U.S. seen probing if derivatives walloped banks

[UpInArms]

Source: Reuters

NEW YORK, Sept 25 (Reuters) - U.S. regulators are looking into credit derivatives as they investigate market manipulation, and some lawyers believe the government is looking at whether traders have used the products to help push banks closer to insolvency.

The Securities and Exchange Commission has said it wants to crack down on investors spreading rumors against financial companies. Lawyers said some traders could be using credit derivatives to harm financial firms more fundamentally than just rumors can.

For example, market participants can buy credit derivatives linked to a bank, boosting the cost of protecting the company's debt against default. That price action could lift a company's borrowing costs dramatically, particularly if combined with rumors of trouble at the company.

For financial companies, which typically borrow billions daily, any pressure on borrowing costs can sap their resources, further pushing them toward the brink.

Boosting a company's borrowing costs through credit derivatives is in some ways similar to short selling, which can also push a bank's shares lower, raising questions about the company's ability to raise equity capital. Those doubts can, in turn, bring ratings downgrades and higher borrowing costs.

Read more: http://www.reuters.com/article/bondsNews/idUSN2553212120080926?sp=true

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financial "weapons of mass destruction"

hmmmm....

Buffet called it after I did.

[MichiganVote]

1. Our own gov't was complicit in the deceit. Who are the addicts now?

[Demeter]

2. Investigate everything, but NO Bailout!

God helps those who help themselves--as long as it ain't to the Treasury.

[UpInArms]

3. when will the congress tell the investment banks to pull themselves up by their bootstraps?

I'm not holding my breath

[FarCenter]

4. That's fine if you really want to go through a full-blown economic collapse like the Soviet Union

It will solve the Social Security problem when the life expectency drops to the high '60s.

It will solve the medical cost problem when all the people with chronic disease and disability, like diabetes, die from lack of supplies and care.

[mbperrin]

5. There is no Social Security problem.

The surplus grows daily, and borrowing it is one way the mad money boys in Washington continue to deficit finance. Social Security is good through at least 2041, when the oldest boomers will be 95, and most likely dead.

We do not need a bailout to nowhere. Bad businesses fail. Anything else creates a moral hazard where the successful must cover the losses of the unsuccessful, so why bother trying? You'll get the money anyway. If we break the link between reward and success, then it's the old Soviet collapse. Government owns it all, rewards cronies, production plummets. That's what this welfare limousine king handout will do.

[FarCenter]

6. There is no social security surplus

The assets of the Social Security trust fund are Treasury Bills.

Once the economy tanks, the government has no tax revenues.

Thus it has no way to pay off its Treasury Bills.

Therefore, Social Security cannot pay retirees.

[dixiegrrrrl]

11. AAAARRRRGGGHHHH

[mbperrin]

12. Well then, problem over. If Treasury bills are no good, then there is

no way to raise money for this bailout.

What a relief.

[mike_c]

8. you'd rather "save" this rotten system...?

Personally, I'd like to bring back the guillotine.

[mmonk]

7. I'm glad the deriative market is being scrutinized.

It's been a heat sinking missile on our economy.

[slipslidingaway]

9. K&R - Notional values, actual dollar values and BIS link...

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=103&topic_id=351988&mesg_id=352021

"....Let's get one thing straight, one must draw a clear distinction between notional values and actual dollar values. The whole premise of derivatives transactions is that a few real dollars can be spent to control a large amount of notional dollars. Hence the leverage..."


"...In futures trading, the ``notional principal amount'' refers to the value of the underlying assets in a futures contract. For example, in a corn futures contract to take future delivery of 5,000 bushels three months hence, the notional principal amount of the contract would be the price of a bushel of corn times 5,000. If the price of corn were, for example, $2.00, the notional principal value of the corn futures contract would be $10,000. But the actual price of the contract, however, is the margin set by the exchange; the CBOT, for example, requires $270 be paid to purchase a futures contract that on May 15 had a notional value of $11,637.50..."


Bank For International Settlements

http://www.bis.org/statistics/derstats.htm


Table 19: Amounts outstanding of over-the-counter (OTC) derivatives
By risk category and instrument
In billions of US dollars

http://www.bis.org/statistics/otcder/dt1920a.pdf

[slipslidingaway]

10. kick n/t

[ozone_man]

13. It's the unregulated Credit Default Swaps themselves

What a bunch of idiots. Look no further than the unregulated $62 trillion market in CDS's that have been generated since 2000.

Investigate JP Morgan, founder of the CDS. I think they have $8 trillion in CDS's.

The woman who built financial 'weapon of mass destruction'

* David Teather
* The Guardian,
* Saturday September 20 2008

If Warren Buffett is to be believed in his verdict that derivatives are "financial weapons of mass destruction" then Blythe Masters is one of the destroyers of worlds.

British-born Masters is one of the most powerful women on Wall Street and is widely recognised as one of an elite group dubbed the "JP Morgan mafia" that fostered the creation of the complex credit derivatives at the heart of the current crisis ripping through Wall Street. Many of the highly qualified mathematicians and academics who worked on the credit derivatives market in the early days have gone on to run hedge funds and into high-powered jobs at other investment banks, but most of them started out at JP Morgan.

Masters sees things slightly differently. In a brief email exchange with the Guardian, she said: "I do believe CDSs have been miscast, much as poor workmen tend to blame their tools."

In 1997, she and a team developed many of the credit derivatives that were intended to remove risk from companies' balance sheets. The idea was to separate the default risk on loans from the loans themselves.

http://www.guardian.co.uk/business/2008/sep/20/wallstreet.banking?gusrc=rss&feed=business