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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Kerry Phineas who wrote (40973)	12/26/1998 3:32:00 PM
From: Knighty Tin	Read Replies (1) \| Respond to of 132070

Kerry, There are several problems with derivatives. These include the fact that the banks on the other side of the trade may not be solvent. If you lose on your trade, you lose. If you win, you may lose because the other guy can't pay. And, worse, the guy you did the derivative with may have been solvent when you did the trade, but he has done a bunch with somebody else who isn't, and that suddenly makes him unable to pay up. Bankers Trust was very nearly at this level when they were bailed by the Germans, and they could have toppled every New York bank. But the main problem is leverage. Like Long Term Capital, these guys are making huge bets on small amounts of capital. True, they try to hedge them out in many cases, but we all know that some hedges are perfect and most are not. So, if you control a billion dollars by putting up $20 million, the market doesn't have to go far against you to kill you. It is very similar to commodities speculation. Commodities tend to be safer investments than stocks, but when you do them leveraged, they are much riskier than stocks. So, what could happen? First, derivatives are only part of the problem. These guys also have mortgage derivatives, which have a similar name, but are different except for the fact that they are also leveraged gambles. They also have huge loans to Latin America. And major bets on the bull stock market and margin loans out the wazoo. When you deal with this much leverage, even a small hiccup that goes against you can wipe out earnings for a year or two. A big hiccup can wipe out your capital. True, you can borrow from the Fed, but there is a point where they shut you down. I think the most likely scenario is total wipe outs of earnings at the banks and even the brain dead bulls may not consider zero or losses good numbers if they persist. The doomsday scenario is possible, but we have to hope that some of our banks are not stupid. And that is certainly more hope than analysis of their actions. The Fed cannot ease forever because it demolishes our balance of payments and creates huge trade deficits. So far, that has not led to a mass avoidance of the dollar. And it may not. But it could cut the value of the dollar making the stock market crash. If the market ever crashes, all the folks being paid with scam options may ask for real cash. True, they may get canned for asking, but cos. will have a tough time getting folks to work for paper that has been proven bogus. All of which adds to inflation, if the cash is paid, or deflation, if the workers are canned. But neither is good for the eps reports of the cos. that are leveraged to a bull market and ever increasing money supply and credit. MB