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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: abuelita who wrote (31287)	3/18/2008 4:50:40 PM
From: TobagoJack	Read Replies (3) \| Respond to of 218169

try this, easier to appreciate than a thick tome of a dense document, just in from pen pal "This Youtube video is getting lots of linkage on the discussion boards today -- it's from the BBC News about a tent city that has sprung up outside Los Angeles -- rather eye-opening, quite frankly Seeing this type of stuff on the telly could put the Fear of God into a lot of those UK house flippers I was writing about last week, and perhaps prompt them to start selling in earnest Fairly brief, only 1:33 in length -- youtube.com "

To: abuelita who wrote (31287)	3/18/2008 7:52:37 PM
From: stan_hughes	Read Replies (1) \| Respond to of 218169

Cliff Notes version is that those numbers represent a potential huge liability -- not all of it will go bad, and not all at once, but if you compare the amount of the invested capital of Bank X to even a tiny fraction of default experience on derivative numbers that large, you could easily and quickly see Bank X wiped out completely during an adverse credit event One other feature of that derivatives exposure is that everybody is cross-guaranteeing everybody else, so if one biggie goes down, it will take a lot of the others with it in a daisy-chain effect. The Fed's role in such a situation is to be the backstop to prevent the failure from spreading, but even the Fed has limited resources In a worse case scenario of a major default where US banks and the Fed could not honor their obligations, ultimately the United States itself would be faced with the choice of either backing up the debts by printing money in the trillions to pay them off, or to repudiate the debts, rendering US currency worthless as a promise to pay. The aftermath of both of those situations would not be very pretty

To: abuelita who wrote (31287)	3/18/2008 8:18:25 PM
From: KyrosL	Read Replies (1) \| Respond to of 218169

The big problem with those trillions of derivatives held by banks and other financial institutions is that they are not very liquid and are very volatile. A credit default swap, for example, which is basically insurance for a particular company's bonds, can double or triple in value overnight based on a rumor about the company. Because these instruments don't trade much, holders use models to value their positions. But different financial institutions use different models. So you have the paradox that banks on opposite sides of a particular trade both show a profit on the trade. They simply tweak their models appropriately <g> The big nightmare is when a bank has to liquidate its positions. Then, all of a sudden, huge losses appear out of the blue. The market doesn't know about models <g> No wonder the Fed was terrified about Bear Stearns going BK and trying to liquidate its positions. When Buffett acquired an insurance company a few years ago, he took a look at its derivatives portfolio that showed a nice gain and was horrified. He ordered it liquidated carefully and as quickly as possible. It took a number of years to do it and resulted in a loss of $400 million.