The $700 trillion elephant (Gargantuan derivatives market weighs on all other issues)

Market Watch ^ | March 6, 2009 | THOMAS KOSTIGEN'S ETHICS MONITOR

[Ernest_at_the_Beach]

SANTA MONICA, Calif. (MarketWatch) -- There's a $700 trillion elephant in the room and it's time we found out how much it really weighs on the economy.

Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements. These contracts are tallied in notional values because no one really can say how much they are worth.

But valuing them correctly is exactly what we should be doing because these comprise the viral disease that has infected the financial markets and the economies of the world.

Try as we might to salvage the residential real estate market, it's at best worth $23 trillion in the U.S. We're struggling to save the stock market, but that's valued at less than $15 trillion. And we hope to keep the entire U.S. economy from collapsing, yet gross domestic product stands at $14.2 trillion.

Compare any of these to the derivatives market and you can easily see that we are just closing the windows as a tsunami crashes to shore. The total value of all the stock markets in the world amounts to less than $50 trillion, according to the World Federation of Exchanges.

To be sure, the derivatives market is international. But much of the trouble we're in began with contracts "derived" from the values associated with U.S. residential real estate market. These contracts were engineered based on the various assumptions tied to those values.

Few know what derivatives are worth. I spoke with one derivatives trader who manages billions of dollars and she said she couldn't even value her portfolio because "no one knows anymore who is on the other side of the trade."

[freeangel]

“derivatives”

Interesting word. I watched a brief film on economics the other day that compared them to side betting or betting parlors that used to exist on the streets of NY that were much of the blame of the great depression and outlawed soon after.

[snowrip]

This is why we’ll keep bailing out AIG. We’re bailing a sinking ship with a leaky bucket... and we’re dumping the water right back into the boat.

[Sequoyah101]

Aren’t these like bad bets and don’t loan sharks just break knees or worse when somebody wimps out on a debt?

Whose portfolios contain this kind of stuff, nobody I know unless it was done secretly.

Bankruptcy is a good option in my book. The bailouts for this kind of phantom “investment” are just payoffs.

[Ernest_at_the_Beach]

That is very interesting....had not heard of that before...

[Scanian]

Those things should never have been legal in the first place. Chris Cox deserves a lot of scorn for being so lax. All we used to hear about him was what a bright bulb he was. Either he isn’t all that bright, is lazy, or has dubious ethics.

[nathanbedford]

I agree with the author. We have no idea of the tsunami that is about to engulf us. Unfortunately, neither do the lending institutions and that, presumably, is why they are not lending and why there can be no recovery until they commence lending. When seen in the context of this derivative problem which can render our entire financial system a shambles, the failure of the Obama administration to deal with the bank problem is inexplicable.

On the other hand, perhaps it is quite explicable, because it reveals that the administration has absolutely no idea how to cope with the Derivatives problem. That is a signal of incompetence. It could be that the administration cynically waits for the tsunami so they can exploit such a crisis for political gain. That is a calculation we can make only with our tinfoil hats on but I for 1 am not willing explicitly to rule out that such a devious bent lurks somewhere in Obama's heart.

If I had to guess, I would say that they just don't have a clue.

[AuntB]

“I spoke with one derivatives trader who manages billions of dollars and she said she couldn’t even value her portfolio because “no one knows anymore who is on the other side of the trade.””

I’m not convinced anyone knows what is really going on.

[FreeReign]

It isn't the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished -- trading phony instruments to the tune of $700 trillion...

I didn't see any place in the article where global warming activist and author, Thomas "Green" Kostigen gets his $700 trillion figure.

Is it BS? Does the author wants to "sway attention"?

[txnativegop]

“no one knows anymore who is on the other side of the trade.”

Question: If you don’t know who you are doing business with, how can you do business in the first place?

[FreeReign]

I agree with the author. We have no idea of the tsunami that is about to engulf us.

The author offers no source to back up his $700 trillion claim.

[snowrip]

It could be that the administration cynically waits for the tsunami so they can exploit such a crisis for political gain. That is a calculation we can make only with our tinfoil hats on

I believe that the Onazi party wants to reap the political benefits of a global banking collapse, but few of them actually have the stomach to kill the American economy in order to establish a communist worker's paradise. However, I also believe that Obama is weak enough to be pushed around by the likes of Reid, Pelosi, Frank and the like. Think of the Emperor in "The Last Samurai"; a puppet controlled by masters who are more tyrannically insane than we could ever imagine.

I've exchanged my roll of tinfoil for lead and a 5.56 press; I really didn't have any use for the foil anymore because all the predictions of socialism and collapse are coming true.

[Orange1998]

Next week they change the accounting rules and Whala! market backt to highs again.

http://latimesblogs.latimes.com/money_co/2009/03/mark-to-market.html

[Ernest_at_the_Beach]

I heard there was to be a hearing ...chaired by Barney Frank on "Mark to Market"....

Hmmm.....

[henkster]

These need to be declared unenforceable and void as a matter of public policy.

[philman_36]

Relax, little Brother...

...we can make more.

[nathanbedford]

"The author offers no source to back up his $700 trillion claim. "

The very first sentence of the author's article reads:

Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements.

But I thought the whole point of the article was that nobody knows the character or extent of these Derivatives and that was a great part of the problem:. The author continues in the next sentence:

These contracts are tallied in notional values because no one really can say how much they are worth.

[Ernest_at_the_Beach]

From the article:

Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements.

**********************************

Central bank body warns of Great Depression

********************EXCERPT**********************

June 9, 2008

by Gill Montia

Story link: Central bank body warns of Great Depression

The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

It also raises concerns about the Chinese economy and questions whether China may be repeating mistakes made by Japan, with its so called bubble economy of the late 1980s.

EDITORS NOTE: Quite a few comments have been made that there is no direct reference to the Great Depression in this month’s BIS report.

While this is strictly true, BIS warned in June 2007 - just before the Credit Crunch really hit - that the global economy was vulnerable to a major economic set-back because of extraordinary exposure to collateralized credit.

BIS directly made references to the 1930’s as an example of a similarly serious credit bubble, and this month’s BIS report describes the conditions of this being lived out.

So, to be pedantic, the warning “BIS warns of Great Depression” is actually a year old already. What BIS discusses now is the fragility of existing conditions of the fall-out from a massive credit bubble bursting - which has already been made clear across their reports historically can be similarly referenced to the 1930’s, though stated in a typically conservative and non-alarmist language.

Even what optimism BIS had about a weak recovery to the end of May 2008 have been dashed by extreme shorting of financial stocks across the US and UK - Lehman Brothers, HBOS, and property developers such as Barratts, have all taken extreme beatings in June 2008.

[BillM]

Quote:

Christopher Cox was approved on Friday by a unanimous voice vote in the US Senate to be the new chairman of the Securities and Exchange Commission, the main regulatory agency for Wall Street. Cox, a former Republican Congressman from southern California, received the full support of the Democratic Party in his confirmation hearings.

[freeangel]

OOOps. I just went to google video and searched “The Gig Is Up” It took me right there.