Copied my post from a little read ET thread regarding derivatives and bank's exposure:
03-04-07 01:09 AM
"You hit the nail on the head:
"The risk associated with derivatives depends on the ability of the counter party to fulfill the underlying contract."
Therein lies the problem, and why the derivatives market should have been regulated long ago by the bumbling bureacrats, and made more transparent. It wasn't. LTCM was a warning shot across the bow, and the Fed and Wall Street rescued the entire system from a potential meltdown.
Q) Are these derivative risks significant?
A) Yes - the "notional" dollar amount dwarfs whatever you might guess it is.
Q) How does the individual investor get a handle on the downside risk for purposes of investing in the banking sector?
A) You don't, they are, for the most part, off-balance-sheet, and that's why its so hard to calculate the real risk.
Q) What would be a guess as to the credit worthiness of various counterparties' ability to perform on the underlying contracts-ie any hedge funds involved, who are in fact the counterparties?
A) Uh, let's see, how can I put this in professional terms...shit
Q) How would one assess the actual risk or downside potential?
A) This risk goes way beyond individual institutions - we are talking the big picture here - we may yet learn what the meaning of systemic risk is
Then again, what do I know, I'm an idiot "
- Updated comment:
The above post applies to any and all companies that participate in the derivatives market.
