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abitarePERFECT (28.29)

If you own an Investment Bank or Bank, I would avoid these



March 16, 2008 – Comments (10) | RELATED TICKERS: JPM , C , WFC

Warren Buffett predicted of financial derivatives: they are proving to be “weapons of mass financial destruction".

Taken from Mike "Mish" Shedlock at:

Look at the level of derevatives in these banks.

JPM $91 TRILLION in derevatives

C $34 TRILLION in  in derevatives

BAC $31 TRILLION in derevatives 

W $5 TRILLION in derevatives 

To big to fail? We will see... to big to rescue makes more sense to me.

Mish comment: 

Let's Not Pretend

I am not going to pretend that I know how much of that is real vs. imaginary risk. But as long as we are not pretending, let's not pretend about this:

*Whatever the risk is, it is enormous.

*That risk is 100% guaranteed to not be marked to market.There is no freaking way, no matter how many people are thrown at the task, to figure out the above mess with any degree of certainty by anytime next week, let alone Monday.

*Fannie Mae's hedge book could not be figured for over two years. Can Bear Stearns' hedge book be figured out in two days?

10 Comments – Post Your Own

#1) On March 16, 2008 at 10:34 PM, lquadland10 (< 20) wrote:

Thank god in real life I am mostly gold and pot and mon. Let loose the trial lawyers.

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#2) On March 16, 2008 at 10:39 PM, dwot (29.01) wrote:

Best be out of banking stocks...

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#3) On March 16, 2008 at 10:40 PM, abitare (30.01) wrote:


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#4) On March 16, 2008 at 10:47 PM, Tastylunch (28.59) wrote:

I'll admit I'm very surprised the JP morgan chase has the most, I assumed Citi would have had the dubious distinction.

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#5) On March 16, 2008 at 11:56 PM, mickeyc21 (30.01) wrote:

If you own any financial stock you've been smoking crack.

The market is punishing the truly stupid. 

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#6) On March 17, 2008 at 12:00 AM, abitare (30.01) wrote:

There is one exception: SKF

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#7) On March 17, 2008 at 12:04 AM, StockSpreadsheet (68.60) wrote:

I would like to know how they figure all these trades and figures.  JPM's $91 trillion in derivatives are more than the entire market capitalization of every stock on every market in the entire world, as I understand it.  In fact, it would be several times the value of the entire world's markets.  I think you could throw in all the bonds and treasury bills in the entire world and still would not come up with a number so big.  If it is more than every stock and bond in the entire world, how can such a thing be traded?  What are they using as collateral or the basis for these items? 

The derivatives that I know about are based on bonds.  They take a regular bond and split it into derivatives.  They sell the principal amount as a zero-coupon bond.  They sell the revenue stream from the interest payments as a derivative.  They sell the claim to the borrower's assets as another derivative.  There are some other funky things they can do also to split out more hairs.  Still, the ones I know of start with bonds, so I don't see how the value could be so much.  After all, if you get the whole bond, you get the rights to everything.  A derivative only gives you partial rights to the above items.  Therefore, the total of all the derivatives derived from a bond should not be worth much more, (and due to trading fees should be worth less), than the total value of the original bond.

Of course, if there is a way to take something simple and turn it into a huge Frankenstein mess, then Wall Street will figure out a way to do it.  After all, they are considered "too big to fail", so they can do any jackamaimy thing they want because if it all comes a cropper, they know that the Fed will come bail them out.  I don't think the Fed could bail out a $91 trillion mess though.  If they tried, the resulting mess in America would make Germany's Weimar Republic days seem like the Garden of Eden or Heaven itself.

Scary days.


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#8) On March 17, 2008 at 12:17 AM, abitare (30.01) wrote:


I understand the derivative market is $500-700 TRILLION. Net reserves held by the FED is $1 Trillion. Hense the rise of commodities and short the US dollar. The insane are running the asylum? 

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#9) On March 17, 2008 at 12:28 AM, mandrake66 (72.70) wrote:

StockSpreadsheet: The Fed is capitalized to the amount of about $800 million. It could not bail out a $1 trillion mess, let alone 91 trillion.

Also, derivatives can be made on any security. Stock options are derivatives, for example. Commodity futures are derivatives. And there are not necessarily in a 1:1 ratio. I can write calls or puts on shares I don't own, though uncovered calls are rather dangerous. Some derivatives, like interest rate swaps, are really just exchanges of cash flows based on interest rate movements. The market for derivatives is huge, and they are not all publicly traded...many are just agreements between two parties and are only disclosed in reports to the SEC if at all. It's impossible to know how big the market for derivatives actually is, since many do not trade.

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#10) On March 24, 2008 at 9:35 PM, ResearchLover (70.47) wrote:

put/call straddles, butterflies of SKF sound like the way to go to me.  You're discounting volatility of the sector.

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