Mountain Of OTC Derivative WMDs Waiting To Explode

[CrackSmokeRepublican]

Some recent Jim Sinclair that is good to keep in mind...

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Mountain Of OTC Derivative WMDs Waiting To Explode
Posted: Sep 13 2009     By: Jim Sinclair      Post Edited: September 13, 2009 at 4:56 pm

Dear CIGAs,

Size and major risk have been confirmed for those with the eyes to see and the ears to hear. It is exactly what I have been teaching.

Translation:

Unless financial contracts have standards there is no way to clear them.
Unless financial instruments have accurate means of daily valuation, there is no way to clear them.
OTC derivatives outstanding from 1991 to 2008 have no standards.
OTC derivatives outstanding from 1991 to 2008 have no sound means of true valuation in any time frame, certainly not from day to day.

With this being the incontrovertible set of facts:

The Bank for International Settlements is for the first time proposing the world's central banks take over the financial risk of the entire mountain of more than one quadrillion one hundred and forty four trillion dollars (valuation before the change to "value to maturity" method valuation of nominal value of OTC derivatives) of OTC derivatives created from 1991 to 2008.

The reason is simple. This unchanged in size mountain of weapons of mass financial destruction as still sitting there ready to explode in the second chapter of the greatest double dip depression of 2007 – 2009.

Can you blame China for simply saying no to Western crack cocaine finance?

Now do you understand why China is buying raw materials, entering joint ventures and purchasing energy and raw material companies while utilizing their dollar instruments for payment?

Central Banks Must Coordinate Clearinghouse Oversight, BIS Says
By Abigail Moses

Sept. 13 (Bloomberg) — Central banks should coordinate global oversight of derivatives clearinghouses and consider offering them access to emergency funds to limit systemic risk, according to the Bank for International Settlements.

Regulators are pushing for much of the $592 trillion market in over-the-counter derivatives trades to be moved to clearinghouses which act as the buyer to every seller and seller to every buyer, reducing the risk to the financial system from defaults. The drive was spurred by the collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the biggest credit-default swaps traders.

"The crisis has exposed the need for international coordination of the oversight of systemically important" clearinghouses, BIS analysts Stephen Cecchetti, Jacob Gyntelberg and Marc Hollanders wrote in a report published today. An important and unresolved question is whether clearinghouses "should have access to central bank credit facilities and, if so, when," they wrote.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and 13 other derivatives dealers last week told the Federal Reserve Bank of New York they will submit 95 percent of new credit-default swaps trades to clearinghouses. They made similar commitments for interest-rate derivatives.

Intercontinental Exchange Inc., owner of the largest credit-default swap clearinghouse, said last week it will make it easier for hedge funds and other bank clients to access its service to guarantee trades starting next month.

In The News Today
Posted: Sep 13 2009     By: Jim Sinclair      Post Edited: September 13, 2009 at 4:57 pm

Filed under: In The News

Thought for a Sunny Sunday:

"The possibility of a short squeeze is one reason some analysts look at a high amount of short interest as a bullish indicator. Short Interest is the fuel, performance is the fuse, says ShortSqueeze.com"
–USA Today

Jim Sinclair's Commentary

Here is confirmation of the most important criteria of the UNSOLVED problem waiting to bring you the second chapter of the worldwide economic crisis.

This is the reason for China saying no to Western Crack Cocaine finance.

The number given by the BIS is less than 50% of the true number. The real number for the nominal value of OTC derivatives outstanding is barely unchanged from the pre-Lehman flushing.

The number you read below is derived from a computer model known as "Value to Maturity," making the BIS as much a culprit as the unstoppable OTC derivative manufacturers and distributors. By adjusting the real number lower they aid and abet.

Derivatives still pose huge risk, says BIS
The global market for derivatives rebounded to $426 trillion in the second quarter as risk appetite returned, but the system remains unstable and prone to crises, according to the Bank for International Settlements (BIS).
By Ambrose Evans-Pritchard, International Business Editor
Published: 7:57PM BST 13 Sep 2009

The BIS said in its quarterly report that total turnover of derivatives rose 16pc, mostly due to a surge in futures and options contracts on three-month interest rates.

Stephen Cecchetti, the bank's chief economist, said over-the-counter markets for derivatives are still opaque and pose "major systemic risks" for the financial system. The danger is that regulators will again fail to see that big institutions have taken far more exposure than they can handle in shock conditions, repeating the errors that allowed the giant US insurer AIG to write nearly "half a trillion dollars" of unhedged insurance through credit default swaps.

The misjudgement was to think the banks and insurers were safe because their "net" exposure was modest. That proved to be an illusion.

"The crisis has cast doubt on the apparent safety of firms that have small net exposures associated with large positions," Mr Cecchetti wrote. "As major market-makers suffered severe credit losses, their access to funding declined much faster than nearly anyone expected. When that happened, it was gross exposure that mattered.

"The use of derivatives by hedge funds and the like can create large, hidden exposures," he added, citing the discovery that firms in Brazil, Korea and Mexico held huge foreign exchange contracts in late-2008.

More...

Jim Sinclair's Commentary

There is no stopping these people other than the manner adopted by China, which is to simply say no to crack cocaine Western finance.

Wall Street's Math Wizards Forgot a Few Variables
By STEVE LOHR
Published: September 12, 2009

"Still, the recent efforts by investment banks to create a trading market for "life settlements," life insurance policies that the ill or elderly sell for cash, suggest that inventive sales people are browsing for new asset classes to securitize, bundle and trade.

"Good or bad, moral or immoral, people are going to make markets and trade via computers, and this is a natural area of financial engineers," says Emanuel Derman, a professor at Columbia University and a former Wall Street quant."

IN the aftermath of the great meltdown of 2008, Wall Street's quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.

But the real failure, according to finance experts and economists, was in the quants' mathematical models of risk that suggested the arcane stuff was safe.

The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn't sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.

More...

Jim Sinclair's Commentary

The inviting conclusion based on timing is that Washington (property of Wall Street) is really pissed off over China simply saying no to Western Crack Cocaine OTC derivative finance.

China to Probe Alleged 'Dumping' of U.S. Products (Update1)
By Bloomberg News

Sept. 14 (Bloomberg) — China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.

Chinese industries have complained that they're being hurt by "unfair trade practices," the nation's Ministry of Commerce said on its Web site yesterday. The Beijing-based ministry is also looking into subsidies for the products, it said. It didn't specify the imports' value.

The European Central Bank said last week that rising protectionism may hamper world trade and undermine the global economy's recovery from recession. The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.

"While th ere's friction, I suspect that the two nations will keep any disputes under control," said David Cohen, an economist at Action Economics in Singapore. "They understand that they're increasingly dependent as trading partners."

Dumping is selling goods for less than the cost of producing them.

More...

 

Jim Sinclair's Commentary

I am not alone in my view.

Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman
By Mark Deen and David Tweed

Sept. 13 (Bloomberg) — Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."


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Jim's Mailbox
Posted: Sep 12 2009     By: Jim Sinclair      Post Edited: September 12, 2009 at 6:10 pm

Filed under: Jim's Mailbox

Jim,

This may wake some more people up from there deep denial.

CIGA BJS

Dear BJS,

This is a factual review that should be watched by all CIGAs, but has forgotten one extremely important item. The Commercial Real Estate loans coming due swamp all the speaker is talking about.

There can be no let up, but rather an increase is required in quantitative easing, the creation of money, primarily to save the financial system.

Now consider if SIVs are revealed as the back office total mess they are, lacking proper paperwork, and in many cases using the same mortgage multiple times to create different instruments. What is the only way out?

The answer is burn them via bankruptcy and foreclosure.

The financial system will be propped up to infinity, but all the property owners will be flushed.

The scheme is no different than the organized crime restaurant that launders money. They MUST appear to prosper first, go broke due to apparently bad management later and then be burned down. You don't want the IRS to know there were few customers and the receipts were all a means to launder money. You want to get back your original seed capital from the insurance company. In the case of SIVs and all OTC derivatives today the insurance company is you and I via TALF, TARP, and all the other schemes.

The SIVs are no different.

Damn, I wish I did not understand all this Larceny 101.

Regards,
Jim

http://jsmineset.com/