Another Fun Day in the Mkt...

motordavid · #36 04-13-2009, 06:23 PM

Interesting lil'snippet from Barron's a couple weeks ago...
that $684,000,000,000,000 (Trillions), worth of derivative
contracts, is pretty freakin amazing to me.

Especially in light that the estimated World GDP/Gross Global Product
is only aprox $44,000,000,000,000, from '05 figures.

But, ah...the old portfolio has risen lately with the momentary incoming tide,
no one has come to shut off the lights or turned us away from the country club,
so things are ok. Right?!
GL,mD

* * * * * * * * *

BERNARD MADOFF WAS BAD, but his offenses may pale in comparison to those of Wall Street firms
that concocted increasingly arcane derivatives products.

To get some sense of the level of absurdity, one need only look to the Bank for International Settlements'
latest estimate of the notional value of over-the-counter derivative contracts outstanding: $683.7 trillion
as of June 2008, an increase of 32% from the previous year.

The December '08 numbers won't be out until May 19, but perhaps they will follow the trend of exchange-traded
futures and options contracts, which are issued quarterly. Open interest, or traders' exposure, on futures fell in
the December quarter by 19%, to $20.1 trillion; open interest on options fell 24%, to $39.7 trillion.

Reducing the OTC contracts won't be a cakewalk. "The whole economy is a Ponzi scheme," says Paul Wilmott,
who publishes Wilmott, a quantitative-finance journal. He warned in 2000 about the dangers of a mathematician-led
market meltdown after the U.S.-led rescue of Long-Term Capital Management.

Wilmott, who is course director of a quantitative-finance program, CQF, notes that the lack of uniformity in many
OTC derivatives makes it hard to value them.

His solution for winding the contracts down? A temporary global nationalization of banks, where everything is frozen,
and accounting rules are changed to "try to get as much cancellation of these contracts" as possible.

"Sometimes, common sense should be used, not just abstract math," says Wilmott. The contracts "just took over the
world and took on a life of their own."