Factoid of the day, courtesy of investment pundit Nicholas Vardy:
The Bank of International Settlements estimates the total current value of all outstanding derivatives at $1.144 quadrillion.
"Tulip Bubble," anyone?
The tulip bubble would be more equivalent to the Dot Com bubble and the housing bubble as it relates more to the price rather than the consequences of what happens after the bubble bursts. It is more indirect. However, the US had 516 trillion last year alone in derivatives. I don't know exactly what ours are up to now. If only 2% of the derivative market fails at that number we are looking at a 10.32 trillion dollar bailout. Back when LTCM went under, the losses totaled around 4.6 billion. Even that was a big deal. But the companies that did proceed to bailout LTCM did make a slight profit.
What I am worried about, is the government leftists turning this into an opportunity to give the government a ridiculous amount of control. I know it does to some degree now, but I'm concerned that this will set a poor precedent. Some politicians are saying that companies should keep making loans to people who basically can't afford them. Yeah. Good idea. Turn this into a repeat where we do the same thing a few years down the road.
This is the info on LTCM's bailout courtesy of Wiki. It was a HUGE deal and it also needed to be done for many of the same reasons.
"[edit]
Goldman Sachs, AIG and Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman's own trading division. The offer was rejected and the same day the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. The contributions from the various institutions were as follows: [4] [5]
$300 million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS
$125 million: Soci?t? G?n?rale
$100 million: Lehman Brothers, Paribas
Bear Stearns declined to participate.
In return, the participating banks got a 90% share in the fund and a promise that a supervisory board would be established.
The fear was that there would be a chain reaction as the company liquidated its securities to cover its debt, leading to a drop in prices, which would force other companies to liquidate their own debt creating a vicious cycle.
The total losses were found to be $4.6 billion. The losses in the major investment categories were (ordered by magnitude):[3]
$1.6 bn in swaps
$1.3 bn in equity volatility
$430 mn in Russia and other emerging markets
$371 mn in directional trades in developed countries
$215 mn in yield curve arbitrage
$203 mn in S&P 500 stocks
$100 mn in junk bond arbitrage
no substantial losses in merger arbitrage
See also: East Asian financial crisis
Long Term Capital was audited by Price Waterhouse LLP.
Unsurprisingly, after the bailout by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the bailers."
