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Message: Bix Weir on derivatives
GOLD/SILVER
Hi All -
I've gotten a couple questions related to my last email statement "Word out of Europe is that the banks derivative books have been DESTROYED".
I did not mean that they have been physically destroyed (as in shredded) but rather there has been massive counter-party defaults causing a chain reaction in derivative defaults. You will begin to see it as banks announce "out of the blue" losses that nobody had any idea that specific risk was even in their portfolio because they were not reported.
I will be posting the second half of my Silver Summit speech next week but here's the part on derivative risk and how counter party failures can destroy financial markets. This is also the reason why Bank of America is trying to pawn their $50T derivative book off on the FDIC...
Silver Derivatives END The rest of the speech will be posted on the website next week.
*Definition - A derivative instrument is a contract between two parties that specifies conditions under which payments, or payoffs, are to be made between the parties. It's like a side bet. Futures, options, swaps, leases etc are all derivative contracts.
The concept behind derivatives is to allow a company to hedge their risk. For example, to hedge a credit risk of a bank loan a lender can purchase a Credit Default Swap contract that will payout if the borrower defaults. Hedging risk is a good thing right? Not always. In reality the risk of default does not go away but rather is transferred to another party and a new risk is created in the form of a counter party risk of the CDS issuer defaulting. The issuer of that CDS can hedge their new risk by purchasing a CDS from another issuer and so on. Although the initial concept of a derivative is to hedge your risk, the more and more derivatives that are created off the first transaction greatly increase the total risk is to the overall market.
In the last 20 years derivative contracts have ballooned into the hundreds of trillions of dollars on a notional value basis. In 2008 the inherent danger in this growth in overall risk became painfully apparent with the global crash of the financial markets.
Warren Buffet was correct in identifying derivatives as "WEAPONS OF MASS FINANCIAL DESTRUCTION".
If there was any one person to blame for the 2008 financial crisis it was a woman named Blythe Masters out of the JP Morgan "Financial Products Division" in London. She was the creator and promoter of the Credit Default Swap market and built it up over 15 years into a monstrous 50 Trillion dollar market by 2008 when it all fell apart. The destruction this amount of "risk hedging" ended up costing the world was almost incalculable. Today, even after all the losses and bankruptcies, the Credit Default Swap market stands at over 30 trillion dollars.
So what ever happened to this woman who destroyed the world's financial markets with derivatives...
Bix Weir
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