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

To: David C. Burns who wrote (94)	9/17/1998 9:33:00 AM
From: Worswick	Read Replies (1) \| Respond to of 2794

David many thanks for the URL... please do note what Soros said about derivative and derivative exposure. Soros.. "the Russian meltdown has revealed certain flaws in the international banking system which had been previously disregarded. In addition to their exposure on their own balance sheets, banks engage in swaps, forward transactions and derivative trades among each other and with their clients. These transactions do not show up in the balance sheets of the banks. They are constantly marked to market, that is to say, they are constantly revalued and any difference between cost and market made up by cash transfers. This is supposed to eliminate the risk of any default. Swap, forward and derivative markets are very large and the margins razor thin; that is to say, the value of the underlying amounts is a manifold multiple of the capital employed in the business. The transactions form a daisy chain with many intermediaries and each intermediary has an obligation to his counter parties without knowing who else is involved. The exposure to individual counter parties is limited by setting credit lines. This sophisticated system received a bad jolt when the Russian banking system collapsed. Russian banks defaulted on their obligations, but the Western banks remained on the hook to their own clients. No way was found to offset the obligations of one bank against those of another. Many hedge funds and other speculative accounts sustained large enough losses that they had to be liquidated. Normal spreads were disrupted and professionals who arbitrage between various derivatives, i.e.: trade one derivative against another, also sustained large losses. A similar situation arose shortly thereafter when Malaysia deliberately shut down its financial markets to foreigners but the Singapore Monetary Authority in cooperation with other central banks took prompt action. Outstanding contracts were netted out and the losses were shared. A potential systemic failure was avoided. These events led most market participants to reduce their exposure all round. Banks are frantically trying to limit their exposure, deleverage, and reduce risk. Bank stocks have plummeted. A global credit crunch is in the making. It is already restricting the flow of funds to the periphery, but it has also begun to affect the availability of credit in the domestic economy. The junk bond market, for instance has already shut down". My best regards to you, Clark