Derivatives Damage not over yet. --> World's Largest Casino

Excerpt from http://www.nytimes.com/2008/11/22/business/22bank.html

"Then, on Tuesday, a report about imminent defaults on two large commercial mortgages sent the price of bonds backed by those loans tumbling. The first $209 million loan was backed by two Westin hotels in Arizona and Hilton Head, S.C., and the second was a $125 million loan backed a shopping complex in Southern California"

Obviously, we haven't hit bottom yet.

It looks like the damage from the mortage market is still coming in.

Fannie and Freddie postponing foreclosures until January is going to just delay things... then the explosion will hit all at once. BOOM.

I mean come on. Westin and Hilton are defaulting on their mortages for crying out loud. What chance does an unemployed American have? ... none, that's what.

Remember, there's 1.4 quadrillion, aka USD1400 trillion of derivatives out there. A mere 1% write off in this figure is 14 TRILLION.
Some people are saying that a lot of these derivatives offset each other.
Well... you know what that means? It actually means that there is a possible outcome that some people are going to collectively profit 700 trillion, some people will lose 900 trillion, and 500 trillion will just rollover.
That will be rather chaotic, actually.

You know what? A lot of people have been claiming that there's a ton of financial institutions that stand to lose billions if the CDO market is allowed to collapse. Er... can we start naming those who stand to make the corresponding billions?

No?

Maybe there isn't as much "offset" and balance as you guys think!!!


Look, here's the deal. Casino's are regulated. Because everyone, EVERYONE knows that uncontrolled heavy gambling can cause ridiculous damage to many people. (while greatly enriching others). At the end of the day, gambling is a zero sum game. It doesn't actually create value, it just redistributes wealth. (though it does have some economic stimulation benefits that come with it... I'm just talking about gambling itself)

Similiarly, the derivatives market is nothing but a big huge casino. Yes you can say it's necessary for hedging, but you forget that the opposing side of the contract is a gambler then. The derivatives market is the WORLD'S LARGEST CASINO.

Even Buffet, who claimed to be against derivatives, and called them financial WMDs, got into the act. The lure of gambling pulls even sane men in...
http://www.capmag.com/article.asp?ID=2531
http://www.bloggingstocks.com/2008/05/03/what-was-berkshire-hathaway-doing-with-derivatives/
http://thestar.com.my/news/story.asp?file=/2008/11/8/apworld/20081108122407&sec=apworld
http://www.reuters.com/article/ousiv/idUSTRE4AK6XX20081121

"Warren Buffett's Berkshire Hathaway Inc provided details to the U.S. Securities and Exchange Commission on how it values what has so far been a money-losing $37.04 billion derivatives bet, after the regulator asked for better disclosure."
"The company obtained about $4.85 billion of premiums upfront, which Buffett may invest as he wishes.
Buffett has said he expects the contracts to be profitable. But falling equity values had by September 30 forced Berkshire to write down $6.73 billion on the contracts. Losses have almost certainly mounted since then as stocks worldwide tumble."


Summary: People have been frequenting the casino for years, making large bets. Even with the odds in their favour, an eventual huge loss is no big surprise to some.
Also, Buffet has not been the paragon of honesty in the recent past. I think that comes partially from his shift from "I manage other people's money. My greatest virtue is my honesty, integrity and investment acumen" to his current focus on being CEO of many businesses, such as INSURANCE, financial etc etc, where the key to success seems to be "screw the shareholders, screw the customers, screw the company, the honest and prudent man makes lower profits"