Posted on 11/17/2008 6:29:35 AM PST by TigerLikesRooster
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
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.
There seems to be a Financial Law on the Conservation of Risk. You cannot destroy risk, you can only shift it around.
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.
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.
Okay, this made me laugh.
It actually fell on the entire world.
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.
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.
Check out the Dow — looks like it’s about the fall off a cliff in the last part of the trading day.
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.
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.
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.
same thing happened to me with poker. the instant I stopped trying to fill those inside straights, all the magic went out of it.
I guess I’ll spend my money in Vegas more productively now- like by stuffing it down g-strings.
The time to buy stocks is when blood is running in the streets. That may be as soon as 4Q09!
Of course it is going to be worse, because none of the participants have any moral guidelines.... anything goes.
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