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OTC derivatives a dangerous delusion Date published: 11/6/2009
I stopped believing in Santa Claus when I was six. Mother took me to see him in a department store, and he asked for my autograph. --Shirley Temple Disillusionment came early to Shirley. For most of us, life can be a painful process of trading childhood beliefs for more sophisticated adult delusions. The financial system is now clinging to one particularly dangerous delusion called the derivative. Money equivalents--checks, plastic, electronic funds transfers, and various financial instruments--have become increasingly intangible and sophisticated. It's this total disconnect from the real world that's gotten us into dire trouble. Derivatives are fundamentally bets on different types of risk based on underlying securities, with traders swapping one kind of risk for another they're more comfortable with. And, yes, some of these are the same incomprehensibly complex innovations Warren Buffett famously called "Financial weapons of mass destruction". There are essentially two kinds of derivatives: One type consists of regulated, exchange-listed, straightforward bets on future prices of commodities and securities. The other, much more dangerous kind, are unregulated, custom-designed, complicated instruments traded over-the-counter (OTC) and not through an open clearing house. These are the ones Buffett had in mind. The Bank for International Settlements has issued a startling report on derivatives. It takes us into a new world where money is counted by the quadrillion. This year, OTC derivatives are
What is really bad is that most of these casino bet derivatives are still held
by the 5 largest American banks. More are being written every day.
Derivatives brought down AIG and caused a direct transfer of money from
taxpayers to Goldman Sacs and major European banks. Jefferson
County, AL will shortly file for bankruptcy after being on the losing end of
derivative contracts sold by JP Morgan. We bailed out these banks but
they havn't learned.
Paul, this needs to written about more and placed in a more prominent place in the paper. It should be in the paper frequently so that people can see what greed does to the entire economic engine of the country.
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