Wednesday, November 4, 2009

Interest rates are the trigger

Trillion Dollar Ticking Derivatives Time Bomb to Explode Under Bankrupt Banks

The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion. 97% of these ($196 trillion) sit on FIVE banks’ balance sheets. If 4% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out ALL OF THEIR EQUITY and they go to ZERO.

Posted by sold 2 rent 1 @ 09:59 AM (1517 views)
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21 thoughts on “Interest rates are the trigger

  • mark wadsworth says:

    “If 4% of derivatives are “at risk” and 10% of those bets go bad, you’ve wiped out ALL OF THEIR EQUITY and they go to ZERO.”

    Not necessarily – these banks were gambling with each other – and it’s a zero-sum game. For every loser there is an equal and opposite winner. True, some winners may not collect the winnings they were hoping for, because the other party will go bankrupt, but every $1 that the winners can’t collect, the loser’s losses will be curtailed by $1.

    I’m not saying that all this gambling with other people’s money is a good thing, it’s not, it’s a very bad thing, but it is not the end of the world.

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  • sold 2 rent 1 says:

    The parabolic stage of this gold bull has started. I have a target of $2500+ by March/April 2010.
    December should bring a stocks crash once inflation becomes visible. At least a 20% drop is on the cards but maybe 80% for a grand super-cycle correction. Remember the s&p500 has a Q2 reported earnings PE ratio of 140, and even if this narrows to PE ratio of 70 with Q3 earnings, a 75% correction still only leaves shares fair value at P/E 17

    Anyone see Horizon on black holes yesterday. Ahhh, the singularity. There are many parallels between the black hole singularity and the consciousness singularity identified by Calleman and his work on the Mayan calendar.

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  • happy mondays says:

    s2r1,
    when you say singularity = oneness ? & i thinks mathematians see singularity as a breakdown of a sum, it cannot go on anymore / collapses ?
    Is this a fair assumption, or am i barking up the wrong tree..?
    Are we still on target, can you give a brief update of your thoughts..Regards Hm

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  • Another little bailout then. Yawn.

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  • sold 2 rent 1 says:

    happy mondays,

    singularity = oneness; that sounds about right.
    We started with a singularity (big bang) and we will end with a singularity.
    Think of infinity rediscovering itself.

    Einstein’s General Theory of Relativity breaks down once you go through the event horizon and proceed to the singularity of the black hole. Essentially a new set of mathematics is now required as the old ones have expired.

    The same will be true of Calleman’s model and Martin Armstrong’s PI cycle, once we pass through the event horizon (of the consciousness singularity) the models break down and we have a period where new models will be formed.

    For religious people out there, the time between the event horizon and the singularity is commonly referred to the “End Times”

    As for being on target, it is not possible to be off target. The “colloidal silver” revolution is set for the same time as the precious metals mania

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  • sold 2 rent 1 says:

    mark wadsworth,

    I found a few articles on the zero-sum game of derivatives
    http://www.bandbstructuredfinance.com/documents/Derivativesareazero-sumgametrueorfalseSCIFeb2009_000.pdf
    http://www.moneyweek.com/investments/stock-markets/derivatives-the-mother-of-all-bubbles.aspx

    But the most important thing to look at here is that the derivatives market has been growing exponentially for quite some time.
    One of the fundamental laws of nature is that exponential growth patterns will eventually collapse. This is true when looking at rabbit populations, house prices, or derivatives.

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  • mark w @1 – in principle it may work like that but in real time it doesn’t. Winning players can’t collect their winnings, so they can’t pay out on their losing bets, so the dominos go down in a cascade of cross-defaults that infects the banking system and the global pyramid scheme. The takeover of Fannie and Freddie was a bailout of the derivatives “industry”, which was faced with a $1.4 trillion “event of default” payout to F&F – if F&F had defaulted on $5 trillion in bonds and mortgage-backed securities they owned or guaranteed then settlements would have been triggered on $1.4 trillion of CDSs entered into by major financial companies which had undertaken to make good on defaulted F&F bonds in return for premia which had become fee income and bonuses. Most of that $1.4 trillion would have been due immediately – but the insurers were themselves highly leveraged and dependent on day-to-day lines of credit to stay afloat. When those creditors see the hit coming they pull the plug and the default dominos go down, triggering another round of CDS events.

    Too many financial entities borrowed short, were highly leveraged and lent long and in illiquid ways, making them highly vulnerable to bank-like runs – but they were unregulated and without deposit insurance or access to a lender of last resort.

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  • Hi s2r1
    Long time, no hear

    I flatter myself that I know a little bit about singularities and that stuff since I studied it at uni long ago. Nothing new on Horizon, but physics is at a bit of an impasse in that area it seems. I know nothing about “consciousness whatsits” but I imagine there are no parallels between those and physics ones, which are nothing more than points at which quantities become infinite. A far more mundane example is a kink on a graph – that is a singularity because the gradient is infinite at that point.

    Just knew you are all wanted to know that.

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  • mark wadsworth says:

    Icarus, I accept there is some assymetry (i.e. we can all end up being slightly worse off) but it’s not that dramatic. Let’s imagine I have a bet with you that Man U will win next year’s Premiership, and I’ve bet £10. They don’t win and I give you £10. Zero sum game.

    OK, let’s imagine I bet you £1 million (which I don’t have) and they lose. You collect all the money I’ve got and bankrupt me. This is not a zero sum game as the cost of making me bankrupt benefits neither you nor me, and the net amount that you win will not make you happy in equal and opposite measure to the misery that it causes me, but this is what I call assymetry.

    If, for example, Warren Buffer had made the £1m bet with you and lost, he wouldn’t even notice a trifling £1m, but you would be set up for life – this transfer would ADD to the sum total of human happiness, for example, so assymetry goes in both directions.

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  • I thought zero sum meant no net gain in wealth, just transfer. Isn’t that the case in all 3 examples?

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  • Sold 2 rent 1

    I do hope you are looking in.

    ROTFL. and no effort. Personally I find it very flattering.

    Hope you are well……..more laughs to come methinks on that sentence.

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  • sold 2 rent 1 says:

    happy mondays,

    One more thing. I found a new video KYMATICA
    http://video.google.com/videoplay?docid=-6736722752013377089&ei=YmnxStyoG8Ku-AbLrJW_CQ#

    Is is the follow-up to “Esoterica Agenda” and gives us a good direction in the way forward.

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  • mark w @9 – You have to work at the level of a complex structure, not at a simple ‘sum of happiness’ level. We are talking of a game with many players, all of whom are dependent on zero defaults on bets because they need to collect in order to pay out on their own losing bets. Everybody has to pay his bills when they fall due or be in default. bankrupt or whatever. Everybody is borrowed to the hilt and dependent on short-term credit to stay in the game. It’s a house of cards which needs little disturbance to make it collapse.

    Why did Warren B talk of ‘weapons of mass destuction’, why did the collapse of Lehman cause such panic, why did they bail out AIG?

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  • 11. Robh said…The first problem with resources is that they are consumed
    The second problem with resources is that they require energy to obtain
    Increasing rate of these combined with increase in population equals problems ahead

    @lp I think not malct. There are glimpses of style that are more like S2R1 or planningforacrash. But you are certainly right; there is nothing new under the sun

    Tuesday, November 3, 2009 08:22AM

    Hope you liked that one sold 2 rent 1. I can’t see it myself.

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  • happy mondays says:

    Thanks s2r1, shall check out the video…
    Have a good day.

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  • contrails are not a conspiracy (formerly npnh) says:

    This site is going downhill again .….

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  • Hindsight is a wonderful thing.

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  • mark wadsworth says:

    “Whydid they bail out AIG?”

    because they had friends in the government, perhaps? As to Lehmans, sure, this led to some asset credit bubbles being deflated etc, too detailed to go into now.

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  • 18. mark wadsworth

    You should stick to the straight stuff.

    No offense! When you can tell me who brought down Leman Bros, and the authorities do have that information.

    You can try to get smart with me. “So much crime too little convictions.” Mp’s a side show. lol

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  • Off for now!

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  • @18 – “some asset bubbles being deflated”. There was panic that the whole financial system would implode, inter-bank lending froze, asset prices plunged and markets became illiquid. I think a pillow was pushed over the face of Lehman as it slept, probably to give the world a taste of panic in order to push through AIG and other bailouts. Whether or not that was the case, the point is that derivatives can indeed do a lot of damage and that they are not a simple ‘zero-sum game’ with hardly any consequence for those outside the game.

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