Speaking of derivitaves...
Our current financial and credit crisis is like the black hole that Albert Einstein predicted. A black hole is formed when a huge mass is packed within a very small volume. A black hole’s gravitational pull is so strong that it sucks everything and not even light can escape.
A black hole will keep growing bigger as it keeps sucking in more matter. When the Large Hadron Collider was recently turned on to search for a ghost particle called Higgs, some feared it could generate a black hole which could swallow the earth. But instead of swallowing the earth, the LHC merely spit out a ton of helium before it was shut down, possibly for good, as nations throughout the world can no longer afford giant science projects like LHC.
But the real black hole that threatens our survival is in the global financial system. The hole in this case is something that Warren Buffett called “Financial Weapons of Mass Destruction”, the so called OTC Derivatives, a thing that no one really understands.
It’s such an enormous monster that by some estimates there’s $1.14 quadrillion worth of them. That’s a ONE followed by FIFTEEN(15) ZEROs.
US$1,140,000,000,000,000 in OTC Derivatives! Where exactly is this huge amount of fortune physically located? This huge amount is actually nothing but some digits stored on some 3.5 inch hard drives within some computers somewhere on Wall Street. That, my friend, is the precise definition of a black hole, a giant mass stored within a tiny space.
This black hole is swallowing everything around it, starting small and growing exponentially bigger. First it was New Century Financial (NEWC.PK), then Countrywide Mortgages (CFC), then Bear Sterns (BSC), Lehman Brothers(LEH), Merrill Lynch (MER), Fannie Mae (FNM), Freddie Mac (FRE), IndyMac Bank (IMB), Washington Mutual (WM), Wachovia Bank (WB). Who knows what’s next! Now the US Congress wants to toss in trillions of dollars in a Bailout? Do they understand that you CANNOT feed a black hole?
This is the analogy the PM of Iceland used yesterday.
yitbos
10% down on the NYSE (Dow -944.71) triggers the 1st “circuit breaker”...
* 10% decline (1,100 points for 4Q08)
The first circuit breaker is triggered if the DJIA declines by approximately 10%. The restrictions that are put into place — if any — depend on the time of day when the circuit breaker is triggered. If the trigger occurs before 2pm Eastern time, trading is halted for 1 hour. If the trigger occurs between 2 and 2:30pm Eastern, trading is halted for 30 minutes. If the trigger occurs after 2:30pm Eastern time, no restrictions are put into place. (This restriction was first used during the afternoon of 27 Oct 97.) Note that there is no similar restriction to the upside; nothing is done if the Dow rallies 10%.
you think the housing market was bad before...
this is just horrible...and it is the fault of the US and democrats...but republicans do share blame too.
i am just so disgusted at what the US allowed to happen...
pundits in europe are saying this is worse than the great depression
You said :
US$1,140,000,000,000,000 in OTC Derivatives! Where exactly is this huge amount of fortune physically located? This huge amount is actually nothing but some digits stored on some 3.5 inch hard drives within some computers somewhere on Wall Street. That, my friend, is the precise definition of a black hole, a giant mass stored within a tiny space.
What do these digits represent?
The figure you note is notional amount. The notional amount of a derivative is nothing more than a plug number against which the payments under the derivative are determined via a payoff formula. The actual credit risk is about 1-3% of the notional, typically (the amount owed by one party to another in accordance with the payoff formula). You should take the time to understand something before commenting public.