Conservative George Will: Another epic economic collapse is coming

Exactly and if we want to discuss derivatives, what about the fact that the VIX trade just blew up a few months ago? That caused some ripples but overall really didn't have a big effect.

 

I like Sweet Lou but he just thinks derivatives is a bad word. He doesn't understand what they are or their function.

He isn't the only one guilty of this in thei thread.

Again debt isnt bad. Debt to people or companies that aren't qualified for the debt is

 

To reiterate this, derivatives have been around for hundreds of years and they are what the commodities market is based off of. They are generally very well regulated. Things got a bit crazy with people chasing yield and bullshit before the crash. Also, I think it was W Bush who lifted the regulations on leverage for the big financial firms. That’s what helped to create the circumstances for this stuff to get wildly out of control.

As an aside, I think we should have bit the bullet and let these institutions fail and reorganize under a non-too big to fail structure. My opinion on this is completely different from when it was unfolding at the time. Maybe it’s just because I’m curious how our economy would look with a more responsive banking sector compared to what we have now with these mega banks backed by the govt. Getting a loan from a co-op bank is so much easier and customer friendly than going thru a mega bank like Wells Fargo in my experience.

The govt let these guys get too big thru mergers etc. and let them persist because these guys had so much control and political influence. Breaking them up probably would have been a boon to the economy in the long run. That’s my random opinion.

 

judging from postings about derivatives, bluntly put,

Sweet Lou has probably forgotten more about derivatives than you ever gonna know​

 

ur confused.

earth to robbie380, the commodities market ain't the RE market.

credit default swaps (CDS) were the financial WMDs that befell the financial industry in 2007/2008;
W's admin was sleeping on the job, there was no regulation in place to monitor CDS.​

ROFLMAO !

you had previously claimed that derivatives were well-regulated;
now you are contradicting urself saying that W had lifted the regulations on leverage.
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that underscores how ignorant ur on the subject matter.​

think before you post. both Rep and Dem opted to bail out the financial industry.

W and his Treasury staff (Hank Paulson) failed to execute the bailout.
O and his Treasury staff were successful in bailing out the financial industry.​

 

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Adoo what's your professional background?

A CDS is an insurance contract and a form of a derivative. They have legitimate value. There are many different forms of derivatives. You understand this, right? I'm making the point that derivatives aren't evil simply because they are derivatives.

You oversimplify things when you say it was simply monitoring CDS's. It was regulating and guaranteeing the payment of the contracts. Further, these contracts were being written and sold like there was no legitimate risk to the seller. The CDS's aren't financial WMDs themselves but the complete lack of risk management by the firms who sold them created massive amounts of exposure to losses.

If you have ever traded options it's the equivalent of selling naked calls or puts without any risk controls on your account. Let's say I developed some sort of simple risk assessment model that showed that NKTR had never been above 25 so I start selling shitloads of calls and collecting the premium for months and months. Then one day they blowout some medical study in Nov 2017 and oh no the price starts skyrocketing. Looks like I've got problems because my dumbass was selling these calls like it was free money and my risk manager at my firm had no risk controls on my account. This is effectively what happened to AIG. The derivative wasn't the problem itself. The risk control was the problem.

Where is the contradiction? Allowing firms to use excessive leverage created major problems.

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What's your point? I gave my opinion. I don't like the too big to fail structure and I don't like the too big to fail banks. I think they are a drag on the economy and I think they are **** for the consumers. I don't care about the parties that organized the bailout. They were all getting money from the big banks and buying the argument that dismantling the big banks would represent some kind of existential risk to the American/world economy. I don't see that as true anymore and I think it was pushed by the banks so they could save themselves at the expense of everyone else.

Anyhow, tell me your background and why your opinion is so much more powerful and correct than my dimwitted one.

 

UC educated, worked for Qualcomm in financial management,

cashed out my QCOM stock options to start business ventures; additionally,
have traded stock options and future contracts since my college days​

therein lies the problem, about which you clearly don't understand

to the extent that no one fully understand the risks inherent to CDS---not even the wall street sellers nor the wall street buyers---
the Gov't should never let CDS be transacted like stock options or future contracts.

that underscores your lack of understanding of the CDS debacle.

to the extent that not even the wall street professionals fully understand the risks inherent to CDS,
they're financial WMDs.

it's too bad that you don't understand

the dizzying height of ignorance.

savvy options/futures traders define their risks by how they structure their derivative trades, such as

• not selling options naked
  • and if they do, have as much cash available as possible, to cover their ass when the sh*t hits the fan
• use call / put / butterfly spreads

 

As robbie said derivatives aren't anything new. That's the point

 

The failure that nearly led to a global collapse of the banking system was due to a derivative called Credit Default Swaps which are bets on the housing market. The value of those bets exceeded the value of the entire stock market - that's how leveraged it became. It is the reason AIG, Lehman, and other banks got into deep trouble. CDS also stimulated the risky subprime loans and was a major contributor to the housing bubble.

To put things in perspective - CDS reached a value of $60 Trillion in 2007. The US Stock Market is worth $30 Trillion. Imagine if something valued at twice the entire stock market suddenly had a value of 0. What do you think happens?

So yes, this instrument was reason for what happened in 2007-2008

 

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We've gone off on a complete tangent so lets keep it going! lol

For me, I've been a professional proprietary trader since I was 24 and I've effectively been retired the past few years. I have my Series 7, 55, and 63 for whatever that is worth. I still trade part time or whenever I feel like it though. So you have a background in this. Why do you keep ignoring the issues with excessive leverage and complete lack of risk controls? I bring it up and it's like you completely ignore it for some reason.

This is a ridiculous argument lol. Are you really saying that still today no one truly understands the risk of a CDS? Even back when **** blew up people understood it except for AIG which decided to go full r****d and only sell risk. Stop acting like they are something mystical. Edit...they didn't truly grasp counter party risk back then until it blew up.

https://www.investopedia.com/terms/c/creditdefaultswap.asp

Read that and tell me if you are still mystified by them.

Are you referring to how people could manipulate debt prices by manipulating the CDS market?

Yes you can create structured trades if necessary to minimize risk, but they aren't always needed or even the best route depending on the price of vol and days til expiration. They can sometimes increase your profit point too much if you are paying too much for the protection of whatever structured trade you are doing. Further, call/put spreads are done to lower the cost basis of the put or call you purchased. The call or put you sell is sold at price level where you feel is a decent place to take profits if you are thinking about holding the trade til expiration. Call/put spreads are not a cover your ass option structure they minimize risk thru reducing the premium you pay...............You should know this since you say you've traded.

The point I was making with AIG is their risk controls were ****ed and for some reason you keep ignoring this stuff. You said you worked in financial management so you likely had a compliance officer or some sort of risk control person there. You should know how this works and you should fully understand how improper risk controls can blow things up. AIG just said **** you to risk controls and decided to blow everything up in the CDS market.

 

That was notional value.

Gross value was closer to $5 trillion at the peak in the 2nd half of '08. It shot up by $2 trillion from the first half to second half of '08 and back down by over $2 trillion in the first half of '09. Even that gross figure isn't an accurate assessment of total potential losses in a credit event.

https://www.bis.org/publ/qtrpdf/r_qt1806b.htm

https://ftalphaville.ft.com/2011/10/27/713826/how-gross-and-net-cds-notionals-really-work/

 

It's not their market value that busted AIG, it was the notional value when the defaults happened and AIG had to pay out face value.

 

A derivative is just a contract based on a value of something. Farmer is gonna sell his crop in six months when its complete and he wants to lock in a price. Thats like the original purpose.

I worked at a power and natural gas provider during 08 in finance. We had trades with Lehman Brothers.

That being said i only worked a few years in that industry doing that kind of work. I don't claim to be an expert

 

another words, AIG didn't fully understand the inherent risks.

another eg; while one Division of JPM was selling CDS, another division was buying CDS from other sellers.

not according to Warren Buffett,

no disrespect to you, but i'll take his considered opinion on financial issues over yours every time.​

ur referring to buying vertical spreads



on the flip side

in the context of selling options, one can construct vertical spreads, butterflys to define the risk one is willing to accept.

one of my recent trades, selling a 10-pt call spread on FB, will expire in another 5+ hours,
i get to keep all the premiums that i have collected​

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