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

To: ahhaha who wrote (314)	10/4/1998 12:32:00 AM
From: Tundra	Read Replies (1) \| Respond to of 2794

ahhaha, Thanks for informative facts and thoughts which you have posted. I am not sure I followed all of it; but nonetheless at least feel slightly better informed. My question revolves more around the reported amount of notional derivatives in the LtCm case; i.e. approximately 1 trillion (or more). Assume for a moment that such number is accurate. Is it meaningful in any real way? Or do a great deal more facts need to come to light to draw any meaningful tentative exposure conclusions? Assume further for a moment that LTCM position consisted entirely of a short position in treasuries offset by an long position in Gnma's or some similiar group of mortgage backed securies.{I realize that such assumption is not factual in this case; other positions were apparently taken as well} At first blush, this would seem to indicate a one half trillion notional sum on each side of the trade. Given the assumptiom, is that true? Or is virtually meaningless even if true ? By trying to simplify an example of positioning like above, what further information do we need to at least ballpark the potential exposure of LTCM? For example, if we find that divergence rather than convergence results in a ten basis points move; thus going against the LTCM bet, do we have enough information in this hypo to translate that into actual dollar "losses."? If not, how much more do we need? This area is far enough from that which I am familiar. Additionally, it is late at nite and I easily could have missed something that should obviously be considered. I am hesitant to posit my guess. Your input would be most appreciated. TIA Regards, Tundra

To: ahhaha who wrote (314)	10/4/1998 2:08:00 AM
From: kahunabear	Read Replies (1) \| Respond to of 2794

Do you think we will have inflation even if the economy slows dramatically ? What about all of the excess capacity/production keeping prices down ? I have been thinking of shorting bonds, but worry about severe deflation as business slows. Do you think we could end up with a Japan rate scenario ? I think the spread between low and high risk rates could continue to widen as lenders become scared to take any risk. Could you explain the economic/fundamental factors you feel will lead to your "T-Bond off a cliff" scenario ? Thanks, WS

To: ahhaha who wrote (314)	10/4/1998 7:31:00 AM
From: IngotWeTrust	Read Replies (1) \| Respond to of 2794

ahhaha sez: ...gambling that FED would do the right thing, i.e., the rational, self-interest, economy-preserving thing, and lean against the US propensity to inflate. It was a Leeson kind of gamble. If they could only stay the position. The fact that he went bust means big money for us by patiently waiting to use the tapas he generated. He was right about the circumstances of US inflation and it's going to cost we the people plenty. ** I gotta say, ah, the thing that gets me about this interest spread gamble which, BTW, you've real written up well!!!, ...the thing that gets me re: these black box arbs that have gone sooooo haywire for LTCM and many other copy-cat hedge funds is the lack of study of history, basic Econ 101...where we, as a nation are a STRONG case study for re-inflation. WHY IN THE WORLD did the arb boyz think it would be different this time? Because AG was at the "helm?" AG didn't invent the cycle, nor can he prevent it. Global reflation has been on the agenda for the last, oh...dozen cycles? And the IMF re-funding has been on hold for over 1yr, which was another big, force the cycle's hand card, which only reinforced the re-flation argument... so, I ask you, why did the boyz think it would be different this cycle? Did they think the basic laws of economics had been repealed? ** And one further note, we students of history/goldbugs couldn't be happier about the birds finally coming home to roost on the 1% they couldn't stuff in the arb black boxes, frankly. The only footnote I hope makes it into the Econ 101 end of chapter discussion/history books for future generations of Merriweathers and Leesons is this: Piling on** without the repeal of inflation doesn't make arb'ing work any easier or nor does piling on make it any better for the guy/gal in the street. Neither Wall Street NOR Main Street. Not when the entire cyclic hand is finally played out! PS...I remember the 21% interest rates days, very very well. It was the causality that drove us broke in farming. We were making money after 10yrs and had decided to lease/financing irrigation equipment, our very first business expansion . At prime plus 8% lease contract which was all they, Commercial Credit (division of Ford-Kansas City) were offering back in those low interest rate days prior to the spike to 21%, you can see how 21% interest rates quickly drove the stake into the heart of our operation. Dear ahhaha, many of us not only remember, but experienced "reality based" life changes that rippled through generations and warped the very woof of day to day fabric. These "economic anecdotes" always have human based consequences. How many times do we have to re-learn "No (hu)man is an (economic) island? O/49r

To: ahhaha who wrote (314)	10/4/1998 9:18:00 AM
From: EPS	Read Replies (2) \| Respond to of 2794

When Economic Bombs Drop, Risk Models Fail By TIMOTHY L. O'BRIEN hen we examine banks, we expect them to have systems in place that take account of outsized market moves." -- Alan Greenspan, chairman of the Federal Reserve, in congressional testimony on Thursday Ever play blackjack at your local casino? Then the name Edward O. Thorp might be familiar. Thorp introduced blackjack fans to counting cards in his 1962 best seller "Beat the Dealer," which gave gamblers an invaluable tool for trying to beat the house. Ever wonder where hedge funds come from? An accomplished mathematician, Thorp started one of the first and most successful hedge funds, now called Edward O. Thorp & Associates, in 1969. And he has few kind words for the Wall Street professionals and Nobel laureates who helped bring Long-Term Capital Management, the giant hedge fund in Greenwich, Conn., to its knees. Thorp said he was invited to invest in Long-Term Capital when it was started in 1994, but he declined. "I didn't want to have anything to do with it because I knew these guys were just dice-rollers," he said. "I didn't really see where these guys had an advantage they could exploit." Many people on Wall Street clearly thought otherwise. Over the last four years, Long-Term Capital attracted money from some of the world's savviest investors, and made a lot of money for them during most of that period -- the salad days of the 1990s bull market. But hedge funds are supposed to perform well even when markets hit rough patches, as they have lately. And it is not clear whether the firm's fans had ever scrutinized Long-Term Capital's investment strategy with hard times in mind. "It was just a mutual admiration society at Long-Term," Thorp said, "and nobody was focusing clearly enough on the model." Aha. The model. Nowhere, except perhaps within the walls of the Pentagon, the White House's Situation Room or the National Weather Service, does "the model" hold as much sway as it does on Wall Street. Some of the most profitable trading on Wall Street, especially within hedge funds, involves complex, innovative products known as derivatives. Derivatives are financial hybrids born in the guts of a computer and intended to protect users from disadvantageous economic shifts like currency devaluations or interest-rate increases. In short, each derivative, its value "derived" from an underlying asset like a stock, bond or currency, is a little model. And financial models are only as good as their makers. nytimes.com