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In early 1998, Larry Summers, called Born to "chastise her for taking steps he said would lead to a financial crisis. But Born kept at it, unwilling to let arrogant men undermine her good judgment. But it got tougher out there. In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr., called on Congress "to prevent Ms. Born from acting until more senior regulators developed their own recommendations." (Levitt now says he regrets that decision.) Months later, the huge hedge fund Long Term Capital Management nearly collapsed--confirming some of Born's warnings. (Bets on derivatives were a key reason.)
"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"
There's a $700 trillion elephant in the room and it's time we found out how much it really weighs on the economy.
Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements. These contracts are tallied in notional values because no one really can say how much they are worth.
The total value of all the stock markets in the world amounts to less than $50 trillion, according to the World Federation of Exchanges.
Stabilizing the housing market will do little to take the sting out of the snapback we are going through on Wall Street. Once people's mortgages were sold off to secondary buyers, and then all sorts of crazy types of derivative securities were devised based on those, and those securities were in turn traded on down the line, there is now little if any relevance to the real estate values on which they were pegged.
We need to identify and determine the real value of derivatives before we give banks and institutions a pass-go with more tax dollars. Otherwise, homeowners will suffer as banks patch up the holes left in their balance sheets by the derivatives gone poof; new credit won't be extended until the raff of the old credit is put behind.
It isn't the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished -- trading phony instruments to the tune of $700 trillion.
Originally posted by Kaytagg
I don't buy into this whole "derivative collapse" talk. Perhaps because I am too ignorant on the subject -- but I challenge anyone on ATS to actually come up with some definitive research (not youtube videos) on the consequences of this.
I don't know, maybe I'm wrong. What are the derivatives in question, anyways? The chicken littles on this board should at least be able to cite some of these derivatives which are threatening to bring down the system.
That's not how investopedia defines derivative:
Originally posted by Erasurehead
I am not an economist but I will give it a shot.
Derivatives are also known as credit swaps. Basically it is these large financial institutions trading some of their risk to other institutions to offset potential losses.
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
As I posted earlier:
Derivative contracts total about three-quarters of a quadrillion dollars.
The total value of all the stock markets in the world amounts to less than $50 trillion.
Can you see how this could cause financial collapse not just in the US but globally. There is not enough money in the world to cover these derivative contracts. So what happens if everyone wants to cash in all at once. I am no financial genius but it does not sound like everything is ok.
[edit on 10/21/2009 by Erasurehead]