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Thread: Deriviatives?????????

  1. #11

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    Quote Originally Posted by CrashPush View Post
    Sadly that wasn't the case with AIG.
    These are called CDOs (Collateralized Debt Obligations). From what I understand, they allow banks to insure the same "property" (securitized obligation) more than one time, perhaps dozens or hundreds.

    Think about this. A hundred people insuring your home. Lots of incentive to burn down the home, right? And how will the insurer survive that kind of loss?
    Last edited by WhatsUpDoc1958; 11-08-2012 at 12:51 PM.
    Legal Disclaimer: I am not a doctor, nor do I play one on TV.

    "It's tough to make predictions, especially about the future." -- Yogi Berra
    A variant of this has also been attributed to physicist Niels Bohr, and others.

    "Tis against some menís principle to pay interest, and seems against othersí interest to pay the principal." -- Benjamin Franklin

    The School of Hard Knocks is where you get the lesson after you fail the test.

    Book title: "The Best Way to Rob a Bank Is to Own One"

  2. #12

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    Quote Originally Posted by Karlus View Post
    Let me step back a second and make sure everyone knows exactly what a derivative is. That might make it a little less scary.

    A derivative is a bet on an outcome based on some underlying event. Thats basically it. If you bet your buddy on a Sunday football game, you have just in effect created a derivative that is added to that $1000 Gazillion number. The word derivative is basically "deriving" the value from something.

    People (and banks) make bets all the time. Sometimes these bets are for events that never occur. For example the really scary sounding CDS is a Credit Default Swap. Lets say you are a rich guy and own a ton of Chesapeake stock (CHK). You are concerned that if they get a credit downgrade it could affect your portfolio. So you buy a credit default (or change) swap (I give you one thing you get something). The swap might be structured that you give a small (relative to your portfolio and the risk) payment every month in exchange for a big payment if CHK gets a downgrade.

    There are many other derivatives like stock options or basically betting where a stock price will be by a certain date. They are not all speculative, but can be depending on what you want to accomplish.

    So while I agree, there are a big number of derivatives out there, its not necessarily financial Armageddon or playing fast and loose with the market. Both sides want to profit so these are usually not made foolishly.
    It was Warren Buffett who said "Derivatives are financial weapons of mass destruction." (Obviously, most here would not agree with his views on gold). I have heard that the typical leverage for derivatives is 33 to 1.

    Investors in USLV buy 3 shares of a silver stock on margin for the price of 1. Investors in USLV know how risky (and some, how profitable) it is investing in USLV.

    Derivatives, as played by banks, is a Heads I Win (big bonuses for executives), and Tails You Lose (taxpayers, bail us out, while we continue to collect large salaries!!!!).
    Legal Disclaimer: I am not a doctor, nor do I play one on TV.

    "It's tough to make predictions, especially about the future." -- Yogi Berra
    A variant of this has also been attributed to physicist Niels Bohr, and others.

    "Tis against some menís principle to pay interest, and seems against othersí interest to pay the principal." -- Benjamin Franklin

    The School of Hard Knocks is where you get the lesson after you fail the test.

    Book title: "The Best Way to Rob a Bank Is to Own One"

  3. #13

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    Derivatives Primer

    I also recommend the DVD, Inside Job, directed by Charles Ferguson, narrated by Matt Damon, probably available from your local library.

    As an indication of the dangers they pose, it is worthwhile recalling a shortened list of recent disasters. Long-Term Capital Management collapsed with $1.4 trillion in derivatives on their books. Sumitomo Bank in Japan used derivatives their manipulation of the global copper market for years prior to 1996. Barings bank, one of the oldest in Europe, was quickly brought to bankruptcy by over a billion dollars in losses from derivatives trading. Both the Mexican financial crisis in 1994 and the East Asian financial crisis of 1997 were exacerbated by the use of derivatives to take large positions on the exchange rate. Most recently, the collapse of a major commodity derivatives dealer Enron Corporation has lead to the largest bankruptcy in U.S. history.
    Legal Disclaimer: I am not a doctor, nor do I play one on TV.

    "It's tough to make predictions, especially about the future." -- Yogi Berra
    A variant of this has also been attributed to physicist Niels Bohr, and others.

    "Tis against some menís principle to pay interest, and seems against othersí interest to pay the principal." -- Benjamin Franklin

    The School of Hard Knocks is where you get the lesson after you fail the test.

    Book title: "The Best Way to Rob a Bank Is to Own One"

  4. #14

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    Quote Originally Posted by WhatsUpDoc1958 View Post
    These are called CDOs (Collateralized Debt Obligations). From what I understand, they allow banks to insure the same "property" (securitized obligation) more than one time, perhaps dozens or hundreds.
    They were CDS (Credit Default Swaps) and AIG sold a lot of them all around the world. CDO's is what investors that got burned were purchasing.
    Last edited by CrashPush; 11-08-2012 at 01:44 PM.

  5. #15

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    Quote Originally Posted by Karlus View Post
    Let me step back a second and make sure everyone knows exactly what a derivative is. That might make it a little less scary.

    A derivative is a bet on an outcome based on some underlying event. Thats basically it. If you bet your buddy on a Sunday football game, you have just in effect created a derivative that is added to that $1000 Gazillion number. The word derivative is basically "deriving" the value from something.

    People (and banks) make bets all the time. Sometimes these bets are for events that never occur. For example the really scary sounding CDS is a Credit Default Swap. Lets say you are a rich guy and own a ton of Chesapeake stock (CHK). You are concerned that if they get a credit downgrade it could affect your portfolio. So you buy a credit default (or change) swap (I give you one thing you get something). The swap might be structured that you give a small (relative to your portfolio and the risk) payment every month in exchange for a big payment if CHK gets a downgrade.

    There are many other derivatives like stock options or basically betting where a stock price will be by a certain date. They are not all speculative, but can be depending on what you want to accomplish.

    So while I agree, there are a big number of derivatives out there, its not necessarily financial Armageddon or playing fast and loose with the market. Both sides want to profit so these are usually not made foolishly.
    It is about the same as me ripping up my lottery ticket. Seeing as I didn't win. Again
    A skeptic's work is never done.

  6. #16

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    It's amazing to me that this market is completely unregulated. This is what damn near ended the world economy in 2008 and the US government has done noting about it. I also read that when it comes to CDS that not only people who have a stake in a company (like a bond holders or a stock holders) but just gamblers were buying CDS with out having any stake in the company thus increasing by a huge margin of people that insurers have to pay out to. This all blows my mind. When I think about it, I want to go out and make sure I have a years worth of food and ammo. Cause if these shoes drop, S**t won't be hitting a fan, it will hit the turbo fans of a 787 dream liner. And it can happen at any time as far as I can see. I need to read more on this subject.

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