Highly leveraged derivatives

I wonder when the talk/action about "speculation" will commence.

my reading of Depression catalysts (1890, 1930), usually mentions "reckless & greedy speculators" as a major element.

the use of futures and options etc, is neccesary to hedge against the real price of commodities etc. I understand this. I think the ancient Greeks did this with olive oil

but if 99% leverage is available to a hedge fund, for instance, soley to make a large profit, ( or risk a large loss), does that strengthen the overall economy?

or add to systemic volatility/risk?

the subject is too complex for me to understand, but other ASF posters would have a much more informed opinion than me.

I like to be informed.
When i am wrong, it is neccesary to be informed to get things more acurate

am i naive in the extreme?

or may this be the next regulatory target?

i doubt the majority would have sympathy for Falcone or others, who make billions.

i suspect it is the massive leverage that is the killer

a confused ex semi-socialist, who trades stock

Bloody heeeeeeeeeeeeeeellllllllll

The only ones that trade on 1% leverage are retail traders.

Trembling Hand said:

Bloody heeeeeeeeeeeeeeellllllllll

The only ones that trade on 1% leverage are retail traders.

Click to expand...

Then it's clear... all retail trading should be banned.:

check out p22

http://www.occ.treas.gov/ftp/release/2008-74a.pdf

JPM has $1.4t in assets and $90t in notional deriv exposure. (In bankrupcy notional value becomes real value. Fullstop.

Thats one huge upside down pyramid.

With the Lehman default, all counterparties are in trouble. It's all coming down.

refined silver that looks bad on first glance but in reality most of the derivatives would be hedges against other holdings and therefore I imagine(hope?) that the total exposure numbers are misleading. And most would be on extremely liquid contracts, treasuries, S&P etc.

True, most is hedged against something similar, so they claimed it would all be a wash. The problems are:

1. Bankrupcy -should anyone default, notional value becomes real value.

2. While some are in liquid securities, most are 2nd degree derivs, derivs based on derivs, and being OTC means they absolutely are not liquid, they are individual contracts, with no clearing house, no standards, no mkt (as we are seeing), dependant on the loser in the transaction for the performance, and now virtually no value. They are a world away from derivs traded on an exchange or with a clearinghouse. (They can't even be put into a clearinghouse cos there are no standards, they are all individual)

3. With such an upside down pyramid, the wild swings we are getting in the underlying instruments and their prices, is shaking this mountain til it crashes.

my original post was expressed in an overly simplistic way.

so is this one, i am a simplistic guy

when the S##t really hits the fan, i am still of the opinion that the witchunt will be aimed at higly leveraged derivatives, as utilised by Lehmans, Bear Stearns etc, etc

these instuments were used laterly for profit, more so than hedging, in a way that does nothing for productive growth.

having said that, there is a blizzard of other problems.

as soon as counterparty failure kicks in, we will be the payers.

the guys who ran these systems are mostly so wealthy, they will be insulated from the outcomes.

i welcome disagreement

awg said:

when the S##t really hits the fan, i am still of the opinion that the witchunt will be aimed at higly leveraged derivatives, as utilised by Lehmans, Bear Stearns etc, etc

these instuments were used laterly for profit, more so than hedging, in a way that does nothing for productive growth.

Click to expand...

Derivatives - irrespective of the degree of leverage are not behind the financial mess that has ensued. The underlying factor is greed and while derivatives may have magnified the level of greed and the mess that has been created, they have also provided the conditions over the last ten years for cheap credit --> productive growth! (many people seem to leave out the latter point from their arguments).

aacantona said:

Derivatives - irrespective of the degree of leverage are not behind the financial mess that has ensued. The underlying factor is greed and while derivatives may have magnified the level of greed and the mess that has been created, they have also provided the conditions over the last ten years for cheap credit --> productive growth! (many people seem to leave out the latter point from their arguments).

Click to expand...

So are you suggesting that the present crisis is a natural consequence of credit fueled growth, aacantona? A "recession we had to have" to paraphrase?

Cheers,

Kenny

By the end the truth will be out.

A simple article, which explains why sub-prime mortagages are not the real problem. They are worth $1t, but have $64t worth of credit default swaps written on top of them (with 5 page long formulas wrriten in to them, that even the maths PhDs can't figure out), as bets as to how the mortgages would go.

http://www.nytimes.com/2008/09/28/business/28every.html?_

The problem is not only the derivatives itself, it is the fantasy valuation of them that is allowed under the accounting rules, and an even more fanciful interpretation of these rules. All under the 'watchful' eyes of the legendary regulators. To me it is Enron on Viagra without a condomn.

refined silver said:

By the end the truth will be out.

A simple article, which explains why sub-prime mortagages are not the real problem. They are worth $1t, but have $64t worth of credit default swaps written on top of them (with 5 page long formulas wrriten in to them, that even the maths PhDs can't figure out), as bets as to how the mortgages would go.

http://www.nytimes.com/2008/09/28/business/28every.html?_

Click to expand...

This article raised some questions I have been thinking, but didnt really want to post, cause it displays my ignorance?

What would be the outcome of canceling or at least renegotiating CDS contracts?

How would that play out thru the system.

I have always held the view that a "capitalist" system based on continual expansion would fail at a quantifiable point in the future, as it is based on "exploitation" of a limited natural resources.

in the near future, wealth creation ( or at least preservation) without environmentally or socially destructive outcomes will be paramount

The other pathetic little point i make is that if lawmakers passed either a wealth tax, either/or limitation on executive pay, that would seem something that may be raised as an issue, if things get worse.

If the captains of industry and finance walked away and said i wont do this for less than $5m, there would be many that would do the job for less and not do any worse, i feel sure.

This sounds like socialist heresy, i know, but is one reason most politicians are relatively poorly payed.

if the axis of the world is re-tilited, it would not surprise me to see attempts made to limit accumulation of vast pay, or even wealth.

i know this is simplistic (again), but is for discussion only.

i do not aim any personal insult. You can insult me though, I wont take ofence

I have had close association of individuals with extreme wealth. I know it could have been put to better use