Credit derivatives rocked by loss at GM finance arm
By Ambrose Evans-Pritchard (Filed: 18/03/2006)
…Long Term Capital Management - a hedge fund with two Nobel laureates on its team - was left on the wrong side of almost $100bn in trades on Italian, Spanish, and Portuguese bonds, among others, until it was rescued by the emergency rate cuts. The Fed said at the time the meltdown had put the entire global financial system at risk.
This time Mr Geithner is demanding that the International Swaps and Derivatives Association (ISDA) clean up it act before - not after - any credit crunch. He said the "most conspicuous" problems were in the $12,400bn market for credit derivatives, which has doubled in size every year for the last decade. A "significant" proportion of total trades do not even match up, he said.
Credit derivatives are an easy way to bet on credit quality without having to buy actual bonds, which are less liquid. Mr Geithner said the risk was very heavily concentrated, with America's ten biggest banks holding $600bn in potential credit exposure (on $95,000bn of notional trades), equal to 175pc of their financial reserves.
"The same names show up in multiple types of positions. These create the potential for squeezes in cash markets, magnifying the risk of adverse market dynamics," he said.
Market traders are scathing about such warnings, accusing the watchdogs of basic ignorance. "Regulators have been going on like this for five years now," said one veteran.
Unconvinced by such blithe assurances, the investor Warren Buffett has been warning since 2003 that derivatives are a ticking "time bomb", although his new metaphor is New Orleans' burst levee.
This month, he was explaining it has cost Berkshire Hathaway $404m to extract itself from derivatives inherited through General Re, the reinsurance group.
He said: "We are a canary in this business coal mine. Our experience should be particularly sobering because we were a better-than-average candidate to exit gracefully.
''General Re has had the good fortune to unwind its supposedly liquid positions in a benign market. It could be a different story for others in the future," Mr Buffett said.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/03/18/cngm18.xml&menuId=242&sSheet=/money/2006/03/18/ixcitytop.html
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Comment: The Perpetual Permabull Pom Pom Prissys better take a look at the above article in its entirety.
The non-transparent and unregulated aspect of the derivative market places ALL the responsibility for making responsible investment decisions on the individual who, for the most part, has been conditioned to believe “they” (the regulators) wouldn’t let this happen.
Folks, the derivative market is TOTALLY unregulated. Don’t get me wrong here. In spite of working for the government, I’m not a big fan or proponent of ‘regulations’. Oftentimes, ‘regulations’ just provide a false sense of security to those individuals who are the most reluctant and unprepared to accept responsibility for their decisions and they, most often, get hurt the worst in the aftermath that inevitably follows.
Keep in mind that behind every historical business, banking, or corporate scandal or bankruptcy, costing investors and employees billions of dollars of investment losses and depleted pensions and benefits, there has always been a ‘regulator’ providing ineffectual oversight.
Many investors are going to get blindsided by derivatives. These non-transparent and unregulated derivatives permeate every sector of the market. You will being hearing more about derivatives in the news and Johnny-Come-Lately politicians will soon be standing up on their soap boxes, after the fact, pleading for more government oversight and more money appropriated to those poor under funded bureaucracies whose budgets have been robbed by the Bush War Machine.
The market in common stocks is rolling over and contracting severely. The more recent advance in common stocks is NOT a broad based advance, but rather a very narrow advance. Fewer and fewer common stocks are maintaining their luster. More and more common stocks are biting the dust. The general economy is grinding sideways at a higher rate of speed with fewer and fewer overall participants. This economy is rolling over to the downside.
The Perpetual Permabull Pom Pom Prissys, to include my blowhard schmuck buddy, think they can talk the markets up in much the same fashion a busted gambler in Vegas thinks he can sweet talk the one-armed bandit into giving back previous losses. Both feel, “This time is different”.
The Perpetual Permbull Pom Pom girlies have the DOW Theory mantra down pat, but they’ve simply failed to recognize a bear market when it is literally bit_h slapping them in the face….and some of ‘em even to seem to enjoy it. Oh well, different strokes for different folks.
Attempting to recoup previous losses from previous bad investment decisions, however, is what keeps most gamblers deluded and coming back for more inevitable punishment. Their handlers keep the pump primed
just enough to keep ‘em coming back for more of the same slapping and amusement. Hey, the institutional investors need SOMEONE to sell their overvalued stock holdings to. Its all in the sacrifice…he, he, he…come to Daddy.
JT, Wilshire 5000, R2K, NYSE Composite and probably the S&P Small Cap 600 as well as the S&P Mid Cap 400.
However, the market hit the support line of 1297 [$SPX] and stopped, starting back up the last few minutes of the day. The advance today should restart the new trend of a primary bullish movement. 
We should be out of the dreaded trading range. With reasonable energy supplies and hoping the Fed will remove the choke collar, 2006 could be a very good year. It's not all roses, yesterday showed just how cautious or jittery the market can get. So, I guess the new rule is that if you want to play with socks, bring along some clean underware.
