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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: mutulu who wrote (149810)	9/24/2008 12:07:45 PM
From: butschi2	Respond to of 306849

>> I would therefore expect a exemption from capital limits >> for GS/MS for some time until they can downsize enough. > An article in FT said they have a period of years > (I think it said 3 years) to comply with > commercial bank capital requirements. Yes, something like that i would have expected. But one major failure in regulation is that the derivatives are not regulated at all. Fair value of fast changing derivatives is in the capital base. Some IBs had after netting sometimes positive fair value of all derivatives greater than their total capital. In a fast changing market if they are on the wrong side or derivatives pricing gets out of control, the core capital therefore evaporates in days. And derivatives dont have any value at all if your counterparties goes belly up and you dont have collateral, derivatives pose the ultimate risk: - price risk - counterparty risk You cant sell your derivatives fast enough in a fast changing market, because most are looked in like swaps for years or are OTC and therefore two partner aggrements and therefore have a limited secondary market, this doesnt count if you have a tranquil market, but if counterparty riks increase reselling of OTC derivaties might be forbidden by your counterparty, but this may depend on the non standard contracts you have. I expect some major lawsuits if OTC-CDS/SWAPS have been resold without prior written consent of the counterparty to some insolvent partner like LEH ;) With CDS you therefore cant really close your position through an offsetting position with another partner due to counterparty risk. In exchange traded derivatives you can close your position and you have standard and hopefully enforced margin requirements! JMP has $90 trillions in notional values in derivatives with only $81 billion in "Net Tangible Assets". Goodwill i dont count as capital. Thats a leverage bigger than 1:1000. On top of the asset base leverage of ~ 1:20 if you exlcude goodwill from capital. finance.yahoo.com You can net, have risk models etc, but the leverage is far to much. If some markets get out of control/models like at LTCM you can be ground to dust and that as a regulated bank ? Its simply nuts.