| Individual Investors Duped by Derivatives |
| 10/05/10 Derivatives |
"Leona Miller, an 84-year-old retired beautician, says she was seeking safe and steady income from bonds two years ago when she bought securities recommended by her Wachovia (WFC) broker, Robert Baldacci, paying 9 percent interest. Within six months, Miller lost about 30 percent of her 20,000 investment, and the bonds were converted into shares of Merck (MRK) in a falling stock market."
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| The city that got swapped |
| 04/27/10 Government Derivatives |
"A decade ago, the mayor of Saint-Etienne, France, hit on a novel way to help pay for urban renewal: currency and interest rate swaps. He was a hero for a while. Then came the crash. Now he's the ex-mayor of a town facing financial disaster "
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| Greece's Goldman Sachs swaps |
| 02/16/10 World Derivatives |
"EU regulators have blessed the use of derivatives contracts to let countries curb their deficits. In 2001, the Commission, the EU's regulatory arm, approved Italy's use of derivatives that helped to reduce its budget deficit in 1997. Italy swapped fixed payments on a three-year, yen-denominated bond in 1996, for a floating rate, allowing it to temporarily cut the amount of interest paid on the debt." [Yikes!]
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| Derivatives should be banished |
| 02/11/10 Derivatives |
"The only firms that will be able to sell the insurance will be firms deemed too big to fail. That is, you wouldn't buy this kind of insurance from a firm you believed might also face a liquidity risk. You would only buy it from a firm you thought was protected from liquidity risk, and that kind of protection ultimately must come from the US government. So, ultimately, the sellers would be making private profits from the existence of public guarantees. They get all the upside, while the taxpayer gets all the risk."
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| The warning |
| 10/20/09 Government Derivatives |
""We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?""
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| Munger favors ban on credit swaps |
| 05/01/09 Buffett Munger Derivatives |
"Berkshire Hathaway Inc. Vice Chairman Charles Munger said he supports an outright ban of credit- default swaps to prevent speculators from profiting on the failure of companies."
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| Berkshire's decline spurred by derivatives |
| 04/28/09 Buffett Derivatives |
"Berkshire Hathaway Inc. shareholders have a chance this year to do something that's rare among the Sage of Omaha's followers: count their losses. "
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| The model made me do it |
| 12/01/08 Derivatives |
"At the bottom of every financial model there is in fact a stubborn lie - the pretense that financial markets operate in the manner of a physical process, subject to the iron laws of statistics, like atoms bouncing around in a thermodynamic equilibrium. This beguiling analogy makes it too easy for geeks like me to lose sight of a timeless truth: If atoms could talk to one another, then the laws of thermodynamics would get broken every day by clouds of stampeding gases."
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| Buffett will give more info on derivatives |
| 11/24/08 Buffett Derivatives |
"Billionaire investor Warren Buffett will provide more information to investors on how he calculates losses on his Berkshire Hathaway Inc.'s derivative bets in the firm's annual report early next year. The report will disclose 'all aspects of valuation' and cover 'deficiencies in the formula' for pricing the derivatives, 'which we nevertheless use,' Buffett said in an e- mail"
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| 'Tax event' may be next for bruised PPNs |
| 11/02/08 Derivatives |
"For a supposedly safe investment, there sure are a lot of risks associated with principal-protected notes. Tax changes being considered by the Canada Revenue Agency could, in the words of one issuer of principal-protected notes (PPNs), "have a material adverse effect" on these investments. And then there's the experience of the U.S. investors who hold PPNs issued by the once illustrious but now bankrupt Lehman Brothers. They're waiting in line to get paid along with other creditors."
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| Dig a grave for those wretched PPNs |
| 11/02/08 Derivatives |
"I've called them the worst of both worlds - bad for equity investors and inappropriate for those seeking a predictable flow of income. And professional money managers would never buy one; the odds are stacked against them. I'm talking about principal-protected notes, or PPNs."
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| Evil Wall Street exports boomed |
| 10/27/08 Derivatives |
"While the collapse was most visible in the stock markets, the cause was the loss of confidence in the world's biggest bond market, structured finance. So far, it has led to the worst financial crisis since the Great Depression, the disappearance or takeover of more than a dozen banks, including three storied Wall Street firms, and almost $3 trillion in government expenditures and guarantees to contain the contagion."
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| Realm of fantasy in credit insurance |
| 10/24/08 Bonds Derivatives |
"If you had a 100,000 car, what kind of world would it be where you'd consider paying 50 grand over five years to insure it? You'd either have to be such an appalling driver that you ought not to be on the road, or the world would be such a lawless and dangerous place that your 100,000 car should be among the least of your worries. We do not need the details of mathematical probabilities to see there is little sense in the idea of paying out insurance costs that are a huge chunk of the value of the thing to be insured. But that is exactly what participants in credit markets are being asked to do."
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| Traders' worst fears realised at Lehmans auction |
| 10/13/08 Derivatives |
"Analysts say the amount of money that has to change hands could be more than $200bn. Some estimates put the value of outstanding credit default swaps on Lehman Brothers debt at $400bn, although some of these trades have already been netted out because some investors both sold and bought CDS contracts. Exact figures are not available because a CDS is a private contract and is not traded on an exchange, but the payout will certainly be the biggest in the 10-year history of the market."
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| Lehman credit-swap auction sets payout |
| 10/10/08 Bonds Markets Derivatives |
"Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market."
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| The monster that ate Wall Street |
| 09/28/08 Derivatives |
"What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves."
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| Credit traders sowing seeds of destruction |
| 09/24/08 Markets Derivatives |
"The $62 trillion market for credit- default swaps, created to protect banks from loan losses, helped fuel a near-meltdown in the financial system and now may be regulated for the first time."
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| The day the ticking time bombs went off |
| 09/21/08 Derivatives |
"The underlying philosophy behind derivatives sounds terrific. The weak can get rid of risks they can't handle and the financial system should be stronger as a result. In the right hands, derivatives can perform this role. But the general practice is very different, as the great investor Warren Buffett worked out years ago. His 2002 letter to his Berkshire Hathaway shareholders made headlines by condemning derivatives as "financial weapons of mass destruction". They were "time bombs, both for the parties that deal in them and the economic system"."
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| Counterparty risk and CDSs |
| 09/17/08 Derivatives |
"Given the crisis on Wall Street and the focus on American International Group Inc., one of the world's largest insurers, everybody is suddenly talking about counterparty risk. What is counterparty risk, and why is it now an issue? In the simplest terms, counterparty risk is the chance that the person on the other side of a deal - the counterparty - won't be there when it's time to pay up. Take an example most people can relate to: Selling a home. There's always the chance that when it comes time to close the deal a month or so down the road, the buyer won't show up or won't have the money."
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| Fannie, Freddie credit-default swaps |
| 09/08/08 Bonds Government Markets Derivatives |
"Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. government seized control of the companies in a bid to bolster the housing market. Thirteen 'major' dealers of credit-default swaps agreed 'unanimously' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today."
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| Moody's ratings error probe |
| 05/21/08 Derivatives |
"Moody's Corp. plunged the most in nine years after the ratings company said it is conducting 'a thorough review' of whether a computer error caused it to assign Aaa rankings to debt securities that later fell in value."
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| Bear Stearns second brush with bankruptcy |
| 05/05/08 Markets Stocks Derivatives |
"Bear believed that if it failed to get a new agreement that reaffirmed JPMorgan's guarantee of Bear Stearns' obligations, Bear could have been cut off from JPMorgan's Fed-backed funding and forced into bankruptcy - an outcome that many investors assumed had been forestalled by the March 16 merger agreement. The dispute that nearly brought Bear down a second time turned on whether JPMorgan would stand behind Bear Stearns' massive credit default swap book and other liabilities. The firm's lack of access to other funding had Bear lawyers preparing for a possible bankruptcy the weekend before the revised merger agreement was unveiled."
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| Triple-A failure |
| 04/22/08 Bonds Markets Government Derivatives |
"Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. 'Everyone assumed the credit agencies knew what they were doing,' says Joseph Mason, a credit expert at Drexel University. 'A structural engineer can predict what load a steel support will bear; in financial engineering we can't predict as well.'"
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| Whither Black-Scholes? |
| 04/08/08 Taleb Markets Academia Derivatives |
"In fact, Black-Scholes may not be used that much in the markets to begin with. New research by veteran traders and best-selling authors Nassim Taleb and Espen Haug points in that direction. Clearly, a formula that isn't used can't have much of an effect on markets, let alone cause the massacre that began last summer."
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| Taleb outsells Greenspan |
| 03/30/08 Markets Disaster Books Derivatives |
"On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley's Manhattan offices on 47th Street and Broadway to address a group of the firm's risk managers. His message: Your models don't work. Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests -- Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said. 'Past shortfall doesn't predict future shortfall,' the options trader turned best-selling author recalls telling the assembled group of about 40. The risk managers, part of a tribe of mathematical model makers known in the finance world as quants, stared back at him blankly, and a debate ensued, according to people who were there. Only six months later, Morgan Stanley experienced its own rout. The world's second-biggest mergers adviser announced in December that it had written down its subprime-related holdings by $9.4 billion after the firm's traders misjudged how fast and far prices of the debt would fall. Their risk management had failed."
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| Anatomy of a panic |
| 11/17/07 Derivatives |
"For three days in August, an obscure but massive investment class teetered on the brink of a meltdown, rescued only by the ingenuity of a small group of bankers and lawyers. The aftershocks have shaken the markets, destroyed reputations and frayed friendships"
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| Derivative danger |
| 09/26/06 Derivatives |
"With the global numbers and values already enormous, adding U.S. pension funds, more institutions and a retail investment audience to the hundreds of trillions of capital the derivatives market attracts could further shift the scale in favor of them more than any other financial instrument or asset class. Yet, it wouldn't take all that much to create a domino effect of market mishap. And there is no net. The Securities Investor Protection Corporation, which insures brokerage accounts, recently announced its reserves. It has a little more than $1.2 trillion. That may sound like a lot. Compared with half a quadrillion, it's a pittance."
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| Derivatives explosion |
| 05/29/04 Derivatives |
"Warren Buffett, the American who has been one of the world's most successful investors for the past 40 years, warned shareholders in his Berkshire Hathaway company last year that derivatives were "time-bombs both for the parties that deal in them and for the economic system". "Large amounts of risk, particularly credit risk, have been concentrated in the hands of relatively few derivative dealers who, in addition, trade extensively with one another. The troubles of one could quickly affect the others," he wrote."
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| Rogue waves & standard deviations - part 2 |
| 05/20/02 Derivatives |
"The companies, funds, investors, and governments best able to withstand a crisis are those who are unleveraged, liquid and have access to cash. Having no debt enables one to ride out a storm. Leverage becomes a ticking time bomb that offers few avenues for escape. In summary, the best protection against adversity is to have minimal debt and plenty of liquidity."
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| Rogue waves & standard deviations |
| 04/28/02 Derivatives |
"What we are seeing in the financial system is similar to what we are seeing in the natural world, which is the increasing frequency and magnitude of storms. As seen from the above list and frequency of crises, storms continues to grow and raise the possibility of one too many shocks to the system."
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