Can some financial wiz please come along and splain to me why this article shouldn’t worry me?? Puh-lease????
I am not a wizard, but it seems that if common sense is forced to prevail, the value of these derivatives bear no true connection to assets. To my mind, these end up being like “side bets” on the creditworthiness of a bond, a bank, some entity. Supposedly, there is some link...notice that the ratio of the value of the derivatives to the underlying asset is about 20:1, just like the reserve ratios for typical retail banks.
But, if you have, for example, off-setting positions that evaporate when they mature, then where is the value linked to the asset? It doesn’t sound to me like it exists anywhere except on paper as something that grossly inflates the true value.
It is the financially self-immolating nature of these credit default swaps and such that are being overlooked until now. It is also becoming a case of the rest of the world looking at these sorts of risks the big banks are taking and asking if the “wizards of wall street” have rocks in their heads. Like so many things, they get so close, so involved, they lose all perspective until the proverbial s**t hits the fan and even then they are not sure what the fuss is really about.
So, while some of these geniuses are complaining, the rest of the system bounces from crisis to crisis until these mistakes are fixed permanently - and a lot of innocent people get hurt in the process.
It could lead to new regulations attempting to fix a problem, but then create additional problems as a result....
That's what I was wondering: Just how much of these trillions are in positions that off-set one another. Just as.... a Vegas casino can take in $200M in wagers on the Super Bowl, but... not really have anything at risk...since they offer wagers on both sides. Is that how it works on these "hedge positions"?