Posted on 09/14/2008 4:30:14 AM PDT by TigerLikesRooster
Insight: The adventure never ends in the derivatives Wonderland
By Aline van Duyn, US markets editor
Published: September 11 2008 19:17 | Last updated: September 11 2008 19:17
The experiences of those frazzled executives in charge of reducing risks in the credit derivatives market are starting to resemble Alice’s adventures in Wonderland. Alice shrank after drinking a potion, but was then too small to reach the key to open the door. The cake she ate did make her grow, but far too much.
It was not until she found a mushroom that allowed her to both grow and shrink that she was able to adjust to the right size, and enter the beautiful garden. It took an awfully long time, with quite a number of unpleasant experiences, to get there.
Just as attempts by Alice to achieve the right fit have a seemingly endless number of unexpected consequences, every time it seems the unregulated $62,000bn credit derivatives beast is a step closer to being tamed, an unexpected horror crops up.
The urgency behind doing this is real. The Federal Reserve realised the systemic risks that lurk in the credit derivatives market when it bailed out Bear Stearns in March. It has made clear it wants these threats reduced.
(Excerpt) Read more at ft.com ...
That's disturbing. It must mean that the events are unfolding faster than industry can cope with.
It's a complicated issue with lots of parties involved, and unfortunately more and more the decision making about how to address problems like this are being pushed by default toward those people least capable of solving the problem effectively, and that "government."
The problem of having our least responsible, least knowledgeable people holding the greatest power and authority is going to be much more sever in the long run than the issues in the market.
“...unregulated $62,000bn credit derivatives beast is a step closer to being tamed, an unexpected horror crops up.”
Tamed? Can anyone wrap their brains around $62,000bn? The number is so huge it doesn’t compute.
Where does one go at this point for safety? There is no safety anywhere. Cash? Who knows what this will do to the Clownbuck.
That's the $62,000bn they're talking about. The total value of those loans. At the end of the day, even if the bonds default, they are still backed by the value of the thing you're sitting in right now while you read this. (or it's more equivalent someplace else).
Of course your house could be hit by lightning, but you have insurance for that so the debt will still be paid. And what's more... as you aggregate these issues the rate of change drops. What that means is, your house may be losing value, but when you put it together with all the homes in your entire town, they may still all be losing value too but in a more predictable way.
My point is, the problem is not the debt, or the models used to value it. It's hard to find any villains in this event.
And it will all get solved if we can just find a way to keep government as "out of it" as possible.
This FR Thread explains it in more detail.
Chemists can. It's far less than a mole.
Cheers!
No, it's the houses and insurance and side bets involving whether the insurance will get paid and more side bets on whether the mortgages on the houses will get paid.
And it is all so intertwined that _no one_ knows who exactly is owed what.
Some people like to pop up on FR and accuse the "rich guys" of turning the world into one big casino talking about "side bets" as if the banking system were a craps game. That isn't how it really works. Those people are just looking for a villain in a situation which really doesn't have any.
But they are people fro their ignorance of the facts, not their knowledge of them.
Are you one of those?
What is an option but a side bet? That is what it is in it’s essence.
A pool of mortgages mixing “high” quality” with “low quality” is a bet that a certain percentage will get repaid. It turns out that lots of the “high quality” stuff wasn’t so great.
Bond insurance on the possibility of those pools not going beyond their pre-calculated expectations of default is a bet by the insurance companies on the due diligence of those putting the pools together. It turns out that some were not very circumspect when putting together those pools.
The “process” of dealing these bets around is indeed well understood. Buy, sell, swap, etc. The “science” of measuring whether the deals would pay off is not.
That makes it much less emotionally satisfying because there isn't really a villain... but that's how it is in real life sometimes.
It’s also far less than a coulomb.
You are either a crook, a fraund - both categories of villains in my book - or an idiot - when in positions of influence also a villain in my book. Your smarmy condescension is exactly the same note that has women around the country so steamed up about Charlie Gibson and Barack Obama.
If we kept the government as out of it as possible, the FED would not be making emergency loans. It would not be brokering deals on Bear Stearns and backing the most toxic paper. The Treasury would not be in possession of FRE and FMN arguing with itself about whether it is obligated to honor the employment contracts for the villains who ran the place into the ground. We wouldn't have Treasury trying to negotiate a buyout of Lehman - with no public money - HAAA!
And look clown - the problem is exactly the debt and the models used to value them, because a lot of that debt is backed by worthless assets and was given to folks who had no way to repay the intended cost of the loan (the real return on the loan after the teaser period passed).
So, go sell your snake oil in some other viper den, but it won't sell here.
I am amazed that you even have the temerity to stick your neck up on a forum like this. You clearly haven't been paying a lot of attention.
PS. Since you are in the business, I am doing little survey. Do you also have undergraduate or professional degrees from an ivy league institution (or near equivalent)?
Actually a mixture of even 6,000 different reacting compounds, each with its own composition and reaction pathways is far beyond the ability of the most powerful computers in the world to model. Right now, with supercomputers such as the one in Texas, you can model one or two really accurately and 10-20 (along with their reaction products) with some degree of fidelity.
So know, the complexity of the system under contemplation here is far beyond the wildest imaginings of our top scientists. It is, however, a snap for our financial geniuses.
know=no.
Seriously, ... you should learn a little more about what ACTUALLY caused this problem because much of what you said is factually untrue. From where I sit it just sounds like you want to find someone to hold accountable and lacking a good target you've latched onto me.
I don’t in the least want to dissuade you from presuming to lecture us on what actually caused this problem since you are so much wiser than the rest of us. Please, go right ahead, and we will agree to bask in your wisdom and knowledge.
Feel free to read it at your leisure.
Who is it that doesn't deserve it. In my book it is the taxpaying public who doesn't deserve it. Virtually everyone in the Financial Services industry has been a benefactor of the monetary / debt inflation that underpins the present problem, and all of them could stand a haircut. Some need more than hairs cut off.
I am aware of very few folks who have actually managed to be prudent through all of this.
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