MarketWatch: The $700 Trillion Elephant
Posted by The Interest on March 7, 2009
You just don’t see enough people talking about this. And maybe that’s why the stock market hasn’t gone completely south yet.
In this MarketWatch commentary from Thomas Kostigen:
Few know what derivatives are worth. I spoke with one derivatives trader who manages billions of dollars and she said she couldn’t even value her portfolio because “no one knows anymore who is on the other side of the trade.”
Derivatives pricing, simply put, is determined by what someone else is willing to pay for the contract. The value is based on an artificial scenario that “X” will be worth “Y” if “Z” happens. Strip away the fantasy, however, and the reality of the situation is akin to a game of musical chairs — without any chairs.
So now the music has finally stopped.
…
It isn’t the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished — trading phony instruments to the tune of $700 trillion.
Good article that more people need to hear about. Kostigen goes on to say we need to value these derivatives and only after we’ve done that can the market move forward. Problem that I see is that nobody wants to truly know the score. Those that know about this problem are getting out while they can. Will you be left standing?
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