Derivative Time Bomb - Has Pat Rabbitte uncovered something VERY SERIOUS?

VincentLeB

I know there has been talk on this already, and I was skeptical at first, but after hearing Patrick Honohan's EXTREMELY shaky response — he didn't confirm or deny anything — on the News at One today, I did a bit more research by simple Googling 'Derivative Time Bomb'...

Here's what I came up with:
http://trueeconomics.blogspot.com/2010/08/economics-25810-derivatives-time-bomb.html

Dr. Constantin Gurdgiev's response to a tip from someone on an alarming figure... he's Trinity's adjunct Lecturer in Finance.

Clips from Pat Rabbitte's remarks (from beginning) and Honohan's response at about 5.30 in the YouTube clip below.

https://www.youtube.com/watch?v=2yITEayX2p4

The podcast isn't up, but the economists after Rabbitte's remarks seemed to sound shocked.

V.

sollar

After 2 years of this crisis i find it amazing that people wouldn't have uncovered all the major problems at this stage. If what he says is correct and we have potentially another multi billion problem on the way. Why is it not major news??


I've learned a few things about finance since this crisis but derivatives are a complete mystery??

Bob_Latchford

If i woke up tommorrow and this government had sold my teeth to prop up their debt I wouldnt be surprised

aphex™

This isn't a problem AFAIK.

The banks securitized their loans into a subsidiary then raised finance on them. For every bond they had about 106% loans as safety buffer. On top of that they are allowed swap out a loan if it goes bad, so you are left with only good loans in the subsidiary.

The downgrade was most likely due to the inherent risk of the economy/property market and was probably expected.

FYI the bonds are set up under the "covered bonds" legislation if you want to google around the subject a bit more.

Hayte

Trading in securities and derivatives isn't an inherently bad thing. Its like guns aren't inherently bad either. However if their use is not strictly regulated they have terrible capacity for destruction.

The way some of the big investment banks like Goldman Sachs were creating and trading in derivatives turned out to be very destructive because there was almost regulation in their use. They would issue bonds which would have an underlying asset i.e. houses during the housing market boom and these things have real value. Then they would securitize it, bundle it up into big packages of all sorts of other different types of securities i.e. CDO making it really hard to assess the value of the debt. Then they issue 10 times the value of the CDO in credit derivatives and 10 times the value of that in yet more derivatives like swaps (i.e. CDS contracts). Each time they use each layer of abstraction to leverage more capital to buy more debt to package up into huge bundles of securities to issue tonnes of derivative contracts. But all of these bets and insurances are based on the performance of the underlying asset. When the housing market crashed, the underlying asset lost an incredible amount value, toppling the house of cards.

Propublica did an awesome investigation into some CDOs traded around by the big US investment banks and found this sort of thing going on:



In the end this went on between 2004 to 2007 and the people that profited from it massively were:

a) Those holding super senior debt from the first CDOs.
b) Those buying up tonnes of equity (mainly hedge funds) and then buying tonnes of CDS insurance against default.

and the people that got screwed were:

c) all the investment banks, asset management agencies etc. that had tonnes of overrated mezzanine tier rubbish structured to look like a better investment than it was with CDS contracts and other types of derivative contracts designed to make up the difference if the asset lost value).
d) CDS protection sellers who were providing tonnes of insurance based on terrible rating advice and poor knowledge of the practises described in (c).
e) ordinary people who became responsible for the liabilities of companies engaged in such derivative trading when their government guaranteed the company.

Derivatives are fine as long as there are mandatory requirements with regards to:-

1) the amount of capital a bank must have in reserve,
2) leveraging limits,
3) proper underwriting practices, independent ratings and valuation practices with full transparency,
4) remuneration that incentivizes trading in the interests of the bank's clients instead of make deal, make commission, next deal, not my problem if the previous deal blows up because f*** you, I got mine already.

Its just like guns. Use them to cull populations on your farm like stopping rooks from eating all the other bird's eggs. Make it illegal to shoot PEOPLE because they don't agree with you.

hmmm

Derivatives are often simple instruments which are used by everyone from banks to banana importers. As Honohan himself said, he didn't know what Rabbitte was talking about, he knows the Irish banks use some simple derivatives and he presumes that's what Rabitte was talking about. Honohan is an intelligent man with a huge financial education, so I can appreciate his confusion when some politician decides that something irrelevant is utterly vital and major news. This thread and similar I've seen smacks of jumping on a hysteria bandwagon when the scary word "derivative" is mentioned.

VincentLeB

aphex™ wrote: »

This isn't a problem AFAIK.

The banks securitized their loans into a subsidiary then raised finance on them. For every bond they had about 106% loans as safety buffer. On top of that they are allowed swap out a loan if it goes bad, so you are left with only good loans in the subsidiary.

The downgrade was most likely due to the inherent risk of the economy/property market and was probably expected.

FYI the bonds are set up under the "covered bonds" legislation if you want to google around the subject a bit more.

I have Googled the covered bonds legislation and came across the Dáil transcript for the Amended Asset Covered Securities Bill 2007.

From this, I was wondering why the bill was rushed through the Dáil. There was significant concerns from the opposition about this.

Joan Burton wrote:

Like other Deputies, I received a note from the Minister for Finance rather late last week to say it was urgent that this proposed legislation would be enacted. The original legislation was brought before the Dáil in the recent past. The Minister needs to tell us why there is a need to amend this legislation already. I accept some measures relate to new moves in regard to the European Central Bank and arrangements in regard to European directives. However, I notice the Minister is also amending the existing legislation. I would be grateful if he would explain what exactly that is about.

Joan Burton wrote:

As with all rushed legislation, the Opposition is obliged to take the word of the Minister for Finance in this case as being his bond. The legislation issued over the St. Patrick’s weekend and there has been no opportunity for the Opposition to seek independent advice or to have any opportunity to meet with people from the industry concerned and to hear some independent counsel.

Has anybody else looked at this legislation and the debate surrounding it? Why was it so urgent? What was the problem with the original bill from 2001?

V.

aphex™

VincentLeB wrote: »

From this, I was wondering why the bill was rushed through the Dáil. There was significant concerns from the opposition about this.

The rush was that the Dáil was coming to a close and there is always a rush at that time before any recess AFAIK.

VincentLeB wrote: »

Has anybody else looked at this legislation and the debate surrounding it? Why was it so urgent? What was the problem with the original bill from 2001?

V.

There was technical problem with the original bill that led to the market not taking off. It was corrected with the new bill.

The 'grave' concerns were not outlined by the opposition and they were likely only concerned because they didn't understand it. Which is fair enough but that's not an actual concern in itself.

Iwannahurl

hmmm wrote: »

Derivatives are often simple instruments which are used by everyone from banks to banana importers. As Honohan himself said, he didn't know what Rabbitte was talking about, he knows the Irish banks use some simple derivatives and he presumes that's what Rabitte was talking about. Honohan is an intelligent man with a huge financial education, so I can appreciate his confusion when some politician decides that something irrelevant is utterly vital and major news. This thread and similar I've seen smacks of jumping on a hysteria bandwagon when the scary word "derivative" is mentioned.

The interview with Pat Rabbitte caught my attention precisely because the word "derivative" is indeed scary to a Joe Soap like me.

Wasn't it the collapse of the whole Derivatives house of cards (aka Ponzi scheme) that led to global economic meltdown? I certainly don't believe the suspect Derivatives are simple instruments. We are still watching the slow and desperately painful unravelling of these "complex assets" -- the unsustainable has not yet run its course.

Somewhere along the line Irish banks forgot their roots and their traditions and turned into casinos. As a layman, my understanding was that they had been borrowing abroad and then lending ridiculously large sums to over-ambitious developers. But what if they had been borrowing to gamble with Derivatives of various kinds? While this might have multiplied their gains during the bubble, when the global Ponzi scheme collapsed their losses would then have been multiplied in the wrong direction by the same leveraging process.

Sorry is any of the above is economic nonsense -- I'm just an average taxpayer struggling to comprehend the madness we, and possibly our children, will be now paying for.

aphex™

Iwannahurl wrote: »

But what if they had been borrowing to gamble with Derivatives of various kinds? While this might have multiplied their gains during the bubble, when the global Ponzi scheme collapsed their losses would then have been multiplied in the wrong direction by the same leveraging process.

What? He's clearly talking about their own mortgage book. They didn't "borrow to gamble with derivatives" other than on their own loanbook.

We've ascertained the specific instruments Pat Rabitte was speaking about and now we're going down the path of analysing them and seeing if there's a risk or not. Throwing around tabloid inflationary statements about ponzi schemes isn't exactly being constructive to anyone. Your other phrases like "Joe Soap" and "just an average taxpayer" make me believe it's possible you genuinely have a column in the Evening Herald.

hmmm

Iwannahurl wrote: »

But what if they had been borrowing to gamble with Derivatives of various kinds?

The Irish banks books have been combed through by the Irish Central Bank, the ECB and the IMF at this stage. I believe Honohan is an honest broker, so I don't believe he's lying when he tells us they do not have a large derivative exposure.

It may be the case that the banks have fooled the best financial minds in the world and instead Pat Rabbitte, ex union official and ex UCG English graduate has been the only person to forensically pick apart their derivatives book but I somehow doubt it. This sounds like the usual shower of forum dwellers who like nothing more than jumping to conclusions about subjects they know nothing about every time they recognise a vaguely important word.

Which isn't to say that there is nothing hiding in the closet, simply that the chances of there being anything left is slim. (famous last words )

kaiser sauze

Isn't this the legislation to abolish tax on CFDs?

Iwannahurl

aphex™ wrote: »

What? ... it's possible you genuinely have a column in the Evening Herald.

Whatever.

I wish I did have a column, even in the EH. Might help me pay some bills...

Iwannahurl

hmmm wrote: »

The Irish banks books have been combed through by the Irish Central Bank, the ECB and the IMF at this stage. I believe Honohan is an honest broker, so I don't believe he's lying when he tells us they do not have a large derivative exposure.

Which isn't to say that there is nothing hiding in the closet, simply that the chances of there being anything left is slim. (famous last words )

Famous last and possibly true words.

Just posted this elsewhere, in true Joe Soap/Evening Herald style:

With regard to that €130 billion the Irish banks have borrowed from the ECB, I find it simply impossible to comprehend (a) why they have to do so on such a massive scale, (b) how this can be tolerated or sustained, and (c) how the problem -- whatever it is -- can be solved.

How bad is this aspect of our economic nightmare? This quote helps to put it in perspective for someone like me:

Adjusted for size, this is roughly equivalent to US banks borrowing a few hundred trillion from the Fed, give or take a few trillion.

To put that in another perspective, as of 7 November 2010, the USA's "Total Public Debt Outstanding" was approximately 95% of annual GDP ($13.723 Trillion). That's regarded as quite a large sum in the US.

Sorry if this makes no sense. But then again, in this mess what does?

Leiva

Can someone please explain (in laymans terms) what this means and potential issues arisen ?

Ta

ei.sdraob

mixednuts wrote: »

Can someone please explain (in laymans terms) what this means and potential issues arisen ?

Ta

We (the people) end up in an even bigger pile of poop since the banks problems are now our problem (thank you FF :rolleyes: ). The narrative for Ireland was that it was old fashioned bad lending, if this is true then they engaged in a casino style gambling operations too.

Theres nothing wrong with derivatives but what is wrong is that all this **** was socialised onto us, while the people responsible walk away.

I mentioned over a year ago that over 10 billion of derivatives is going into NAMA alone, of course all the NAMA supporters here made it out as if its a good thing not bad. Watch them try to squirm out of this one now.

edanto

hmmm wrote: »

The Irish banks books have been combed through by the Irish Central Bank, the ECB and the IMF at this stage. I believe Honohan is an honest broker, so I don't believe he's lying when he tells us they do not have a large derivative exposure.

It may be the case that the banks have fooled the best financial minds in the world and instead Pat Rabbitte, ex union official and ex UCG English graduate has been the only person to forensically pick apart their derivatives book but I somehow doubt it. This sounds like the usual shower of forum dwellers who like nothing more than jumping to conclusions about subjects they know nothing about every time they recognise a vaguely important word.

Which isn't to say that there is nothing hiding in the closet, simply that the chances of there being anything left is slim. (famous last words )

I think that's very unfair to Pat Rabbitte. Are you saying that because he's an English graduate and an ex-union official that he can't possibly understand this high flying world of international finance? That's the kind of superior attitude that led us into this mess.

Rabbitte is sincere and careful man, I've never known him to bluster or bullshit.

The 'best financial minds in the world' that you refer to are the very people that have hung us. As Rabbitte says in the clip, the ECB are owed €160bn by the Irish banks, of course they are going to support anything that increases their chances of getting their money back, even if it means pouring our entire pension fund into broken banks so that rich people don't get upset!

Honahan says that this is just a technical shift, 'it's not going to cause a problem', but he also admits that the IMF etc haven't had much time to examine the books, or look for this type of securitisation problem.

In the last week or two, we have just taken out a mega-loan on our own backs to cover the debts run up by the banks, and our friends the 'best financial minds'. I want to see Rabitte and Quinn and the rest of the Labour party in Government, so that we can find out exactly what the hell is going on, and someone will finally stand up for us and stop giving away the money that we haven't even earned yet.

P. Breathnach

edanto wrote: »

...
Rabbitte is sincere and careful man, I've never known him to bluster or bullshit.
...

I am beginning to wonder if I inhabit a different world from many who post here. I have a recollection of Rabbitte being brought back on RTE later in the day (Drivetime, I think) to clarify what he had said earlier, and his clarification was an exercise in furious back-pedalling, while attempting to save face. Did I imagine that?

As to OP characterising Honohan's response as being extremely shaky, I simply don't agree. Honohan is not a politician, but is a very able person. He was not going to enter into a political dogfight, and I interpreted what he said as a restrained way of telling us that there was no known basis for what Rabbitte said.

BeeDI

edanto wrote: »

I think that's very unfair to Pat Rabbitte. Are you saying that because he's an English graduate and an ex-union official that he can't possibly understand this high flying world of international finance? That's the kind of superior attitude that led us into this mess.

Rabbitte is sincere and careful man, I've never known him to bluster or bullshit. .

Sincere and carefull, eh!! never known to bluster eh!!

This is the man, who precipitated the downfall of a democratically elected government, by loosing the run of himself in the Dail, and making totally unfounded allegations relating to the office of the then attorney general, Harry Whelahan! Remember Rabbitte's bluster and bull**** in the dail, "I have information to hand which will rock the state to it's very foundations"
http://irishsalem.com/individuals/Politicians%20and%20Others/pat-rabbitte/FallofReynoldsShaneColeman.php

ROCKING THE FOUNDATIONS - PAT RABBITTE
Shane Coleman sets the scene as follows:
"It was the 16 November 1994 and the Dail [Parliament] was experiencing one of its most dramatic days since the Arms Trial almost a quarter of a century before. The Fianna Fail-Labour Government had been under strain for some weeks over Taoiseach [Prime Minister] Albert Reynolds move to appoint his Attorney General (AG) Harry Whelehan as President of the High Court, despite opposition from Labour. Now the Government was on the verge of collapse over the handling of the Father Brendan Smyth extradition case. there had been a delay of seven months in processing the extradition warrant in the office of the AG. Wild and unsubstantiated rumours swept through Leinster House as to the reasons behind that long delay. One of the unfounded rumours was that the AG's office had received a letter from a senior figure in the Catholic Church which contributed to the delay in the Smyth case.

THE GAFFE
"Pat Rabbitte, then a member of the Democratic Left Party, got up to speak in the Dail during a procedural discussion on the Order of Business. He asked: "Will the Taoiseach and the Tanaiste [Deputy PM] say if. in respect of the recent discovery of documents in the Attorney General's office, there is another document that ought to be before this house that will rock the foundations of this society to its very roots?" Rabbitte added: "If there is such a document its contents should be before this House before Deputy [John] Bruton moves his motion [of no confidence in the government] and we should know now whether the Labour Party has rowed in behind the Taoiseach following the discovery of this document".

THE IMPACT
"The effect on what was already a highly charged atmosphere was sensational. Rabbitte's dramatic use of vocabulary and the suggestion that the very foundations of society would be rocked, suggested scandal at an unprecedented level.

"Rabbitte's party leader Proinsias de Rossa also waded in. "It seems that we are dealing with one of the most sleazy events in Irish parliamentary history. Is it true that a memorandum has been found in the Attorney General's Office which indicates that there was outside interference in the decision by the Attorney General not to proceed with extradition for seven months?

"THE PROBLEM FOR RABBITTE AND DEMOCRATIC LEFT WAS THAT IT QUICKLY BECAME APPARENT THAT THERE WAS NO EVIDENCE THAT ANY SUCH LETTER OR DOCUMENT EXISTED OR HAD EVER EXISTED. [Shane Coleman's emphasis].

Iwannahurl

Perhaps Pat Rabbitte's confusion (or is it just plain doubt) is understandable given the complexity of the situation and the fact that the banks have done a fine job of obfuscation, pretence and fantasy in recent years?

The IMF themselves have made statements about the Irish banks in the past which, in hindsight, now look totally wide of the mark:

Stress tests confirm, however, that the major financial institutions have adequate capital buffers to cover a range of shocks. Ireland: Financial System Stability Assessment Update (2006)

Was that genuinely true of the Irish banks in 2006, or were the IMF also not being sincere and careful?

Hayte

It was generally true of all banks. The ones battling insolvency now are just deleveraging themselves. As has been mentioned in this thread already, derivatives are not a bad thing in and of themselves and they are useful "tools" if used carefully. They just weren't and that was a systemic thing.

Why leverage up in the first place? You front a little bit of your own money and borrow the rest to pile into swaps, put options, whatever based on the performance of the asset. If the underlying asset gains a little bit in value then all the derivatives on top of it also gain value so theres huge potential for profit. The opposite is also true since if the underlying asset loses value then welp. If it loses alot of value then it can wipe out the bank which is what happened to quite a few banks.

The trading side of modern banking is all well and good but banks also serve an important function in modern societies which is to lend money - move capital to where it is needed to keep the gears of enterprise turning. If the bank doesn't keep enough capital in reserve and they over leverage themselves on their trade desk and then their deals go bad, they don't have money to absorb the losses or to lend. Small businesses start dying because they can't get credit etc.

Iwannahurl

The scale of the leveraging that went on before the bust suggests that the losses are astronomical and cannot be recouped. The house of cards will continue to fall, and Ireland is the Joker at the top.

Even in rigged games, if the sums bet are large enough, the losses can be staggering and can break the bank, sic the house/casino. With bets leveraged 40:1, a fall of only 2.5 % completely wipes out the bettor. A fall of 100 % takes out not only the bettor but the enormous amount of credit extended to the bettor by the house. Some of the losses incurred by subprime CDOs are as high as 90 %. The losses on Lehman’s bonds are over 90 %. The reason why financial markets are in such trouble is the trillions of dollars in credit extended by the banks is now gone and, as a consequence, almost all banks are bankrupt.
With the casino now broke, governments have announced that they will guarantee the value of all paper chips issued by the casino. Governments do not want bettors to cash in their paper chips because they know the banks are broke and do not have the cash to cover either their bets and/or the chips they issued.
Now the casino patrons are being forced to subsidize the casino while their governments are frantically issuing more chips hoping that by so doing the now terrified patrons will return to the now empty tables and continue to bet what little they have left.

And I've just read an online analysis that says the EU-wide bank bailouts are only "delaying the inevitable debt defaults / restructuring". The same online report also says that UK savers should get ready for their banks going bust! Here's how it sees the shape of the 'house of cards':

CelticMeltdown

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"I believe Honohan is an honest broker, so I don't believe he's lying when he tells us they do not have a large derivative exposure"
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I'm amazed that you are so sure we don't have a massive derivatives exposure.
Why would our banks not have been up to their tonsils in this very dubious trade, they were active in ALL other reckless gambling ventures and their enormous debts are testimony to that.
"Citibank was the biggest, and was considered one of the most stable, banks a little while ago. But its derivatives exposure killed it"
http://www.globalresearch.ca/index.php?context=va&aid=11145
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I also think that Mr. Honohan is a terribly nice man but I distinctly heard him on radio yesterday fudge the derivatives issue.
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As the financial crisis exploded with full force in 2008, it was obvious that something was gravely wrong with the huge, unregulated market for derivatives.
Lehman Brothers had $738 billion of these contracts—which are based on the value of some other asset, such as a stock or a bond or a hog belly—on its books when it failed on September 14, 2008.
Lehman certainly wasn’t alone. Over the next few months, insurer AIG reported as much as $53.5 billion of derivatives losses—losses that were linked to nearly one third of its $182.5 billion federal bailout. The scope of this derivatives exposure was beyond anything investors had ever seen. Enron, which had failed just a few years before, had only $22 billion in derivatives contracts on its books.
http://thekomisarscoop.com/2010/03/the-ice-age/
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We have been lied to consistently over the past two years on a variety of subjects, so I find it very surprising that you now seem to think that everybody is telling the truth all of a sudden.
I for one don't buy that line of thought and I believe that here in Ireland at the present time there is a very large cover-up underway in the whole derivatives and securitisation area.
Both of these issues are at the very heart of why our banks are in the current enormous mess and why they have swallowed up over Euro 100 BILLION to date.
Why, for example, did the CEO of AIB - Eugene Sheehy - appear before an Oireachtas Committee in May of last year and say that Irish banks would be able to use NAMA bonds as collateral for cash at the ECB and later we discovered that what he said was wrong, or if you want to talk plainly 'that he lied.' Some of his apologists have been saying that he himself was misled by the 'high-flyers' (the Nick Leesons) down at the IFSC, but I don't buy that for one minute.
I believe Sheehy thought that he could put one over on the Germans at the ECB and he very quickly discovered that they are not quite as dumb as he thought they were. Consequently he decided very shortly afterwards to hit the road as he knew the jig was up and it was only a matter of time before the chickens came home to roost and that time has now come.

Those in power in both the government and the banks are not to be trusted on past performance and they are certainly not to be trusted in relation to this enormously dangerous derivatives situation.

http://www.youtube.com/watch?v=unVe5Yhm3zk&feature=player_embedded#!

CelticMeltdown

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"Can someone please explain (in laymans terms) what this means and potential issues arisen"
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DERIVATIVES EXPLAINED
http://www.youtube.com/watch?v=m3im-iJdhv4

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Here is what Warren Buffet had to say about these unregulated financial tools

In fielding a question about derivatives, which he once referred to as “financial weapons of mass destruction,” Mr. Buffett told shareholders that he expects derivatives and borrowing, or leverage, would inevitably end in huge losses for many financial participants.

“The introduction of derivatives has totally made any regulation of margin requirements a joke,” said Mr. Buffett, referring to the U.S. government’s rules limiting the amount of borrowed money an investor can apply to each trade. “I believe we may not know where exactly the danger begins and at what point it becomes a super danger. We don’t know when it will end precisely, but…at some point some very unpleasant things will happen in markets.”

Mr. Buffett has expressed similar bearish sentiments about derivatives in previous meetings and in his widely read annual letters to shareholders. He had first-hand experience with the difficulties of derivatives after Berkshire acquired General Re, the reinsurance company, in the late 1990s, and spent several years unwinding its derivatives portfolio at a loss to reduce the subsidiary’s exposure to risk. He noted, however, that Berkshire currently has several dozen derivatives positions — such as futures and options contracts on stock indexes and foreign currencies — and added that “derivatives aren’t evil.”

Charlie Munger, Berkshire’s 83-year-old vice-chairman and Mr. Buffett’s droll sidekick during the six-hour annual meeting, said that the accounting of derivatives contributed to the risks they pose to the financial markets.

“The accounting being deficient enormously contributes to the risk,” said Munger, lamenting that executives and shareholders were getting paid on “profits that don’t exist.”

Mr. Buffett noted that existing accounting conventions allow parties involved in derivative transactions to value the same contract differently, leading to an inadequate or incomplete picture of the contract’s risk. “I will guarantee you, if you add up the marks on both side, they don’t add up to zero,” Mr. Buffett said, referring to the accounting of a single derivative contract.

Exacerbating the problem of derivatives and leverage is the short-term trading mentality and high turnover in the stock and bond markets, Mr. Buffett and Mr. Munger added. “There is an electronic herd of people around the world managing an amazing amount of money” who make decisions based on minute-by-minute stimuli, said Mr. Buffett, adding, “I think it’s a fool’s game.”

Source http://seekingalpha.com/article/34606-buffett-on-derivatives-a-fool-s-game
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hmmm

The posts above are a classic example of someone trying to scare people using the word derivatives and an appeal to authority. Saying that derivatives are bad is like saying science is bad because of Thalidomide - and then going on to shout down everything to do with science by posting about and linking to stories about Thalidomide. Sure some derivatives are dangerous, but the vast majority are simple instruments that help business to function.

E.g. I mentioned banana importers earlier. A banana importer in Ireland will sign a contract with a grower in Costa Rica to agree to purchase x amounts of bananas in 2011. The grower knows how much to invest into next years crop and has a guaranteed price. The importer has guaranteed supply and a guaranteed price also. That's a simple derivative and is hardly a "financial weapon of mass destruction".

As for marketoracle.co.uk, read this
http://www.cxoadvisory.com/individual-gurus/nadeem-walayats-oraculations/

hmmm

edanto wrote: »

I think that's very unfair to Pat Rabbitte. Are you saying that because he's an English graduate and an ex-union official that he can't possibly understand this high flying world of international finance? That's the kind of superior attitude that led us into this mess

Yes I am. We have a Dail full of schoolteachers, auctioneers and trade unionists trying to navigate Ireland through a shark infested financial market and they are completely and utterly out of their depth as evidenced by what has happened over the past 3 years. If you're asking me whether I think Pat Rabbitte (or any other TD), in-between arranging medical cards for constituents and getting potholes filled, has found some complex financial derivative problem hidden in the banks that the ECB, IMF and Honohan have missed then no, I don't think that has happened. Would you agree?

CelticMeltdown

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@ hmmm

Maybe you should stick to bananas.
It's banking shils like yourself who have turned this country into a banana republic.
Boom's getting boomier and all that.
Know what I mean.

But waffle on if you wish, it's probably how you earn your crust

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GuanYin

CelticMeltdown banned, ironically, due to his melt down - 1 week

Iwannahurl

Point taken re certain pundits. The IMF itself is presumably a more reliable source, and here is something from that quarter.

From a 2007 IMF Working Paper, External Linkages and Contagion Risk in Irish Banks.

"Banks buy risk protection mainly from banks of other countries. The underlying asset in structured credit risk transfer (CRT) products include mainly: loans and bonds issued by financial and non-financial firms; mortgages (for asset-backed securities); and financial and non-financial firm debt as underlying asset for the more traditional CRT (for example, mortgage indemnity guarantee). The U.S. and the U.K. were the main counterparty locations selling risk protection to Irish banks. Other countries included France, Germany, Canada, Switzerland, Netherlands, Italy, and Poland."
.../...
"Irish banks could be indirectly exposed to property markets by selling risk protection (buying of covered bonds, credit default swaps, and mortgage backed securities) to other banks which are exposed to foreign property markets. From anecdotal evidence, some small IFSC banks, exposed to international property markets, are selling CDS to other domestic-oriented banks, making the latter indirectly exposed to these property markets even though their loan books are not." [Emphasis added]
.../...
"Even though linkages with the U.S. do not come out strongly from aggregate consolidated balance sheet exposures [original emphasis], there might be derivatives or other off-balance sheet exposures [emphasis added] that the bank supervisors may need to be vigilant of. The Irish authorities may need to collect more information about types and counterparties of derivative positions and risk transfers through structured products of Irish banks, as the use of these is likely to grow rapidly in the future. This would especially be necessary if Irish banks are buying CRT products from foreign banks (that is selling risk protection) that are in turn exposed to property markets or other loan products in the U.S. or the U.K., thus exposing the Irish banks to these markets even though there is no direct loan exposure." [Emphasis added]

Iwannahurl

Worth reading, for those of you who can fully understand and appreciate these things:

How to measure credit risk transfer in the EU

Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time

Also consider this sentence:

Two sources of risk have been identified: a prolonged expansionary monetary policy and a banking sector that relies heavily on credit risk transfer mechanisms, that weaken its commitment to monitor clients. Credit Risk Transfers and the Macroeconomy (2010)

Is this the kind of securitisation Pat Rabbitte was referring to?

Irish banks engaged in reckless lending to wildly over-ambitious developers, while the regulators continued to insist the fundamentals were sound. But maybe one of the fundamental problems was in fact the securitisation, or credit risk transfer? In other words, a bank could say it wasn't being reckless, and a regulator could concur/acquiesce, if the bank was "insuring" its risk. This in turn encouraged even riskier gambling -- a form of high-stakes risk compensation. Trouble is, when the bubble burst all that credit risk that had been spread around turned into contagion...

hinault

CelticMeltdown wrote: »

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"Can someone please explain (in laymans terms) what this means and potential issues arisen"
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DERIVATIVES EXPLAINED
http://www.youtube.com/watch?v=m3im-iJdhv4

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Here is what Warren Buffet had to say about these unregulated financial tools

In fielding a question about derivatives, which he once referred to as “financial weapons of mass destruction,” Mr. Buffett told shareholders that he expects derivatives and borrowing, or leverage, would inevitably end in huge losses for many financial participants.

“The introduction of derivatives has totally made any regulation of margin requirements a joke,” said Mr. Buffett, referring to the U.S. government’s rules limiting the amount of borrowed money an investor can apply to each trade. “I believe we may not know where exactly the danger begins and at what point it becomes a super danger. We don’t know when it will end precisely, but…at some point some very unpleasant things will happen in markets.”

Mr. Buffett has expressed similar bearish sentiments about derivatives in previous meetings and in his widely read annual letters to shareholders. He had first-hand experience with the difficulties of derivatives after Berkshire acquired General Re, the reinsurance company, in the late 1990s, and spent several years unwinding its derivatives portfolio at a loss to reduce the subsidiary’s exposure to risk. He noted, however, that Berkshire currently has several dozen derivatives positions — such as futures and options contracts on stock indexes and foreign currencies — and added that “derivatives aren’t evil.”

Charlie Munger, Berkshire’s 83-year-old vice-chairman and Mr. Buffett’s droll sidekick during the six-hour annual meeting, said that the accounting of derivatives contributed to the risks they pose to the financial markets.

“The accounting being deficient enormously contributes to the risk,” said Munger, lamenting that executives and shareholders were getting paid on “profits that don’t exist.”

Mr. Buffett noted that existing accounting conventions allow parties involved in derivative transactions to value the same contract differently, leading to an inadequate or incomplete picture of the contract’s risk. “I will guarantee you, if you add up the marks on both side, they don’t add up to zero,” Mr. Buffett said, referring to the accounting of a single derivative contract.

Exacerbating the problem of derivatives and leverage is the short-term trading mentality and high turnover in the stock and bond markets, Mr. Buffett and Mr. Munger added. “There is an electronic herd of people around the world managing an amazing amount of money” who make decisions based on minute-by-minute stimuli, said Mr. Buffett, adding, “I think it’s a fool’s game.”

Source http://seekingalpha.com/article/34606-buffett-on-derivatives-a-fool-s-game
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Surely these derivatives have to be accounted for in either the assets or liabilities on the respective bank balance sheets?

I listened to Honahan's interview on News at One yesterday and he said and I quote "approximately 40 people from different agencies have gone through the books of the 6 Irish banks as a prelude to the ECB/IMF negotiations".

Maybe I am being naive here : but I would have assumed that the liabilities and assets of each of the banks would have scrutinised and checked to see how these derivatives were classified in the respective balance sheets?
And discussions would have centred on the assumptions of how these derivates were valued (mark to market, fair value,), regardless of whether they were assets/liabilities?

Iwannahurl

"...there might be derivatives or other off-balance sheet exposures" ~IMF.

hinault

Iwannahurl wrote: »

"...there might be derivatives or other off-balance sheet exposures" ~IMF.

International Financial Reporting Standards and International Accounting Standard (IAS 39) requires these derivatives to be stated on the balance sheets of the banks, when realised.

Surely though, if bailout packages were being negotiated, someone had to review the potential exposure to derivatives not yet realised
(even if it was a guesstimate??)?

M three

hmmm wrote: »

Derivatives are often simple instruments which are used by everyone from banks to banana importers. As Honohan himself said, he didn't know what Rabbitte was talking about, he knows the Irish banks use some simple derivatives and he presumes that's what Rabitte was talking about. Honohan is an intelligent man with a huge financial education, so I can appreciate his confusion when some politician decides that something irrelevant is utterly vital and major news. This thread and similar I've seen smacks of jumping on a hysteria bandwagon when the scary word "derivative" is mentioned.

Honohan graduated with a B.A. in Economics and Mathematics at UCD in 1971 and received an M.A. from the same institution in 1973. From the London School of Economics he received an M.Sc. in Econometrics and Mathematical Economics (1974) and a PhD (1978).

You call that a huge financial education?? I call that above average. And is that the same london school of economics that bertie ahern reckoned he went to?
Honohan is just another government appointed muppet who'll keep his mouth shut when told. when he's interviewed he doesnt come across as incredibly intelligent or articulate

Iwannahurl

hinault wrote: »

International Financial Reporting Standards and International Accounting Standard (IAS 39) requires these derivatives to be stated on the balance sheets of the banks, when realised.

Surely though, if bailout packages were being negotiated, someone had to review the potential exposure to derivatives not yet realised
(even if it was a guesstimate??)?

Fair enough, though I'm not sure what are the implications of the "when realised" aspect.

I presume the potential exposures are being urgently considered, in every jurisdiction. Looks like we're all in this together, whether we like it or not.

Diarmuid

M three wrote: »

You call that a huge financial education?? I call that above average. And is that the same london school of economics that bertie ahern reckoned he went to?
Honohan is just another government appointed muppet who'll keep his mouth shut when told. when he's interviewed he doesnt come across as incredibly intelligent or articulate

You don't know much about Honohan but you have the strawman logical fallacy down to a tee.

P. Breathnach

M three wrote: »

Honohan graduated with a B.A. in Economics and Mathematics at UCD in 1971 and received an M.A. from the same institution in 1973. From the London School of Economics he received an M.Sc. in Econometrics and Mathematical Economics (1974) and a PhD (1978).

You call that a huge financial education??

Four degrees from two major institutions: yeah, that's seriously good.

I call that above average. And is that the same london school of economics that bertie ahern reckoned he went to?

And why did Bertie pick the LSE for his fictitious education? Because it is one of the most highly-regarded institutions in the world of economics.

Honohan is just another government appointed muppet who'll keep his mouth shut when told.

As he has done so far?

when he's interviewed he doesnt come across as incredibly intelligent or articulate

Frankly, a claim like that does not warrant the effort of refutation.

Iwannahurl

hinault wrote: »

International Financial Reporting Standards and International Accounting Standard (IAS 39) requires these derivatives to be stated on the balance sheets of the banks, when realised.

Surely though, if bailout packages were being negotiated, someone had to review the potential exposure to derivatives not yet realised
(even if it was a guesstimate??)?

I'm just guessing here -- not surprising.

It seems that the ECB/IMF didn't have the necessary data to delve into these issues. Data on securitisation was particularly lacking.

According to this paper from the Bank for International Settlements (don't know date), the first reporting of the required data sets was not due until mid-2010, based on 2009 figures.

Hypothesis: nobody liked what they saw, so enter the IMF. In late 2010.

"The ECB Regulation concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions (ECB/2008/30) and the related update of Guideline ECB/2007/9 were adopted by the Governing Council on 19 December 2008. They set the framework for the reporting of new statistics regarding the holdings of securitised assets and the issuance by FVCs of securities backed by these assets.

This webpage provides information on available and forthcoming statistical data and background information on the statistics. Furthermore, it provides a gateway to the reporting requirements as implemented by the national central banks in the euro area.

First reporting of FVC statistics is scheduled to begin in the first quarter of 2010 for the reference period end-December 2009. These new statistics, complemented by an enhanced reporting by Monetary Financial Institutions (MFIs) involved in securitisation transactions, as laid down in Regulation ECB/2008/32, will fill a gap in current statistics and provide harmonised information on the securitisation market and risk transfer. Based on the statistical reports submitted by reporting agents, aggregated results will be compiled for the following three vehicle sub-categories: (i) FVCs engaged in traditional securitisation; (ii) FVCs engaged in synthetic securitisation; and (iii) other FVCs. Data will refer to end-of-quarter outstanding amounts and financial transactions provided on a quarterly basis. A first publication of the data is tentatively planned for early 2011."