Derivatives

[TPS]

There was a discussion on the trillions dollar derivative markets in another post; here is a great discussion on the markets and Wall Street's big 4. Deserves its own thread.

http://dailybail.com/home/chris-whalen-barry-ritholtz-the-derivatives-timebomb.html

 

[Nanker]

Is this a differential equations thread?

[TPS]

Is this a differential equations thread?

Your first derivative is negative. PPPlllfffftttt!!!

[TheMadCap]

Pull derivative.

Set equal to zero.

Solve for X.

 

[Dean Cain]

It's so funny how TPS a known liberal tries to educate us the "aristocracy" on derivatives.

 

We invented them. In fact we invest our money in hedge funds & private equity. While labor pays FICA 6.2% taxes, & income tax of usually 25%, my pay is only subjected to 15% capital gains now 20% thanks to the communist Obama. But still I come out ahead.

 

When Ronald Raegan & Tipp O'Neil "saved" social security it meant another 50 years of SS solvency and opened the door to the massive tax cuts Raegan, Bush, Clinton, Bush & Obama have willingly given. Now that our too big to fail banks control 90% of banking volume we own the Federal Reserve, & the US Treasury. We control money printing, interest rates, & who gets bailed out & who doesn't. This is the era of financial capital. Those who create money with money & those who borrow.

[GG]

There was a discussion on the trillions dollar derivative markets in another post; here is a great discussion on the markets and Wall Street's big 4. Deserves its own thread.

http://dailybail.com/home/chris-whalen-barry-ritholtz-the-derivatives-timebomb.html

 

Not all derivatives are created equal

 

[TPS]

 

 

Not all derivatives are created equal

I thought it was a pretty good discussion. I think they also point out that question I asked about, the counterparty risk. It's pretty clear that the big 4 have carte blanche to gamble (as defined by Whalen I believe) without worrying about a default by one of them, as they are now effectively guaranteed by the FDIC as Tasker said. I believe the saying is, "privatized profits and socialized losses."

[GG]

I thought it was a pretty good discussion. I think they also point out that question I asked about, the counterparty risk. It's pretty clear that the big 4 have carte blanche to gamble (as defined by Whalen I believe) without worrying about a default by one of them, as they are now effectively guaranteed by the FDIC as Tasker said. I believe the saying is, "privatized profits and socialized losses."

 

1 - Name one bank under FDIC or Fed auspices that needed to be rescued because of bad derivatives or trading moves.

2 - Name a financial institution that wasn't under FDIC or Fed auspices that needed to be rescued because of bad derivatives or trading moves.

 

One of those lists will be infinitely bigger than the other.

[TPS]

1 - Name one bank under FDIC or Fed auspices that needed to be rescued because of bad derivatives or trading moves.

2 - Name a financial institution that wasn't under FDIC or Fed auspices that needed to be rescued because of bad derivatives or trading moves.

 

One of those lists will be infinitely bigger than the other.

As Tasker pointed out, this is an issue going forward. There is now an explicit backing of the derivatives trade for these TBTF firms. What do you think that will do for their risk-taking behaviour?

[GG]

As Tasker pointed out, this is an issue going forward. There is now an explicit backing of the derivatives trade for these TBTF firms. What do you think that will do for their risk-taking behaviour?

 

And your evidence for this explicit backing of all derivatives trades by the big institutions is the large number of zeros or what is actually happening on the regulatory front inside the banks? If the Fed was giving trading floors carte blanche to open up the casinos, wouldn't that translate to expansion of the trading floors over the last year? Is that what has been happening on the Street?

[meazza]

And your evidence for this explicit backing of all derivatives trades by the big institutions is the large number of zeros or what is actually happening on the regulatory front inside the banks? If the Fed was giving trading floors carte blanche to open up the casinos, wouldn't that translate to expansion of the trading floors over the last year? Is that what has been happening on the Street?

 

Hell no.

[TPS]

And your evidence for this explicit backing of all derivatives trades by the big institutions is the large number of zeros or what is actually happening on the regulatory front inside the banks? If the Fed was giving trading floors carte blanche to open up the casinos, wouldn't that translate to expansion of the trading floors over the last year? Is that what has been happening on the Street?

I'm not privvy to any numbers, so I'm only going on what was said by Whalen and Ritholtz, who I don't think have an agenda. They argue that the derivatives trade is what is propping up the big 4. If you have numbers to counter that, I'm all ears. I'm also surprised that you would not believe that the fact that BofA is backstopped by the FDIC, including their d-trade, does not lead to a moral hazzard problem...?

[3rdnlng]

I'm not privvy to any numbers, so I'm only going on what was said by Whalen and Ritholtz, who I don't think have an agenda. They argue that the derivatives trade is what is propping up the big 4. If you have numbers to counter that, I'm all ears. I'm also surprised that you would not believe that the fact that BofA is backstopped by the FDIC, including their d-trade, does not lead to a moral hazzard problem...?

 

Oh schit! After all the crap I've given you now I'm going to have to deal with the Secret Service?

[GG]

I'm not privvy to any numbers, so I'm only going on what was said by Whalen and Ritholtz, who I don't think have an agenda. They argue that the derivatives trade is what is propping up the big 4. If you have numbers to counter that, I'm all ears. I'm also surprised that you would not believe that the fact that BofA is backstopped by the FDIC, including their d-trade, does not lead to a moral hazzard problem...?

 

The biggest problem that I have with the Bloomberg piece is that in 15 minutes they try to explain the machinations of global finance that realistically should take a full day to explain. As a result, they conflate a lot of issues under the broad "derivatives" umbrella, when a lot of things they were talking about have no relation to one another. There is very little commonality between interest or FX swaps to CDS's, yet the former make up the dominant share of global derivatives. But if you throw enough zeros and the words "shadowy derivatives" out there you'll get a rise out of Bloomberg.

 

I particularly like their projection that the next blow up will occur sometime between now and 20 years from now and derivatives will be to blame. Well, golly!! Considering that they threw the entire global capital market into a derivatives casino, that's not a difficult prediction to make.

 

Of course the moral hazzard exists, but regulators are taking care of it by making regulatory compliance very painful right now. Extra diligence is being paid to derivatives that can cause a company to go under, and putting CDSs on an exchange, like Whalen & Rhitholz recommend, will not change the underlying risk nor the probability of a bank taking stupid sides of CDS contracts.