Sunday, Oct 01, 2006

Fear of Crash from Derivatives Market...

Observer: Fears of crash put focus on the City's dark arts

Fears of crash put focus on the City's dark arts

Concern is mounting that derivatives, hedge funds or private equity firms could spark a crisis, writes Richard Wachman.
Regulatory bodies in Europe and the US appear to be getting twitchy about areas where there is less transparency
than in the comparatively simple business of trading shares via brokers and banks. .Sunday October 1, 2006
The Observer

Posted by hyrax @ 01:56 AM (504 views)
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5 Comments

1. Ticktock said...

Ref - It is the nightmare scenario everybody hopes will never happen: a financial crash that brings capitalism to its knees, affecting us for years to come.

Everybody hopes will never happen? I think worldwide that there are many more seeking this end than fearing it. Capitalism will always be just a hares breathe from self destruction, it is the nature of the beast itself.

Derivetive trading is a step closer to the abyss, and derivetives of derivitives of derivetives would be quite funny if not so seriously dangerous.

The Empire is fading, crushed by its own dillusions , hypocracy, greed, and general moral bankruptcy.

Not 'all' will mourn its passing.

Sunday, October 1, 2006 10:51AM Report Comment
 

2. Retiredbanker said...

Warren Buffett has already warned that such highly complex financial instruments are "time bombs and
financial weapons of mass destruction, that could harm the whole economic system".

Bet that nothing is done to control the situation.

Watch this space.

Sunday, October 1, 2006 11:47AM Report Comment
 

3. paolo88888 said...

It is disappointing that journalism has become so low.

The collapse of Barings resulted from fraud - unauthorised trading which went undiscovered due to poor management and actual falsification of documents. But this article uses this to pad out a scare story about financial collapse due to over-indebtedness. Just because people make a loss on derivatives does not equate to financial collapse, because when one party makes a loss there is another party making a gain. The Barings collapse was different because the option positions were not fully covered and therefore market prices were being distorted. But if the regulators are now "twitchy" and "The investment banks are recruiting debt specialists in large numbers" as the article tells us, then hopefully this type of fraud can be prevented in the future.

I would like to understand how safe banks are and how likely it is that there will be "a financial crash that brings capitalism to its knees, affecting us for years to come", but this article does not help my understanding very much.

Sunday, October 1, 2006 01:36PM Report Comment
 

4. d'oh said...

paolo88888...

I agree that the article isn't enlightnening, but a serious issue is flagged and done so in a way that communicates with a wide audience.

Whilst LTCM would have been a better example of what could happen, I can see why a journalist would use Leeson in the UK context, as it gives an indication of how serious trading in options can be that everyone in the UK is at least passingly familiar with.

Long Term Capital Management got itself into difficulties when the Russian government defaulted on their bonds. LTCMs trading position was not correlated with normal economic indices (hence "safely hedged"), but the flight to liquidity which ensued after the Russian default meant that the "price of risk" changed and all their bets went the wrong way.

LTCM had to be bailed out by the Federal Reserve Bank of New York, in order to avoid a wider collapse in the financial markets from recursive liquidation of securities to cover their debt, lowering the price of the securities forcing other companies to do the same to cover their debts, creating a spiral into who knows what.

Now what if this happened on a slightly larger scale so that the Fed couldn't bail out without REALLY setting the printing presses in motion? Hedge funds amongst others hold highly leveraged positions that are based on market rationality and are "safe" in "normal" economic conditions, they may not be far from equilibrium and, because of leverage, the effect may be drastic. What if many of them have made the "same mistake"?

Sunday, October 1, 2006 06:07PM Report Comment
 

5. talking rot said...

Chaps

TickTock comes up with some interesting views. Capitalism may be appalling and fundamentally rotten but it is far more appealing then the alternatives.

I think this is poor journalism. It must have been a slow news day for this one to be brought up from the bottom of the barrel.

Monday, October 2, 2006 02:09PM Report Comment
 

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