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Derivatives: The $600 Trillion Time Bomb That's Set To Explode

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Author Topic: Derivatives: The $600 Trillion Time Bomb That's Set To Explode  (Read 899 times)
Psalm 51:17
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« on: November 17, 2011, 09:58:25 pm »

http://market-ticker.org/akcs-www?post=197702

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Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not.And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

....

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg.There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.


Oh boy.

Look folks, the risks involved here are real.

Rick Santelli was just on CNBC pointing out that there have been no answers forthcoming on the MF Global mess.  There are reports that several people who you would never expect to have gotten caught in something like this did, including Gerald Celente.

The reason they got caught is the same reason I would have gotten caught if I had been clearing through MF Global: Despite being around the markets since well before the 2000 crash and having successfully negotiated that and the 2008 mess everyone has believed, right up until MF blew up, that customer funds were in fact segregated and thus this risk would never occur.

Simply put everyone has now discovered that this assumption is wrong.

Nothing that has come out of the CME, the SEC or Washington DC that has restored my confidence that MF Global is, in fact, a one-off situation.  In point of fact The Fed is now requiring margin on certain repo transactions where they never did before, implying that there may well be additional snakes in the grass and additional unrecognized and intentionally hidden risks of this sort.

Read Ann's entire missive.  Yes, it's highly partisan, but given what has just happened and Obama's continued insistence that "no crimes were committed" (yet no grand juries have been convened to investigate, so how would he know?) it is entirely justified.

Folks, we must insist that the rule of law be brought back into the forefront.  We must do this particularly with credit instruments and other OTC derivatives and that has to happen right now.  In addition all off-balance sheet BS must be ended immediately.

I have, since 2007, advocated that all credit instruments be forced onto an exchange and that cash margin be required on all underwater positions, marked nightly, without exception or offset.  This has been "poo-pooed" as impractical due to bespoke contracts and other considerations.

Now it turns that I was in fact right - there were additional "snakes" in the grass that were cheating.  First we had ENRON, then Bear and Lehman and now this.

Here's reality folks: We either fix this problem and do it now or you had better pray that Europe doesn't detonate, because if it does you're going to see the very thing that everyone was talking about back in 2008 happen on a global scale, it's a hundred times the size that Lehman was, and we will not be immune to it here in the United States -- in fact we'll damn near be the "center of the sun!"

There is the potential for an imminent cascade failure on these contracts just as there was in 2008; it has not gone away, it has not been attenuated, it has in fact grown in size since 08 and if we do not act to put a stop to it and the risk becomes realized it will be too late.

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Kilika
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« Reply #1 on: November 18, 2011, 04:39:01 am »

The world's mentality is that you cannot offer a solution if there is no problem to fix!
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« Reply #2 on: March 30, 2012, 08:22:47 am »

A bipartisan House agrees to relax rules on complex financial instruments called derivatives

http://www.washingtonpost.com/business/bipartisan-house-moves-toward-easing-rules-on-complex-financial-instruments-called-derivatives/2012/03/26/gIQAz7gZcS_story.html

To the chagrin of consumer groups, the House gave overwhelming bipartisan approval Monday to two bills easing requirements that President Barack Obama’s overhaul of financial regulations impose on some exotic financial instruments blamed for helping trigger the 2008 financial crisis.

One measure, approved 357-36, would exempt some derivative trades between related companies from rules including requirements that they set aside money to cover possible losses. Firms sometimes move a derivative from one subsidiary to another that might be in a better position to handle the risk involved, perhaps because one has more capital or could enjoy a tax advantage

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« Reply #3 on: March 30, 2012, 02:27:18 pm »

I'm no accountant or economics expert, but that to me sounds insane! Relax restrictions on the most toxic financial timebomb out there? They have really lost their minds now.

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from one subsidiary to another

And that is how companies get around many rules, by claiming they are some kind of "business partners" like with sharing personal information with their "partners", which means these companies will be operating outside the rules for derivatives so long as they claim it is a "subsidiary".

I'm pretty much convinced that greed causes insanity.
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« Reply #4 on: March 30, 2012, 03:40:19 pm »

^^

Lindsey Williams said on Alex earlier in the week that to look out for the derivatives market in the near future, in terms of spotting warning signs for the worldwide economic collapse.

No, I don't endorse "pastor" Williams(I think any born-again Christian should find it fishy how a Christian pastor still has connections to the "elite"), however, when I read this article on PPF earlier, I thought of what Williams said recently.
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Kilika
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« Reply #5 on: March 30, 2012, 04:01:02 pm »

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No, I don't endorse "pastor" Williams(I think any born-again Christian should find it fishy how a Christian pastor still has connections to the "elite"), however,

I totally understand. It is a bit of a balancing act when referring to what a given person said. While the info spoken may be quality info, and true, that isn't always a reflection of the person that said it, if that makes sense.
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« Reply #6 on: March 30, 2012, 04:25:07 pm »

I took a derivatives class last year - pretty much, when you invest in the market, you are betting on something in the future.

HOWEVER, when you bet on a mere stock, you are placing your bet on something happening DAY-TO-DAY. With derivatives, you are placing a bet on something that you think will happen in the FAR future(ie-around 90 days from the present time).

Yeah, as you can see, not only the whole market seems rigged, but the derivatives/futures market is obviously scammed.(to be honest, even my derivatives professor seemed very confused himself, even though he's been teaching this course for YEARS) For example, remember all those put options that were invested right before 9/11(and then those that invested in these put options got a big profit - puts are options when you expect the markets to be DOWN in the far future, calls are just the opposite).

So yeah, not saying we should try to corrolate the derivative markets with potential false flag events, but if let's say you see some suspicious activity in the derivatives market like this, then chances are the potential for something to happen is there.(not all the time though)
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« Reply #7 on: March 30, 2012, 04:41:37 pm »

I'm following you. It's like a massive buy of a commodity call options on say gold within a certain time frame. So basically, these derivatives are the stock equivalent of a commodity option, sort of, limited to a set maturity period of 90 days, (though a commodity option can be shorter or longer)?

Instead of being tied to a commodity like gold bullion, a derivative is backed(?) by stocks?
« Last Edit: March 30, 2012, 04:43:27 pm by Kilika » Report Spam   Logged
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« Reply #8 on: March 30, 2012, 04:47:23 pm »

I'm following you. It's like a massive buy of a commodity call options on say gold within a certain time frame. So basically, these derivatives are the stock equivalent of a commodity option, sort of, limited to a set maturity period of 90 days, (though a commodity option can be shorter or longer)?

Instead of being tied to a commodity like gold bullion, a derivative is backed(?) by stocks?

I don't understand it fully, but yes, I believe this is the case. There's an "exercise" period of a certain time period(usually 90 or so days). So by the time the time period expires, the worst that can happen to the investor is that he merely loses his investment. Early exercise I think is also not recommended. And yes, I believe they're backed by stocks.

Even my professor, who taught this course for YEARS, didn't seem to understand some of this stuff as well.(understandably)
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« Reply #9 on: June 04, 2012, 11:14:23 am »

10/12/11

http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/


Do you want to know the real reason banks aren't lending and the PIIGS have control of the barnyard in Europe?

It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States.

In 2009, five banks held 80% of derivatives in America. [size=18]Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller[/size].

[size=18]The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).[/size]

[size=18]Derivatives played a crucial role in bringing down the global economy[/size], so you would think that the world's top policymakers would have reined these things in by now - but they haven't.

[size=18]Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market[/size].
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« Reply #10 on: June 05, 2012, 09:36:05 am »

http://johngaltfla.com/wordpress/2012/06/03/647762000000000-reasons-to-worry-the-derivatives-time-bomb/

647,762,000,000,000 Reasons to Worry: The Derivatives Time Bomb
 
by John Galt
 June 3, 2012 19:10 ET
 
The hits just keep coming and with $647 trillion reasons to worry, aka, the total notional derivatives now outstanding as of Q4 in 2011 per the Bank of International Settlements just released this afternoon and published officially on Monday (click here for the PDF of the full report).  The really, really good news is that our Federal Reserve has this completely under control and the trillions of dollars in Credit Default Swaps (CDS) and European Interest Rate Swaps will as always settle without concern.
 
Right?
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« Reply #11 on: June 27, 2012, 04:45:04 pm »

DERIVATIVES: Bank downgrades trigger billions in collateral calls
27 June 2012, by Christopher Whittall (IFRE)
http://www.ifre.com/derivatives-bank-downgrades-trigger-billions-in-collateral-calls/21026406.article

A series of ratings downgrades from Moody’s last week has created an unwelcome but manageable liquidity squeeze on three major banks, by forcing them to post billions of dollars in additional collateral against derivatives exposures.

Moody’s completed its rating review of international banks last Thursday and downgraded three major derivatives dealers below the crucial Single A threshold, which will likely have led to hefty collateral calls from counterparties.

Citigroup’s two-notch long-term rating downgrade from A3 to Baa2 could have led to US$500m in additional liquidity and funding demands due to derivative triggers and exchange margin requirements, according to the bank’s 10Q regulatory filing at the end of the first quarter.

Morgan Stanley – which Moody’s downgraded from A2 to Baa1 – said a two-notch downgrade from both Moody’s and Standard and Poor’s could spur an additional US$6.8bn of collateral requirements in its latest 10Q.

The bank did not break down its potential collateral calls under a scenario where only Moody’s downgraded the bank below the Single A threshold.

Royal Bank of Scotland estimated it may have to post £9bn of collateral as a result of the one-notch Moody’s downgrade to Baa1 in a statement on June 21, but did not detail how much of this additional requirement was driven by margin for swaps exposures.

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« Reply #12 on: June 27, 2012, 05:17:00 pm »

http://theeconomiccollapseblog.com/archives/the-coming-derivatives-crisis-that-could-destroy-the-entire-global-financial-system

Most people have no idea that Wall Street has become a gigantic financial casino.  The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end.  The word "derivatives" sounds complicated and technical, but understanding them is really not that hard.  A derivative is essentially a fancy way of saying that a bet has been made.  Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before.  Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.  Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion.  The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction".  For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down.  When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.
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« Reply #13 on: November 14, 2012, 01:23:35 pm »

Q2 Total Gross Notional Derivatives Outstanding: $639 Trillion
13 November 2012, by Tyler Durden (Zero Hedge)
http://www.zerohedge.com/news/2012-11-13/q2-total-gross-notional-derivatives-outstanding-639-trillion

Excerpt:
 
Earlier today, the BIS, which has been doing everything in its power today to defend the 1.27 support in the EURUSD since the market open this morning, released its H1 OTC derivatives presentation update.

There was little of material note: total OTC derivatives were virtually unchanged at $639 trillion gross, representing $25 trillion in net outstanding (market value), and $3.7 trillion in gross credit exposure.

Here the PhD theorists will say gross is irrelevant because Finance 101 said so, while the market practitioners will point to Lehman, counterparty risk, and less than infinite collateral to fund sudden implosions of weakest links in counterparty chains, and say that it is gross (which until a recent revision of BIS data had been documented at over $1 quadrillion) that mattered, gross which matters, and gross which will always matter until finally everything inevitably collapses in a house of missing deliverable cards.

Because not even the most generous sovereigns and central banks can halt the Tsunami once there is a failure of a major OTC Interest Rate swap counterparty.

And whereas Basel III had some hopes it would be able to bring down the total notional in derivative notionals slowly over the next few years with a gradual deleveraging across all financial firms, the bankers fought, and the bankers won, because the last thing the current batch of TBTFs can afford it admit there is any hope they can ever slim down.

The will... but never voluntarily.
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