The derivatives market is the $700 trillion elephant in the room. Not gorilla... elephant. And the $700 trillion elephant is pissing on our heads. The elephant will soon sit on our heads if we don’t nip it. NIP IT... in the bud... like Barney Fife with a snoot-full of corn likker.
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.
To gain some perspective on what $700 trillion means (I do not believe that sum even exists in the whole world), let’s put that number next to a few of the little disasters that already have our fiscal panties in a wad. Try as we might to salvage the residential real estate market, it's at best only worth $23 trillion. 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 amounts to the stoned-tripping-drunk-hallucinating valuation of the derivatives market and you can easily see that we have essentially installed screen doors in our diving submarine. The total value of all the stock markets in the world, by the way, 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 really worth. One derivatives trader who manages billions of dollars said she couldn't put a value on her portfolio because "no one knows anymore who is on the other side of the trade."
Derivatives pricing, simply put, is determined by what someone else is willing to pay for the contract. The value is based on an artificial scenario that 'X' will be worth 'Y' if 'Z' happens. Strip away the fantasy, however, and the reality of the situation is akin to a game of musical chairs – without any chairs – and the music must, sooner or later, stop.
That's why the current strategies designed to stabilize the housing market will do little to take the sting out of the snapback we are going through on Wall Street. Once people's mortgages were sold off to secondary buyers, and then all sorts of crazy types of derivative securities were devised based on those, and those securities were in turn traded on down the line, there is now little if any relevance to the real estate values on which they were pegged. We must identify and determine the real value of derivatives before we give banks and institutions a pass-go with more tax dollars. Otherwise, homeowners will suffer as banks patch up the holes left in their balance sheets by the derivatives gone poof; new credit won't be extended until the raff of the old credit is in the rear-view mirror. 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.
In what may be the strangest, darkest, deadliest head-scratcher ever, derivatives regulation falls under the jurisdiction of the Agriculture committees of both houses, which means a bunch of corn-huskers who have never really considered the issue will have to try to wrap their heads around it before anything can be done. This means --not merely suggests -- that toothless, meaningless non-enforceable regulation was all that was ever intended to guard obligations of more money than actually exists in the world. This ensured that people in-the-know could make the most money possible... and that in doing so, the possibility of genuine catastrophe was considered an acceptable risk and part of the cost of doing business by those whose only motive was getting rich. Only greedy politicians could do something that stupid.
To paraphrase Allen Greenspan: "We thought the issue would police itself." Evidently, and most disturbingly, Greenspan was wrong. But rest not blame completely on the shoulders of Alan Greenspan, dear readers. The likes of the Maxine Waters' and Barney Franks of the world -- crying out for regulation and more regulation, bureaucracy and more bureaucracy, government and more government -- are just as lost as their so-called conservative counterparts who idiotically shriek aloud at even the tiniest hint of regulatory control, for one can write neither the rule nor regulation that greedy human ingenuity and opposable thumbs cannot skirt. Everything these days is a fine print-laden greasy salesman-covered, screw-your-fellowman con. It's in our capitalist nature to make money at any cost, and the path of least resistance is, unfortunately, to tread willfully, greedily and deceptively upon the fortunes of trusting, faceless victims.
What a fine system we have built, indeed. Even with all the untold trillions thrown into bottomless pits of financial need named AIG and Lehman, (and now Citigroup and probably Bank of America), institutions stupidly considered too big to fail clearly ARE failing. With them – right before our eyes – goes the combined wealth of four American generations, the total wealth of the Treasury of the United States, and every other world government while we sink together, incredulously bewildered, into the sea of global, systemic, synchronized depression.
The human civilization has not yet been born that was too big to fail, and ours is no exception. But that lesson appears to be lost on the deaf ears and blind eyes of the belligerent, immature, child-like incompetents who run the show, frivolously arguing until blue in the face, while Roma Americana burns to the ground around them.
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.
To gain some perspective on what $700 trillion means (I do not believe that sum even exists in the whole world), let’s put that number next to a few of the little disasters that already have our fiscal panties in a wad. Try as we might to salvage the residential real estate market, it's at best only worth $23 trillion. 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 amounts to the stoned-tripping-drunk-hallucinating valuation of the derivatives market and you can easily see that we have essentially installed screen doors in our diving submarine. The total value of all the stock markets in the world, by the way, 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 really worth. One derivatives trader who manages billions of dollars said she couldn't put a value on her portfolio because "no one knows anymore who is on the other side of the trade."
Derivatives pricing, simply put, is determined by what someone else is willing to pay for the contract. The value is based on an artificial scenario that 'X' will be worth 'Y' if 'Z' happens. Strip away the fantasy, however, and the reality of the situation is akin to a game of musical chairs – without any chairs – and the music must, sooner or later, stop.
That's why the current strategies designed to stabilize the housing market will do little to take the sting out of the snapback we are going through on Wall Street. Once people's mortgages were sold off to secondary buyers, and then all sorts of crazy types of derivative securities were devised based on those, and those securities were in turn traded on down the line, there is now little if any relevance to the real estate values on which they were pegged. We must identify and determine the real value of derivatives before we give banks and institutions a pass-go with more tax dollars. Otherwise, homeowners will suffer as banks patch up the holes left in their balance sheets by the derivatives gone poof; new credit won't be extended until the raff of the old credit is in the rear-view mirror. 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.
In what may be the strangest, darkest, deadliest head-scratcher ever, derivatives regulation falls under the jurisdiction of the Agriculture committees of both houses, which means a bunch of corn-huskers who have never really considered the issue will have to try to wrap their heads around it before anything can be done. This means --not merely suggests -- that toothless, meaningless non-enforceable regulation was all that was ever intended to guard obligations of more money than actually exists in the world. This ensured that people in-the-know could make the most money possible... and that in doing so, the possibility of genuine catastrophe was considered an acceptable risk and part of the cost of doing business by those whose only motive was getting rich. Only greedy politicians could do something that stupid.
To paraphrase Allen Greenspan: "We thought the issue would police itself." Evidently, and most disturbingly, Greenspan was wrong. But rest not blame completely on the shoulders of Alan Greenspan, dear readers. The likes of the Maxine Waters' and Barney Franks of the world -- crying out for regulation and more regulation, bureaucracy and more bureaucracy, government and more government -- are just as lost as their so-called conservative counterparts who idiotically shriek aloud at even the tiniest hint of regulatory control, for one can write neither the rule nor regulation that greedy human ingenuity and opposable thumbs cannot skirt. Everything these days is a fine print-laden greasy salesman-covered, screw-your-fellowman con. It's in our capitalist nature to make money at any cost, and the path of least resistance is, unfortunately, to tread willfully, greedily and deceptively upon the fortunes of trusting, faceless victims.
What a fine system we have built, indeed. Even with all the untold trillions thrown into bottomless pits of financial need named AIG and Lehman, (and now Citigroup and probably Bank of America), institutions stupidly considered too big to fail clearly ARE failing. With them – right before our eyes – goes the combined wealth of four American generations, the total wealth of the Treasury of the United States, and every other world government while we sink together, incredulously bewildered, into the sea of global, systemic, synchronized depression.
The human civilization has not yet been born that was too big to fail, and ours is no exception. But that lesson appears to be lost on the deaf ears and blind eyes of the belligerent, immature, child-like incompetents who run the show, frivolously arguing until blue in the face, while Roma Americana burns to the ground around them.
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2 comments:
Mr. Bear, your comments are brilliant and bang-on.
I would only add that perhaps some of the fine folks responsible for leading us into this situation be treated to an old-school televised gurgling and whimpering decapitation. When the gutters begin to run with the blood of the motherfuckers who made their millions off gold-painted turds, perhaps then, and only then, will the rest of their kind wake up.
Of course, all this is figurative.
Yep.
Figurative.
When thinking of derivatives and credit default swaps, I can't get out of my mind a scene from "The Matrix Reloaded" where Morpheus and Trinity pay a visit to the Merovingian. After a tense confrontation in which all Hell breaks loose, all of a sudden everyone in the room is simultaneously pointing a gun at everyone else's head. This is the situation we are now in thanks to these insane financial instruments. If FDR could get away with confiscating all of the people's gold during the 1930's, surely Obama can find a way to declare these financial instruments null and void, if he has the cojones to try.
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