Posted on 10/22/2011 4:55:46 PM PDT by dennisw
21..That was an excellant video on the housing crash and in such simplist terms anyone can understand it. Oddly enough just changing their vocabulary makes this all the more deceptive.
Enormous amounts in derivatives were based on mortgages for real estate—houses. It appears that the author omitted that.
bookmark
What Cooked The World’s Economy?
http://www.freerepublic.com/focus/f-news/2209313/posts
And...
Here’s the link for the evidence in the information from the “Bank for International Settlements,” as mentioned in the full version of the excerpted article linked above.
http://www.bis.org/publ/otc_hy0805.pdf
...and a quote from it.
“The over-the-counter (OTC) derivatives market showed relatively steady growth in the second half of 2007, amid the turmoil in global financial markets. Notional amounts of all categories of OTC contracts rose by 15% to $596 trillion at the end of December (Table 1), following a 24% increase in the first half of the year.1”
The simplest derivatives are options, the basic ones being puts and calls.
A put is a contract which gives the buyer of the put the right to sell a certain asset (e.g. a certain number of shares of XYZ corp., and oz. of gold, . . .) at a fixed price to the seller of the put at any time during the term of the contract (American version) or at the ending date of the contract (British version).
A call is a contract which gives the buyer of the call the right to buy a certain asset at a fixed price from the seller of the call (again at any time ruing the term of the contract or at the ending date of the contract).
A straddle is a contract that combines a put and a call (with different prices) on the same asset.
Puts were traditionally used to hedge downside risk when buying on margin (i.e. on credit), and calls to hedge risk of price rises when short-selling (selling borrowed assets).
Of course there are more exotic derivatives like credit default swaps in which one party pays the other for the right to sell some asset (usually a loan or portfolio of loans) at an agreed to price if some specified bad thing happens. (The “bad thing” is most often the borrower defaulting on the loan, but it could be something else.) The seller of the CDS either believes the bad thing won’t happen, or that even if it does the asset will be worth acquiring at the agreed price, or some probabilistic combination of the two, while the buyer is worried about the bad thing happening and thinks the asset won’t be worth holding onto if it does, and is willing to pay something to hedge against the bad thing happening and being stuck with the asset.
Anyone with a brokerage account can trade in options and maybe more exotic derivatives as well. Generally the only mutual funds that use derivatives much are hedge funds (hence the name).
That’s about all I know on the subject.
Derivatives aren't "borrowings".
($16T went out for bank interest payment bailouts on derivative bond losses 2008-2010).
Huh? Derivative bond losses? Are you talking about derivatives or bonds?
The $1.5Quadrillion of world-wide derivatives, say at 1% interest due each year
They aren't debt, why would interest be due?
I’m not sure how it’s calculated for other derivatives, but the notional value of a call is the value of the stock (at current marke price) which the purchaser of the call has a right to buy at a fixed price, while the notional value of an interest rate exchange is the underlying principal amount.
Quite frankly, it seems adding up the notional values of derivatives is quite meaningless, and the huge sum doesn’t forebode anything. It’s rather like adding up the maximum possible payouts of all outstanding insurance policies of all types, then running around worrying that the sky is falling because the insurance companies don’t have anywhere near that amount in assets.
Quit making sense. You have to PANIC!!!
Thank you. It's too bad the author or OP didn't explain it.
Derivatives are long shot odds. I get $1 million for $1 investment if Michigan Sate beats Wisconsin on a Hail Mary pass with no time left in the game. Oh wait that just happened!!!
Those are not the complex CDS derivatives that have the world banking system in peril. Those and futures are simple derivatives that are traded publicly out in the open
Went a great gun show today. Not as crowded as the ones right after Obama’s election, but much more crowded than the ones of the past year or so.
Vendors were saying AR-15s weren’t moving much anymore. Shotguns and other old standby SHTF stuff was moving briskly, though.
I have more confidence in the rapture predictions than in anything from this lame blog.
Remember Bush’s first two Secretaries of the Treasury were non Wall Street corporate types who quietly pushed for financial reforms. Both were pushed out and ultimately replaced by Hank Paulson, CEO of Goldman Sachs, the ultimate financial insider. Bush also appointed Ben Bernanke to the Chairman of the Federal Reserve.
The Republicans are as much enablers of crony Wall Street capitalism as the Democrats. The Wall Street banks have increased their stranglehold over the economy since Bill Clinton appointed Robert Rubin (also Goldman Sachs) to the Secretary of the Treasury position.
True economic reform will require breaking up the Wall Street banking cartel and once again separating investment banking from retail banking. Neither party is currently favoring this type of reform because both parties are owned by Wall Street.
The Feds need to outlaw national banks and return the control to each of the individual 50 states! No bank is allowed to cross state lines, nor is any bank allowed to hold any interest in other state banks. Very drastic I know, but probably too late for what is inevitably coming. America is doomed!
Concerning state govts controlling commercial banks, that’s what we had for 70 years? It worked well and then the bankster lobby which had Greenspan in their pocket bought off politicians of both Parties and repealed the law that kept banks small enough to fail.
The repeal gave them carte blanche to do anything including profiting from our taxes and Fed Reserve. Bill Clinton, Phil Gramm and his wife got rich and about 10 years later we were all screwed.
If OWS is pushing an end to TBTF and states’ rights I’m for it.
You’ve made this very understandable. Well, I had to look up “notional,” but the student has to do at least a little homework.
From your explanation, this article appears to be a little over-the-top.
Thank you for taking the time to explain.
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