European Union(EU) calls for clear plan on valuing credit derivatives

October 18, 2008 by · Leave a Comment
Filed under: Global News 

Me and many other notable analysts and economist have been saying that this is the number one crisis we have to deal with in this financial catastrophe.   This is the core reason banks are not lending to each other.  Many global banks and insurance companies were big players in this market.  It has also grown to a staggering $600 trillion dollars which is 6 times the value of all equities and bonds on the plant ($100 trillion).  Banks are very afraid that their counter-party will not have the ability to pay so in a situation where a person thought they had protection is actually now taking full risk.  

I am not sure a clearinghouse is going to solve anything, in my opinion we have well past an amount of derivatives which would be manageable and at this point we should let these institutions fail to cleanse the market, set correct precedence and restore trust by doing what should happen when companies make choices that puts the company at risk and fails.  Let them fail.  Until I see some fundamental change I will not be taking on any debt or extra-ordinary risks.   

IHT News Piece:


European Union regulators called Friday for a clear plan on valuing some of the shadowy high-risk credit derivative investments — estimated at around US$600 trillion (€444 trillion) — that are now a key issue in easing the global financial crisis.

Billions of euros (dollars) have been wiped off banks’ balance sheets in recent months on fears that some complex investments may be based on assets that are nearly worthless — such as housing loans that may not be paid back when a recession puts people out of work.

The market for derivatives boomed over the last decade as investors sought new ways to parcel out risk, with many jumping on a gravy train that few really understood. Billionaire investor Warren Buffett has been vocal in avoiding them, dubbing them “financial weapons of mass destruction.”

EU financial services chief Charlie McCreevy called on national supervisors and the financial industry to agree on the real risks credit derivatives pose — and how they can be limited to prevent further losses unraveling.

“I would like to have, by the end of this year, concrete proposals as to how the risks from credit derivatives can be mitigated,” he said in a statement.

McCreevy said there is now a pressing need for a central clearing counterparty — or negotiator — to trade derivatives. McCreevy pointed to a vacuum in the system since the collapse last month of U.S. investment bank Lehman Brothers, which negotiated many of the world’s derivative contracts.

“At US$600 trillion, the size of derivatives markets today are such that we cannot let this over-the-counter market continue without adequate counterparty clearing,” he said.

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