What Are Derivatives?
by Jaceson Maughan -- life123.com
A derivative is essentially a binding contract for a person to buy or sell an asset at some point in the future, but the person is paying for it in the present. Its value is "derived" from the value of something else. In order to lock in the contract, the investor must provide some kind of cash somewhat immediately for the right to do business a certain way in the future. In essence, it is the right of one group to buy or sell from another party at a locked in price.
What are derivatives and how do they work?
Dear Yahoo! February 19, 2002
Derivatives is a generic term for a variety of financial instruments. Unlike financial instruments such as stocks and bonds, a derivative is usually a contract rather than an asset. Essentially, this means you buy a promise to convey ownership of the asset, rather than the asset itself. The legal terms of a contract are much more varied and flexible than the terms of property ownership. In fact, it's this flexibility that appeals to investors. "A good toolbox of derivatives allows the modern investor the full range of investment strategy" and "the sophisticated management of risk," according to the derivatives specialists at NumaWeb.
Well that clears things up -- hardly. A Derivative is a contract that lets investors buy and sell the risk of owning something ... or let's them "lock in" a set price of something, that they "might buy" at some point in the future. When you drill down into it, a derivative is a lot like taking out an insurance policy, on something -- often something you don't even own.
No wonder, Wall Street speculators like them. Supposedly Futures Options -- one of the simplest Derivatives -- they have limited down-side risk. Unlike stocks ... which can plummet to Zero.
That is until you bring Credit Default Swaps into the picture. Then the "limited risk" concept can go right out the window. Those risk-shedding insurance policies can multiply like weeds ... given the opportunity.
Here are some easy to understand vids on some important Economic topics. Topics currently holding our Economy back still. And the Global Economy too.
Start drilling.
Introduction to Financial Derivatives
kanjohvideo
http://www.youtube.com/...
Introduction to Credit Default Swaps
kanjohvideo
http://www.youtube.com/...
Toxic Assets
marketplacevideos
http://www.youtube.com/...
So what happens when you get too much "Toxicity" on your asset sheets -- well the people you sold the "bad goods" to, well they just might sue. Especially if there was no friendly Government agency, that came along to bail out your own shadowy "off-the-books" bad derivatives. No Bailout, to make all your institutional "risk trading" customers -- financially whole again:
Trapped with Toxic Assets: Addressing Mortgage-Backed Securities and Other Mortgage-Related Securities Losses
Robins, Kaplan, Miller & Ciresi -- January 26, 2009
[...]
Conclusion
MBS and other mortgage-related securities take many forms, and importantly not all of them are "toxic." However, litigation is being pursued for those securities whose value has precipitously declined where they were largely made up of risky MBS and mortgage-related securities and where investors were never informed of that fact (particularly those securities that are private-label, and thus are not being purchased by the federal government). Where institutional and individual investors have found themselves "trapped with toxic assets," we have seen such litigation in the areas of mutual fund investments, by institutional investors, and even by banks against other banks.
No wonder Banks are still sitting on their Assets. They are bracing for the inevitable cascade of lawsuits, from the investor class, that they had previous sold a "crate" of "questionably valued goods" to. Sold it as AAA gold, no less.
What is a Country to do to resolve this mess? To deal with the Toxic Hangover ... to put us on back on the fast track for real national growth again?
Well former president Bill Clinton, has a few "cut to chase" solutions, he thinks would speed up the lagging recovery. And the bulk of his ideas revolve around Mortgage Write-downs. Who knew?
ie. Deal with that toxic hangover, once and for all ...
How to fix the economy and create jobs
Bill Clinton: How to fix the economy
CNN Finance -- October 7, 2011
[Bill Clinton: ]
First, Congress and President Obama can adopt strategies designed to unleash the massive amount of capital that is accumulated but not being invested. There's some $2.2 trillion in cash in American banks that is not committed to loans. A couple hundred billion has to be held back for bad mortgages, but there's about $2 trillion that could be used in cash reserves for up to $20 trillion in loans. So, in theory, that would take the world out of recession. And U.S. corporations have about $2 trillion more that they have decided not to invest.
The second thing is to accelerate the resolution of the home mortgage crisis, which would make businesses more eager to borrow, expand and consumers more willing to spend. These kinds of financial crises typically take about five years to get over. What we're really trying to do is beat the historical trend by getting over it more quickly. We can't do that unless we do on a larger scale what we did in the S&L crisis, which is to flush the debt quicker.
[...]
Mortgage relief
I cannot emphasize the boost I think it would give the economy if we had a system that said to people whose homes are worth less than the mortgages that you can write down your mortgages to the value of your home if you can make the payment. Or you can extend the mortgage out and lower the interest rate. I don't think we ought to keep dumping these houses on the market when it's so depressed. Can we get the votes to do it? I don't know. When the Tea Party started, they seemed to object to the bailout of the big banks, claiming they were being protected from their own mistakes.
[...]
CNN Money -- Interview with Bill Clinton -- October 17, 2011
http://money.cnn.com/...
In other words, fast forward to the future. Take our medicine. Write off all those bad debts. Put those those Mortgages -- back 'above water'.
Let Housing valuations get back on track ... instead of constantly waiting for those next shoes to drop. Drip. Drip. Drip.
And Banks should be forced to take a healthy dose of Medicine this time around -- afterall they created, and promoted, those shoddy MBS Derivatives, and then mismanaged all that Speculative Risk into the ground in the first place (by writing CDS, on CDS, on CDS ... etc.)
It would be only fair, that THEY take the hit for fixing it now. It's only fair that they started accelerating the Economic Recovery, and quit trying to intentionally lengthen the Downturn, that their own reckless trading created.
Fair is fair. ... Now that we have their attention.