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Meltdown: The toxic effects of Derivatives (another class of derivative due to implode?)
Commodity Online ^ | 11/16/08 | Monty Guild and Tony Danaher

Posted on 11/17/2008 6:29:35 AM PST by TigerLikesRooster

Meltdown: The toxic effects of Derivatives

By Monty Guild and Tony Danaher

A few weeks ago many thought I was out of my mind. I had the temerity to state that I thought that we were going into a depression, not a recession, and that the economic decline would last for two to three years. Now, it looks like a few others are coming around to my view.

The chairman of Goldman Sachs recently said we are facing a banking crisis worse than the Great Depression. The former chairman of the New York Stock Exchange said it is comparable to the Great Depression.

More and more are willing to admit the magnitude of the problem. We continue to see a few Pollyanna types who want to see everything as sunny. For them, we have the following outlook. In our opinion, things will get sunny and big buying opportunities will periodically develop, but they will be interspersed with big declines, and a lot of hand wringing.

It was probably more than six years ago that we first started to warn in these memos about the toxic effects of derivatices. It was about one and a half years ago that derivatives connected with mortgages began to meltdown.

Unfortunately, we do not believe that this is not the end of the derivative problem. A bigger problem looms on the horizon. Derivatives are still being created everyday. Often, they are created by people who are just as greedy and self deluded, as those who created the mountain of mortgage derivatives that have brought the system to its knees. If the current unexploded mountain of derivatives were to implode, (as those derivatives connected to mortgage bonds did) the crisis could become much worse.

(Excerpt) Read more at commodityonline.com ...


TOPICS: Business/Economy; News/Current Events
KEYWORDS: autoloan; creditcard; derivatives; studentloan
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To: ConservativeMind
"It wasn’t derivatives that brought the system to its knees. It was the default on loans those derivatives tried to cushion that brought it around."

The defaults caused the problem, but that problem would have been manageable. However, the derivatives is what is causing the economy to tank. No money. No liquidity. blah, blah, blah

21 posted on 11/17/2008 8:49:03 AM PST by Texas_shutterbug
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To: ari-freedom
Barney Frank shot you in the back and he is laughing because you’d rather blame capitalism and freedom instead of him.

Exactly...Lefties, and I am talking about Rat and RINO lefties, use the unavoidable inefficiencies of personal freedom to justify their constant attack on freedom itself. And, owing to the normal distribution of human intelligence, the tactic works well for them.

Unfortunately, those who live their lives logically will always be punished by the antics of the Collectivists who have been seduced by their need for power into the belief that human nature- a love of freedom- can be negated. The current financial crisis is nothing more or less than another reminder from nature that it is the boss.

All of the Lefty programs and bailouts will come to naught; but the fat part of the bell curve won't be easily convinced to support Conservative principles, until their necks are run through the financial wringer. Then the whole process will start again.
22 posted on 11/17/2008 9:15:16 AM PST by PerConPat (A politician is an animal which can sit on a fence and yet keep both ears to the ground.-- Mencken)
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To: durasell; NeoCaveman; metmom; idov

Durasell, that is a great explanation. Let’s also imagine you go to a local bar and tell how inventive you have been in creating a new source of income. After the word gets around you have a hundred people in the community doing the same thing. The only problem is the community depends heavily on employment at a Korean chip plant. Now the plant closes and those 100 people receive an immediate lesson through a financial thrashing on an important factor they did not include in their economic decision. People have to understand you can write derivatives, and sell and resell them worldwide, where ever there is risk.


23 posted on 11/17/2008 9:53:08 AM PST by Retain Mike
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To: durasell
They used to be ways for investors to hedge their bets against a large gamble in a traditional stock purchase or commodity purchase. Figure it was like making two dates for a Saturday night in case one date fell through.

There seems to be a Financial Law on the Conservation of Risk. You cannot destroy risk, you can only shift it around.

24 posted on 11/17/2008 10:01:25 AM PST by PapaBear3625 (Question O-thority)
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To: PapaBear3625

You can mitigate risk and “counter-balancing it.” I have a friend in the candy business who regularly buys options on sugar. If the price of sugar goes up, then the increase is offset by the money he made on the options. If the price of sugar goes down, then the difference pays for the options. It’s a system that works reasonably well in a world where the price of commodities is always shifting.


25 posted on 11/17/2008 11:05:21 AM PST by durasell
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To: durasell
I have a friend in the candy business who regularly buys options on sugar. If the price of sugar goes up, then the increase is offset by the money he made on the options.

Yes, he can make the risk go away for himself, by paying somebody else to take the risk for him. The risk itself has not disappeared, just been shifted. And hopefully his contra-side on the option will actually be able to fulfill his end if the time comes.

Where we got to, is some very smart traders figured out how to package risk and send it on its way, so that the risk ultimately fell upon the US taxpayer.

26 posted on 11/17/2008 11:51:24 AM PST by PapaBear3625 (Question O-thority)
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To: durasell
But the returns were too good to resist, and they became the primary investment for a lot of firms. They made two dates and kept both of them, like one of those situation comedies, but hilarity did not ensue,

Okay, this made me laugh.

27 posted on 11/17/2008 11:54:58 AM PST by Citizen Blade (What would Ronald Reagan do?)
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To: PapaBear3625

It actually fell on the entire world.


28 posted on 11/17/2008 11:55:10 AM PST by durasell
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To: Citizen Blade

I’ve spoken to some of the old time wall street guys over the past several years. They were aghast at what was going on. There were 27 year olds pocketing $5 million in bonuses, kids just out of good schools getting $200,000 a year for grunt work. The money being thrown around was huge.


29 posted on 11/17/2008 12:04:10 PM PST by durasell
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To: durasell
I’ve spoken to some of the old time wall street guys over the past several years. They were aghast at what was going on. There were 27 year olds pocketing $5 million in bonuses, kids just out of good schools getting $200,000 a year for grunt work. The money being thrown around was huge.

It's funny (not ha-ha funny) that Wall Street is incapable of learning lessons. Every decade or so, it goes through an orgy of money-making, followed by a catastrohpic train wreck of a bust. I guess it's tough to be the guy in the company who is recommending caution while everyone else is doing blow off of call girl cleavage.

30 posted on 11/17/2008 12:34:35 PM PST by Citizen Blade (What would Ronald Reagan do?)
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To: Citizen Blade

It’s always a different story. In 87 it was junk bonds. In 99 it was dot.coms. In 2007 it was derivatives/real estate.

And through it all, there’s always the “true believers,” usually guys in their late 20s/early 30s who read the Wall Street Journal every single day and desperately want to join the “rich guy club.” Oddly, they’re usually the ones who get ground into dust.


31 posted on 11/17/2008 12:40:35 PM PST by durasell
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To: Citizen Blade

Check out the Dow — looks like it’s about the fall off a cliff in the last part of the trading day.


32 posted on 11/17/2008 12:42:02 PM PST by durasell
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To: durasell
And through it all, there’s always the “true believers,” usually guys in their late 20s/early 30s who read the Wall Street Journal every single day and desperately want to join the “rich guy club.” Oddly, they’re usually the ones who get ground into dust.

I guess the trick is to get off a particular bandwagon while the getting's good. The true believers aren't cynical or experienced enough to make this move- they think the party will go on forever. It's the ruthless, experienced operators who make sure to sell the investment flavor-of-the-decade at the right time and walk away with a fat nest egg that they use to make even more money in the next boom cycle.

33 posted on 11/17/2008 12:57:33 PM PST by Citizen Blade (What would Ronald Reagan do?)
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To: Citizen Blade

The most successful guys I know on wall street are those who hold no beliefs when it comes to investments. they have no emotional attachment to any particular stock or industry. it’s a boring way to make money, but they seem to make a lot of it.


34 posted on 11/17/2008 1:04:34 PM PST by durasell
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To: durasell

It’s sort of how I lost the ability to have fun playing Blackjack. About a year ago I went out and really learned how to play Blackjack “by the book.” I’m a lot better at it now, but the fun is gone- I play every hand in a predetermined way now, because that gives you the best mathematical odds. But that takes the fun out of it for me.


35 posted on 11/17/2008 1:25:58 PM PST by Citizen Blade (What would Ronald Reagan do?)
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To: Citizen Blade

same thing happened to me with poker. the instant I stopped trying to fill those inside straights, all the magic went out of it.


36 posted on 11/17/2008 1:29:14 PM PST by durasell
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To: durasell

I guess I’ll spend my money in Vegas more productively now- like by stuffing it down g-strings.


37 posted on 11/17/2008 1:33:13 PM PST by Citizen Blade (What would Ronald Reagan do?)
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To: blam

The time to buy stocks is when blood is running in the streets. That may be as soon as 4Q09!


38 posted on 11/17/2008 1:56:02 PM PST by darth
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To: TigerLikesRooster

Of course it is going to be worse, because none of the participants have any moral guidelines.... anything goes.


39 posted on 11/17/2008 4:45:36 PM PST by pointsal
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