CDS Derivative Losses .. the Sequel - IRD's!

[aidanodr]

HoweStreet.com - The Source for Market Opinions - Alarming News: Bank Losses Spreading!

(by Martin D. Weiss, Ph.D.) - Published March 30th 2009.

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"For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates.

In a moment, I'll explain what this means for your savings and your stocks.

But first, here's the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category.1

And here's why the losses are so ominous:

Until the third quarter of last year, the banks' losses in derivatives were almost entirely confined to credit default swaps — bets on failing companies and sinking investments.

But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market.

Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.




Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we've seen so far."

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Just thought I would cheer ye up further ... Oh look whats coming our way??? You heard it here first ...

Aidan

[aidanodr]

WHAT are IRD's - Interest Rate Derivatives:

Interest rate derivative - Wikipedia, the free encyclopedia

"An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate.

The interest rate derivatives market is the largest derivatives market in the world. Market observers estimate that $60 trillion dollars by notional value of interest rate derivatives contract had been exchanged by May 2004.

Measuring the size of the market is difficult because trading in the interest rate derivative market is largely done over-the-counter. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows. This compares with 75% for foreign exchange options, 25% for commodity options and 10% for stock options."

Aidan

[aidanodr]

To further agitate you:

Derivatives, How Dangerous are they? | Global Economics, Energy and Investing

"If parties, unknown to you, had multimillion dollar bets that your $200 thousand house will burn down in the coming year, would you be upset? I suspect so. Some of those parties may need money, may send an arsonist over, maybe not even tell you in time to get your family out. Well… Welcome to the world of derivatives. Only, forget the $200,000 house, start thinking in the billions and trillions.

Now, please sit down, these figures may shock you: The face (notional) value of derivatives held by US commercial banks is over $200 trillion dollars and the total derivative market over $700 trillion. Don’t believe me? Click here - http://www.occ.treas.gov/ftp/release/2009-34a.pdf - for the US government’s 4th quarter OCC Report, released last Friday ( March 27th 2009 ). Read the first two bullets. Remember, this is just derivatives held by US commercial banks, the total market is, as mentioned above, over $700 trillion.

How much is $700 trillion dollars? Temple University math professor John Allen Paulos says: “A million dollars a day for 2,000 years is only three-quarters of a trillion dollars” Well, think about it a minute or so, then go figure $700 trillion.

The purpose of this article is not to demonize all derivatives. My question is: what are commercial banks doing with over $200 trillion of them? This amount is almost four times larger than the total GNP of the entire world, more than all the combined stock and bond values of the world. Their is only one explanation and that is large scale leveraged speculation. Another, maybe more accurate term, would be gambling."

Read the rest of this article - IT IS a good read!
Aidan

[atlantic]

Are cdos (Collateralized debt obligations) brought in under this?
http://www.npr.org/templates/story/s...5715&ft=1&f=13

[Outlander]

The real question is who is printing all the trillions? Did the central banks actually issue this much electronic money?

Derivatives are beginning to look a bit like shares in the Compagnie d’Occident - print more money to keep the value high.

[atlantic]

As the guy in the link above says they were basically side bets.

[youngdan]

Actually it is a bit deceiving. The big numbers refer to notional value. To give you an extremely simple analogy. If you bought life insurance for a million dollars for a thousand and if everyone on the street did likewise then it could be said that there was 200 million dollars of insurance value on the street but unless everyone gets a heart attack there is no big problem.

The CDS problem arose because the heart attacks did begin to occur in mass and AIG did not have the cash to pay the widows because the men looked healthy and nobody expected the phuckers to croak