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To: d:oug who wrote (39015)	8/14/1999 10:37:00 PM
From: long-gone	Read Replies (2) \| Respond to of 116866

OT Yes, Doug, you have come upon some of the deepest thinkers in all of SI here on the GPM, & I'm also glad to have learned so much from so many.

To: d:oug who wrote (39015)	8/15/1999 12:16:00 AM
From: Enigma	Read Replies (1) \| Respond to of 116866

All of that time and effort to come up with this assanine remark!!: <<doug - Thanks teevee, your post was like shaking a wasp nest and getting all those gold bugs agitated>> Surely it should be a gold bug's nest? d

To: d:oug who wrote (39015)	8/15/1999 3:22:00 AM
From: d:oug	Respond to of 116866

Subj: David Tice - Interest Rate Swaps and Other Likely Problems Date: 8/14/99 8:37:11 AM EST From: LePatron@LeMetropoleCafe.com ... there are potentially big, big financial storm clouds on the horizon. Tice and Charles Peabody are alerting us THAT they are coming and WHY they are coming... ... David Tice has articulated how out of control the derivative situation may be... ..."last year - interest rate derivative positions expanded by $7.7 trillion - more than the total outstanding in 1993" ... "heavy losses have been suffered and our acutely vulnerable credit system is highly impaired" August 13, 1999 ... the market was able to ignore the darkening storm clouds encircling our financial system... ... US banks currently have off-balance sheet derivative obligations in excess of $33 trillion. Of this, fully $25 trillion are interest rate-related instruments. The growth of these products has been truly astounding... ...prone to egregious credit and other excesses. In this regard, we have a keen eye on interest rate swaps. ... let's look at the definition of an Interest Rate Swap "a contract in which two counter-parties agree to exchange interest payments of differing character based on an underlying notional principal amount that is never exchanged." Basically, a swap just allows the exchange of interest rate risk from one party to another. While there are many variations of swaps, their recent spectacular growth is certainly associated with the proliferation of leveraged speculation that has become endemic to our financial system. Whether it has been the over-enterprising hedge funds and securities firms that leverage mortgages, asset-backs, junk bonds and agency securities in the repo (repurchase) market, or Fannie and Freddie that aggressively use money market borrowings to finance their bloated balance sheets of mortgages, or companies such as GE Capital and GMAC that borrow in the money markets to finance holdings of various loans and receivables, these strategies of borrowing short and lending long create significant interest rate risk. And in this vein, remember that our financial sector increased borrowings last year by more than $1 trillion, in what largely amounted to one massive interest rate arbitrage.... ... speculators incorporated the use of swaps ... ... The seller of the swaption, usually a commercial bank or investment bank, assumes the risk of interest rate changes, in exchange for payment of a swap premium." Valuing these types of swaps with embedded options can be very tricky and writing such exceedingly volatile derivatives is a most risky endeavor, as many have learned this year... ... Another risky instrument that has become quite commonplace is the inverse floater... ... the key point to recognize is that with interest rates moving sharply higher after a period of unprecedented credit excesses, leveraging, speculation and financial engineering, the massive, virtually systemic, interest rate arbitrage has faltered badly... ... With $100 trillion of derivatives globally, we are much in uncharted territory that is reflected in heightened risk premiums. In this context, today there is absolutely no transparency to judge how some of these major players are weathering the storm... ... Is their book properly hedged or is their derivative portfolio an accident waiting to happen ?... ... we will be the first to admit that all this seems rather moot on a day where the Dow gained 184 points and the S&P Bank and NASDAQ100 indices advanced 4%. And while the bulls and the pundits will celebrate today's benign inflation report, it is largely irrelevant to the big picture. The bottom line remains that we are in the midst of unfolding financial turmoil with a dislocation in the credit markets... ... And each month the bubble lingers only leads to more problematic distortions. ... derivatives played a key role in today's buying melee. However, one of these days derivatives will not be so helpful and, in fact, we fully expect that they will play a major role in a selling stampede. For now, however... David Tice, The Prudent Bear Fund Endemic Distortions to the US Economy lemetropolecafe.com Le Metetropole Cafe Bill Murphy, Le Patron