You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Stock Market Crash in 2007 or 2009
- Thread starter SouthAmerica
- Start date
.
SouthAmerica: Reply to Pequelo
You missed the "or at any time in between?"
****
October 16, 2007
SouthAmerica: The stock market crash is coming but the question is: It will be in October of 2007 or in October of 2009 or at any time in between?
http://www.elitetrader.com/vb/showt...=6&pagenumber=1
.
SouthAmerica: Reply to Pequelo
You missed the "or at any time in between?"
****
October 16, 2007
SouthAmerica: The stock market crash is coming but the question is: It will be in October of 2007 or in October of 2009 or at any time in between?
http://www.elitetrader.com/vb/showt...=6&pagenumber=1
.
Quote from Pekelo:
Actually, you DIDN'T Pick 2008 for the crash, you picked 2007 or 2009.
So, wrong prediction....We might even rally 20% in 2009....
No you're wrong. If you could read more than the headlines or the first sentence or two you would have seen him say it would be 2007 or 2009 or somewhere in between, in October. He was even saying a crash and depression back in his 2005 article. It's funny to read peoples responses to his article.
http://www.brazzilmag.com/content/view/1424/49/
.
October 10, 2008
SouthAmerica: Last night Charlie Rose interviewed on his show the one of the most outstanding economists that we have in the United States. I respect his opinions, and I think he is the only âLegendâ that they had at the Federal Reserve. His name is Paul Volcker.
Mr. Volcker was a guest at the Charlie Rose Show in an attempt to calm the markets. And he said that we should not end up in a Great Depression.
He had to say that, but I am sure that he understands that a total collapse of the entire global financial system is a possibility at this time; a complete global financial meltdown, a real financial Chernobyl.
For some reason the world of derivatives made an impression on me in the early 1990âs at the time when if I remember correctly massive derivatives losses were the cause that forced 2 major banks into forced mergers to avoid going out of business â the banks were Bankers Trust, and Manufacturers Hanover Trust Company (the bank that people referred to as âManny Hannyâ).
I searched on the web and I found an article published by The New York Times describing the problems that derivatives were already causing to various corporations at that time. And around 1992 the notional or face value of the US derivatives market was estimated to be just $ 24 trillion dollars - contrast that with - the total "notional," or face value, of derivatives held by U.S. banks in September 2008 is $180 trillion, and it's three times that much globally.
For many years now I have been writing on my articles that what is going to trigger the First Great Depression of the New Millennium would be the meltdown in the derivatives market. The derivatives Chernobyl would be at the core of the collapse of the global financial system.
We got a taste of the nasty surprises that derivatives losses can cause to the financials of all kinds of corporations, and these losses can be very large and catch people by surprise since they are balance sheet items.
With the events that have been occurring in the global financial markets in the last 10 months and the massive amount of large corporations and banks that had meltdowns â that means that the entire financial system is littered with massive derivatives losses that is going to surprise people over and over again and will put a lot of people out of business creating a chain reaction â as Warren Buffett predicted derivatives are instruments of mass destruction and right now we have the hydrogen- bomb type of derivatives going off all over the place.
Just wait to see how fast these Ebola virus derivatives are infecting the entire global financial system and the damage that they are inflicting all over the place.
Forget these G 7 meeting of finance ministers or some other type of damage control that they are trying to organize to contain this massive epidemic â Basically it is too late since there are too many people inflicted with the disease and time has run out long ago.
All you can do at this time is hope that you will be one of the survivors of this catastrophic event that is underway.
At this point the only thing that you can do if you are a religious person â pray to God for him to help you.
If you are not religious that all you can do is hang in their as long as you can.
*********
Sep 15, 2008
Derivatives are essentially bets on interest rates, foreign currencies, stocks or specific events like the bankruptcy of a particular company. The interest rate-related bets are by far the biggest. But the bets on bankruptcies â called credit default swaps â are the fastest growing and the most volatile.
These derivatives were originally designed to help hedge investments reduce risk â like insurance policies. But in practice, they've been increasingly used to leverage investments, increasing the risks of participants.
Here are some essential facts that illustrate the enormity of the problem ...
The amounts are absurdly large. The total "notional," or face value, of derivatives held by U.S. banks is $180 trillion, and it's three times that much globally. This figure is said to overstate the actual market risk. But it does not overstate the risk of defaults such as those that could be triggered by the failure of a company the size of Lehman Brothers.
Over 90% of all derivatives are traded outside of regulated exchanges.
Consequently, other than very general information, the authorities have no mechanism for keeping track â let alone efficiently cleaning up the mess in the wake of a giant failure.
Off the balance sheets. Some companies report nothing more than the total value of their derivatives in footnotes to their financial statements. Others don't report at all.
Consequently, the actual risk, amounts and even the very existence of derivatives is often poorly disclosed to investors.
Concentrated in the hands of five major players. Nearly 97% of all U.S. bank-held derivatives are concentrated in the hands of just five major U.S. banks â JPMorgan Chase, Citibank, Bank of America, Wachovia and HSBC.
Big brokers are also loaded with derivatives. Merrill Lynch has $4.2 trillion. Morgan Stanley has $7.1 trillion.
As best we can determine, Lehman Brothers has significantly less â $729 billion. But in proportion to its dwindling capital, its exposure seems to be among the worst.
Now do you see why the $180 trillion in U.S. derivatives, supposedly overstating the true risk, is actually a lot riskier than almost everyone cares to admit? It's because defaulting banks or brokerage firms are also a grave threat to the entire system.
And now do you understand why Mr. Bernanke and Mr. Paulson are probably bluffing?
Don't let them fool you. The Lehman Brothers debacle is a far greater threat than anyone has dared tell you.
Source: http://www.marketoracle.co.uk/Article6275.html
**********
At the time of the Bear Stearns collapse according to an article published in March 2008 by prominent analyst Ambrose Evans-Prichard âFedâs rescue halted a derivatives Chernobylâ, Bear Stearns held $ 13.4 trillion in derivatives. The Federal Reserve arranged that JP Morgan add Bear Stearns derivatives to its own $ 77 trillion portfolio, and since then JP Morgan has been holding a total of around $ 90 trillion dollars in derivatives.
.
October 10, 2008
SouthAmerica: Last night Charlie Rose interviewed on his show the one of the most outstanding economists that we have in the United States. I respect his opinions, and I think he is the only âLegendâ that they had at the Federal Reserve. His name is Paul Volcker.
Mr. Volcker was a guest at the Charlie Rose Show in an attempt to calm the markets. And he said that we should not end up in a Great Depression.
He had to say that, but I am sure that he understands that a total collapse of the entire global financial system is a possibility at this time; a complete global financial meltdown, a real financial Chernobyl.
For some reason the world of derivatives made an impression on me in the early 1990âs at the time when if I remember correctly massive derivatives losses were the cause that forced 2 major banks into forced mergers to avoid going out of business â the banks were Bankers Trust, and Manufacturers Hanover Trust Company (the bank that people referred to as âManny Hannyâ).
I searched on the web and I found an article published by The New York Times describing the problems that derivatives were already causing to various corporations at that time. And around 1992 the notional or face value of the US derivatives market was estimated to be just $ 24 trillion dollars - contrast that with - the total "notional," or face value, of derivatives held by U.S. banks in September 2008 is $180 trillion, and it's three times that much globally.
For many years now I have been writing on my articles that what is going to trigger the First Great Depression of the New Millennium would be the meltdown in the derivatives market. The derivatives Chernobyl would be at the core of the collapse of the global financial system.
We got a taste of the nasty surprises that derivatives losses can cause to the financials of all kinds of corporations, and these losses can be very large and catch people by surprise since they are balance sheet items.
With the events that have been occurring in the global financial markets in the last 10 months and the massive amount of large corporations and banks that had meltdowns â that means that the entire financial system is littered with massive derivatives losses that is going to surprise people over and over again and will put a lot of people out of business creating a chain reaction â as Warren Buffett predicted derivatives are instruments of mass destruction and right now we have the hydrogen- bomb type of derivatives going off all over the place.
Just wait to see how fast these Ebola virus derivatives are infecting the entire global financial system and the damage that they are inflicting all over the place.
Forget these G 7 meeting of finance ministers or some other type of damage control that they are trying to organize to contain this massive epidemic â Basically it is too late since there are too many people inflicted with the disease and time has run out long ago.
All you can do at this time is hope that you will be one of the survivors of this catastrophic event that is underway.
At this point the only thing that you can do if you are a religious person â pray to God for him to help you.
If you are not religious that all you can do is hang in their as long as you can.
*********
Sep 15, 2008
Derivatives are essentially bets on interest rates, foreign currencies, stocks or specific events like the bankruptcy of a particular company. The interest rate-related bets are by far the biggest. But the bets on bankruptcies â called credit default swaps â are the fastest growing and the most volatile.
These derivatives were originally designed to help hedge investments reduce risk â like insurance policies. But in practice, they've been increasingly used to leverage investments, increasing the risks of participants.
Here are some essential facts that illustrate the enormity of the problem ...
The amounts are absurdly large. The total "notional," or face value, of derivatives held by U.S. banks is $180 trillion, and it's three times that much globally. This figure is said to overstate the actual market risk. But it does not overstate the risk of defaults such as those that could be triggered by the failure of a company the size of Lehman Brothers.
Over 90% of all derivatives are traded outside of regulated exchanges.
Consequently, other than very general information, the authorities have no mechanism for keeping track â let alone efficiently cleaning up the mess in the wake of a giant failure.
Off the balance sheets. Some companies report nothing more than the total value of their derivatives in footnotes to their financial statements. Others don't report at all.
Consequently, the actual risk, amounts and even the very existence of derivatives is often poorly disclosed to investors.
Concentrated in the hands of five major players. Nearly 97% of all U.S. bank-held derivatives are concentrated in the hands of just five major U.S. banks â JPMorgan Chase, Citibank, Bank of America, Wachovia and HSBC.
Big brokers are also loaded with derivatives. Merrill Lynch has $4.2 trillion. Morgan Stanley has $7.1 trillion.
As best we can determine, Lehman Brothers has significantly less â $729 billion. But in proportion to its dwindling capital, its exposure seems to be among the worst.
Now do you see why the $180 trillion in U.S. derivatives, supposedly overstating the true risk, is actually a lot riskier than almost everyone cares to admit? It's because defaulting banks or brokerage firms are also a grave threat to the entire system.
And now do you understand why Mr. Bernanke and Mr. Paulson are probably bluffing?
Don't let them fool you. The Lehman Brothers debacle is a far greater threat than anyone has dared tell you.
Source: http://www.marketoracle.co.uk/Article6275.html
**********
At the time of the Bear Stearns collapse according to an article published in March 2008 by prominent analyst Ambrose Evans-Prichard âFedâs rescue halted a derivatives Chernobylâ, Bear Stearns held $ 13.4 trillion in derivatives. The Federal Reserve arranged that JP Morgan add Bear Stearns derivatives to its own $ 77 trillion portfolio, and since then JP Morgan has been holding a total of around $ 90 trillion dollars in derivatives.
.
.
Part 1 of 2
October 10, 2008
SouthAmerica: I searched on the web and I found an article published by The New York Times describing the problems that derivatives were already causing to various corporations at that time. And around 1992 the notional or face value of the US derivatives market was estimated to be just $ 24 trillion dollars - contrast that with - the total "notional," or face value, of derivatives held by U.S. banks in September 2008 is $180 trillion, and it's three times that much globally.
Here is the article that give you a flavor about what was happening in the early 1990âs when the derivatives market was nil compared with the size of that unregulated market and a market that has been going on in automatic-pilot.
The day of reckoning has finally arrived for the global financial markets with the compliments of derivatives â financial weapons of mass destruction.
******
âDerivatives as the Fall Guy: Excuses, Excusesâ
By SAUL HANSELL
Published: October 2, 1994
The New York Times
EVERY day, the list of financial casualties grows longer and more varied -- from blue-chip corporations like the Procter & Gamble Company to local governments like Portage County, Ohio. They lost millions in the markets. Now, they blame their losses on "derivatives," and on the banks and brokers who deal in these arcane-sounding financial products.
In many quarters, derivatives is already a dirty word. As more and more companies have been stung by losses on their bets on derivatives, the nerdy term -- coined by the financial engineers of Wall Street and London a few years ago -- is invariably preceded in newspaper and magazine articles by the adjective "risky." Earlier this year, the General Accounting Office called for Federal regulation of trading in derivatives. Congress is investigating them. Last week, the central bankers for the 10 largest developed nations recommended increased disclosure of the derivatives holdings of banks, brokerage houses and companies.
Are derivatives a high-tech, 1990's version of financial snake oil? Is there anything inherently dangerous about them? The answer is a qualified "no," according to central bankers, economists, commercial bankers and the corporations that use derivatives.
For big companies, in particular, these new financial instruments can be efficient tools that lend greater stability to business operations. They help companies with far-flung international operations reduce their risk from swings in currency values and from interest-rate movements abroad.
Hedging against those risks became a far more intricate game during the 80's as more and more nations opened up their financial markets.
Liberalization brought more opportunities, but also more volatility.
To help companies cope with volatile markets, bankers, aided by computers, came up with new tools to hedge against risk -- and new ways to take risk. The biggest new tool was derivatives, broadly defined as contracts whose value is derived from the value of some underlying asset, like currencies, bonds or stocks.
They can be used as a kind of financial insurance policy, locking in currency or interest rate values for months or years, allowing companies to plan their spending and operating budgets with some assurance. They can also be an easy way to make an investment, with protection against losses for the meek, or 10-to-1 leverage for the speculator.
Derivatives, then, are powerful tools for companies to use in the high-stakes balancing act of international financial management. Just how those tools are used, however, depends on the user.
William McDonough, president of the Federal Reserve Bank of New York, says there are legitimate questions about these tailor-made contracts and the implications of their enormous growth to $24 trillion or so in notional, or face value.
â¦In fact, Mr. McDonough has recently begun to warn of the dangers of what he calls "derivatives angst," a simple-minded backlash that could result in legislation that prohibits companies from using these tools.
Any backlash against the use of derivatives would have a serious impact on large corporations.
Two-thirds of the 500 largest American companies use derivatives regularly, according to a study of 1993 annual reports by Swaps Monitor, a newsletter. And the big multinationals clearly want to keep using them.
"I'm very distressed that all of a sudden derivatives have become a dirty word," said Arvind Sodhani, treasurer of the Intel Corporation, who manages the microchip maker's cash reserves of $5 billion. "To earn the highest return you need to use all the arrows in your quiver, and today that includes derivatives."
Of course, derivatives deals can be risky, and some of the companies that have lost money feel misled. After the Gibson Greeting Company lost $25 million on derivatives trades earlier this year, it filed suit against the Bankers Trust Company, the big New York bank and major derivatives dealer. Gibson Greeting claimed it had been lured into excessively speculative deals by "deception, cheating and fraud."
PROCTER & GAMBLE absorbed a $157 million pretax charge against earnings from losses on derivatives transactions. The big consumer products company threatened to sue its bank, also Bankers Trust, but it hasn't.
Bankers Trust denies the charges that it misled the companies, saying they knew the risks they were taking.
These cases, and other disputes, hinge on specific bank-client contracts and communications. The details are confidential. But it is worth noting that when interest rates were falling steadily and when derivatives provided a mechanism for making leveraged bets that rates would fall further, disputes were scarce indeed. It was when rates reversed sharply earlier this year, turning many profitable bets into losses, that companies started to cry foul.
"I don't think it's the dealers' responsibility to say how much risk a corporation should have," said Michael S. Joseph, a partner at Ernst & Young, the accounting firm. "The greed factor is entering into the decisions on the corporate side."
And clearly, these powerful financial tools should only be used by experts who understand them. "Derivatives are truly remarkable things," said Andre Perold, a finance professor at the Harvard Business School. "But they are like a new fighter plane. You don't put an average pilot in an F-15 fighter without special training."
At the same time, Mr. Perold points out that once companies learn how to use this advanced financial weaponry for defensive purposes, it's natural and often profitable for them to take on some extra risk.
"You can't say, 'We never speculate, we only hedge,' " he said. "That's impossible and if it weren't it would probably be too costly. A little bit of speculation is probably good, if you are any good at it."
Moreover, the kind of derivatives losses reported in recent months by companies is not the kind of problem that most worries central bankers and economists. In January 1992, Mr. McDonough's predecessor at the New York Fed, E. Gerald Corrigan, for the first time made this specialized business a public issue by warning a gathering of bankers that derivatives could introduce unforeseen risks into the financial system.
â¦THE danger, central bankers feared, was that because derivatives transactions are usually custom-made contracts between two parties -- typically a bank and a corporate customer -- the failure of one large player in the market could ripple through the entire business. Unlike stocks or bonds, which can move through the markets like a hot potato, these tailored financial products stay on the books of the dealers who sell them until they mature.
Thus the nightmare, regulators warned, was of "payment gridlock" in the derivatives market, where a default by a bank or a big corporate derivatives user would cascade uncontrollably to others they dealt with.
This systemic problem has not materialized. "We need to be vigilant about systemic risk," Mr. McDonough noted. "But the visions of meltdown are overblown."
Instead, the losses recently have been mainly the result of companies simply making bad bets on the direction of interest rates -- a very different, more isolated, less worrisome issue.
"There have been relatively few highly publicized losses," said Walter Shipley, the chairman of Chemical Bank, a large derivatives dealer. "All of the regulators that have looked at it have fundamentally affirmed that most of the market functions responsibly."
The public anxiety about derivatives stems in part from the sense that these transactions seem to be unrelated to normal business. To most people, they look suspiciously like the sort of thing one should get at a bookie rather than at a bank.
.
Part 1 of 2
October 10, 2008
SouthAmerica: I searched on the web and I found an article published by The New York Times describing the problems that derivatives were already causing to various corporations at that time. And around 1992 the notional or face value of the US derivatives market was estimated to be just $ 24 trillion dollars - contrast that with - the total "notional," or face value, of derivatives held by U.S. banks in September 2008 is $180 trillion, and it's three times that much globally.
Here is the article that give you a flavor about what was happening in the early 1990âs when the derivatives market was nil compared with the size of that unregulated market and a market that has been going on in automatic-pilot.
The day of reckoning has finally arrived for the global financial markets with the compliments of derivatives â financial weapons of mass destruction.
******
âDerivatives as the Fall Guy: Excuses, Excusesâ
By SAUL HANSELL
Published: October 2, 1994
The New York Times
EVERY day, the list of financial casualties grows longer and more varied -- from blue-chip corporations like the Procter & Gamble Company to local governments like Portage County, Ohio. They lost millions in the markets. Now, they blame their losses on "derivatives," and on the banks and brokers who deal in these arcane-sounding financial products.
In many quarters, derivatives is already a dirty word. As more and more companies have been stung by losses on their bets on derivatives, the nerdy term -- coined by the financial engineers of Wall Street and London a few years ago -- is invariably preceded in newspaper and magazine articles by the adjective "risky." Earlier this year, the General Accounting Office called for Federal regulation of trading in derivatives. Congress is investigating them. Last week, the central bankers for the 10 largest developed nations recommended increased disclosure of the derivatives holdings of banks, brokerage houses and companies.
Are derivatives a high-tech, 1990's version of financial snake oil? Is there anything inherently dangerous about them? The answer is a qualified "no," according to central bankers, economists, commercial bankers and the corporations that use derivatives.
For big companies, in particular, these new financial instruments can be efficient tools that lend greater stability to business operations. They help companies with far-flung international operations reduce their risk from swings in currency values and from interest-rate movements abroad.
Hedging against those risks became a far more intricate game during the 80's as more and more nations opened up their financial markets.
Liberalization brought more opportunities, but also more volatility.
To help companies cope with volatile markets, bankers, aided by computers, came up with new tools to hedge against risk -- and new ways to take risk. The biggest new tool was derivatives, broadly defined as contracts whose value is derived from the value of some underlying asset, like currencies, bonds or stocks.
They can be used as a kind of financial insurance policy, locking in currency or interest rate values for months or years, allowing companies to plan their spending and operating budgets with some assurance. They can also be an easy way to make an investment, with protection against losses for the meek, or 10-to-1 leverage for the speculator.
Derivatives, then, are powerful tools for companies to use in the high-stakes balancing act of international financial management. Just how those tools are used, however, depends on the user.
William McDonough, president of the Federal Reserve Bank of New York, says there are legitimate questions about these tailor-made contracts and the implications of their enormous growth to $24 trillion or so in notional, or face value.
â¦In fact, Mr. McDonough has recently begun to warn of the dangers of what he calls "derivatives angst," a simple-minded backlash that could result in legislation that prohibits companies from using these tools.
Any backlash against the use of derivatives would have a serious impact on large corporations.
Two-thirds of the 500 largest American companies use derivatives regularly, according to a study of 1993 annual reports by Swaps Monitor, a newsletter. And the big multinationals clearly want to keep using them.
"I'm very distressed that all of a sudden derivatives have become a dirty word," said Arvind Sodhani, treasurer of the Intel Corporation, who manages the microchip maker's cash reserves of $5 billion. "To earn the highest return you need to use all the arrows in your quiver, and today that includes derivatives."
Of course, derivatives deals can be risky, and some of the companies that have lost money feel misled. After the Gibson Greeting Company lost $25 million on derivatives trades earlier this year, it filed suit against the Bankers Trust Company, the big New York bank and major derivatives dealer. Gibson Greeting claimed it had been lured into excessively speculative deals by "deception, cheating and fraud."
PROCTER & GAMBLE absorbed a $157 million pretax charge against earnings from losses on derivatives transactions. The big consumer products company threatened to sue its bank, also Bankers Trust, but it hasn't.
Bankers Trust denies the charges that it misled the companies, saying they knew the risks they were taking.
These cases, and other disputes, hinge on specific bank-client contracts and communications. The details are confidential. But it is worth noting that when interest rates were falling steadily and when derivatives provided a mechanism for making leveraged bets that rates would fall further, disputes were scarce indeed. It was when rates reversed sharply earlier this year, turning many profitable bets into losses, that companies started to cry foul.
"I don't think it's the dealers' responsibility to say how much risk a corporation should have," said Michael S. Joseph, a partner at Ernst & Young, the accounting firm. "The greed factor is entering into the decisions on the corporate side."
And clearly, these powerful financial tools should only be used by experts who understand them. "Derivatives are truly remarkable things," said Andre Perold, a finance professor at the Harvard Business School. "But they are like a new fighter plane. You don't put an average pilot in an F-15 fighter without special training."
At the same time, Mr. Perold points out that once companies learn how to use this advanced financial weaponry for defensive purposes, it's natural and often profitable for them to take on some extra risk.
"You can't say, 'We never speculate, we only hedge,' " he said. "That's impossible and if it weren't it would probably be too costly. A little bit of speculation is probably good, if you are any good at it."
Moreover, the kind of derivatives losses reported in recent months by companies is not the kind of problem that most worries central bankers and economists. In January 1992, Mr. McDonough's predecessor at the New York Fed, E. Gerald Corrigan, for the first time made this specialized business a public issue by warning a gathering of bankers that derivatives could introduce unforeseen risks into the financial system.
â¦THE danger, central bankers feared, was that because derivatives transactions are usually custom-made contracts between two parties -- typically a bank and a corporate customer -- the failure of one large player in the market could ripple through the entire business. Unlike stocks or bonds, which can move through the markets like a hot potato, these tailored financial products stay on the books of the dealers who sell them until they mature.
Thus the nightmare, regulators warned, was of "payment gridlock" in the derivatives market, where a default by a bank or a big corporate derivatives user would cascade uncontrollably to others they dealt with.
This systemic problem has not materialized. "We need to be vigilant about systemic risk," Mr. McDonough noted. "But the visions of meltdown are overblown."
Instead, the losses recently have been mainly the result of companies simply making bad bets on the direction of interest rates -- a very different, more isolated, less worrisome issue.
"There have been relatively few highly publicized losses," said Walter Shipley, the chairman of Chemical Bank, a large derivatives dealer. "All of the regulators that have looked at it have fundamentally affirmed that most of the market functions responsibly."
The public anxiety about derivatives stems in part from the sense that these transactions seem to be unrelated to normal business. To most people, they look suspiciously like the sort of thing one should get at a bookie rather than at a bank.
.
.
Part 2 of 2
Frankly, in some ways they are a bit like gambling, but then again so is insurance. A homeowners policy, after all, essentially pays off 100 to 1 in cash if the house burns down. The most common use of derivatives, similarly, is as a form of financial insurance.
â¦By contrast, the Air Products and Chemicals Corporation got battered earlier this year by using a derivative that locked it into a potentially risky situation. It wound up taking a charge against earnings of $67 million because of losses on interest rate swaps, the most common form of derivative. The Allentown, Pa., producer of industrial gasses entered into a complex series of swap transactions in what was a leveraged bet that rates would not rise. When rates did rise, the company's losses mounted.
Gerry White, the chief financial officer of Air Products, says he became aware of his company's problem only when he ordered what he thought would be a routine audit as a double-check after Procter & Gamble announced its big loss. But the audit uncovered five leveraged transactions that, he says, were not adequately disclosed to top management and not fully understood by the Air Products financial staff who bought the swap contracts.
"There was a misjudgment in assessing the risk of these transactions," Mr. White said.
AFTER the $67 million loss, Air Products replaced its treasurer and assistant treasurer. The company, Mr. White says, has also tightened its policies and procedures for managing derivatives risks.
â¦The biggest derivatives loss by an American company came last year and it came as no surprise to the loser, Sears, Roebuck & Company. The company took a pretax charge of $237 million in 1993. The Sears loss shows that for a huge borrower there can be a sizable risk, and cost, even for pursuing what it regarded as a conservative strategy.
The Chicago-based retailer was able to raise money cheaply by selling what grew to be $11 billion in commercial paper, a short-term debt instrument with rates that fluctuate with the market.
To protect itself against any sudden increases in interest rates, Sears decided in the 1980's to buy swap contracts that essentially converted the obligations into fixed rates, ranging from 7 percent to 12.5 percent.
In its swap arrangements, typically made with a bank or broker, Sears would make regular payments at a fixed interest rate to the dealer and would receive in return -- the swap -- a payment that would fluctuate with the rate it owed on its commercial paper.
If rates rose, the swap would cover the cost of the higher payments. But what happened was that rates fell sharply, so the swap obligated the company to pay much more every month than it would have if it had kept the floating rate.
The real reckoning for Sears came last year, when its management decided to sell off assets and use the proceeds to pay off billions of dollars worth of debt.
When the company took that step, it took a loss both on the swaps and also on bonds, since it had to make prepayment penalties for retiring the bonds before they matured.
THE $24 TRILLION PUZZLE
Even to the statistically jaded, $24 trillion seems like a big number. It is nearly four times the size of America's gross domestic product, and it is also the size of the derivatives market at the end of last year, according to Swaps Monitor, an industry newsletter.
â¦Defining what is and what is not a derivative is tricky -- and often depends on what point the commentator is trying to make.
The name derivatives was adopted at the start of the 1990's to describe a fast-growing category of contracts whose value is derived from some underlying asset, like bonds or stocks. Yet derivatives are custom-made contracts and not the securities themselves.
In the last year or so, however, the term derivative has suddenly been applied to financial instruments that are securities, even if esoteric ones, like the mortgage-backed bonds that the government of Portage County, Ohio, lost money on. And securities, unlike derivatives, fit more neatly into existing legal, regulatory and accounting systems.
Still, many in the press and in Congress have used the more expansive definition of derivatives. The broader definition, after all, does embrace more casualties from recent reverses in the financial markets -- and thus perhaps provides more ammunition for those who advocate a regulatory crackdown.
Source: http://query.nytimes.com/gst/fullpa...n=&&scp=4&sq=derivatives losses + 1992&st=cse
.
Part 2 of 2
Frankly, in some ways they are a bit like gambling, but then again so is insurance. A homeowners policy, after all, essentially pays off 100 to 1 in cash if the house burns down. The most common use of derivatives, similarly, is as a form of financial insurance.
â¦By contrast, the Air Products and Chemicals Corporation got battered earlier this year by using a derivative that locked it into a potentially risky situation. It wound up taking a charge against earnings of $67 million because of losses on interest rate swaps, the most common form of derivative. The Allentown, Pa., producer of industrial gasses entered into a complex series of swap transactions in what was a leveraged bet that rates would not rise. When rates did rise, the company's losses mounted.
Gerry White, the chief financial officer of Air Products, says he became aware of his company's problem only when he ordered what he thought would be a routine audit as a double-check after Procter & Gamble announced its big loss. But the audit uncovered five leveraged transactions that, he says, were not adequately disclosed to top management and not fully understood by the Air Products financial staff who bought the swap contracts.
"There was a misjudgment in assessing the risk of these transactions," Mr. White said.
AFTER the $67 million loss, Air Products replaced its treasurer and assistant treasurer. The company, Mr. White says, has also tightened its policies and procedures for managing derivatives risks.
â¦The biggest derivatives loss by an American company came last year and it came as no surprise to the loser, Sears, Roebuck & Company. The company took a pretax charge of $237 million in 1993. The Sears loss shows that for a huge borrower there can be a sizable risk, and cost, even for pursuing what it regarded as a conservative strategy.
The Chicago-based retailer was able to raise money cheaply by selling what grew to be $11 billion in commercial paper, a short-term debt instrument with rates that fluctuate with the market.
To protect itself against any sudden increases in interest rates, Sears decided in the 1980's to buy swap contracts that essentially converted the obligations into fixed rates, ranging from 7 percent to 12.5 percent.
In its swap arrangements, typically made with a bank or broker, Sears would make regular payments at a fixed interest rate to the dealer and would receive in return -- the swap -- a payment that would fluctuate with the rate it owed on its commercial paper.
If rates rose, the swap would cover the cost of the higher payments. But what happened was that rates fell sharply, so the swap obligated the company to pay much more every month than it would have if it had kept the floating rate.
The real reckoning for Sears came last year, when its management decided to sell off assets and use the proceeds to pay off billions of dollars worth of debt.
When the company took that step, it took a loss both on the swaps and also on bonds, since it had to make prepayment penalties for retiring the bonds before they matured.
THE $24 TRILLION PUZZLE
Even to the statistically jaded, $24 trillion seems like a big number. It is nearly four times the size of America's gross domestic product, and it is also the size of the derivatives market at the end of last year, according to Swaps Monitor, an industry newsletter.
â¦Defining what is and what is not a derivative is tricky -- and often depends on what point the commentator is trying to make.
The name derivatives was adopted at the start of the 1990's to describe a fast-growing category of contracts whose value is derived from some underlying asset, like bonds or stocks. Yet derivatives are custom-made contracts and not the securities themselves.
In the last year or so, however, the term derivative has suddenly been applied to financial instruments that are securities, even if esoteric ones, like the mortgage-backed bonds that the government of Portage County, Ohio, lost money on. And securities, unlike derivatives, fit more neatly into existing legal, regulatory and accounting systems.
Still, many in the press and in Congress have used the more expansive definition of derivatives. The broader definition, after all, does embrace more casualties from recent reverses in the financial markets -- and thus perhaps provides more ammunition for those who advocate a regulatory crackdown.
Source: http://query.nytimes.com/gst/fullpa...n=&&scp=4&sq=derivatives losses + 1992&st=cse
.
.
Part 1 of 2
October 10, 2008
SouthAmerica: It is too late to save the global financial system right now, and the meetings in Washington D.C. of the G7, IMF, or any other type of meeting designed for damage control is not going to work, because the nuclear explosion on the derivatives market is already in an advanced stage and it is contaminating everything on its path.
Not even the US government and other Central Banks interventions are going to be able to stop these complete financial meltdown.
Watching the news on CNBC, or on CNN news, or in any other mainstream media for that matter I realized that not a single person, maybe with the exception of Noriel Roubini has the understanding of the financial nuclear chain reaction that is already underway.
I have no idea why the economists, financial analysts, central bankers, and other financial authorities canât understand what is at the core of this financial nuclear explosion?
Let me clarify what I mean by the fact that the financial explosion already happened and it is just a matter of time for the entire financial system to implode. I am trying to simplify as much as I can, and I hope that some people will start grasping what I have been talking about for a long time.
I donât understand why the entire financial world including the CNBC financial talking heads, and also at Bloomberg News are clueless of what is underway. And these people have the balls to give misinformation and suggest to the public that this financial crisis has reached the bottom and might be time to jump in the stock market.
Only FOOLS would invest his/her money right now when the financial meltdown still has a long way to go.
Going back to the nuclear financial explosion, what has triggered the mother of all nuclear financial explosions is a number of financial events that have been happening over the last 10 months and culminated with the final trigger that set off this massive nuclear financial explosion that is mushrooming into a nuclear cloud and is infecting the entire global financial system.
In the early 1990âs we had a preview of future things to come when the derivatives market was at the epicenter of the problems at Bankers Trust, and Manufacturers Hanover Trust and the impact that they had in companies as large as Procter & Gamble, Sears Roebuck and many others. Today when we read the above article that was published on The New York Times about the derivatives losses in the early 1990âs â those figures look small when compared with the financial numbers that we see today.
When reading that article you need to keep in mind that those losses were a big deal in the early 1990âs based on the financial structure of the time and the size of the US economy. And in the early 1990âs the derivatives market was insignificant when compared with the size of that market today.
What the financial markets have not grasped as yet is the severity of what already has happened and the impact that is having in the entire financial system and it is spreading just like a nuclear chain reaction. There were many companies involved in this mess, but let give you an example and put the spotlight in the impact that only one company is having in the entire financial system then you multiply that by thousands of.times and you can see why the entire system is spinning completely out of control, and will result into a massive implosion of the global financial system.
Keep in mind the following information:
1) The total "notional," or face value, of derivatives held by U.S. banks in September 2008 was $180 trillion, and it's three times that much globally.
2) At the time of the Bear Stearns collapse according to an article published in March 2008 by prominent analyst Ambrose Evans-Prichard âFedâs rescue halted a derivatives Chernobylâ, Bear Stearns held $ 13.4 trillion in derivatives. The Federal Reserve arranged for JP Morgan to add Bear Stearns derivatives to its own $ 77 trillion portfolio, and since then JP Morgan has been holding a total of around $ 90 trillion dollars in derivatives.
3) Concentrated in the hands of five major players. Nearly 97% of all U.S. bank-held derivatives are concentrated in the hands of just five major U.S. banks â JP Morgan Chase, Citibank, Bank of America, Wachovia and HSBC. (One of the banks on this list âWachovia - has gone out of business or is being absorbed by another major bank.)
4) Big brokers are also loaded with derivatives. Merrill Lynch has $4.2 trillion. Morgan Stanley has $7.1 trillion. As best we can determine, Lehman Brothers has significantly less â $738 billion.
5) To put the problem in perspective, as the enclosed article said: âIt could take a while to hash this out, since the bankruptcy court has never had such a disaster on its docket. Derivatives disputes, at a judge's behest, could end up in mediation. It happened in Enron's bankruptcy back in 2001. But untangling Lehman's web could prove more tedious. The failed energy giant, then considered a big player in derivatives, had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.â
6) We already know the impact that the Lehman Brothers collapse had in just one of their casualties â the company Sadia from Brazil, and here is what I posted on this forum about Sadiaâs major financial losses:
******
October 6, 2008
SouthAmerica: I was watching CNBC TV and their talking heads were trying to spin every way they could for people to go back into the market.
Basically, only idiots would invest their money right now since the market is heading South and nobody have any idea where the bottom is regarding the current stock market MELTDOWN.
The market is littered with nuclear mine fields called âDERIVATIVESâ and these devices are exploding all over the place, but nobody can get even an estimate of the carnage that these devices are going to inflict in the financial institutions, and also on regular corporations.
Here is only one example of what is in store for companies around the world.
When the new earnings season starts the new estimates are going to be full of surprises, but Real bad surprises â the type of surprise that the stock market does not like it.
Not little surprises, real big surprises as in the case of Sadia â they lost almost $ 500 million dollars in Derivatives and Lehman Brothers.
You can bet that the major American corporations are also going to disclose that they incurred a massive amount of losses in the derivatives market.
***
September 26, 2008
Sadia shares plunge 28 pct on Lehman, derivatives collapse (guardian.co.uk)
Shares of Brazil's largest poultry and pork processor Sadia plunged on Friday after the company reported serious losses due to forward derivatives positions taken on the currency exchange marketsâ¦
Sadia said it had 760 million reais in losses (US$ 410 million) due to foreign exchange positions and Lehman Brothers Holding Inc bonds. That was more than the 689 million real profit the company had in 2007.
http://www.elitetrader.com/vb/showthread.php?s=&postid=2108821&highlight=Sadia#post2108821
******
7) The number of firms that made derivatives deals with Lehman Brothers = 8,000
8) The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them.
9) Lehman Brothers had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.
10) Morgan Stanley may implode by this coming week, and be forced to go out of business, and in September 2008 Morgan Stanley was loaded with derivatives; they had contracts worth $7.1 trillion
11) Other companies such as Fannie Mae, Freddie Mac, AIG, Washington Mutual, and Wachovia are also playing a part of this massive derivatives meltdown.
12) The derivatives meltdown also will have a major impact in the earnings of many companies in the $ 3 trillion Hedge Fund industry.
13) The derivatives meltdown also will have a major impact in the earnings of many global insurance industry.
14) To make all this massive derivatives market meltdown even worse - The International Swaps & Derivatives Assn. (ISDA) estimates that investment shops have collected nearly $2 trillion dollars in collateral as part of derivatives agreementsâmoney that in some cases is used several times over.
Free-flowing, promiscuous money from derivatives helped spur the credit boom to new heights. By using their customers' collateral as their own collateral, Lehman and other firms could borrow more money, using the proceeds to buy the kind of high-risk securities that are now imploding.
It turns out that Lehman, like other big dealers, was running a perfectly legal but highly risky game moving money from firm to firm. It used the collateral from one trading partner to fund more deals with other firms.
.
Part 1 of 2
October 10, 2008
SouthAmerica: It is too late to save the global financial system right now, and the meetings in Washington D.C. of the G7, IMF, or any other type of meeting designed for damage control is not going to work, because the nuclear explosion on the derivatives market is already in an advanced stage and it is contaminating everything on its path.
Not even the US government and other Central Banks interventions are going to be able to stop these complete financial meltdown.
Watching the news on CNBC, or on CNN news, or in any other mainstream media for that matter I realized that not a single person, maybe with the exception of Noriel Roubini has the understanding of the financial nuclear chain reaction that is already underway.
I have no idea why the economists, financial analysts, central bankers, and other financial authorities canât understand what is at the core of this financial nuclear explosion?
Let me clarify what I mean by the fact that the financial explosion already happened and it is just a matter of time for the entire financial system to implode. I am trying to simplify as much as I can, and I hope that some people will start grasping what I have been talking about for a long time.
I donât understand why the entire financial world including the CNBC financial talking heads, and also at Bloomberg News are clueless of what is underway. And these people have the balls to give misinformation and suggest to the public that this financial crisis has reached the bottom and might be time to jump in the stock market.
Only FOOLS would invest his/her money right now when the financial meltdown still has a long way to go.
Going back to the nuclear financial explosion, what has triggered the mother of all nuclear financial explosions is a number of financial events that have been happening over the last 10 months and culminated with the final trigger that set off this massive nuclear financial explosion that is mushrooming into a nuclear cloud and is infecting the entire global financial system.
In the early 1990âs we had a preview of future things to come when the derivatives market was at the epicenter of the problems at Bankers Trust, and Manufacturers Hanover Trust and the impact that they had in companies as large as Procter & Gamble, Sears Roebuck and many others. Today when we read the above article that was published on The New York Times about the derivatives losses in the early 1990âs â those figures look small when compared with the financial numbers that we see today.
When reading that article you need to keep in mind that those losses were a big deal in the early 1990âs based on the financial structure of the time and the size of the US economy. And in the early 1990âs the derivatives market was insignificant when compared with the size of that market today.
What the financial markets have not grasped as yet is the severity of what already has happened and the impact that is having in the entire financial system and it is spreading just like a nuclear chain reaction. There were many companies involved in this mess, but let give you an example and put the spotlight in the impact that only one company is having in the entire financial system then you multiply that by thousands of.times and you can see why the entire system is spinning completely out of control, and will result into a massive implosion of the global financial system.
Keep in mind the following information:
1) The total "notional," or face value, of derivatives held by U.S. banks in September 2008 was $180 trillion, and it's three times that much globally.
2) At the time of the Bear Stearns collapse according to an article published in March 2008 by prominent analyst Ambrose Evans-Prichard âFedâs rescue halted a derivatives Chernobylâ, Bear Stearns held $ 13.4 trillion in derivatives. The Federal Reserve arranged for JP Morgan to add Bear Stearns derivatives to its own $ 77 trillion portfolio, and since then JP Morgan has been holding a total of around $ 90 trillion dollars in derivatives.
3) Concentrated in the hands of five major players. Nearly 97% of all U.S. bank-held derivatives are concentrated in the hands of just five major U.S. banks â JP Morgan Chase, Citibank, Bank of America, Wachovia and HSBC. (One of the banks on this list âWachovia - has gone out of business or is being absorbed by another major bank.)
4) Big brokers are also loaded with derivatives. Merrill Lynch has $4.2 trillion. Morgan Stanley has $7.1 trillion. As best we can determine, Lehman Brothers has significantly less â $738 billion.
5) To put the problem in perspective, as the enclosed article said: âIt could take a while to hash this out, since the bankruptcy court has never had such a disaster on its docket. Derivatives disputes, at a judge's behest, could end up in mediation. It happened in Enron's bankruptcy back in 2001. But untangling Lehman's web could prove more tedious. The failed energy giant, then considered a big player in derivatives, had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.â
6) We already know the impact that the Lehman Brothers collapse had in just one of their casualties â the company Sadia from Brazil, and here is what I posted on this forum about Sadiaâs major financial losses:
******
October 6, 2008
SouthAmerica: I was watching CNBC TV and their talking heads were trying to spin every way they could for people to go back into the market.
Basically, only idiots would invest their money right now since the market is heading South and nobody have any idea where the bottom is regarding the current stock market MELTDOWN.
The market is littered with nuclear mine fields called âDERIVATIVESâ and these devices are exploding all over the place, but nobody can get even an estimate of the carnage that these devices are going to inflict in the financial institutions, and also on regular corporations.
Here is only one example of what is in store for companies around the world.
When the new earnings season starts the new estimates are going to be full of surprises, but Real bad surprises â the type of surprise that the stock market does not like it.
Not little surprises, real big surprises as in the case of Sadia â they lost almost $ 500 million dollars in Derivatives and Lehman Brothers.
You can bet that the major American corporations are also going to disclose that they incurred a massive amount of losses in the derivatives market.
***
September 26, 2008
Sadia shares plunge 28 pct on Lehman, derivatives collapse (guardian.co.uk)
Shares of Brazil's largest poultry and pork processor Sadia plunged on Friday after the company reported serious losses due to forward derivatives positions taken on the currency exchange marketsâ¦
Sadia said it had 760 million reais in losses (US$ 410 million) due to foreign exchange positions and Lehman Brothers Holding Inc bonds. That was more than the 689 million real profit the company had in 2007.
http://www.elitetrader.com/vb/showthread.php?s=&postid=2108821&highlight=Sadia#post2108821
******
7) The number of firms that made derivatives deals with Lehman Brothers = 8,000
8) The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them.
9) Lehman Brothers had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.
10) Morgan Stanley may implode by this coming week, and be forced to go out of business, and in September 2008 Morgan Stanley was loaded with derivatives; they had contracts worth $7.1 trillion
11) Other companies such as Fannie Mae, Freddie Mac, AIG, Washington Mutual, and Wachovia are also playing a part of this massive derivatives meltdown.
12) The derivatives meltdown also will have a major impact in the earnings of many companies in the $ 3 trillion Hedge Fund industry.
13) The derivatives meltdown also will have a major impact in the earnings of many global insurance industry.
14) To make all this massive derivatives market meltdown even worse - The International Swaps & Derivatives Assn. (ISDA) estimates that investment shops have collected nearly $2 trillion dollars in collateral as part of derivatives agreementsâmoney that in some cases is used several times over.
Free-flowing, promiscuous money from derivatives helped spur the credit boom to new heights. By using their customers' collateral as their own collateral, Lehman and other firms could borrow more money, using the proceeds to buy the kind of high-risk securities that are now imploding.
It turns out that Lehman, like other big dealers, was running a perfectly legal but highly risky game moving money from firm to firm. It used the collateral from one trading partner to fund more deals with other firms.
.
.
Part 2 of 2
In a Nutshell: Just look at the impact that Lehman Brothers bankruptcy had in only one company â Sadia â then when you take in consideration that they did derivative business with 8,000 firms, and roughly 1 million derivative deals had its name on them â then you add on top of that all the turmoil that is going on in the derivative businesses of all kinds of Hedge Funds, insurance companies, regular corporations, and in many banks â and the result is a global financial meltdown much too big to be contained by any country or group of countries; including the United States and Europe.
The current nuclear financial explosion that is underway it is too large and extremely destructive - because of the leverage that they used that is at the core of this entire financial meltdown â high leverage in the way up, high leverage also in the implosion process.
Remember all kinds of companies besides losing on their derivatives agreements they are also going to lose the money that they gave as collateral that probably is sitting on the books of these companies such as: banks, insurance companies, hedge funds, and so on, as very secure assets â but instead these hundreds of billions of dollars will need to be written off by all these companies because the companies such as Lehman Brothers gambled their money away and most of that collateral has gone up in smoke.
No wonder the entire financial system is frozen right now, nobody knows how much losses are in the pipeline that it is going to have a massive negative impact on the earnings of all kinds of businesses - and how many businesses will be forced to go out of business when they have to acknowledge that they have incurred these massive losses.
Too many companies are going to become insolvent at the same time and the international monetary system is going to spin completely out of control when most countries realize that the US government is completely bankrupt.
*********
Business Week â October 20, 2008
Lehman: One Big Derivatives Mess
8,000 The number of firms that made derivatives deals with Lehman Brothers.
The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them.
***
Business Week â October 20, 2008
âA Money Mystery at Lehmanâ
Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
By: Matthew Goldstein and David Henry
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers may have been the disaster he imagined.
How lethal was the investment bank's derivatives portfolio? Just look at the long line of banks, hedge funds, and other big investors trying to get their money back. Lehman's bankruptcy threw into jeopardy derivative deals with a staggering 8,000 different firms that had paid Lehman billions of dollars in collateral. Now some trading partners are calling on state and federal courts to reclaim their assets, which have been frozen since the Sept. 15 bankruptcy filing. It will be a "very awesome task to try to unwind all of that," says Lehman's lead bankruptcy attorney, Harvey R. Miller, a partner at Weil, Gotshal & Manges.
It turns out that Lehman, like other big dealers, was running a perfectly legal but highly risky game moving money from firm to firm. It used the collateral from one trading partner to fund more deals with other firms. The same $100 million collected in one deal can be used for many other transactions. "Firms basically can use [the money] as their own collateral for anything they want," says Kenneth Kettering, a former derivatives lawyer and currently a professor at New York Law School. But when the contracts terminate as the result of bankruptcy, the extra collateral is supposed to be returned.
Lehman's travails are only adding to the worries shaking the financial system. Not only has Lehman's debacle snagged the portfolios of such big traders as hedge fund firm Harbinger Capital Partnersâit has also helped push global short-term lending markets into a deep freeze. It's enough to make some market watchers wonder if Lehman was too big for the U.S. Treasury and Federal Reserve to let fail.
Derivatives contractsâwhose value is tied to the performance of an underlying security or benchmark over a specific periodâare designed in part to help firms minimize losses from interest rate fluctuations, corporate bond defaults, and other events. The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them.
Welshing on Deals
As part of those transactions, buyers had put up collateral in the event of losses. But weeks after Lehman's demise, large sums of leftover collateral have yet to be returned to the trading partners. Bank of America executives tried several times to persuade Lehman officials via e-mail and phone calls to fork over funds, according to a suit. But BofA was rebuffed. In one e-mail exchange, a Lehman employee wrote to BofA: "All activity has been suspended until further notice."
Nasreen Bulos, a lawyer for one of Dubai's sovereign wealth funds, got the same chilly response. The Global Strategic Equities Fund of Dubai, part of the gulf state's $12 billion investment portfolio, gave Lehman $40 million in June as part of a deal pegged to energy giant BP's stock. According to an affidavit, Bulos started contacting Lehman on Sept. 15 to get back $27 million in collateral. Four days later, Lehman told Bulos it would not honor the request or say anything further on the matter.
Both BofA and the Dubai fund have filed suit against Lehman. They're not alone. Some two-dozen Goldman Sachs hedge funds say in a suit that Lehman owes them "hundreds of millions of dollars." Others trying to get their collateral back in court: ING, Schroders, Federal Home Loan Bank of Atlanta, the Federal Home Loan Bank of Pittsburgh, and oilman T. Boone Pickens.
Where all that money ended up is a mystery. After Lehman used the collateral for its own deals with other firms, they could have used the money for their own purposes. The International Swaps & Derivatives Assn. (ISDA) estimates that investment shops have collected nearly $2 trillion in collateral as part of derivatives agreementsâmoney that in some cases is used several times over. That's up from $700 billion in 2003, the year Buffett made his prescient prediction. "This has been standard practice for many years, and it is very helpful in contributing to the efficiency of the collateral market," says Richard Metcalfe, ISDA's global head of policy.
In rare cases dealers agree to cordon off the collateralâbut even that doesn't mean the money is safe. The Federal Home Loan Bank of Pittsburgh, a government lender to small and community banks, appears to have paid extra to keep its collateral in a segregated account, a precautionary measure designed to avoid this kind of mess. Now it's worried the money may have been lumped in with the Lehman assets sold to British bank Barclays.
Free-flowing, promiscuous money from derivatives helped spur the credit boom to new heights. By using their customers' collateral as their own collateral, Lehman and other firms could borrow more money, using the proceeds to buy the kind of high-risk securities that are now imploding. "It was one way for the leverage bubble to grow," says Christian Johnson, a law professor at the University of Utah.
In theory, Lehman's bankruptcy shouldn't have caused such a stir. When a party goes belly up, derivatives contracts are designed to end immediately and get settled outside of court proceedings. But problems can arise when the amount of collateral exceeds the value of the agreements, which can deteriorate over time.
The Missing Money
Many of the firms now filing claims against Lehman face just that situation. For instance, the Federal Home Loan Bank of Atlanta had a longstanding derivative deal with Lehman to protect against interest rate changes. When Lehman collapsed, the Atlanta bank's agreements were worth $757 million. But it had put up $936 million as collateral. According to court documents, Lehman ignored management's demands to return the extra $179 million.
There's speculation that JPMorgan Chase, Lehman's primary clearinghouse for trades, may have its hands on some of that money. Lawsuits filed by BofA and others allege that Lehman socked away their collateral in accounts at JPMorgan. After the bankruptcy, JPMorgan grabbed $13 billion that Lehman had pledged as guarantees. BofA and others are wondering whether some of that money is rightfully theirs. JPMorgan declined to comment.
It could take a while to hash this out, since the bankruptcy court has never had such a disaster on its docket. Derivatives disputes, at a judge's behest, could end up in mediation. It happened in Enron's bankruptcy back in 2001. But untangling Lehman's web could prove more tedious. The failed energy giant, then considered a big player in derivatives, had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.
Source: http://www.businessweek.com/magazine/content/08_42/b4104000160047.htm
********
October 10, 2008
SouthAmerica: We also have been discussing the global derivatives market meltdown at:
Financial Derivatives Market Meltdown
http://www.elitetrader.com/vb/showthread.php?s=&threadid=57218&perpage=6&pagenumber=5
.
Part 2 of 2
In a Nutshell: Just look at the impact that Lehman Brothers bankruptcy had in only one company â Sadia â then when you take in consideration that they did derivative business with 8,000 firms, and roughly 1 million derivative deals had its name on them â then you add on top of that all the turmoil that is going on in the derivative businesses of all kinds of Hedge Funds, insurance companies, regular corporations, and in many banks â and the result is a global financial meltdown much too big to be contained by any country or group of countries; including the United States and Europe.
The current nuclear financial explosion that is underway it is too large and extremely destructive - because of the leverage that they used that is at the core of this entire financial meltdown â high leverage in the way up, high leverage also in the implosion process.
Remember all kinds of companies besides losing on their derivatives agreements they are also going to lose the money that they gave as collateral that probably is sitting on the books of these companies such as: banks, insurance companies, hedge funds, and so on, as very secure assets â but instead these hundreds of billions of dollars will need to be written off by all these companies because the companies such as Lehman Brothers gambled their money away and most of that collateral has gone up in smoke.
No wonder the entire financial system is frozen right now, nobody knows how much losses are in the pipeline that it is going to have a massive negative impact on the earnings of all kinds of businesses - and how many businesses will be forced to go out of business when they have to acknowledge that they have incurred these massive losses.
Too many companies are going to become insolvent at the same time and the international monetary system is going to spin completely out of control when most countries realize that the US government is completely bankrupt.
*********
Business Week â October 20, 2008
Lehman: One Big Derivatives Mess
8,000 The number of firms that made derivatives deals with Lehman Brothers.
The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them.
***
Business Week â October 20, 2008
âA Money Mystery at Lehmanâ
Enron may look tame compared with this: a fight over billions of dollars posted as collateral, then used in a tangled web of deals
By: Matthew Goldstein and David Henry
In 2003, legendary investor Warren E. Buffett called derivatives "weapons of mass destruction." Buffett predicted that the complex financial instruments would morph, mutate, and multiply "until some event makes their toxicity clear." The failure of Lehman Brothers may have been the disaster he imagined.
How lethal was the investment bank's derivatives portfolio? Just look at the long line of banks, hedge funds, and other big investors trying to get their money back. Lehman's bankruptcy threw into jeopardy derivative deals with a staggering 8,000 different firms that had paid Lehman billions of dollars in collateral. Now some trading partners are calling on state and federal courts to reclaim their assets, which have been frozen since the Sept. 15 bankruptcy filing. It will be a "very awesome task to try to unwind all of that," says Lehman's lead bankruptcy attorney, Harvey R. Miller, a partner at Weil, Gotshal & Manges.
It turns out that Lehman, like other big dealers, was running a perfectly legal but highly risky game moving money from firm to firm. It used the collateral from one trading partner to fund more deals with other firms. The same $100 million collected in one deal can be used for many other transactions. "Firms basically can use [the money] as their own collateral for anything they want," says Kenneth Kettering, a former derivatives lawyer and currently a professor at New York Law School. But when the contracts terminate as the result of bankruptcy, the extra collateral is supposed to be returned.
Lehman's travails are only adding to the worries shaking the financial system. Not only has Lehman's debacle snagged the portfolios of such big traders as hedge fund firm Harbinger Capital Partnersâit has also helped push global short-term lending markets into a deep freeze. It's enough to make some market watchers wonder if Lehman was too big for the U.S. Treasury and Federal Reserve to let fail.
Derivatives contractsâwhose value is tied to the performance of an underlying security or benchmark over a specific periodâare designed in part to help firms minimize losses from interest rate fluctuations, corporate bond defaults, and other events. The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them.
Welshing on Deals
As part of those transactions, buyers had put up collateral in the event of losses. But weeks after Lehman's demise, large sums of leftover collateral have yet to be returned to the trading partners. Bank of America executives tried several times to persuade Lehman officials via e-mail and phone calls to fork over funds, according to a suit. But BofA was rebuffed. In one e-mail exchange, a Lehman employee wrote to BofA: "All activity has been suspended until further notice."
Nasreen Bulos, a lawyer for one of Dubai's sovereign wealth funds, got the same chilly response. The Global Strategic Equities Fund of Dubai, part of the gulf state's $12 billion investment portfolio, gave Lehman $40 million in June as part of a deal pegged to energy giant BP's stock. According to an affidavit, Bulos started contacting Lehman on Sept. 15 to get back $27 million in collateral. Four days later, Lehman told Bulos it would not honor the request or say anything further on the matter.
Both BofA and the Dubai fund have filed suit against Lehman. They're not alone. Some two-dozen Goldman Sachs hedge funds say in a suit that Lehman owes them "hundreds of millions of dollars." Others trying to get their collateral back in court: ING, Schroders, Federal Home Loan Bank of Atlanta, the Federal Home Loan Bank of Pittsburgh, and oilman T. Boone Pickens.
Where all that money ended up is a mystery. After Lehman used the collateral for its own deals with other firms, they could have used the money for their own purposes. The International Swaps & Derivatives Assn. (ISDA) estimates that investment shops have collected nearly $2 trillion in collateral as part of derivatives agreementsâmoney that in some cases is used several times over. That's up from $700 billion in 2003, the year Buffett made his prescient prediction. "This has been standard practice for many years, and it is very helpful in contributing to the efficiency of the collateral market," says Richard Metcalfe, ISDA's global head of policy.
In rare cases dealers agree to cordon off the collateralâbut even that doesn't mean the money is safe. The Federal Home Loan Bank of Pittsburgh, a government lender to small and community banks, appears to have paid extra to keep its collateral in a segregated account, a precautionary measure designed to avoid this kind of mess. Now it's worried the money may have been lumped in with the Lehman assets sold to British bank Barclays.
Free-flowing, promiscuous money from derivatives helped spur the credit boom to new heights. By using their customers' collateral as their own collateral, Lehman and other firms could borrow more money, using the proceeds to buy the kind of high-risk securities that are now imploding. "It was one way for the leverage bubble to grow," says Christian Johnson, a law professor at the University of Utah.
In theory, Lehman's bankruptcy shouldn't have caused such a stir. When a party goes belly up, derivatives contracts are designed to end immediately and get settled outside of court proceedings. But problems can arise when the amount of collateral exceeds the value of the agreements, which can deteriorate over time.
The Missing Money
Many of the firms now filing claims against Lehman face just that situation. For instance, the Federal Home Loan Bank of Atlanta had a longstanding derivative deal with Lehman to protect against interest rate changes. When Lehman collapsed, the Atlanta bank's agreements were worth $757 million. But it had put up $936 million as collateral. According to court documents, Lehman ignored management's demands to return the extra $179 million.
There's speculation that JPMorgan Chase, Lehman's primary clearinghouse for trades, may have its hands on some of that money. Lawsuits filed by BofA and others allege that Lehman socked away their collateral in accounts at JPMorgan. After the bankruptcy, JPMorgan grabbed $13 billion that Lehman had pledged as guarantees. BofA and others are wondering whether some of that money is rightfully theirs. JPMorgan declined to comment.
It could take a while to hash this out, since the bankruptcy court has never had such a disaster on its docket. Derivatives disputes, at a judge's behest, could end up in mediation. It happened in Enron's bankruptcy back in 2001. But untangling Lehman's web could prove more tedious. The failed energy giant, then considered a big player in derivatives, had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.
Source: http://www.businessweek.com/magazine/content/08_42/b4104000160047.htm
********
October 10, 2008
SouthAmerica: We also have been discussing the global derivatives market meltdown at:
Financial Derivatives Market Meltdown
http://www.elitetrader.com/vb/showthread.php?s=&threadid=57218&perpage=6&pagenumber=5
.
.
Correction:
Posted on the above thread:
9) Lehman Brothers had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.
It Should read:
9) Lehman Brothers had contracts worth $ 738 billion as of its last annual report.
.
Correction:
Posted on the above thread:
9) Lehman Brothers had contracts worth about $22 billion. Lehman's tally as of its last annual report: $738 billion.
It Should read:
9) Lehman Brothers had contracts worth $ 738 billion as of its last annual report.
.
.
October 11, 2008
SouthAmerica: Tonight I did watch the Lou Dobbs Tonight program on CNN. He was discussing the current stock market crash in the United States with some economists and they were suggesting that the US government close the banks and the US stock market for a couple of days in an effort to stop the continued decline in the US financial market.
These guys think that they can stop deleveraging by closing the stock market for a few days.
If they do that you can bet it is a last resort strategy designed more to stop a complete PANIC and a complete stock market meltdown than anything else. That is equivalent to a Hell Mary Pass in football â it is a desperate strategy because you know that this will send a signal to the rest of the world that the US financial market is not as liquid as Americans led the rest the world to believe.
Maybe this coming week if the US government closes the banks and the stock market to prevent from a further decline â that will send a strong signal to the rest of the world that it is time to sell all kinds of foreign assets in the United States and get out as much as you can before the herd leaves you with assets worth nothing in US dollars.
That also will send a signal that it is time to get out of the US dollar and buy gold, and at this point I donât know what else.
If the US closes its banks and stock market I would suggest that they do the same in Brazil, otherwise the hot money find a way to destabilize and also to destroy the Brazilian economy. The hot money operators are experts in destroying countries economies and they have all kinds of strategies designed to make a fast killing when they are trying to make money for their high stake gambling investors.
The other stock exchanges and banks in South America also would be foolish if they let their financial system open for business and to be LOOTED by these fast operators.
One more illusion about the US financial system is going up in smoke: the illusion of high liquidity.
I am also posting this information on various websites where people would be able to be alerted to what is happening in the US financial markets â and possibly the last stand before the final meltdown.
I canât pin point the reason why? But Americans love to have their stock market crashes during the month of October â October is a very special month for financial meltdowns - They had one in 1929, another in 1987, and finally the mother of all stock market crashes in October 2008.
Americans are addicted to October stock market crashes â maybe there is something to do with Halloween that spooks the U.S. stock market.
Halloween it is a time when Americans commemorate their beliefs in ghosts, witches, and magic â and in the magical month of October Americans watch their money disappear just like in a magical stock market crash event.
Maybe the US government can blame the current stock market crash on Halloween â the ghosts are making it happen.
.
October 11, 2008
SouthAmerica: Tonight I did watch the Lou Dobbs Tonight program on CNN. He was discussing the current stock market crash in the United States with some economists and they were suggesting that the US government close the banks and the US stock market for a couple of days in an effort to stop the continued decline in the US financial market.
These guys think that they can stop deleveraging by closing the stock market for a few days.
If they do that you can bet it is a last resort strategy designed more to stop a complete PANIC and a complete stock market meltdown than anything else. That is equivalent to a Hell Mary Pass in football â it is a desperate strategy because you know that this will send a signal to the rest of the world that the US financial market is not as liquid as Americans led the rest the world to believe.
Maybe this coming week if the US government closes the banks and the stock market to prevent from a further decline â that will send a strong signal to the rest of the world that it is time to sell all kinds of foreign assets in the United States and get out as much as you can before the herd leaves you with assets worth nothing in US dollars.
That also will send a signal that it is time to get out of the US dollar and buy gold, and at this point I donât know what else.
If the US closes its banks and stock market I would suggest that they do the same in Brazil, otherwise the hot money find a way to destabilize and also to destroy the Brazilian economy. The hot money operators are experts in destroying countries economies and they have all kinds of strategies designed to make a fast killing when they are trying to make money for their high stake gambling investors.
The other stock exchanges and banks in South America also would be foolish if they let their financial system open for business and to be LOOTED by these fast operators.
One more illusion about the US financial system is going up in smoke: the illusion of high liquidity.
I am also posting this information on various websites where people would be able to be alerted to what is happening in the US financial markets â and possibly the last stand before the final meltdown.
I canât pin point the reason why? But Americans love to have their stock market crashes during the month of October â October is a very special month for financial meltdowns - They had one in 1929, another in 1987, and finally the mother of all stock market crashes in October 2008.
Americans are addicted to October stock market crashes â maybe there is something to do with Halloween that spooks the U.S. stock market.
Halloween it is a time when Americans commemorate their beliefs in ghosts, witches, and magic â and in the magical month of October Americans watch their money disappear just like in a magical stock market crash event.
Maybe the US government can blame the current stock market crash on Halloween â the ghosts are making it happen.
.