A £516 trillion derivatives time-bomb
Not for nothing did US billionaire Warren Buffett call them the real weapons of mass destruction
By Margareta Pagano and Simon Evans
12 October 12 2008
The market is worth more than $516 trillion, (£303 trillion), roughly 10 times the value of the entire worlds output: its been called the ticking time-bomb.
Its a market in which the lead protagonists typically aggressive, highly educated, and now wealthy young men have flourished in the derivatives boom. But its a market that is set to come to a crashing halt the Great Unwind has begun.
Last week the beginning of the end started for many hedge funds with the combination of diving market values and worried investors pulling out their cash for safer climes.
Some of the worlds biggest hedge funds SAC Capital, Lone Pine and Tiger Global all revealed they were sitting on double-digit losses this year. Septembers falls wiped out any profits made in the rest of the year. Polygon, once a darling of the London hedge fund circuit, last week said it was capping the basic salaries of its managers to £100,000 each. Not bad for the average punter but some way off the tens of millions plundered by these hotshots during the good times. But few will be shedding any tears.
The complex and opaque derivatives markets in which these hedge funds played has been dubbed the worlds biggest black hole because they operate outside of the grasp of governments, tax inspectors and regulators. They operate in a parallel, shadow world to the rest of the banking system. They are private contracts between two companies or institutions which cant be controlled or properly assessed. In themselves derivative contracts are not dangerous, but if one of them should go wrong the bad 2 per cent as its been called then it is the domino effect which could be so enormous and scary.
A £516 trillion derivatives time-bomb « Did You Know
Not to minimize your wonderful explaintation of the situtation: Do you think future historians will be able to explain how AIG sold insurance that private persons would default on their home mortage? And how AIG went out of its way to ensure their clients buying these insurance policies would not fail by underwritting insurance claims that they should have known were triple d's yet were rated triple a's?