Derivatives the new 'ticking bomb', $516 trillion bubble is a disaster waiting to happen Options

[dr. Müller]

Athyglisverð lesning - Sér í lagi þegar umfang afleiðuviðskipta er sett í samhengi við aðrar hefðbundnar hagstærðir á heimsvísu og margfeldisvöxtur þeirra síðasta hálfan áratug.

Derivatives the new 'ticking bomb'

Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

By Paul B. Farrell, MarketWatch
March 10, 2008

ARROYO GRANDE, Calif. (MarketWatch) -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.

"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.

Also fresh on Buffett's mind: His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street's big shots look like amateurs.

Buffett tried to sell off Gen Re's derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a "financial weapon of mass destruction." That was 2002.

Derivatives bubble explodes five times bigger in five years

Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:

1. Sarbanes-Oxley increased corporate disclosures and government oversight
2. Federal Reserve's cheap money policies created the subprime-housing boom
3. War budgets burdened the U.S. Treasury and future entitlements programs
4. Trade deficits with China and others destroyed the value of the U.S. dollar
5. Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.

Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:

• U.S. annual gross domestic product is about $15 trillion
• U.S. money supply is also about $15 trillion
• Current proposed U.S. federal budget is $3 trillion
• U.S. government's maximum legal debt is $9 trillion
• U.S. mutual fund companies manage about $12 trillion
• World's GDPs for all nations is approximately $50 trillion
• Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
• Total value of the world's real estate is estimated at about $75 trillion
• Total value of world's stock and bond markets is more than $100 trillion
• BIS valuation of world's derivatives back in 2002 was about $100 trillion
• BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

Also, keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets."

Bubbles, domino effects and the 'bad 2%'

However, while that may be true as far as the parties to an individual deal, there are broader risks to the world's economies. Remember back in 1998 when LTCM's little $5 billion loss nearly brought down the world's banking system. That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market and the world economy down with it.

This cascading "domino effect" was brilliantly described in "The $300 Trillion Time Bomb: If Buffett can't figure out derivatives, can anybody?" published early last year in Portfolio magazine, a couple months before the subprime meltdown. Columnist Jesse Eisinger's $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded:

"There's nothing intrinsically scary about derivatives, except when the bad 2% blow up." Unfortunately, that "bad 2%" did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was "contained."

Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a "bad 2% deal" to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It's only a matter of time.

World's newest and biggest 'black market'

The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today's slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco's bond fund king Bill Gross said "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't "figure out" the world's $516 trillion derivatives.

Why? Gross says we are creating a new "shadow banking system." Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic "shadow banking system" that has become the world's biggest "black market."

That's crucial, folks. Why? Because central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives don't. They're not "real money." They're paper promises closer to "Monopoly" money than real U.S. dollars.

And it takes place outside normal business channels, out there in the "free market." That's the wonderful world of derivatives, and it's creating a massive bubble that could soon implode.

Sjá nánar: http://www.marketwatch.com

[hildur234]

Athyglisverð lesning - Sér í lagi þegar umfang afleiðuviðskipta er sett í samhengi við aðrar hefðbundnar hagstærðir á heimsvísu og margfeldisvöxtur þeirra síðasta hálfan áratug.

Derivatives the new 'ticking bomb'

Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen

By Paul B. Farrell, MarketWatch
March 10, 2008

ARROYO GRANDE, Calif. (MarketWatch) -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.

"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.

Also fresh on Buffett's mind: His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street's big shots look like amateurs.

Buffett tried to sell off Gen Re's derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a "financial weapon of mass destruction." That was 2002.

Derivatives bubble explodes five times bigger in five years

Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:

1. Sarbanes-Oxley increased corporate disclosures and government oversight
2. Federal Reserve's cheap money policies created the subprime-housing boom
3. War budgets burdened the U.S. Treasury and future entitlements programs
4. Trade deficits with China and others destroyed the value of the U.S. dollar
5. Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.

Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:

• U.S. annual gross domestic product is about $15 trillion
• U.S. money supply is also about $15 trillion
• Current proposed U.S. federal budget is $3 trillion
• U.S. government's maximum legal debt is $9 trillion
• U.S. mutual fund companies manage about $12 trillion
• World's GDPs for all nations is approximately $50 trillion
• Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
• Total value of the world's real estate is estimated at about $75 trillion
• Total value of world's stock and bond markets is more than $100 trillion
• BIS valuation of world's derivatives back in 2002 was about $100 trillion
• BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

Also, keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets."

Bubbles, domino effects and the 'bad 2%'

However, while that may be true as far as the parties to an individual deal, there are broader risks to the world's economies. Remember back in 1998 when LTCM's little $5 billion loss nearly brought down the world's banking system. That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market and the world economy down with it.

This cascading "domino effect" was brilliantly described in "The $300 Trillion Time Bomb: If Buffett can't figure out derivatives, can anybody?" published early last year in Portfolio magazine, a couple months before the subprime meltdown. Columnist Jesse Eisinger's $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded:

"There's nothing intrinsically scary about derivatives, except when the bad 2% blow up." Unfortunately, that "bad 2%" did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was "contained."

Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a "bad 2% deal" to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It's only a matter of time.

World's newest and biggest 'black market'

The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today's slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco's bond fund king Bill Gross said "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't "figure out" the world's $516 trillion derivatives.

Why? Gross says we are creating a new "shadow banking system." Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic "shadow banking system" that has become the world's biggest "black market."

That's crucial, folks. Why? Because central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives don't. They're not "real money." They're paper promises closer to "Monopoly" money than real U.S. dollars.

And it takes place outside normal business channels, out there in the "free market." That's the wonderful world of derivatives, and it's creating a massive bubble that could soon implode.

Sjá nánar: http://www.marketwatch.com

Sko, það nenna fáir að lesa þessa rullu á ensku um afleiðusamninga.

Það væri skynsamlegt fyrir þig, og gott fyrir okkur hina, að þú útskýrir fyrir okkur leikmönnunum
hvað afleiðusamningar eru og hvernig þeir virka. Ég veit að það er mikið verslað með þetta á
mörkuðum, og ég heyri orðið "derivatives" nánast í öðru hvoru orði, án þess að vita nákvæmlega
við hvað er átt (eru þetta kannski sjóðasjóðir, eða eitthvað álíka), en lesendur hér vilja vita
íslenska heitið yfir svona hugtök, til að geta amk reynt að skilja þessa umræðu, takk.

[Zyklus]

Sko, það nenna fáir að lesa þessa rullu á ensku um afleiðusamninga.

Það væri skynsamlegt fyrir þig, og gott fyrir okkur hina, að þú útskýrir fyrir okkur leikmönnunum
hvað afleiðusamningar eru og hvernig þeir virka. Ég veit að það er mikið verslað með þetta á
mörkuðum, og ég heyri orðið "derivatives" nánast í öðru hvoru orði, án þess að vita nákvæmlega
við hvað er átt (eru þetta kannski sjóðasjóðir, eða eitthvað álíka), en lesendur hér vilja vita
íslenska heitið yfir svona hugtök, til að geta amk reynt að skilja þessa umræðu, takk.

Framvirkur samningur er dæmi um afleiðu (derivative). Ég geri t.d. samning við þig um að kaupa bréf í félagi A eftir 1 ár á ákveðnu gengi, þá eru bréfin í félagi A undirliggjandi eign samningsins en verðgildi samningsins tekur mið af undirliggjandi eigninni.
Þetta er bara eitt dæmi, það er til alveg hellingur af mismunandi tegundum afleiða.

[hildur234]

Framvirkur samningur er dæmi um afleiðu (derivative). Ég geri t.d. samning við þig um að kaupa bréf í félagi A eftir 1 ár á ákveðnu gengi, þá eru bréfin í félagi A undirliggjandi eign samningsins en verðgildi samningsins tekur mið af undirliggjandi eigninni.
Þetta er bara eitt dæmi, það er til alveg hellingur af mismunandi tegundum afleiða.

Ok, takk fyrir þetta svar. En getur þú frætt mig á t.d. af hverju einhver aðili vill kaupa
í félagi A eftir eitt ár. En af hverju svona langur tími? Margt getur gerst á einu ári,
félag A gæti hækkað eða lækkað?

En þegar ég hugsa meira um þetta, þá sýnist mér þetta vera svokölluð spákaupmennska.
Ef Jón gerir samning við Jónu um að kaupa í félagi A að ári á genginu x, er þá Jón að
gera ráð fyrir að gengið verði x-hærra eða lægra að ári? En ef honum skjátlast, þá tapar hann
eða græðir?

Skil ekki alveg hugsunina að baki þessu, miðað við ár, en kannski eru þessi gæjar
að miða við styttri tíma?

[dr. Müller]

Framvirkur samningur er dæmi um afleiðu (derivative). Ég geri t.d. samning við þig um að kaupa bréf í félagi A eftir 1 ár á ákveðnu gengi, þá eru bréfin í félagi A undirliggjandi eign samningsins en verðgildi samningsins tekur mið af undirliggjandi eigninni.
Þetta er bara eitt dæmi, það er til alveg hellingur af mismunandi tegundum afleiða.

Skil ekki alveg hugsunina að baki þessu, miðað við ár, en kannski eru þessi gæjar
að miða við styttri tíma?

Ef maður ætti að koma með klassískt skólabókardæmi um afleiðusamning þá gæti hann verið með eftirfarandi hætti:

Bóndi í loðdýrarækt semur við kaupanda um fast verð á skinnunum fyrirfram næstu tvö ræktunartímabil. Með því móti tryggir bóndinn sig fyrir áföllum í tekjuhliðinni næstu tvö ræktunartímabil og getur einbeitt sér að halda niðri gjaldahliðinni á meðan.

Kaupandinn er hins vegar að tryggja sér aðgengi að skinnaframleiðslu á fastsettu verði sem hann er tilbúinn að gangast undir næstu tvö árin. Þannig að ef það verður umframeftirspurn á skinnum á markaði og þá er hann ekki að borga markaðsverð fyrir skinninn, heldur fastsett umsamið verð til bóndans. Með því móti tryggir hann sig fyrir hækkunum á skinnaverði á opnum markaði, en fær beint í vasann hækkunina á milli umsamda verðsins og markaðsverðs.

Svo eru ótal margir aðrir vinklar á þessu viðskiptaformi, þannig að birtingarformið á þeim er alls ekki einskorðað við þetta einfalda dæmi sem ég nefndi hér að ofan.

Og í sjálfu sér ekkert slæmt við afleiðusamninga sem slíka þar sem þeir eru að veita samningsaðilum ákveðna tryggingu gegn óvæntri þróun á markaði.

Síðan kemur næsti vinkill - Segjum sem svo að viðkomandi kaupandi sé stórtækur í skinnabransanum og hefur gert afleiðusamninga við fjölmarga loðdýraræktendur, þá hefur hann jafnvel komið sér í þá stöðu að geta verslað með þessa afleiðusamninga á ýmsan þann hátt sem honum lystir, s.s. gert aðra afleiðusamninga við fataframleiðendur á móti samningnum við bóndann, áframselt samninginn við bóndann beint til fataframleiðandans eða tekið lán út á afleiðusamninginn ef sýnt er að skinnaverð fer stighækkandi á næsta ræktunartímabili sem kaupandinn gæti svo nýtt sér í t.d. hlutabréfakaup. Og á þeim tímapunkti er bóndinn ekki einu sinni jafnvel búinn að hefja ræktun fyrir umsömdu tímabil - Í greininni segir: "the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules"

Það sem greinin er að benda á er hið flókna samspil á milli efnahagsþróunar og umfang slíkra viðskipta, að afleiðuviðskiptin sjáist ekki nógu vel inn á radarnum (vantar gagnsæi) hjá þeim sem eru við efnhagsstjórn (t.d Federal Reserve í U.S., evrópski seðlabankinn í Frankfurt), til að tækifæri sé fyrir hendi að grípa í taumana í tæka tíð ef á þarf að halda.

Eitt argúmentið er svo reyndar það að efnhagsstjórnin bæði í U.S. og ESB séu þá ekki lengur með þau skilvirku stjórntæki sem hún hafði áður fyrr og ætti í raun ekki að vera að reyna að stýra, heldur leyfa hlutunum að blása hressilega út, t.d. taka út 30-40% lækkun á hlutabréfamarkaði í einum hvelli.

Ef hins vegar á að blása í efnahagsblöðruna enn og aftur (FED var nýverið að fleyta $200 milljörðum inn í bandaríska efnhagslífið), og þynna þar með út traustið sem á viðkomandi hagkerfi hefur (síhækkandi gullverð er til marks um það), þá endar það bara á því að menn missa trúna að lokum og ég held að slík lending væri sú versta sem menn gætu valið sér. Betra er að taka áfallið út í einu sjokki heldur en að láta hlutina fjara út hægt og rólega líkt og sandur úr greip, þegar til lengri tíma er litið.