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

To: accountclosed who wrote (866)	3/27/1999 1:49:00 PM
From: Henry Volquardsen	Respond to of 2794

A very good summary, a few minor points 2. exposure to the clearing house is still exposure. Bu the clearing house has a fairly transparent structure so its strength can be judged. Also the margin system helps it avoid major problems. 3. it's not an automatic offset. It only takes place if the participants have agreed to it in their master documentation. Banks have been very concerned about credit exposure and many have pushed very aggressively for this language in documentation. It is now almost universal among market makers. 5. there is not a direct restriction placed on this, that I am aware of. The Fed will review what the banks are doing. If they are uncomfortable they will 'talk' to bank management about it. They are pretty effective in these talks. 6,7,8,9. absolutely Henry

To: accountclosed who wrote (866)	3/27/1999 8:04:00 PM
From: Stitch	Read Replies (1) \| Respond to of 2794

Antoine, I am a lurker on this thread but must read it intermittently due to time demands during the week. I've just caught up and your discussion with Henry and your subsequent summary, along with Henry's responses and comments have been very enlightening. Thank you and, of course, to Henry as well, for a splendid Sunday morning read here in Kuala Lumpur. Best, Stitch

To: accountclosed who wrote (866)	4/12/1999 10:56:00 AM
From: Worswick	Read Replies (2) \| Respond to of 2794

Good morning to all of you. What a great thread this is and how marvelously coherent. A great treat in a world, mostly, of dross. I have been away working and am sorry not to be able to read and keep up. If you could bear with me a moment…. let me be like Diane Sawyer. Forthright. Honest. Sincere. "I want to help point you in the right direction. It makes me feel so happy." I think all of you should run down to your library and get a book out, any book, on the war in Vietnam. Next, take out a book on Afghanistan, any book, on the period 1980 to 1990. Then, run through the exercise of asking yourselves why did Vietnam and Afghanistan occur? As a historian - I work on a process which I will call "historical inevitability". Before one takes up the issue of the ever escalating values or non values in the financial world… think of power as a series of blocks piled higher and high on each other…. With this none too difficult to master idea you look at the projection of power in the world…. and you say, "At a certain point of time… these powers or this power will attempt to "project" this power and the result will inevitably be…not victory in war or finance but failure." The First World War was a wonderful example of this "historical inevitability". The war was almost fought several times between the European powers but it came, finally, in 1914. In another time and other decades both the US and the USSR built up huge military establishments and it was inevitable…. that through a process of some terrible hubris that they would eventually attempt to use them somewhere… some day. The result: Vietnam and Afghanistan. What the US and the USSR (or what the European powers of 1914 thought they were doing) was attempting to fight a war that was easily winable because of their superior moral stature. The result: failure. Hubris. Now, turning to the financial markets. We are at a moment when we have become almost morally convinced that we UNDERSTAND! We understand the markets. We understand what makes them tick. At the last moment the FED will step in and save the day if anything untoward happens. They UNDERSTAND. Basically, the blocks have been piled so high that gravity or plain hubris is going to knock them down and unravel us. Five companies equal the entire US bond market? Bill Gates personal net worth is six or seven times the entire "giving" of the thousands and thousands of US foundations in one year? Comes a "glitch" the Fed, which sits atop this pyramid, will attempt to deal with the problem in the way that won the last war but not this war. This "glitch". What we are looking at is systemic risk on a huge scale, an almost mind boggling that will unravel carefully hedged, and carefully balanced exchanges that I till turn out were not carefully balanced. The result will look like a Abrams tank has rolled through a building of paper. I love your idea of the exchanges balancing out and taking the risk out of this derivative world Henry. Ref yours: "Gross exposure tells us little about net directional bets. The vast majority of gross derivative exposure is offsetting another position. Alarge portion of derivative holdings are exchange traded which removes the counterparty risk issue on that portion by virtue of exchange clearing mechanisms and margin requirements". Take a look at Alan Ryan's "corner" on Stutz Bearcat in the 20's, or the Hunt's corner on silver in the early 80's, or Soros S&P index position in Chicago during 1987 when positions went against the exchange. What was the result? There is simply so much systemic risk out there now in derivatives, with so many different synthetic instruments and so many aberrant personalities involved, with so many banks with so many differing agendas and portfolios and backroom problems of keeping up and logging in and out…. that even the machines won't be able to keep up once the blocks begin their dance and gravity begins to exert it's force on the market. Let me tell you the worst sign of all. My own personal bout of "historical inevitablility" and probably hubris. For fifteen years I have been a disbeliever in this market, in this carefully controlled and oh so carefully manipulated market. Now, I seriously believe that this market can go to 30,000 by 2010. Let me warn you. Every time I have turned into a raging bull in the last 18 years on a stock I have been wrong! Everytime I think something good is going to happen it is precisely the opposite. This is a horrrrrrrrrrrrrrrrrrrrrrrrrrible, horrible predictor. I am becoming optimistic. Eventually even a fool gets it right and I have come to absolutely distrust my my feelings of optimism. Listen. It's Chicken Little. Cheep. Cheep. Best to you all, Clark