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Posts tagged ‘derivatives’

Boom Goes The Dynamite: The Crashing Price Of Oil Is Going To Rip The Global Economy To Shreds

f you were waiting for a “black swan event” to come along and devastate the global economy, you don’t have to wait any longer.  As I write this, the price of U.S. oil is sitting at $45.76 a barrel.  It has fallen by more than 60 dollars a barrel since June.  There is only one other time in history when we have seen anything like this happen before.  That was in 2008, just prior to the worst financial crisis since the Great Depression.  But following the financial crisis of 2008, the price of oil rebounded fairly rapidly.  As you will see below, there are very strong reasons to believe that it will not happen this time.  And the longer the price of oil stays this low, the worse our problems are going to get.  At a price of less than $50 a barrel, it is just a matter of time before we see a huge wave of energy company bankruptcies, massive job losses, a junk bond crash followed by a stock market crash, and a crisis in commodity derivatives unlike anything that we have ever seen before.  So let’s hope that a very unlikely miracle happens and the price of oil rebounds substantially in the months ahead.  Because if not, the price of oil is going to absolutely rip the global economy to shreds.

What amazes me is that there are still many economic “experts” in the mainstream media that are proclaiming that the collapse in the price of oil is going to be a good thing for the U.S. economy.

The only precedent that we can compare the current crash to is the oil price collapse of 2008.  You can see both crashes on the chart below…

Boom Goes The Dynamite: The Crashing Price Of Oil Is Going To Rip The Global Economy To Shreds.

Understanding Credit default swaps

In the first video clip toward the end you heard we the taxpayers were taking over approximately 14,000,000,000:00 Billion worth of Derivatives or (CDS) from Anglo Irish Bank  alone!

(I personally believe that that figure to be near the 100,000,000:00 mark)

But most people do not know or understand what exactly these Derivatives are let alone understand them .So in the 2nd video clip you can get a crash course on the basics of CDS.

But the bottom line is Brian Cowen and Brian Lenihan could not possible know what they needed to know before taking on such obligations and there lies’ the crocks of the Irish financial meltdown.

Politicans, experts at waffling are making decision on complex financial instruments, that I have being studying for the last 12 years and still do not fully understand, but I know that they are like financial nuclear bombs and are best Instruments that should be avoided at all costs. They are unregulated and you are buying a pig and a poke.

Here is what Warren Buffet had to say about these unregulated financial tools .

In fielding a question about derivatives, which he once referred to as “financial weapons of mass destruction,” Mr. Buffett told shareholders that he expects derivatives and borrowing, or leverage, would inevitably end in huge losses for many financial participants.

“The introduction of derivatives has totally made any regulation of margin requirements a joke,” said Mr. Buffett, referring to the U.S. government’s rules limiting the amount of borrowed money an investor can apply to each trade. “I believe we may not know where exactly the danger begins and at what point it becomes a super danger. We don’t know when it will end precisely, but…at some point some very unpleasant things will happen in markets.”

Mr. Buffett has expressed similar bearish sentiments about derivatives in previous meetings and in his widely read annual letters to shareholders. He had first-hand experience with the difficulties of derivatives after Berkshire acquired General Re, the reinsurance company, in the late 1990s, and spent several years unwinding its derivatives portfolio at a loss to reduce the subsidiary’s exposure to risk. He noted, however, that Berkshire currently has several dozen derivatives positions — such as futures and options contracts on stock indexes and foreign currencies — and added that “derivatives aren’t evil.”

Charlie Munger, Berkshire’s 83-year-old vice-chairman and Mr. Buffett’s droll sidekick during the six-hour annual meeting, said that the accounting of derivatives contributed to the risks they pose to the financial markets.

“The accounting being deficient enormously contributes to the risk,” said Munger, lamenting that executives and shareholders were getting paid on “profits that don’t exist.”

Mr. Buffett noted that existing accounting conventions allow parties involved in derivative transactions to value the same contract differently, leading to an inadequate or incomplete picture of the contract’s risk. “I will guarantee you, if you add up the marks on both side, they don’t add up to zero,” Mr. Buffett said, referring to the accounting of a single derivative contract.

Exacerbating the problem of derivatives and leverage is the short-term trading mentality and high turnover in the stock and bond markets, Mr. Buffett and Mr. Munger added. “There is an electronic herd of people around the world managing an amazing amount of money” who make decisions based on minute-by-minute stimuli, said Mr. Buffett, adding, “I think it’s a fool’s game.”

Source http://seekingalpha.com/article/34606-buffett-on-derivatives-a-fool-s-game

So what has Cowen and Lenihan gotten us into ?

18 months later!

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Ireland’s leading academics recommend ‘Nationalising banks is the best option’

Date: 17 Apr 2009

The following commentary has been written by a group of Ireland’s leading academic economists, including faculty from UCD Smurfit School: John Cotter, associate professor of finance, Don Bredin, senior lecturer in finance, Elaine Hutson, lecturer in finance and Cal Muckley, lecturer in finance

Published:  Irish Times

Twenty of Ireland’s leading academic economists argue that the Government has got it badly wrong. Nama is not the way to clean up the banking mess created by the property bubble: temporary but full-blooded nationalisation of the banks is the only way

OVER THE last number of months extraordinary changes have occurred in the Irish banking and financial scene. We believe that we are now at a critical stage in Irish economic history and that it is crucial that the Government take the right course of action to deal with the problems in our banking sector.

The banking system is widely perceived to have seized in terms of lending, and whether correct or not this perception needs to be addressed. We believe that the correct action to take now is nationalisation of the banking system, or at least that part of it that is of systemic importance.

We do not make this recommendation from any ideological position. In normal circumstances, none of us would recommend a nationalised banking system. However, these are far from normal times and we believe that in the current circumstances, nationalisation has become the best option open to the Government.

Furthermore, we explicitly recommend nationalisation only as a temporary measure. Once cleaned up, recapitalised, reorganised with new managerial structures, and potentially rebranded, we recommend that the banks be returned to private ownership.

In introducing its proposals for the National Asset Management Agency (Nama), Government Ministers and Peter Bacon, the consultant who recommended this plan to the Government, have stressed that they see their current plan as likely to produce a superior outcome to nationalisation (though they concede that majority State ownership may be required).

We disagree strongly. We see nationalisation as being the inevitable consequence of a required recapitalisation of the banks done on terms that are fair for the taxpayer.

We can summarise our arguments in favour of nationalisation, and against the Government’s current approach of limited recapitalisation and the introduction of an asset management agency, under four headings. We consider that nationalisation will better protect taxpayers’ interests, produce a more efficient and longer lasting solution to our banking problems, be more transparent in relation to pricing of distressed assets, and be far more likely to produce a banking system free from the toxic reputation that our current financial institutions have deservedly earned.

PROTECTING THE TAXPAYER

Our banks have made an enormous quantity of bad loans, mainly to property developers, and realisation of these losses will see a substantial erosion of their capital base. International financial regulations require that banks maintain certain levels of capital to be allowed to stay in business.

In addition, as the recession mounts, so too will bad debts in consumer and other commercial loans, and so our banks need outside capital investment to make up the losses on these loans. The highest grade, and most desirable, form of capital is ordinary share capital, and in the current circumstances the Irish Government is the only conceivable investor willing to provide this capital.

The Government has put forward Nama as a vehicle to take these bad loans off the banks at a discounted rate. To the extent that the realisation of losses on these loans erodes the capital position of the banks, the Government has indicated that it is willing to supply equity capital in return for shares.

Crucially, however, the Government’s current descriptions of the range of outcomes from this process suggest that they are badly underestimating the scale of losses at our banks, and as such may end up substantially overpaying for bad assets.

Take our two leading banks, AIB and Bank of Ireland. Analysts have repeatedly estimated the extent of bad loans at these banks to be of the order of at least €20 billion. Losses of this sort would wipe out virtually the entire €27 billion of Tier 1 capital of these banks. This means that if the Government purchases these loans at fair market value, it will end up having to provide funds to replenish fully the equity capital of these banks and, in consequence, would end up with essentially full ownership of these banks.

There is thus a fundamental internal contradiction in the Government’s current position. The Government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership.

These three outcomes are simply mutually incompatible, and we are greatly concerned that the Nama process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement. This would arise if Nama purchases the bad loans at a discount – but still well above market value.

With €90 billion in loans to be purchased, the consequences to the taxpayer of overpaying for bad assets by 10 to 30 per cent are truly appalling. To put these figures in perspective, the effect in a full year of the Budget measures taken last week was to save the exchequer €5 billion.

Peter Bacon and others have argued in recent days that the question of who owns the banks does not matter, because the ownership structure does not change the underlying size of loan losses. Frankly, this is argumentation by distraction.

Nobody is claiming that nationalisation changes the underlying loan losses on the bank balance sheets. However, what it does change is who owns the equity and also who has first claim on any increase in value in the new banks after they have been recapitalised. If nationalised, the taxpayer stands to get a return on their equity investment after the banks have been sold into private hands in a few years’ time, and this would substantially reduce the underlying cost to the taxpayer.

Furthermore, nationalisation offers an opportunity, should the Government see such a need, to share directly with the taxpayers the upside in restoring banking sector health. Such an opportunity could involve a voucher-style reprivatisation of the banks and could be used to provide economic stimulus at a time of scarce resources, at no new cost to the exchequer.

A MORE LASTING SOLUTION

With the Nama process charged with meeting the three mutually contradictory objectives above, it is also possible that objective (b), recapitalising, will not be fully met. In other words, a Government that needs to be seen to purchase the bad assets at a reasonable discount and that does not want to take too high an ownership share may end up skimping on the size of the recapitalisation programme. Thus, rather than create fully healthy banks capable of functioning without help from the State, this process may continue to leave us with zombie banks that still require the State-sponsored life-support machine that is the liability guarantee.

However, once nationalised and with the promise of future returns for the State, the incentive for the Government will be to create well-capitalised healthy banks that can be privatised and allowed to operate independently from the State, as quickly as possible. We believe that full nationalisation now will end up getting the State out of its involvement in the banking business faster than the current approach being taken by the Government.

In contrast, a circumstance where a drip-feed of recapitalisations is required would be the worst of all possible outcomes.

TRANSPARENCY

Peter Bacon and Government Ministers have stressed that it is necessary to keep the banks out of public hands so that the process is a transparent one.

The truth is exactly the opposite.

Every additional euro that the State pays for bad assets is an additional euro for the current bank capital holders and one euro less of valuable equity investment for the State. For this reason, the process by which Nama purchases the bad assets is going to be an extremely controversial one. Already, analysts are citing ranges from 15 per cent to 50 per cent as appropriate for the discount on these loans.

However the Government decides to price these assets, whether it be via accountancy firms, auctioneers or economic consultants, the process is going to have an element of arbitrariness to it and is unlikely to be one that will be widely seen as fair and transparent.

By contrast, nationalisation per se requires no such controversial asset-pricing process. Nationalisation can still involve a Nama, if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.

However, the valuation process in this case would cease to be controversial, as the Government would own both the Nama and the banks, so the price would hardly matter. The Swedish bad bank experience (widely mis-reported in this country) involved an asset valuation board that set the price for assets transferred from nationalised banks, but the process was not a controversial one.

A related argument that Government officials have made against nationalisation is that it would remove the stock market listing and market monitoring function, rendering opaque the quality of the State-owned banks. However, the experience of recent years is one that would have to cast doubt on the ability of markets to effectively monitor financial institutions.

TOXIC REPUTATIONS

The Government’s plans seem likely to keep in place the current management at our biggest banks.

For instance, the smaller discounts on bad loans being cited would, if paid, likely allow Bank of Ireland to maintain its recent levels of equity capital without taking more funds from the Government than the €3.5 billion it has already taken (in return for preference shares which give an option for a 25 per cent State share.)

This type of incremental change will do little to restore the battered reputation of Irish banking. It would be difficult to avoid claims of crony capitalism and golden circles were billions of State monies to be placed into the banks with minimal changes in their governance structure.

Nationalisation provides the opportunity for a fresh start for Irish banking. The State should run the temporarily nationalised banks as independent semi-State operations headed by highly independent boards of senior figures of the utmost integrity. Executives for these banks should be sourced through an international search, and remunerated accordingly.

These executive boards should be charged with a clear mandate to improve risk management practices, restore the brand image of Irish banking and finance, and return the banks to private ownership in a reasonably short time frame, for as high a stock price as possible.

This would certainly see substantial changes in senior management and board members in these banks, and allow for a rebuilding of the reputational capital of these institutions.

To conclude, we consider that the Government’s approach of limited recapitalisation supplemented by Nama represents only a partial solution to our banking problems, and one that is unlikely to protect the taxpayer. A nationalised banking system with a mandate to restructure and reprivatise would be a preferable approach at this time.

List of signatories

This commentary has been written by a group of Ireland’s leading academic economists, several of whom have analysed and commented on the banking and financial crisis on these pages and elsewhere over the past year. They are:

Karl Whelan, professor of economics, dept of economics, UCD; John Cotter, associate professor of finance, Smurfit School, UCD; Don Bredin, senior lecturer in finance, Smurfit School, UCD; Elaine Hutson, lecturer in finance, Smurfit School, UCD; Cal Muckley, lecturer in finance, Smurfit School, UCD; Shane Whelan, senior lecturer in actuarial studies, school of mathematics, UCD; Kevin O’Rourke, professor of economics, Trinity College Dublin; Frank Barry, professor of international business and development, school of business, Trinity College Dublin; Pearse Colbert, professor of accounting, school of business, Trinity College Dublin; Brian Lucey, associate professor of finance, school of business, Trinity College Dublin; Patrick McCabe, senior lecturer in accounting, school of business, Trinity College Dublin; Alex Sevic, lecturer in finance, school of business, Trinity College Dublin; Constantin Gurdgiev, lecturer in finance, school of business, Trinity College Dublin; Valerio Poti, lecturer in finance, DCU business school; Jennifer Berrill, lecturer in finance, DCU business school; Ciarán Mac an Bhaird, lecturer in finance, Fiontar, DCU; Gregory Connor, professor of finance, department of economics, finance and accounting, NUI Maynooth; Rowena Pecchenino, professor of economics, department of economics, finance and accounting, NUI Maynooth; James Deegan, professor of economics, Kemmy School of Business, Limerick; and Cormac Ó Gráda, professor of economics, UCD

source http://www.smurfitschool.ie/aboutsmurfit/news/newsarchive/title,31429,en.html

Comment:

It’s hard to believe but it is now 18 months since these academic economists called for the government to do what I would have thought was the most obvious route to go regarding the Banking crises

18 months later we see these people were right all along!

On the 01.10.2010 the Irish government has effectively nationalized 85% of the banking system and has wasted billions by not taking the advice of these leading academic economists. In fact it has emerged the two Brian’s have wasted millions on advice from international firms like Morgan Stanley only then to ignore it

In the video clip above we hear about Derivatives and a possible 14,000,000,000:00 exposure

For  the last 18 months I have consistently tried to expose  these losses and I must now conclude that 14 billion is far short of the eventual figure, baring in mind what has emerged since the video was first shown across our TV screens

I suspect that the eventual figure is many times this figure and could be up to 100,000,000,000:00

This Derivative market has collapsed with the bankruptcy of AIG in the US

and there is no sure way in valuing these particular financial toxic tools

there is no market so there is no value !

Last Friday in the irish Times I picked up this article and it appears we are taking on another 200 billion in Bank debts??Doc132010  (last paragraph) are these the derivate losses I am talking about?

The banks are continuing to hide these huge losses and the government is colluding with the banks with this fraud!

We are saddled with an obviously incompetent corrupt Government hell-bent on clinging to power at all , and any cost to the Irish people. We as a people must stand up and challenge these economic terrorists any way we can. It’s time the people had their say

We need a general election.

NAMA and its derivative trading

NAMA and its first Quarterly accounts  ACCOUNTS NAMA    PDF Doc  
I have been warning for the last 18 months that the Banks were hiding losses in their derivative trades .I then showed that NAMA was also intending to deal in derivatives.
I have not had any luck getting any comments from any of the political parties (including the Labour party)
I now feel vindicated as the first public accounts from NAMA clearly show losses stemming from
Derivative trades of which they are holding approx 16 Billion euro worth!
So now we know that NAMA are also dealing in Derivatives and are doing no better that the banks were
I predict a total loss in all of this kind of trading activity!
Cowen and Lenihan should be taken out and S*** for this fraud on the Irish people

Derivatives ???


NEW YORK (Reuters) – Warren Buffett’s Berkshire Hathaway Inc said fourth-quarter profit surged, helped by derivatives bets tied to global stock markets, though operating profit fell 40 percent as the weakened economy weighed on several businesses.

Profit rose for a third straight quarter, and full-year profit increased 61 percent, as Berkshire rebounded from perhaps its worst year since Buffett took over in 1965.

“I was quite impressed with the results,” said Vahan Janjigian, author of the book “Even Buffett Isn’t Perfect.”

“It is clearly suffering from the economic recession we have been in, but compared with most other companies involved in similar businesses, it is doing quite well,” he added.

In his annual letter to Berkshire shareholders, Buffett admitted that Berkshire’s ability to outperform that benchmark “has shrunk dramatically,” and that “our future advantage, if any, will be a small fraction of our historical edge.”

Net worth per share, which measures assets minus liabilities and is a key metric for Buffett, rose 19.8 percent, compared with a 9.6 percent drop a year earlier.

Still that lagged a 26.5 percent gain including dividends for the Standard & Poor’s 500, the first time it trailed since 2004. Berkshire’s net worth per share is up 20.3 percent annually since 1965, while the S&P 500 is up 9.3 percent. Total book value rose to $131.1 billion from $109.27 billion.

full story link

http://www.reuters.com/article/idUSTRE61Q1IF20100227?loomia_ow=t0:s0:a49:g43:r5:c0.100000:b31169752:z0

Have helped warren buffet to come in with substantial profits as fourth-quarter profits surged, helped by derivatives bets tied to global stock markets, though operating profit fell 40 percent as the weakened economy weighed on several businesses.
Profit rose for a third straight quarter, and full-year profit increased 61 percent, as Berkshire rebounded from perhaps its worst year since Buffett took over in 1965.

 

Derivatives have been the driving force for the enormous profits enjoyed by the major banks in the US in the last quarter as well

Now we see even Buffet is using them!

But on real economic activity nothing doing we are still in the dole drums and the only way the banks are going to give an encore with regards to their profits going forward is to keep using even bigger and riskier Derivatives bets

In other words “Gambling” all over again!

They will have to engineer another bubble and the stock market in the obvious choice so expect a massive turn in the markets soon

Place your bets here now!

Wall St. Helped to Mask Debt Fuelling Europe’s Crisis

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.

Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.

A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.

Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.

The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow.

For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.

“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.

These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed.

The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union‘s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.

George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.

Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.

Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.

Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”

source  http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=2

The Derivatives bubble

 

 


 

Derivatives have grew into a massive bubble, some USD
1,144 Trillion
by 2007. The new derivatives bubble was fuelled by five key economic and political trends:

  1. Sarbanes-Oxley increased corporate disclosures and government oversight
  2. Federal Reserve’s cheap money policies created the subprime-housing boom
  3. War budgets burdened the U.S. Treasury and future entitlements programs
  4. Trade deficits with China and others destroyed the value of the U.S. dollar
  5. Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett’s clear warnings,”
in my view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

That warning was in Buffett’s 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. On Buffett’s mind also was His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street’s big shots look like amateurs. Buffett tried to sell off Gen Re’s derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a “financial weapon of mass destruction.”


A massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession. In five years comes from the most recent survey by the Bank of International Settlements, the world’s clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier’s window at a racetrack or casino, where you’d place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

To grasp how significant this bubble is let’s look at these numbers

U.S. annual gross domestic product is about $15 trillion

  • U.S. money supply is also about $15 trillion
  • Current proposed U.S. federal budget is $3 trillion
    • U.S. government’s maximum legal debt is $9 trillion
    • U.S. mutual fund companies manage about $12 trillion
    • World’s GDPs for all nations is approximately $50 trillion
    • Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
    • Total value of the world’s real estate is estimated at about $75 trillion
    • Total value of world’s stock and bond markets is more than $100 trillion
    • BIS valuation of world’s derivatives back in 2002 was about $100 trillion
    • BIS 2007 valuation of the world’s derivatives is now a whopping $516 trillion

Moreover, the folks at http://www.bis.org/statistics/derstats.htm
BIS tell me their estimate of $516 trillion only includes “transactions in which a major private dealer (bank) is involved on at least one side of the transaction,” but doesn’t include private deals between two “non-reporting entities.” They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

Also, keep in mind that while the $516Trillion “notional” value (maximum in case of a meltdown) of the deals is a good measure of the market’s size, the 2007 BIS study notes that the $11 trillion “gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.”


The fact is, derivatives have become the world’s biggest “black market,” exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today’s slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco’s bond fund king Bill Gross said “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.” In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America’s leaders can’t “figure out” the world’s USD .1,144 Trillion $ derivatives.(see below)

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic “shadow banking system” that has become the world’s biggest “black market?”

Here are some of the types of derivatives that are out there.

Have you ever heard of them?

Chances are your local bank manager hasn’t either!

But I bet his Head office has a few slick traders that are trading these on a Daly bases and I’m

Pretty sure that they must be in it up to their necks!

  • Foreign exchange contracts
  • Listed credit derivatives
  • OTC ( over the counter)
  • Forwards and forex swaps
  •  Currency swaps
  • Options on Interest rate contracts
  • Forward rate agreements
  • Interest rate swaps
  • Options on
    Equity-linked contracts
  • Forwards and swaps
  • Options on Gold & Other commodities
  • Credit default swaps
  • Single-name instruments
  • Multi-name instruments
  • Unallocated instruments
  • CDS (credit default swaps)
    CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ to which the CDS contract refers

     

  • ABS (asset-backed securities)
  • MBS (mortgage-backed securities)
  • OTC derivatives
  • Futures

    To name but a few!

  •  According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

  • 1. Listed credit derivatives stood at USD 548 trillion;

    2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

    a. Interest Rate Derivatives at about USD 393+ trillion;

    b. Credit Default Swaps at about USD 58+ trillion;

    c. Foreign Exchange Derivatives at about USD 56+ trillion;

    d. Commodity Derivatives at about USD 9 trillion;

    e. Equity Linked Derivatives at about USD 8.5 trillion; and

    f. Unallocated Derivatives at about USD 71+ trillion.

 

For a more indebt information on the latest actual derivative figures please follow this link

It makes very interesting reading

Link  http://www.bis.org/statistics/derstats.htm

Source http://www.elliottwavetechnology.com

Tom Foremski at http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php

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