Remember about three years ago I warned you about the devastating consequences of...

[baja]

Derivatives looming on the horizon. Well it's here......


Global Exposure in Financial Derivatives Surpasses One Quadrillion Dollars (Update)
July 21, 2009, 3:32PM

When I posted the lowest responsibly sourced figure for global exposure in financial derivatives, $592 trillion, published May 19, 2009 by the Bank of International Settlements, all sorts of hoodoo apologists for Obama, Geithner, Summers, and Goldman Sachs crawled out the woodwork to claim that this figure is ridiculously exaggerated, there's really nothing to worry about, it's just a few bucks, and so on.

All the same hoodoos unfailingly claimed that it's stupid to consider worst-case scenarios when you calculate risk, because...

They have learned absolutely nothing from the ongoing financial meltdown which annihilated some of the oldest and largest investment banks in the world, and plunged the global economy into an almost vertical downturn.

So, since even the lowest reasonable figure for global exposure in financial derivatives attracts so much obfuscation and denial, I might as well be hanged for a sheep as a lamb, and offer up a much larger and probably more accurate estimate, which also includes the huge market in off-the-books derivatives, instead of only considering the OTC market upon which the previous calculation by the Bank of International Settlements was based, and that estimate is...

$1.4 quadrillion.

That's more than one million piles of money, with a billion dollars in each pile.

In previous posts I also considered the total exposure of the federal government from various programs designed to bail out the banking establishment, $23.7 trillion, which was calculated by Special Treasury Department Inspector General Neil Barofsky, one of the very few watchdogs charged with overseeing Geithner/Paulson/Summer's infinite generosity to the banks, and why should we believe a mere inspector general, when we can rely on unsourced estimates from right-wing hoodoos?

So in the interests of complete fairness, balance, impartiality, and pandering to ignorant hoodoos who insist on nothing but sunshine in the news, I am also offering up a much smaller figure for the total bailout exposure of the federal government, extracted from the most reputable of the many sunshine blogs selling all-is-well scenarios all over the internet, and that low-ball estimate for federal exposure is... $13.9 trillion.

Added to those figures are $4.4 trillion in other possible Treasury programs, and $2.3 trillion in F.D.I.C. guarantees of deposits. The final $7.2 trillion comes mostly from various mortgage-related programs.
"Possible Treasury programs!"

"Various mortgage-related programs!"

And that's really just about all anybody knows about them, except for Tim Geithner, Larry Summers, and Goldman Sachs, because the US Treasury and the Federal Reserve don't have to tell you anything, and they don't even have to disclose much to inspectors-general like Neil Barofsky, who says...

Treasury also should report the values of its investments in banks and other financial institutions, disclose the identity of borrowers under a nonrecourse loan program and disclose trading activity under a public-private investment fund.
Treasury should report the values of its investments in banks!

What a silly idea!

Special Treasury Department Inspector General Neil Barofsky is obviously insane, and I'm only posting this article to give a bunch of right-wing hoodoos yet another chance to correct his absurd misinformation.

[baja]

Government Is Trying to Make Bailouts for the Giant Banks PERMANENT
Submitted by George Washington on 10/28/2009 16:45 -0500

bailouts banks Brad Sherman C Compensation Comptroller of the Currency congress Creditors Dollar economy Federal Reserve House Financial Services Committee loans Moral Hazard Paul Volcker pay RIchard Trumka risk Sheila Bair steroids TARP Tim Geithner Treasury Wall Street

http://www.zerohedge.com/article/government-trying-make-bailouts-giant-banks-permanent

[atomicbloke]

I agree... I knew several years ago that derivatives are a disaster waiting to happen..... its going to be more destructive to humanity than all wars combined together.... thats not sensationalism, thats reality.... the reason its flying under the radar is because very very few people take the trouble to actually understand how derivative instruments work.... derivatives are evil, and a lot of human endeavors are going to be destroyed because of it...

[Meck77]

Bring it.

[baja]

Bring it.

My guess is you won't feel so cocky in the coming months.

[baja]

Oh by the way;

http://www.kitco.com/charts/livegold.html

[Tombstone RJ]

I agree... I knew several years ago that derivatives are a disaster waiting to happen..... its going to be more destructive to humanity than all wars combined together.... thats not sensationalism, thats reality.... the reason its flying under the radar is because very very few people take the trouble to actually understand how derivative instruments work.... derivatives are evil, and a lot of human endeavors are going to be destroyed because of it...

Please elaborate.

[baja]

http://tpmcafe.talkingpointsmemo.com/talk/blogs/rutabaga_ridgepole/2009/07/global-exposure-in-financial-d.php?ref=reccafe

http://en.wikipedia.org/wiki/Derivative_(finance)

[baja]

http://controlcongress.com/2008-election/the-impending-derivitives-storm-that-threatens-the-world


Control Congress is a multi-partisan, issue-oriented political forum that brings together the Left, Right, and everyone in between.
The impending derivitives storm that threatens the world
This is the real financial tsunami that is threatening to engulf Wall St and the world. The propaganda in the controlled media continues to ignore this blaming it all on the subprime crises. But the subprime crises is really just the tip of the iceberg. This is why Freddie and Fannie and AIG had to bailed out. The recent auction of Lehmans’ credit default swaps for $370 billion has terrified the financial giants. This is why the credit industry is frozen. The banks are hoarding their cash in fear of derivitive judgement day. They cannot pay these debt obligations. Thank you J.P. Morgan.

The subprime mortgage problem is really just the detonator for the coming derivatives bomb that Warren Buffett rightly called “weapons of financial mass destruction” back in 2003.

Wall St. has literally gambled away our economic stability and future in a form of high stakes financial Russian roulette. And they sold it as insurance??? Guess who blocked the legislation to outlaw this insanity in the early ’90’s? Some of the very same people that blocked reforms of Fannie and Freddie. And Greenspan promoted it along with his lucrative hedge funds that are now going belly up all over the world. Paulson, btw, was known as a big derivative trader when he ran Goldman Sachs. Both Cinton and Phill Gramm fueled the explosion of the derivitives industry when they dismantled the Glass-Steagall Act in 1999. 98 Senators voted for it. The Wall St. lobbies pay well.

The recent bailout (sellout) to Wall St. does not or solve or prevent this very real looming financial crises. The wake alone will be enough to swamp the entire global financial system.

Tuesday, 4 March, 2003

Buffett warns on investment ‘time bomb’

Derivatives are financial weapons of mass destruction

The rapidly growing trade in derivatives poses a “mega-catastrophic risk” for the economy and most shares are still “too expensive”, legendary investor Warren Buffett has warned.

The world’s second-richest man made the comments in hisfamous and plain-spoken “annual letter to shareholders”, excerpts of which have been published by Fortune magazine.

The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.

But Mr Buffett argues that such highly complex financial instruments are time bombs and “financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system.

Contracts devised by ‘madmen’

Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares – without buying the underlying investment.

Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years

Derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets – in effect buy insurance against market movements -, but have quickly become a means of investment in their own right.

Outstanding derivatives contracts – excluding those traded on exchanges such as the International Petroleum Exchange – are worth close to $85 trillion, according to the International Swaps and Derivatives Association.

Some derivatives contracts, Mr Buffett says, appear to have been devised by “madmen”.

He warns that derivatives can push companies onto a “spiral that can lead to a corporate meltdown”, like the demise of the notorious hedge fund Long-Term Capital Management in 1998.

Derivatives are like ‘hell’

Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers … which can trigger serious systemic problems

Derivatives also pose a dangerous incentive for false accounting, Mr Buffett says.

The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later.

This can result in nasty accounting errors. Some of them spring from “honest” optimism. But others are the result of “huge-scale fraud”, and Mr Buffett points to the US energy market, which relied for most of its deals on derivatives trading and resulted in the collapse of Enron.

Berkshire Hathaway, the investment group led by Mr Buffett, is pulling out of the market, closing down the derivatives trading subsidiary it bought as part of a huge reinsurance company a few years ago.

In his letter Mr Buffett compares the derivatives business to “hell… easy to enter and almost impossible to exit”, and predicts that it will take years to unwind the complex deals struck by its subsidiary General Re Securities.

Warren Buffett, dubbed “the sage of Omaha”, from where he controls Berkshire Hathaway, is well-known for both his blunt assessments of the markets and the high returns he delivers to shareholders.

This year, he remains cool towards further share investments, despite the sharp correction in stock market values. Mr Buffett says this “dismal fact is testimony to the insanity of valuations reached during The Great Bubble”.

Berkshire backyard barbecues

A good friend of Bill Gates, he famously refused to invest in technology shares during the boom years that came to a sudden end in March 2000. As a result, Berkshire was sitting pretty after the technology bubble burst.

In marked contrast to the hubris of former managers at fallen firms like Enron and WorldCom, Mr Buffett is known for his down-to-earth style, summoning shareholders not to glitzy hotels but “Berkshire backyard barbecues” and baseball games in out-of-the-way Omaha, Nebraska.

But his strategy of identifying undervalued companies with good management in unfashionable retail sectors or the insurance industry and investing in them for the long-term has produced spectacular returns.

During the past 37 years, the company has delivered an average annual return of 22.6%. Since 1965 the company’s book value has gone up by 194,936%.

However in 2001, the last year for which detailed numbers are available, heavy losses in the insurance industry worldwide resulted in a $3.77bn loss at Berkshire Hathaway – the first loss in the firm’s history under Warren Buffett.

Here are some more good articles on the issue:

IT’S THE DERIVATIVES, STUPID! WHY FANNIE, FREDDIE AND AIG ALL HAD TO BE BAILED OUT

Coming Derivatives Crisis_150

Gold Up as the $500 Trillion Derivatives Time Bomb Keeps Ticking

A dangerous bubble of derivatives trading – indiatimes

And here is an excellent blog on the derivitives market: George Washington’s Blog

[W*GS]

We'll just put it all on baja's AMEX.

Then it's his problem, and the rest of us are in the clear.

[watermock]

I've harped about this for 2 years, absolutely nothing has been done.

We taxpayers just added 25 trillion to keep the Casino Royale turning.

[JJJ]

I am a free market guy but derivatives as we have seen can be very dangerous. Under normal salient conditions and at reasonable levels they actually can reduce risk but they steepen the profit/loss curves so much duing the boom and bust periods especially with so many derivatives having been issued that they are very destablizing. Not quite sure how these should be better regulated but they should be.

[L.A. BRONCOS FAN]

Under normal salient conditions and at reasonable levels they actually can reduce risk but they steepen the profit/loss curves so much duing the boom and bust periods especially with so many derivatives having been issued that they are very destablizing.

Yep.

Unfortunately, the people who benefit the most from them are the "I got mine - f&ck everybody else" types.

[L.A. BRONCOS FAN]

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[Rohirrim]

We're ****ed.