Tuesday, September 16, 2008

Lehman had derivative contracts with a face value of $738bn

Wall Street crisis: Is this the death knell for derivatives?

Buffett made a gloomy prediction half a decade ago. "The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear," he said. "Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts."

Posted by malct @ 03:44 PM (675 views)
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4 thoughts on “Lehman had derivative contracts with a face value of $738bn

  • The Buff knows his Stuff.

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  • Some derivatives lack a credible reason to exist, and have more in common with gambling than with investment; while others have a very legitimate and useful commercial purpose.

    The killer is leverage. Lehman accepted responsibility for $738bn worth of contracts, but only considered them to be worth 5% of that amount. A great bonus season if the contracts increase in value – even if only by a percent or two – but utter wipeout if their value fell sharply, which is what has happened.

    Much of the current problem stems from the impossibility of correctly valuing the over-complex debt instruments that were created.

    But they do have a value. Even though the US is going through a painful meltdown in its housing market, the percentage of mortgages that will end in foreclosure will remain relatively small, and when they do go bad, the lender will ultimately get most of his money back. A proportion of the interest rate set was allocated to cover defaults, and while that proportion was doubtless set too low, it will soften the impact on the lenders.

    Yes, the banks are taking a well-deserved kicking; but the doom and gloom in the media and markets seems a bit over-played

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  • Perhaps this is a bit trite, but it is illegal to trade while insolvent in the UK. So all the UK companies involved will presumably either lose money they have, or lose money money they don’t have with prosecutions against the directors.(<- I have my fingers crossed good luck with waiting for this, which will arrive with my kingdom on mars and my new ferrari). I agree that this should be a storm in a teapot, like kids betting millions amongst themselves on the flip of a coin, eventually one kid loses a lot and guess what he can't pay. I think the problem is that there are savings, pension funds all stuck into this and worse, the winnings have been taken out already. There are lots of people with a huge amount of wealth safely banked. Now it appears that this wealth was taken from capital, not from fortune in business. Somebody has lost out big. Not me thank god because I have no savings.

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  • To put it another way, the electronic transfer system used in banks has been corrupted. The only way that people in derivatives made the fortunes they did, was because the electronic transfers went through to their private bank accounts. Now there is a huge deficit on the Lehman computer showing minus minus minus on every figure.
    They seem to have printed money electronically.
    (!)
    You read it here first.

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