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Back to the fundamental issue. Don't the tax payers get some of the
benefits? Where would you suggest the risk should reside. If your futures
broker fails the clearing house pays .... everyone gets protected and market
integrity is intact. FDIC protects the depositors .. not the investors.
Yes someone still gets screwed. There is huge bank failure here in Illinois
.. the taxpayers will get hit and the owners are billionaires... the
Pritzkers.... who will lose some money, but probably not as much as the
taxpayers. Now you have raised, or I've raised a different issue.
Guaranteed speculation because of Deposit insurance? This was the crux of
the S & L scandal. You lose a $1,000,000 dollars you have a problem ,,,,
you lose $100,000,000 we have a problem. Would banks business mix be
different if the didn't have insurance .. or the assumption of a bailout by
the government.
This raises an interesting thread about bank bailouts which might be an even
bigger issue. Let's think about that. What about foreign banks. The
biggest US equity derivative desk .. currently ... is a German bank. Would
we have an interest in saving them? The biggest bank that would have stuck
at LTCM was UBS .... a Swiss bank.
I don't have a real good answer here, except I would like to see the
benefits of having a robust derivatives market intact.
-----Original Message-----
From: Earl Adamy [mailto:eadamy@xxxxxxxxxx]
Sent: Saturday, August 18, 2001 9:17 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: [RT] Derivatives
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:
> > realtraders-unsubscribe@xxxxxxxxxxxxxxx
> >
> >
> >
> > Your use of Yahoo! Groups is subject to
http://docs.yahoo.com/info/terms/
> >
> >
> >
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> >
> >
> >
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> >
> >
> >
>
>
> To unsubscribe from this group, send an email to:
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