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."

[Secret Agent Man]

Do-Over.

[Ernest_at_the_Beach]

This thread got a bit messy...thought it might be good to start a thread ...well... see this:

BIS Quarterly Review, December 2008 ( Global Financial Information )

[Ernest_at_the_Beach]

Thanks....will try to read thru that....looks good.

[Sequoyah101]

That is what I figured, our life insurance and annuities are backed by junk.

[April Lexington]

ping:(

[ExSES]

I would like to know who has any Idea how to recover from 700 TRILLION DOLLARS lost.

The "Tried & True" method is to merely print more money or add 0's to existing currency.

Check out Zimbabwe (currently), Argentina, or Weimer Republic Germany about 80 years agp. There are hundred, if not thousands of examples! The only differencies are the magnitudes involved and the historical dates!

[SouthTexas]

This is out of my league, but it sure sounds like plain ol’ fraud to me.

[Ernest_at_the_Beach]

Love that tagline!

[Ernest_at_the_Beach]

Love that tagline!

[Fred]

Ahh, Ernest, I think you have found a new good use for Gitmo....Angelo Mozzilo should be in cell # 1, followed by Frank and Dodd...

[combat_boots]

whoever came up with these CDA instruments should be cut up in 1” chunks. Slowly. And in public.

[SunkenCiv]

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

That's because Obama and company (including the partisan media shills) hadn't targeted that market before.

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.

Thanks Ernest.

[dennisw]

I’ve known derivatives were very fishy ever since Barings and LTCM went under

[FreeReign]

Have posted another study, with about same conclusions many times, and each day you find someone that cannot read talking about butt-boy barney caused the melt down. Link to other study: http://www.marketoracle.co.uk/Article6756.html

Each day I find somebody like you who doesn't understand the figures.

Are you actually defending Butt Boy on this?

[FreeReign]

Link to other study: http://www.marketoracle.co.uk/Article6756.html

The first sentence from your linked "study".

"George Soros, one of the world's foremost investor-speculators, has said many times..."

[FreeReign]

Link to other study: http://www.marketoracle.co.uk/Article6756.html

Your link to a "study" is to an article written by David Haas who seems to be keen on spreading George Soros propaganda. Here is anotherlink to Hass spreading Soros propaganda. I can produce many more.

[org.whodat]

The facts are the facts, no matter where they come from, you seem to think you have your republican facts and barney has his democrat facts. Where I look at the conservative facts, which is the truth, I don’t care which party it falls on.

[FreeReign]

The facts are the facts, no matter where they come from, you seem to think you have your republican facts and barney has his democrat facts. Where I look at the conservative facts, which is the truth, I don’t care which party it falls on.

Democrat, Republican...yada, yada...yada.

I gave an explanation of the numbers earlier in the thread. Derivatives didn't cause the problem. Describing derivatives as a $700 trillion problem is hyperbole.

[givemELL]

Coming late to the party relative to this article. There is something that has not been well attended to regarding the establishment of a value for derivatives. Most of us here recall the “close call” Paulson referred to with the “rescue” of Bear Stearns, which “prevented’ a total world-wide derivative meltdown. The meltdown was diverted and postponed as Bears’ derivatives were not marked to market, thereby establishing what was feared would be a low salvage price (10 cents on the dollar?). Fast forward now to July 24, 2008. The National Australian Bank marked to market 1/2 of a tranch of derivatives it shared with Lehman Brothers on Friday, July 24. They loaned 75% of the purchase price which was about 22 1/2 cents on the dollar, thus establishing a price of about 5 1/2 cents on the dollar.

The Congress was proposing a potential $25 billion liability related to Fannie Mae (which had about $5 trillion of toxic mortgages out of the $12 trillion in mortgages they held). The Australian sale on Friday blew their fantasy $25 potential billion liability out of the water...5.5% of $5 trillion is a marked to market value of $275 billion in Australian terms, thus costing the taxpayers ultimately $4.725 billion should there be an eager buyer, and the full $5 trillion if there was not an eager buyer. Thus exposed, the Congress met immediately, the next day, Saturday, July 25, 2008 to pass the Housing Bill before, in addition, Lehman Bros. marked to market their half of the tranch in the US on Monday, July 27, 2008. On Monday, July 27, 2008 the Lehman sale of their half of the tranch was about 5% without them loaning the buyer part of the purchase price as the NAB had done. Thus THE VALUE OF DERIVATIVES WAS CONCRETELY PROVEN ON FRIDAY, July 25, 2008, and derivatives and the unwinding in unstoppable progress now, to run for about 5 years in its’ remorseless course, are known to be practically valueless. After all, how does one borrow money to even pay the short term rollover interest payments?

I have seen in several places that all the gold on the planets surface is about 4 billion ounces. At just a measley
$1000 an ounce, $4 trillion gets it all (coins, jewelry, bullion)...won’t even cover Fannies’ liability.

For gold bugs, success will be relatively short as the price per ounce inevitably rises. History shows that Kings or modern govts have all repossessed gold when it rises too high. FDR did it instantly in 1933. Our govt. will do it again when it considers the time right.

$50 trillion is quoted today in a piece as the amount of equity the world has lost so far...only $650 trillion to go.

[org.whodat]

Hope you were able to read the post following your silly reply, but I doubt your were able to understand it.