Take Heed of the Derivatives
March 23, 2008
– Comments (7)
I was just going to have a quick look around before heading off to the NTW today, and what do I find, Ambrose Evans-Pritchard's article about a derivative chernobyl being averted by the fed's actions over that little Bear incident.
"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital.
"There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."
First in line for the slaughter are people with more than $100k in a bank. I seriously doubt that the fed can rescue other investment banks and they simply seem like a high risk place to have investments, even supposedly safe investments.
So, how do businesses with liquid assets manage their business if, for example, their assets get frozen? The mess the financial sector has made means that Joe idiot's actions can end up have serious consequences for Paul responsible and can whip Paul without Paul seeing it coming.
"We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen," he said.
I agree on this assessment of Greenpuke. That man's financial experiments and irresponsible actions towards financial regulations will be paid for for years. I paid for a huge share of his last bubble (huge relative to my 'wealth') due to my ignorance of what was happening and the gross level of incompetent financial advice out there. I was Susan average who bought into the trust financial advisers because they are the experts who know what they are doing, ha-ha.
I don't think people have any idea of how they will be paying for this mess. I believe it will start with pensions. I have stated previously that I have no belief what-so-ever that I will collect the pension I've been promised and comments I've gotten seem to indicate to me that it is only my pension at risk and I say this because maybe I have a less stable pension provider, or something like that. I think my pension provider is one that would be rated with one of the highest levels of faith. Pensions are simply going to be enormously hit by this mess and they will not walk on water and magically create more than what people have put in. My calculations are that we pay for 8 years of pension, yet the average life expectancy means they are expected to pay people for 20 years. Greendick's policies have given an illusion that things were working and short falls weren't that bad. Now the illusion retracts and so do our pension funds.
So, JP Morgan now owns 1/6th of the world derivate contracts. My way of thinking, I would steer so completely clear of these guys.
The most neuralgic niche is the $45 trillion market for credit default swaps (CDS). These CDS swaps are a way of betting on the credit quality of companies without having to buy the underlying bonds, which are less liquid. They have long been the bête noire of New York Fed chief Timothy Geithner, alarmed that 10 banks make up 89 per cent of the contracts.
"The same names show up in multiple types of positions. These create the potential for squeezes in cash markets, magnifying the risk of adverse dynamics," he said.
"They could increase systemic risk, by amplifying rather than dampening the movement in asset prices," he said.
This is what happened as the banking crisis gathered pace. The CDS spreads measuring default risk on Bear Stearns debt rocketed from 246 to 792 in a single day on March 13 amid - untrue - rumours that the broker was preparing to invoke bankruptcy protection.
I have stressed over and over again that making sure you don't exceed that $100k insurance limit is a very good idea and I tend to think reducing holdings in investment banks is probably also a good idea.
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