Sunday, July 15, 2007

Number of the Day....."Derivatives"

Serhan Cevik / Morgan Stanley has put up some scary derivatives numbers. As seen in the rmbs related derivatives there is potential for major trouble. Just ask Bear Stearns :-)

Serhan Cevik von Morgan Stanley hat hier einige furchteinflößende Zahlen zu Derivaten zusammengetragen. Wie gerade zu bei den an die US-Hypotheken angelehnten Papieren zu sehen verbirgt sich gewaltiges Gefahrenpotential. Fragt mal bei Bear Stearns nach :-)

The volume of derivative contracts on a variety of assets increased from US$5.7 trillion in 1990 to US$415.2 trillion last year. Put differently, the total amount of exchange-traded and over-the-counter derivatives snowballed from 26% of global GDP to an astonishing 789%

As a result, the proliferation of these complex instruments — with abbreviated names like CDO, CDS, CLO, CPDO, CDS of CDOs, CPPI and LCDS — has become a major source of credit expansion and has decoupled market liquidity from monetary tightening. Indeed, derivatives and securitized debt instruments account for almost 90% of global liquidity, while ‘traditional’ monetary aggregates represent a mere 10%.

This explosive expansion is not just a result of financial innovation, in our view, but reflects the emergence of new players with greater appetite for leverage and ‘positive feedback’ from the moderation of volatility in recent years.

For example, the number of hedge funds increased from 300 in 1990 to more than 10,000 today, with an unlevered asset pool of about US$2 trillion under management and accounting for 60% of the trades in derivatives.
>Whenever i read numbers like this this video comes to mind
>Ich kann mir nicht helfen, aber immer wenn ich Zahlen wie diese lese muß ich an dieses Video denken
Dank an Zeitenwende
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Anonymous Anonymous said...

I don't see the article by Cevik at the link you posted...

6:09 AM  
Blogger jmf said...


thanks for the hint.

Unfortunately Morgan Stanley cuts the older link after a few days.:-(

is another example.

9:38 AM  
Anonymous Anonymous said...

It must be nice to be able to pull money out of your a$$ whenever you feel like screwing over the world with your bogus monetary system.

12:39 PM  
Blogger jmf said...

Moin Mort,

it will be interesting to see when the rating agencies will face the investigation and the outcome....

I think Paulson is still working on a positive outcome.....

2:56 AM  
Blogger David said...

You can't use the notional figure on derivatives in comparison to real figures like securitized debt, etc. That's apples and oranges.

The real question is how well-capitalized the losers on the derivatives trades are. That's the $6.4 trillion dollar question. So long as the losing counterparties can make good, derivatives are not that big of an issue... well, so long as everyone is using the same prices to mark their positions.

I can imagine a situation where the winners are marking at fair-ish prices, and the losers at optimistic prices. There would be value created out of nowhere that would disappear with a thud whenever the position had to be liquidated.

This is a serious issue, I just think the inverted pyramid oversimplifies the complexity of what is going on.

David Merkel

10:49 AM  
Blogger jmf said...

Moin David,

thanks for the comment.

I agree that the real issue how "strong" the counterparty is.

As we have seen lately either from Bear Stearns or a story in Europe from
Banca Italease
they all were leveraged to the hilt and it takes only one week of wrong positioning to wash out 20 month of gains

We will soon find out how strong or weak the counterparty is.

I think the banks are urging some players to reduce their leverage


10:44 PM  
Blogger jmf said...

seems to be not a strong player.... :-)

2:30 AM  

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