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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (1277)	3/7/2009 2:35:01 AM
From: axial	Read Replies (1) \| Respond to of 2794

Hawk, thanks for the reading assignment <g> I'm away for a few days. On a quick scan my reaction (as opposed to thinking) is to agree with you and Soros. I'll append the following... Message 25473636 and... Top U.S., European Banks Got $50 Billion in AIG Aid The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant. Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter. The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant. Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter. --- Covered Counterparties Some banks that were paid by AIG after it was bailed out by the government * Goldman Sachs * Deutsche Bank * Merrill Lynch * Société Générale * Calyon * Barclays * Rabobank * Danske * HSBC * Royal Bank of Scotland * Banco Santander * Morgan Stanley * Wachovia * Bank of America * Lloyds Banking Group --- More: online.wsj.com Jim

To: Hawkmoon who wrote (1277)	3/9/2009 8:32:47 AM
From: axial	1 Recommendation Read Replies (1) \| Respond to of 2794

Hawk, the two linked posts cover a lot of ground. Don't think it's possible to respond properly without writing a book. Some observations: - the Zero Hedge writer appears to start from the premise that derivatives are OK: good and useful. From that beginning, he advances to the conclusion that CDS may be insufficient. At no point in the linked article do we see any examination of the global impacts; no doubt is expressed, no caution advised. "Zero Hedge argues that CDS has been probably the most efficient way to hedge credit risks in the past 3 years." He doesn't ask or answer this question: "What is the point of hedging credit risk? What value does it add? If A gives credit to B, how does a side-bet between C and D improve matters?" I've advocated careful use of hedging (weather hydro and fuel cost) in previous employment: that is, limited use of derivative transactions to "even out" budget peaks. There's no question that derivatives and hedging can be useful. But no sane person would ever "bet the company" on 100% hedging, i.e., a zero-cost budget. This goes to the question of degree, in many aspects of derivative use throughout the financial system. --- - The writer spends a lot of time distinguishing between net and gross derivative exposure. I've posted on this before, about the supposedly "low" default rate eventually discovered in Lehman auctions last October. OK, they were low... but what would they have been without economic intervention? We don't know. - In the third chart, the writer notes the difference between net and notional exposures; the effect is to downplay the dangers. Fine. Global derivative exposure (notional) is estimated at ~ 1 $quadrillion. His charts suggests net exposure might be in 10% range - that is $100 trillion. One hundred trillion dollars: not chump change. We can slice and dice that number between leading economic players any way we want, but it still means that in a long-tail event governments (and taxpayers) are underwriting huge exposures. --- I won't even go into Soros' article. Largely, I agree. This gets almost philosophical. Do financial markets exist as entities in themselves, generating profits and losses without reference to the underlying economy? Should financial markets generate huge gains, without accompanying increases in measurable output? Is finance an entity itself, needing no correspondence to the real world of trade, hard goods, GDP, productivity? No. They are linked. When activities in the financial sector bleed back into destruction of healthy enterprises, disruption of supply and demand, speculative commodity excesses, mis-allocation of capital, and more - then the tail is wagging the dog. In my opinion. Jim