Derivatives: Darth Vader's Revenge Message Board

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Non-Tech : Derivatives: Darth Vader's Revenge

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To: Henry Volquardsen who wrote (839)	3/25/1999 1:47:00 PM
From: Freedom Fighter	Read Replies (4) of 2794

Henry, >with all due respect I disagree. Mr Greenspan's analysis is correct.< The trouble I have with this "zero sum" idea is that even if true on an aggregate basis, it would appear to not be true on another level. Example: Assume four parties have a highly leveraged linkage of contracts. If one of the parties makes a large directional bet with another and loses, one of the other 4 is a big winner. The net being zero. Only problem is the loser may no longer be in a position to make good on its relationships with the other two and the big winner is not coming to the rescue. We then have 3 in trouble. I do not know the credit risk involved relative to net worth, but the published numbers I have seen are quite scary. If there are 88 trillion dollars of total derivatives, it would only take a small percentage of them to have credit risk and a small percentage of that to fail to cause quite a meltdown. I think any sort of prudence would require that this sort of stuff be discouraged as it simply must be adding risk in many ways even if some are using it to reduce risk. As the watchdog of the financial system, I think AG is doing a disservice. If I am misunderstanding please explain, but considering Warren Buffett expressed "meltdown" concerns as long as 5 years ago... Wayne Crimi

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