Re: Greenspan' and Derivatives

["Gary Santos" <evs@xxxxxxxxxxxx>]

I can't reconcile your numbers with the OCC estimate (total credit exposure
(not notional) to be in the magnitude of $570 billion). Also I note from the
OCC report that charge-offs went has high as $400 million in 1998. When LTCM
failed, it took $3.2 billion to bail out Meriwether.

----- Original Message -----
From: "Stan Jonas" <sjonas@xxxxxxxxxxxxx>
To: "Gary Santos" <evs@xxxxxxxxxxxx>
Sent: Sunday, March 16, 2003 1:06 AM
Subject: Re: Greenspan' and Derivatives


You miss the point of derivatives..
In the simplest case and the largest the interest rate swap..
in reality they're less risky for the system than Treasury's.

For leveraged investors.. and that's everyone that counts..
a default on a swap will mean only tthat I will be out the change in value
of the swap.. in a sense  the replacement value due to the change in
interest rates since I held the swap.. this of course can be plus or minus
depending on whether rates have gone up or down..
  For a Treasury, if my counterparty on REPO ( and this is the key point
Treasuries are the most leverage market of all with most trades  being done
on zero haircut or margin by the largest speculators of all your little
neighborhood bank and Treasury dealer.)
  If the counterparty to my  Repo defaults.. Im out the replacement value
and the par value of the bond  (100 bucks)...
          The 50 trillion number is of course pure non sense.. For example
in the European marketplace  the largest volume is done in Eonia Swaps..
these are essentially bet's on the course of overnite interest rates set by
the ECB..  if you look at a 1 month Eonia contract.. the actually dollar
risk is miniscule its the change in interest rates on a 1 month piece of
paper..    assumed the ECB moves 50 bp's this is roughly 300 dollars per
million.. or300,000 dollars per  billion Euro's.... doesnt take a lot of
Treasuries or cash to collaterallize a 300,000 move..
  Same principle everywhere elses..

By the way.. most people would assume that in time of crisis as you fear the
value of the collateral would increase dramaticallly as there would be a
flight to quality in the Treasury asset itself.. as in the LTCM embroglio...
         If you really want to worry... go right to our friend Warren
Buffet's basic line of business..
selling derivatives ( that he calls Insurance) to willing buyers without any
margining or marke to the market or collateralization..
----- Original Message -----
From: "Gary Santos" <evs@xxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Friday, March 14, 2003 11:41 AM
Subject: Re: Greenspan' and Derivatives


> I don't know, Stan. $50 trillion in derivatives collateralized with
> Treasuries? Of course, that's notional value but I still wouldn't bet a on
> full collateralization especially if the bottom fell out. Liquidation of
> treasuries can have its own disastrous effect in terms of recoverable
value
> and interest rates. Bottom line: time will tell. . . as long as interest
> rates remain low... as long as inflation is kept low... as long as world
> peace is achieved shortly... and you can't deny that there are too many
> variables in the equation, Stan.
>
>
>
>
> ----- Original Message -----
> From: "Stan Jonas" <sjonas@xxxxxxxxxxxxx>
> To: <pkt@xxxxxxxxxxxxxxxx>
> Sent: Friday, March 14, 2003 8:33 PM
> Subject: Re: Greenspan' and Derivatives
>
>
> Perhaps the word collateral is confusing..
> For the most part the only collateral accepted are
> in the US Market place.. US Treasuries..  risk that remains
> is the stochastic correlation between the movement of US Treasuries
> and underlying move in the derivative.
>
>     For those not familiar with derivatives.. the OTC marketplace is
rapidly
> becoming indistinguishable from the futures  with variation and initial
> margining the rule not the exception.
>
> ----- Original Message -----
> From: "Gary Santos" <evs@xxxxxxxxxxxx>
> To: <pkt@xxxxxxxxxxxxxxxx>
> Sent: Thursday, March 13, 2003 1:32 AM
> Subject: Re: Greenspan' and Derivatives
>
>
> > Counterparty risk goes beyond collateralization. Even if the derivatives
> are
> > collateralized, the question of liquidity still has to be addressed,
i.e.
> > the collateral may not be able to answer for cash demands especially
under
> a
> > liquidation scenario. What valuation on collateral was used?
> > Collateralization only addresses static balance sheet solvency issues
via
> > "dacion en pago" or the surrender of collateral as payment. And, may I
add
> > that the only real solution to a counterparty failure and a demand for
> cash
> > payment is for the Bernanke to step in with cold fiat credit via some
> credit
> > window at the Fed.
> >
> >
> >
>
>
>
>
>