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I sense perception of a gored goat, however I don't believe I said anything
about killing derivatives. I make my living trading derivatives (futures),
however I do so using more than adequate capital for the leverage I employ.
My comments were directed toward the size of bank derivative positions
relative to capital ... in the case of several banks, derivative positions
dwarfs total bank assets by 20:1-40:1 much less bank capital. While this may
be great for the banks and for the derivatives industry, I don't think that
the taxpayers and investors should get stuck will the bill for screw-ups ...
we they always do.
Earl
----- Original Message -----
From: "Jacobson, Alex" <AJacobson@xxxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Saturday, August 18, 2001 6:49 PM
Subject: RE: [RT] Derivatives
> Good derivatives or Bad derivatives. Interest rates swap are good so we
can
> all have fixed rate mortgages. CMOs .. part of the equation were bad
> because they murdered Orange County.... ever ask yourself who made the
money
> LTCM and Orange County lost? Misuse of leverage is clearly an issue and
in
> the end that's what kills the user. Any market where you trade a enormous
> amount of leverage and then experience discontinuous pricing will always
> result in disaster.
>
> You need a robust derivatives market to manage risk and the process of
> transferring risk. When you lose that ability you no longer have fully
> functional financial market. You need to bring hedgers, speculators and
> liquidity providers together. On occasion the speculators and the
liquidity
> providers cannot both make money. Sometimes all three make money....
> sometimes only one or two of the participants make money.
>
> Before you kill derivatives go try to get a mortgage or buy a foreign car.
> Look at the fiasco in California electricity .... some speculators who
> didn't figure out they were speculators.... lost tons of money. Some
> speculators made tons of money.
>
> You will always have big losers and winners as long as risk occurs.
>
> -----Original Message-----
> From: Earl Adamy [mailto:eadamy@xxxxxxxxxx]
> Sent: Friday, August 17, 2001 8:58 PM
> To: realtraders@xxxxxxxxxxxxxxx
> Subject: Re: [RT] Derivatives
>
>
> There is a strange thing about derivatives ... they work well until they
> don't and they usually work quite well until there is major stress put on
> the system. Not unlike LTCM, some of the 7 institutions are loaded with
> derivatives to a point where there their balance sheets are not remotely
> capable of handling an unhinging. We are already seeing stress cracks
where
> the cream level of some CDO's (Collateralized Debt Obligations) are
becoming
> near-junk because the underlying levels have deteriorated i.e. that is
what
> the American Express $600m+ write-off was all about. BA just took a big
> write-off of their lease holdings because the residual resale values of
the
> vehicles underlying the holdings plummeted. There are stress cracks
> occurring in the financial system, and while I am not predicting that one
of
> these institutions will be taken down by derivative risk, the reserving of
a
> paltry $2 million against $43 trillion of derivative in a less predictable
> economy is absurd. If the COC did not have some concerns in this regard,
the
> report would not have appeared as written.
>
> Earl
>
> ----- Original Message -----
> From: "Jacobson, Alex" <AJacobson@xxxxxxxxxxxxxx>
> To: <realtraders@xxxxxxxxxxxxxxx>
> Sent: Friday, August 17, 2001 4:44 PM
> Subject: RE: [RT] Derivatives
>
>
> > Kind of curious that you would assume otherwise. If the lion's share is
> > concentrated in the big seven and none of them had problems .. the
> > chargeoffs should have been tiny. Most of the stuff is interest rate ..
> > over 80% .. with the balance being FX. The mix used to be different ..
> > almost the opposite if I remember correctly. They only deal a very
small
> > portion of the trading with the smaller players therefore the chargeoffs
> are
> > .. as you would expect tiny. Could they become unhedged. Sure to a
> degree,
> > but that is why they have balance sheets.
> >
> > If you didn't have all this activity ... you have very very little
> interest
> > rate trading and huge vol. swings and risk. Which would you prefer.
> >
> > -----Original Message-----
> > From: Earl Adamy [mailto:eadamy@xxxxxxxxxx]
> > Sent: Friday, August 17, 2001 4:14 PM
> > To: Realtraders
> > Subject: [RT] Derivatives
> >
> >
> > Very interesting report from Office of Controller of Currency Bank
> > Derivatives Report. The entire 23 page report complete with tables can
be
> > found at http://www.occ.treas.gov/ftp/deriv/dq101.pdf. The tables show
> > tremendous concentration of derivative leverage, holdings, and risk
among
> 7
> > banks. Needless to say, with the entire global financial system under
> > stress, there is significant risk that hedged derivative positions will
> > become unhedged.
> >
> > One paragraph stands out: "During the first quarter of 2001 banks
charged
> > off $2 million due to credit losses from derivatives, or .0004 percent
of
> > the total credit exposure from derivative contracts. For comparison
> > purposes, net loan charge-offs relative to total loans for the quarter
> were
> > .18 percent." $2 million out of $43.9 trillion!!!
> >
> > Earl
> >
> >
> >
> > To unsubscribe from this group, send an email to:
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> >
> >
> >
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> >
> >
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> >
> >
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> >
> >
> >
>
>
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