[TheLion]

In the early 90's the media had the insurance companies on the run as the next savings and loan debacle. I see a little resemblance here. It was almost a self fullfilling prophecy. The author of this article doesn't have enough information to drawing conclusions about derivatives. I see this all the time on this website...derivatives in the trillions. First we need to understand what they really are and what the risks really are. This article sheds little light on either. One thing is for certain and that is the markets could sink JPM without anything to do with derivatives........is that the self fullfilling prophecy. I for one would like to learn more about derivatives and not just use them in debate to warn of the imminent collapse of global financial markets.

[BlackJack]

Tokyo, Oct. 9 (Bloomberg) -- Mizuho Holdings Inc. and UFJ Holdings Inc. led drops in Japanese bank shares on speculation their loans to problem borrowers may put them first in line to be seized by the government.

Mizuho, the world's biggest bank by assets, and UFJ, Japan's fourth-largest lender, both fell as much as 30,000 yen, their daily limit, to record intraday lows of 164,000. Both lenders traded 7.7 percent lower at 179,000 on the Tokyo Stock Exchange as of 1 p.m. Japan time.

Both Japanese and foreign investors are concerned about Japan's banks, which they say may have more bad loans than the official estimate of about 52 trillion yen ($422 billion). The government may need to seize the most troubled lenders to reform and revive the industry, said Richard Medley, chairman of Medley Global Advisors, a New York-based hedge fund adviser who previously worked for George Soros.

``There may have to be a nationalization of a (major) bank or two,'' Medley said. ``The most important thing that can get done now is to support Minister (for Financial Services Heizo) Takenaka in his effort to get the bank situation dealt with as rapidly as possible.''

Takenaka, who was last week named to his post, has said Japan will consider injecting public funds into banks. Finance Minister Masajuro Shiokawa has said Japan must use taxpayer money to ``rescue'' the industry.

Takenaka is scheduled to hold a monthly press briefing on the economy at 4.15 p.m. Tokyo time, in his capacity as minister for economic and fiscal policy.
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Looks bad for world banking. Mizuho is the worlds biggest bank.

[Deuce]

I for one would like to learn more about derivatives and not just use them in debate to warn of the imminent collapse of global financial markets.

The three most important things to understand about derivatives are:

1. They are one of the tools that the unproductive financial sector uses to rip off a bigger piece of the proverbial pie from the productive sector of the economy.

2. Part of the supposed profits attributed to derivatives trading comes from creative bookkeeping. Therefore, while derivatives are a zero sum game in reality, they are (have so far been) a positive sum game on the collective books.

3. While derivatives supposedly allow companies to manage risks, they actually create systemic risk. Victor Haghani, formerly of LTCM summed it up, thusly: The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen because the people who know you have sold the insurance can make it happen. So you have to monitor what other people are doing.

[Soren]

The notional value of JPM's derivative book has been reported to be $26 trillion. I have read that it is customary to set aside reserves of 2% of notional value for unexpected losses, such as when your counterparty defaults. 2% of $26 trillion is $520 billion. JPM's net worth is in the range of $40 billion. That is the problem, IMO.

Another problem is that hedging models assume that "tail" events are independent ("tail" refers to the tail of the probability distribution, i.e. events that are highly unlikely to occur). In reality, they are not. This is what sunk LTCM. When Russia defaulted, it triggered a cascade of "tail" events. With all the dislocations occurring in the markets, interest rates and spreads, foreign situations, etc., it seems a very ripe environment for "tail" events to occur.