>Second, the banks wanted the right to play a new high-risk game: “derivatives trading”. JP Morgan alone would soon carry $88 trillion of these pseudo-securities on its books as “assets”.
1. Derivatives trading wasn't new; they've been traded for a long time. And derivatives aren't inherently risky or evil. There's nothing mystical about them.
2. $88 trillion in notional value. Derivatives deals should net to zero.
>payments have raised Summers’ net worth by $31 million since the “end-game” memo.
How much did "payments" increase Mark Pincus' net worth as he sold stock at inflated prices while his employees couldn't, and billions in wealth was destroyed by Zynga (as a familiar analogy)?
"1. Derivatives trading wasn't new; they've been traded for a long time. And derivatives aren't inherently risky or evil. There's nothing mystical about them.
2. $88 trillion in notional value. Derivatives deals should net to zero."
As long as a reasonable amount of derivatives are created for the purposes of "legitimate hedging activities" (whatever that means) then that may indeed be the case.
However, as you create more and more derivatives ... as the value and volume of the derivatives increases beyond the value and volume of the underlying securities, they begin to distort the value and prices of the underlying securities. In the real world, where they affect real people.
The more you distort those underlying values and prices, the more violent the snapback is.
You may indeed be able to tie up the derivatives ecosystem into a tidy little box in theory, but real people get hurt when derivatives distort underlying prices. AIG and credit default swaps is a perfect (and very recent) example.
>they begin to distort the value and prices of the underlying securities. In the real world
I disagree. I don't believe the problem was price distortion. Instead, it was caused by there being no means of seeing counter-parties to most of these transactions, and hence no way to measure (and hedge) the risk.
If I'm going into a deal with AIG, I have no way of knowing what other deals AIG had done, and hence no way to put an accurate price on their default risk.
If there was a "derivative" clearing house, most of the problems go away.
How something like a credit default swap net to zero? If I sell you one, I create a new instrument which has a stream of income (so it can be valued theoretically). But if the securitIes that are insured against are to opaque to be valued, there is now unknown potential liability.
As it happened with AIG, they had a situation where those liabilities became real, and to large to honor. It was as if they created this huge debt from thin air, with not enough collateral.
I guess in a sense since their loss was supposed to be Goldman Sachs gain, there is a netting to zero, but that seems semantic.
In would think of netting to zero as meaning something like a zero sum gameve where no participant can win or lose more money that existed.
1. Derivatives trading wasn't new; they've been traded for a long time. And derivatives aren't inherently risky or evil. There's nothing mystical about them.
2. $88 trillion in notional value. Derivatives deals should net to zero.
>payments have raised Summers’ net worth by $31 million since the “end-game” memo.
How much did "payments" increase Mark Pincus' net worth as he sold stock at inflated prices while his employees couldn't, and billions in wealth was destroyed by Zynga (as a familiar analogy)?
More alarmist tripe.