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Derivatives Face Regulation Amid 'Calamitous' Risks

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posted on Apr, 16 2008 @ 08:30 AM
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Derivatives Face Regulation Amid 'Calamitous' Risks


www.bloomberg.com

Wall Street executives are preparing for more regulation in the $62 trillion market for credit derivatives that is partly responsible for $245 billion of losses and writedowns in the subprime crisis.
The amount of credit-default swaps outstanding almost doubled last year from $34.5 trillion as traders used the market as a cheaper and easier way to speculate on debt than buying bonds and to protect against losses. Banks packaged credit-default swaps, bonds and loans into collateralized debt...
(visit the link for the full news article)




posted on Apr, 16 2008 @ 08:30 AM
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Not to be alarmist, but a serious unwinding of the massive $62 trillion+ derivatives market has the potential to dwarf the subprime debacle and literally bring about a collapse of the financial system.

This is the elephant in the closet, the dirty secret no one on Wall Street wants the little guy out there to know about.

Derivatives are a rather arcane element of financial dealings, but essentially are bets used to hedge against risk, and are done on margin; i.e., a fractional amount is spent to insure against an unwanted rise or drop in an asset's price during a financial transaction. There is no insurance on such positions; the trading firms essentially insure themselves, with one marginally generated "asset" (read: "piece of debt") being used as collateral against another.

Derivatives started out as a logical way to limit risk in financial trading, but have taken on a life of their own as a potentially high-profit means of speculating on all aspects of the markets. As things developed, speculation has overtaken legitimate hedging, and the entire market nearly doubled in the last year alone.

Plain and simple, the derivatives market has become a debt-swap, -trade and -speculation orgy, a staggeringly huge ponzi scheme of debt being magically collateralized into assets to underwrite more debt that now has financial regulators finally looking to impose stricter (read: any) rules now that it threatens to implode.


www.bloomberg.com
(visit the link for the full news article)



posted on Apr, 16 2008 @ 09:26 AM
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It would be nice if they could regulate away this problem. JP Morgan holds 90 Trillion worth of derivates now that it has Bear Stearns 13 Trillion on its books. That's almost double WORLD GDP! At ONE investment bank!

Yeah, it's a bit late for regulation. The Famine and rumors of War are just symptoms IMO. Inflation and the destruction of the Dollar are going to cause alot of hardship to this world.



posted on Apr, 16 2008 @ 10:16 AM
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reply to post by HimWhoHathAnEar
 


It's too late for effective regulation at this point: there is a recession coming on, with a volatile bear market, and banks already are writing down serious debt because of subprimes, and the scale of the exposure is on the level of numbers usually used in astrophysics, not finance.

You mention JP Morgan, but they are of course a Fed member bank, so they are both potential regulator and problem.

Frankly the only way out is if they can keep the whole mess of debt that passes for our financial system tottering along indefinitely so they can buy time to get the derivatives markets in some kind of rational order, but since you haven't seen any intelligent foresight until now, why would you expect this near-miracle now that the odds are so heavily stacked against success?



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