Use access key #2 to skip to page content.

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.   


7 Comments – Post Your Own

#1) On March 23, 2008 at 10:22 AM, dwot (29.14) wrote:

My goodness, I've just looked at the rest of the news and today's buzz word is "Chernobyl" and it is used in the context centered around the derivatives, which I've consistently given as my reason for deciding to watch the markets rather than participate.

Report this comment
#2) On March 23, 2008 at 10:48 AM, dwot (29.14) wrote:

Damn, well, this looks like potentially another of my predictions coming true, sniff...

How sovereign wealth funds were left nursing multibillion losses.

It does not refer to how the Canadian SWF is doing...  Amazing how the world is in a serious financial crisis, and Canada has $121 billion in the markets, has recently changed laws to allow our money to be risked in the derivative mess, and our media is absolute mute on the subject.  If anyone is following Canada's biggest investment, well, that news simply isn't making the news wires.

I maintain that media is also incompetent.  They complete fail to recognize where their reporting priorties ought to be and put a crazy 20-25% of their effort into reporting non-events like weather and traffic.  I can't even watch news anymore, it is such a waste of life for the nonsense priorities and utter shallowness. 


Report this comment
#3) On March 23, 2008 at 11:15 AM, binv271828 (< 20) wrote:


First let me say that your blogs and your viewpoints are always very enlightening and extremely educational. Thank you for taking the time to write them and to share.

My question is: regarding FDIC insurance for a bank, Is is $100K per account, or $100K per person per account (e.g. $200K for a joint account)? Granted, having to worry about this as a problem for my actual bank account would be a very nice problem to have :). But assuming in the future that I would have to worry about it, it would be nice to know for planning purposes.

Report this comment
#4) On March 23, 2008 at 11:22 AM, dwot (29.14) wrote:

I am not an expert on US rules, but I believe a joint account does give $200k of coverage and I base that belief on a story I read about a senior who had more than half a million in a failed bank and he had put one of his children on the account to make it joint.  Because of that he got $200k back up front, but is waiting in line with the rest of the bank's creditors to see how much of his other $300k he will get back.

I just think it is a good idea even if you are under the limit to have money spilt into two banks in case one gets in trouble.  I suppose so much of what I was told about the way things work have been proven wrong to me, I just don't trust that things will work the way it is expected.

Report this comment
#5) On March 23, 2008 at 12:03 PM, LordZ wrote:

HMMM I'll gladly accept your money I can safely hold on to it if you'd like... ha ha ha ha ha

Just buy stocks and soon you wont have to worry about having more than 100k

 you'll have like 80 k


Interesting point about businesses who keep large amounts of cash at banks I wonder if the rules are different for them...

I think any management types who are responsible for a bank to fail and cause such an FDIC intervention should be banned for life from any type of job other than price checker at the dollar store.

Imagine you'd saved up for 30 years and all the sudden your worried about your money that you really hadnt been earning a lot of interest on, lets face it banks dont pay a lot, you can match that interest in one trading session in the market compared to one year with the bank. But you thought you had piece of mind, lets say your enjoying a month on a deserted beautiful beach, and then when you come back to dry city land, you find out your $$$$$$ has somehow been compromised.

OH what a sad day to run out of shot gun shells.


Report this comment
#6) On March 23, 2008 at 1:44 PM, abitare (30.06) wrote:

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

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.

Report this comment
#7) On March 24, 2008 at 12:10 AM, DemonDoug (31.39) wrote:

If those derivatives blow up, you might see commodities rise 20% or more in a day.  Best bets: silver and oil.

Oh yeah and i rec'd your other post dwot.  Since you asked so very nicely, i appreciate it.

Report this comment

Featured Broker Partners