It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree when we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees."
Keynes, John Maynard The general theory of employment, interest and money. London : Macmillan, St. Martin's Press, 1936. page 156.
db.riskwaters.com
Those with a more upbeat view than Marc Faber or Warren Buffet of the contribution made by credit derivatives to the global financial system argue that far from encouraging the irresponsible build-up of an ever-proliferating stock of credit, the CDS market in particular acts as an extremely efficient arbiter of value and hence of risk.
Many also argue that rather than concentrate risk, the credit derivatives market has made a remarkable contribution to diffusing it. Notably, Federal Reserve chairman Alan Greenspan has lent his voice to this particular argument, describing financial derivatives in January 2004 as “the new instruments of risk dispersion” that “have enabled the largest and most sophisticated banks in their credit-granting role to divest themselves of much credit risk by passing it to institutions with far less leverage”. Those instruments, Greenspan added, had contributed to the development of a “far more flexible, efficient and hence resilient financial system than existed just a quarter-century ago”. Tangible proof of this was provided, he said, by the telecommunications sector, which on a worldwide basis borrowed more than $1 trillion between 1998 and 2001. Although a substantial amount of this debt defaulted, the capacity of banks to pass their exposure on to institutions and hence to diffuse the risk associated with the telecoms boom meant that “no major financial institution defaulted, and the world economy was not threatened. Thus, in stark contrast to many previous episodes, the global financial system exhibited a remarkable ability to absorb and recover from shocks.”
Now Greenspan just prior to the S&L crisis was praising how well they were all doing no?
credit-deriv.com
Credit derivatives volumes soar with triple digit growth rate
Added 7th Oct, 2005
The growth in the credit derivatives market surpasses all previous estimates - the first half 2005 data released by ISDA shows an unprecedented year-on-year growth and the volumes are moving towards a whopping USD 20 trillion by the year-end. |
