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Derivatives New?



March 10, 2008 – Comments (2)

Paul Farrell on Market Watch has a piece titled "Derivatives the new 'ticking bomb.'"  The only thing "new" about derivatives is that learning about these things is new to the masses. 

If you read the piece the events that lead to Buffett statement "financial weapon of mass destruction" was his experience in unwinding Gen Re's derivative group back in 2002.  It appears to have been costly and difficult.

So, clearly when someone of Buffett's reputation is warning about these things six years ago, they are hardly new. 

I'd had never heard of them until about a year and half ago.  At the time I immediately tried to learn more about them because I'd heard their was around $300 trillion of them.  It seemed like a big number.  I didn't have a clue as to how big the US economy was, but that seemed like a good comparison figure.  The US economy was around $12 trillion, so these derivative things were about 25 times bigger than the world's largest economy.

Here's the thing, a year and half ago you could spend a few days around search engines looking for more information on these derivative things, yet there was practically no information out there.  As far as I can tell, the "derivative time bomb" isn't a time bomb, but it has been a black hole sucking everything in its path and it's about to go super nova. 

And, that is amazing, that you could something out there that is so massive, and utter silence about it withing the markets.  Why was that?  I stopped what I was doing when I heard about these things and I all heard was a figure in the few hundred trillion range.  That was all I needed to hear to figure this is a pretty important thing to be informed about.  Seriously, why haven't these things been making the news regularly, with dire warnings, oh, since about 2002? 

The Market Watch piece is good, it is simply 6 years late... 

2 Comments – Post Your Own

#1) On March 11, 2008 at 12:37 AM, dbajack (29.46) wrote:

It's sad that the masses struggle to understand even basic finance and economics. Their brains have the capacity but they choose to fill them with other things. There is more curiosity about what the Sunday paper sales may hold.


Worse, is how often those who succeed in developing the areas of their brains that master finance and economics (etc.), do so at the cost of stunting the part that handles ethics.

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#2) On March 11, 2008 at 1:05 AM, jegr5347 (< 20) wrote:

I don't know where you got the $300trillion figure from but derivates always make reference to an underlying notional amount which is not the value of the option itself or the exposure. A currency futures is a perfect example where you control a notional amount much larger than the cost or exposure of entering into the transaction itself. Interest rate swaps are another example.

Derivates do serve a purpose and have for hundreds of years in cattle raising, farming, etc. The problem is that now you have a bunch of counterparties that are insolvent entering into these things. Enron opened a can of worms and Wall Street financiers have taken it to another level in recent years.

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