Read this to see how derivitives touch each of our lives.

Link

-- Farouk Madjurian (fmadjurian@hotmail.com), February 05, 2000

Answers

I meant to say, "how DERIVATIVES touch" instead of "derivitives touch"?

So Sorry.

-- Farouk Madjurian (fmadjurian@hotmail.com), February 05, 2000.

I know this is all very interesting...but where is "watch whatchadoing" to explain it all to us dummies? Is this leveraging, where I buy 25 cents on the dollar? Or the banks buy 25 cents on the dollar? Isn't that what was going on when it all crashed in '29? Or am I totally off base here. Someone please explain it all. I have the feeling its important for me to know.

Taz

-- Taz (Tassi123@aol.com), February 05, 2000.

Taz,

It may not be important to you to know how derivatives work, but it is important to know that when they go wrong the results are verrryyyyy bad. Try Numa for references and literature and more than you'll ever need to learn in a couple of lifetimes. There are some basic derivatives you might be familiar with: futures contract, where a small margin allows the buyer (seller) to control large contracts stock options options on futures contracts But, as I said, these are simple. Most of the big boys put together contracts that are based on interest rates, the price of tea in china, and the phase of the moon. They are complex. When they go bad they are hard to unravel, since someone looking to get out of bad speculation may have to buy and sell a large number of contracts, all of which are going against them. Now, isn't it interesting to know that people put their money in these banks. Soon the banks have so much money they don't need customer deposits......because they are investing their money, in ever more risky holdings. No longer is a mortgage on farmer Brown's acres, returning 7% good enough. No, they have to cross-link plays on T-Bonds, gold, paying considerably more than 7%. No, they're not buying or selling stocks on 25% margin. Now read the information in the thread below about Bank of America and others and Goldman Sachs. Sleep well tonite, Taz

-- rocky (rknolls@no.spam), February 05, 2000.

This link from that link above is also must reading. Maybe it has all been said before and everybody knows it already. Idiot Americans

-- Kyle (fordtbonly@aol.com), February 05, 2000.

From the top link, not Numa. That previous post must have been made while I was making mine.

-- Kyle (fordtbonly@aol.com), February 05, 2000.

Practical question. If ap erson uses Bank of America for personal banking and credit cards. Should they move to another bank or does it matter? If BA bottoms up, big as it is, it seems it'll take out all the others?????

-- mush (mush@psicorps.com), February 05, 2000.

Practical question. If a person uses Bank of America for personal banking and credit cards, should they move to another bank or does it matter? If BA bottoms up, big as it is, it seems it'll take out all the others?????

-- mush (mush@psicorps.com), February 05, 2000.

The complexity of modern derivatives action is a result of improvements in the price/performance curve of computer technology. The unimaginably complex models that allow "the big boys (and girls)" to do these deals with some modicum of confidence would have required a Cray and a whole mess o' time 10 years ago. Now they're cranking out results on relatively affordable systems.

However... Those models are only as good as their relationship to real-world conditions. LTCM found out what happens when your wunnerful models run up against unforeseen events. It was not pretty.

Anyone think that all the major players have been using models which incorporate such unusual events as, say, an inverted yield curve in the bond markets? Me, either.

-- DeeEmBee (macbeth1@pacbell.net), February 05, 2000.

If Bank of America (or CitiBank, Chase Manhattan, or Wells Fargo) tanks, it would be an economic disaster of gigantic proportions. Ergo, the Fed would step in and prop them up...(remember, the Fed "owns" the money supply...)

Are we walking a tightrope right now? I think so...

-- Mad Monk (madmonk@hawaiian.net), February 05, 2000.

The underlying (pun intended) OCC reports can be found at:

OCC Qrtly bank derivative report

FWIW, a few opinions:

1. These data are handy, but not particularly helpful in getting a sense of systemic risks of derivative trading.

because, for example:

2. much, but I do not know how much, of the banks' derivative activity is on behalf of clients, which, I am guessing, passes the risk on to those clients. I suspect that in most cases these clients are engaging in actual "hedging", not in "speculation".

3. the emphasis on the notional amounts can be very misleading, particularly with respect to interest rate swaps which account for close to half of the total notional amounts.

I suspect that most of the most risky derivative activity is outside of the scope of the OCC bank derivative report.

Just MHO.

Jerry

-- Jerry b (skeptic76@erols.com), February 05, 2000.