Derivatives; The Monster That Ate The Future Part II

The whole article can be read at http://globaleconomicanalysis.blogspot.com/

Derivatives Trading
Bloomberg is reporting Derivatives Trading Soars to $370 Trillion.
Nov. 17 (Bloomberg) -- The use of derivatives grew at the fastest pace in eight years during the first half of 2006, boosting earnings at securities firms and reducing costs for investors.

The face value of derivatives based on corporate bonds, currencies, interest rates, commodities and stocks jumped 24 percent to $370 trillion, according to the Bank for International Settlements. It was the biggest percentage rise since the bank began keeping records in 1998.

Trading in credit-default swaps, the fastest-growing derivatives market, helped spur record earnings for banks including New York-based Morgan Stanley and Goldman Sachs Group Inc. At London-based Barclays Capital derivatives accounted for more than 60 percent of revenue and profit, Chief Executive Officer Bob Diamond said in May."

The pace of growth is going to have continued unabated in the second half of the year," said Kit Juckes, head of fixed-income research in London at Royal Bank of Scotland Group Plc.

The amount of outstanding credit-default swap contracts jumped to $20.3 trillion from $13.9 trillion at the end of last year, the Basel, Switzerland-based bank said on its Web site today. The securities are financial instruments based on bonds and loans that are used to bet on an increase or decrease in indebtedness.

Alan Greenspan, the former chairman of the Federal Reserve, has been saying since 2002 that derivatives reduce risks by making financial markets resilient to shocks. In May he told a Bond Market Association gathering in New York that derivatives are the most significant change on Wall Street "in decades."

Modern Financial Wizardry
In other news, a spokesman claiming to represent Greenspan reported that the entire risk of all derivatives trading to date has now officially been offloaded to Mars. A Martian spokesman verified that claim and went on to state that Martian risk has been offloaded to France. France in turn claims to have offloaded the risk to the MMMM corporation better known as Madame Merriweather's Mudhut Malaysia, the ultimate guarantor of $370 trillion in derivatives.

Leverage on the trade has not yet been calculated but Madame Tandalayo Merriweather of Kuala Lumpur has emailed me personally stating " Don't Worry, My Mudhut is Priceless". The key point here is the priceless nature of the Malaysia Mudhut which is a good thing given that it has taken two years and counting to straighten out the derivatives mess at Fannie Mae alone. In a miracle of modern financial wizardry, no one it seems has any risk associated with these derivatives, given they are all backed by something priceless.