Re: Greenspan' and Derivatives

["Gary Santos" <evs@xxxxxxxxxxxx>]

For brevity I am posting the press release on derivatives in another email.
The credit exposure figure I mentioned came from the 3rd quarter. Just for
this discussion, I looked for the 4Q report which can be found at:
http://www.occ.treas.gov/ftp/deriv/dq402.pdf. Apparently, credit exposure to
the writers is now $600 billion.

With the way you describe the business, it would seem the derivatives
business has absolutely no systemic risk and it certainly is worth noting
the morality of the system in the case of LTCM as you described it.

One additional sub-topic, if you will, what about the short positions in
gold? If you are familiar with that market, I would like to know your
prognosis on the counterparty issue should gold continue to rise to 10 year
highs.



----- Original Message -----
From: "Stan Jonas" <sjonas@xxxxxxxxxxxxx>
To: "Gary Santos" <evs@xxxxxxxxxxxx>
Sent: Sunday, March 16, 2003 2:47 AM
Subject: Re: Greenspan' and Derivatives


Actually it didn't take anything to Bail Out LTCM..
everyone involved most particularly J Merriwether  emerged with a hansome
profit...
the bailout was a strict transfer of the public's money to well connected
players who didn't want to lose their investments...

    Keynes' maxim was proven true..  If you trade have a former Vice
Chairman of the FEd on your Board...
   John Merriweather.. is doing the exact same thing he did before in a new
fund although on a slightly smaller scale..

but even if that were so.. recall that up to that time LTCM was the
"largest" derivatives aribitrageuer around.. and if it only took 3.2 billion
to bail them out.. well that's chump change..
 Caxton, today's pre eminent hedge fund made approximately 30% last year on
14 billion of assets.. (substitute original margin)

Some lose and some win.. don't let the magnitudes scare you..

By the way would love to see where you get that OCC estimate from.. and what
total credit exposure is defined as... you should understand that in
derivatives credit exposure can be a two way sword.. in the simplest case if
you write an option to counterparty.. which is what most dealers do.. they
don't really care net of some nice legalities whether the counterparty
disappears or not..
     everything has to be looked at from a "conditional basis"...

----- Original Message -----
From: "Gary Santos" <evs@xxxxxxxxxxxx>
To: "Stan Jonas" <sjonas@xxxxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, March 15, 2003 1:13 PM
Subject: Re: Greenspan' and Derivatives


> 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.
> > >
> > >
> > >
> >
> >
> >
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