This is the mark of the derivative beast.

http://www.bloomberg.com/apps/news?pid=206...&refer=home
UBS Reports Record Loss After $14 Billion Writedown

Jan. 30 (Bloomberg) -- UBS AG, Europe's largest bank by assets, reported a record loss after about $14 billion of writedowns on assets infected by subprime mortgages in the U.S.

The fourth-quarter net loss of 12.5 billion Swiss francs ($11.4 billion) was almost double what analysts surveyed by Bloomberg were estimating, and brings the total decline for the year to about 4.4 billion francs, the Zurich-based bank said today in a statement. UBS publishes its official results on Feb. 14.

``The damage is enormous,'' said Dominique Biedermann, director of Ethos Foundation in Geneva that holds UBS shares worth about 80 million francs. ``It wipes out profit and shows that an inquiry is needed to make sure it doesn't happen again, and eventually whose responsibility this is.'' Biedermann has called for an independent audit of the bank's controls.

UBS posted its first annual loss since the company was created through a merger a decade ago, with the fourth-quarter drop exceeding the records reported earlier this month by Citigroup Inc. and Merrill Lynch & Co. The collapse of the U.S. subprime mortgage market has led to more than $130 billion of losses and markdowns at securities firms and banks since June.

Have you protected yourselves yet? If not, what is your excuse? What are you waiting for? Do it NOW or prepare to live in poverty and regret.

http://uk.reuters.com/article/businessNews...30?rpc=401&
UBS subprime losses deepen
Wed Jan 30, 2008 8:06am GMT

ZURICH (Reuters) - Subprime-related problems at UBS AG (UBSN.VX: Quote, Profile, Research) deepened on Wednesday as the Swiss bank unveiled $4 billion (2 billion pounds) in new writedowns in a surprise statement, dragging the embattled bank deep into the red for the year.

UBS posted a 12.5 billion Swiss franc (5.8 billion pounds) loss for the last three months of 2007 and a full-year loss of 4.4 billion francs. The bank had previously left open the possibility of a full-year loss, depending on its performance in the final quarter.

UBS is one of the hardest-hit banks worldwide from the credit crisis that has caused over $100 billion in losses, gashed balance sheets and forced some of the proudest institutions like UBS, Citigroup (C.N: Quote, Profile, Research) and Merrill Lynch (MER.N: Quote, Profile, Research) into emergency capital-raising measures.

The surprise announcement adds to the sense of chaos in Western banking after Societe Generale (SOGN.PA: Quote, Profile, Research) last week shocked with a $7 billion loss it blamed on a lone trader -- the worst trading loss in history by far.

Its coming & it cant be stopped

Some VERY scary charts. Sweet dreams!

Why Bernanke will furiously cut

Karl Denninger at Market-Ticker has this to say after market close tonight amongst other things

http://market-ticker.denninger.net/



Are the banks going to be able to go on delaying the ratings agencies from downgrading the monolines? There have been so many commentators saying that the monolines cannot cover the costs of the 'storms' already hitting the collateral they're covering, I find it hard to see how they can justify any further delay.

Surely, it's all down to politics. A concerned call by Sarcozy, Merkel and Broon would do wonders.

Say no more.

If the Honey Bee becomes extinct the Human Race will soon follow and protecting yourselves will then become futile.

So, is the whole system now insolvent?
See: http://www.housepricecrash.co.uk/forum/ind...st&p=952903

I can almost hear your voice quiver with glee......

There will be no queues Monday but the next couple of weeks this side of the pond?

The sheer scale of the numbers involved and the seriousness of the situation cannot have been lost on the world leaders who have recently been holding meetings to discuss it. I cannot think what the politicians can actually do to avert a collapse of some of the banks who are most exposed in the present conditions. Surely it is now just down to events taking their own course?

The effect of a collapse on sentiment will be terrible. I fear for the UK given the level of personal debt exceeds £1.4 trillion (more than a year's GDP), has credit card debt greater than the rest of the EU countries combined and some of the worst savings/head of population.

I have a feeling you may have written more about how you think this should be done ... I'd love to get a pointer if you have.

You're new, so you're forgiven.

The solution is shiny and yellow, does not corrode, is very malleable and easily divisible, and has been used as money and store of value during the last 6,000 years of human history.

I have no idea if this is at all right, but I'll post it anyway....

The Trillion Dollar Secret

Filed under 'midly bearish', I think.

That's an interesting article... not only because its title seems to be a vast understatement.

I am particularly intrigued by the idea that 15% ($27t?) of derivatives are essentially uncovered bets... I'm also curious about the distribution of derivative contracts among truly independent market participants. The idea that immediately arises in my mind is that it is likely possible to profit by intentionally scuppering viable businesses... I wonder to what extent these sorts of conflicts of interest are identified... both when new derivatives contracts are signed - and when control of contracts is transferred in mergers and acquisitions.

I disagree with the implicit claim that the Fed would rather see hyperinflation than the collapse of a commercial bank...

You have to start seeing from the perspective of the powers-that-be and not from the perspective of a rational human being. Step across the divide and consider how, if you were an employee of the Fed or the government, you would go about preserving your job, your reputation, the viability of the Fed, the government etc etc. Don't look for logical and rational responses, in other words, look for how, if you were in a position of power you would attempt to save your skin and the skins of government and central banks. Even governments and central banks share a herd mentality (they, too, are composed of fallible individuals, not immune to the fear and greed that direct most human action) - it's just that they are a different herd from those they purport to govern and lead. I maintain that hyperinflation remains a distinct possibility.

With crap such as this

"This is just what Long Term Capital (LTC) did back in the late 90’s. Remember them? They were the hedge fund that utilized the Black Scholes options model to run its derivative hedge fund to the point of bankruptcy. The fellas that ran LTC were only Nobel Prize winners (in economics) and the Black Scholes model was heralded as “the answer�. It is still used today.

What they failed to do was to have all of the bases covered. A funny thing happened - a sovereign nation wasn’t supposed to default on it debt. But Russia didn’t know the rules and so when they defaulted in the late 90’s, LTC went in the dumper.
"

I am assuming the rest of the article is just as much a load of crap

I noticed that the LTCM angle was rather misguided... (LTCM fell over on bond arbitrage - nothing to do with the Black Scholes option pricing model) - which does undermine the author somewhat... but the ideas about the derivatives market remain interesting... even if we shouldn't consider the article a factual source by any stretch of the imagination.

http://www.bis.org/publ/rpfxf07t.pdf?noframes=1

3. OTC derivatives notional amounts outstanding and gross
market values

Positions in OTC derivatives grew at an even more rapid pace than turnover.
Notional amounts outstanding went up by 135% to $516 trillion at the end of
June 2007 (Table C.5). This corresponds to an annualised compound rate of
growth of 33%, which is higher than the approximately 25% average annual
rate of increase since the current format of the triennial survey was established
in 1998.

Details here.

http://www.noelwatson.com/blog/content/binary/BIS2007.JPG



We debated this at length on another thread (or maybe it was this one) and came to the conclusion that the notional numbers do not mean an awful lot due to netting of trades.

That's pretty much what happened to LTCM. Black Scholes assumption about a risk-free rate wiped them out when it turned out not to be true. I agree with the article there (and the company I worked for got the assets on the cheap so all's well that ends well).

While Messers Black and Scholes might have assumed the bonds risk free... that does not correspond to the famous "Black Scholes" model (of Nobel-prize-for-economic fame) which makes no such assumption.

The assumption of "Black Scholes" is (approximately) that changes in the value of an derivative are random - since anything that can be anticipated about future trends is already factored into the spot price for the equity. The Black Scholes assumption allows the pricing of derivatives independently of market data. It has *nothing* to do with the presumption that national governments will not default on debt - and it has very little bearing on the failure of LTCM. The only tenuous link is that Black and Scholes were given eye-popping credit worthiness because everyone thought that they were really, really smart.

You're thinking of the efficient markets hypothesis.

Black Scholes does have the risk-free bond assumption in it (the e to the minus rt part of the equation). It's OK though, even Scholes doesn't understand the modern derivation of the formula very well. My lecturer had to explain it to him too...

Tenuous, I'd argue.

It has the assumption that it is possible to borrow and lend cash at a constant risk-free interest rate... I'd say that doesn't have to involve bonds - in principle, at least.

You're right that I explained the "efficient markets hypothesis" though... at least that is an assumption on which the Black Scholes model does rest. :-)

Several sentences that are factual on the same topic one after another might not be linked.

For example.

The house has wide doors of bright blue. The curtains are brown. THe bright blue doors are well known to lower house value.

>insert rant about curtains not being blue and width of curtains having nothing to do with house value<

I haven't read this for a while

http://www.amazon.com/When-Genius-Failed-L...t/dp/0375758259

but as far as I can recall, they made a number of mistakes, inclusing

Overleverage (they gave capital back to investors)
Their trades were so big they were effectively the market - everyone knew what they were up to
They were selling volatility, and got caught out

I think it was more assumption of loognormal price mkovements than assumption of constant risk free rate that was the problem, but from what I recall this was secondary to the other problems.

PROTECT YOURSELVES NOW

http://uk.reuters.com/article/marketsNewsU...06?rpc=401&
http://www.ft.com/cms/s/88e590f0-d4f8-11dc...00779fd2ac.html
http://www.bloomberg.com/apps/news?pid=206...&refer=home
http://www.bloomberg.com/apps/news?pid=206...&refer=home

It's coming.

Either way, it wasn't what Black and Scholes got their Nobel Prize for describing that landed them in the soup.

Trying to understand the severity of this & how it will effect me getting a home.

Will the banks be able to lend anything in the future...will there be banks ?

Scary stuff

Sh1TTing hell that last link is pretty juicy...

protect yourselves?? How?? (Other than gold).

http://www.telegraph.co.uk/money/main.jhtm...bcnstand111.xml

Standard Chartered's SIV forced into receivership

Last Updated: 4:34pm GMT 11/02/2008

Standard Chartered has been forced to place Whistlejacket, the structured investment vehicle (SIV) it manages, into receivership after credit market problems slashed the value of the SIV's assets in half.

The specialist Asian lender was preparing to bail out Whistlejacket with a $7.15bn funding line before a sudden collapse in the value of the assets triggered today's "enforcement event". Under the rules governing the SIV, a receiver has now had to be called in.

I wonder how many more of these implosions we're going to see over the coming weeks and months. All eyes on the monolines.

Cheers for the link.

I remember, some time ago, they said: 'it's contained'.

I've never known him/her answer that Q bob.............

.. though today could be the day .....?

A watched pot never boils, but I do think we are getting perilously close to boiling point now.

7.15bn dollars, not enough to rescue it.

Wonder how much it has actually lost.

They said "it's contained" now they repeat "that is only slow down or mild recession, don't worry about major recession or depression".
While it looks like begin of major financial meltdown, which will lead to major global recession...

I expect its gold and shiny...does anyone know how gold has faired in a deflationary environment (genuine question)? I always thought it wouldnt fare to well, ough I've recently heard arguments to the contrary??

US arrests four 'Chinese spies'

From the article:


How are they going to make him live until he's 172?

As jim sinclair has been saying of late 'This is it!'

I am seriously thinking about releasing some ISA funds and protecting myself, i feel when the Armageddon hits there will be much loose sex and free love as a release from the tension, i will be buying shares in durex and the product itself, i need to protect myself or i am sure i will regret it.

If i have any change left i will add to my gold position.

Hmmm. Very good.

"protect yourself....wear a sheath"

Yes, and the banks have been trying to keep the lid on it

http://www.bloomberg.com/apps/news?pid=206...&refer=home

AIG Falls on Concern Losses May Have Been Understated

Feb. 11 (Bloomberg) -- American International Group Inc., the world's largest insurer by assets, fell the most in 20 years in New York trading after its auditor found faulty accounting may have understated losses on some holdings.

So-called credit-default swaps issued by AIG, which protect fixed-income investors against losses, declined by $4.88 billion in value in October and November, four times more than previously disclosed, the company said today in a regulatory filing. AIG's auditors found ``material weakness'' in its accounting for the contracts, and the firm doesn't know what they were worth at the end of 2007, the filing said.

AIG Chief Executive Officer Martin Sullivan has presided over a 30 percent decline in the company's shares since replacing Maurice ``Hank'' Greenberg in March 2005. Investors have been concerned that losses tied to the U.S. housing slump might reduce earnings and the value of AIG's holdings. Sullivan assured investors that writedowns from the U.S. housing market were ``manageable'' on Dec. 5.

``It raises the question about whether management is in control of what's going on with their derivatives,'' Edward Ketz, a Pennsylvania State University accounting professor, said in an interview. ``The uncertainty as to whether additional losses are coming is as unsettling as anything.''

AIG retreated 12 percent to $44.74 at 4:01 p.m. in New York Stock Exchange composite trading, the biggest full-day decline since Oct. 19, 1987.

Cqnao in these last few weeks I have thought that yer brands been contaminated yours warnings have lost their punch, but when AIG start to get Walloped then I too think we are approaching the End Game.

The End Cometh. Hold onto yourselves it could be a very interesting ride..

http://www.nytimes.com/2008/02/17/business...amp;oref=slogin

So, there is an example from 2005 when only one company defaulted and the system did not work.

What if many, many more go into default now?

This is the BIG ONE^TM. Remember where you heard it first. From the same article:

This is the BIG ONE^TM. Remember where you heard it first. From the same article: