Imagine if McDonald's was the largest shareholder WEIGHT WATCHER or SlimFast. Imagine if our rehab centers were held by major drug traffickers. The boundless cynicism of those men you would then appear as an absolute scandal. Basically, the banks act in a similar manner with impunity and without awakening the slightest hint of scandal.
The term "derivative" includes a large number of investment more or less complex and exist in the money markets, bond, action or raw materials. If the title of this article is obviously excessive, I will try to demonstrate just how many of them destabilize economies and their share of responsibility in the financial crisis we are experiencing.
begin with currency derivatives. They are to be able to exchange 1 week, 1 month, 6 months in advance a certain amount of one currency against another currency at an exchange rate fixed in advance. I can today and I agree with a bank to exchange euros cons XX YY dollars at a rate close to that today with a bank. Their role is to introduce a few certainties in the midst of enormous fluctuations in the exchange market. Indeed, how can companies manage any of his predictions, knowing that exchange rates can vary from 5, 10 or 20% within a few months. For a company that exports, the turnover which range from 5, 10 or 20% with the variation in rates. But the costs, however, are fixed in the national currency. Imagine a plane that Airbus sells for $ 10 million on 1 January. Payment is due on 1 June On 1 January the exchange rate is 1 € = 1.40 $. Airbus estimates that during these six months, the exchange rate may vary between 1 € = $ 1.20 and 1 € = 1.60 $. Thus, Airbus may receive 8.3 million euro in the most positive cases but receive 6.25 million cases in the most negative. If the cost is 6.5 million euro. Airbus can make a profit of 1.8 million euro, but could make a loss of 250 000 euros. This shows how much the currency risk can be critical for a company. To manage this risk, Airbus can subscribe to a derivative that will offer him a monetary bank. Airbus is January 1st to sign a contract under which Airbus will exchange 10 June to 1 million at a rate of 1 € = 1.43 $. Thus, on 1 June, Airbus is sure to receive 7 million euro and make a profit of 500,000 euros.
What wonderful service! The bank through its financial services has preserved our Champion European Aeronautics the terrible exchange rate risks plaguing our beautiful planet. The bank does itself no risk and actually performs arbitration on the interest rate differentials on different financial markets and its service charges by adjusting the exchange rate offered. The bank charges in the end virtually unlimited access to credit in the short-term which does not have businesses. What's wrong with that? The bank has it not done a great service to Airbus?
reasoning thus it completely sidesteps the basic issue: Who is responsible for large variations incurred on the exchange rate? In economic terms, rates exchange have absolutely no reason to change so violently in such a short time. Under the regime of floating exchange rates, changes in theory are supposed to allow trade in goods and capital between currency areas to achieve a balance. There is no deficit or surplus on both sides. The dollar, the yen may vary against the euro from 20 to 30% in 1 year. The terms of trade between different currency areas are very far also vary greatly. This is speculation on exchange rates is the main cause of the violence of these variations. Each day 60 billion worth of goods traded between the different currency areas. 6,000 billion is traded on exchange markets. Find the error. Banks play a dual responsibility. First, because they are speculating heavily on their own account. Second, because they open up credit lines phenomenal speculation on currency markets to other banks or business or to hedge funds. Without this credit, speculation of this magnitude is impossible.
You understood. The banks could spread the virus and then sell the cure of the disease. The bank wins on all fronts : They take significant commissions on transactions and currency conversions on derivatives and also affect the important interests on loans and speculation. More speculation, the larger the bank wins. the financial system has thrived for years on the disorder. But the vice goes even further. Derivatives exchange rates are overwhelmingly purchased for speculative purposes and not to prevent any risk. They allow an alternative method to bet on movements in exchange rates and thus aggravate the exchange rate variations where it is supposed to be a loophole. Turning now to
derivatives on the commodity market. The problem is exactly the same as before. The price of oil, wheat, aluminum can vary violently few months. Again, changes in consumption and production of its raw materials can not explain such violence. The oil price has been multiplied by 7 in 7 years. Suppose that on 1 January, the price of oil is $ 60 per barrel. Air France fears that a significant increase in the price of oil starts to hurt margins. An investment bank offered him to buy in 6 months, oil he will then priced at $ 65. To do this, the merchant bank will borrow money to purchase the required quantity of oil at $ 60, will store these barrels. By selling six months later at $ 65, the merchant bank will repay the loan, pay the financial costs and reap a profit. Again, the bank benefits from access to credit that the company did not.
responsibility of banks is yet again double in large changes in commodity prices. First, they speculate on their own account. Second, it opens monstrous lines credit to any kind of speculator banks, hedge funds ... What's worse is that the very nature of derivatives may cause serious shortages. As we say, when a player buys a derivative, an equivalent amount is stored by the financial institution. Thus, the more people fear (or hope) a higher price, the more they will award contracts for future purchase of raw material at a fixed price. As a result, ever larger quantities are stored. The shortage is greatest. Prices rise even more. This explains how one could see wheat prices, oil soar to such heights. On the contrary when the trend reversed and the majority of players expect a significant decrease, it becomes far less interesting to subscribe to such a contract. Naturally, there are fewer that are signed. The stock set up to honor its contracts no longer serve anything and pours violently on the market. Prices collapsed completely. This partly explains how prices could collapse so fast. But we can also continue to make small calculations to predict future changes in commodity prices.
CDS (Credit Default Swap) took the spotlight by sinking the U.S. insurer AIG literally. Their concept is apparently simple. This is insurance that can be subscribed in case of default of a company that we have a claim. Thus, the insurer reimburses the insured for the amount not payéeen case of default by the debtor. In return the insured to pay interest to the insurer on a monthly or yearly. The very existence of this product is a scandal because it challenges the very principle of credit and irresponsible makes all the players. To have a responsible, the lend money or that of its depositors must be the bearer of risk. Otherwise, all deviations are allowed.
Vice is twofold: the lender expects to achieve an arbitration. If he takes 100 euros to 6% but pays only 2% per year to the insurer, it feels like to touch 4% per year without taking any risk. The lender is completely cleared and to assess the quality of its investments since in case of payment of the claim as in case of nonpayment, the investor wins. The side of the insurer, it can provide a very large number of claims and receive a rent without investing a penny in these transactions which makes this activity extremely profitable.
is exactly what happened in the case of AIG. The group's financial division has launched headlong into the CDS insurance for hundreds or thousands of billions of debt and especially CDOs (collateral debt obligations), the product of mortgage backed securities. These CDOs were mostly rated AAA by major rating agencies or claims considered virtually certain. AIG outsourcing in all its risk assessment in these rating agencies are provided for these ridiculous financial products. Banks and hedge funds are able to jump at the chance to buy these debts can be insured in case of default and depreciation with AIG. Since defects in real estate receivables soared, AIG must repay money monstrous other financial players. This sector is completely deregulated, AIG would not put any money aside, as is the case in conventional insurance, to cover any risk. This is how the world's largest insurer became an endless hole for the U.S. government. The bailout allows the U.S. government not to allowed to spread beyond measure the effects of losses on these financial products today focus largely on the actor.
CDS also have other major problems. The sums insured are estimated at 50 000 and 60 000 billion more than the world GDP. This market is far from coming down to protect against default risk has become a giant casino where you bet on the failure of any particular company. In that market completely deregulated, we can insure against default of a company without ever having paid for the same company. Everyone can also improvise insurer without having to put any money aside. The insurer and the insured may well sell their contracts without consideration being aware. The opacity of the system is extreme. The staggering sums involved. Risks increasingly maddening.
Regulating this market is obvious if we want to avoid further explosions at AIG. But is it enough? We must return to the basis of banking to answer this question. The banker lends. For this loan, he received what he considers the cost of money added what it considers to be the risk premium of the loan. This risk premium compensates the bank where the bank is not actually paid. Assess the risk premium at a time when it will invest money from its depositors is the same job as a banker. Where is the role of CDS in this? How can someone who is not investing money can assess this risk? How the financial system may be responsible just as he clears himself of his task in favor of acting shamelessly.
The CDS issue is symbolic of the drift of the financial sector in recent decades. The perception of the banking business has grown from one to evaluate the risk that eliminate the risk. To eliminate the risk, it must pass to someone as soon as possible in any way whatsoever. How not to see that this spiral can only undermine the whole system. You have created so many beautiful counterpart as you like, the risk will always be held by someone. However, the greater the return, the greater the distance between the one who first took the risk and evaluated and the one who actually holds the risk is more important and this first one is less responsible than the second. Plus he is disempowered, most important risks are undertaken. The overall risk is growing as well as everyone feels protected. The original sin of our financial system was to believe he could ignore the essence of its function.
The same reasoning holds also for the CDO, the famous mortgage backed securities. By bringing together in one product, a large number of real estate debt, investors believed they could protect themselves from risks. Again the main problem is the astronomical distance between the one who takes the first risk and the one who actually holds. Whoever makes the loan in hand is the only one who can properly assess the risk of the mortgage. However, as the financial institution knows that she will be able to resell these claims quickly and they are then passed between many hands, his role is not to assess risk but produce a number needed to meet loan demand for this type of financial product deemed safe. Disempowerment is total.
How to defend this type of system. The lender must hold the risk. If he wants to reduce the risk of the loan, the only way is to assess its value in the risk premium on the loan based on default risks.
can be summed up the situation. There are two types of derivatives. Those where the financial sector creates disorder and then propose a panacea and where the financial sector plays in creating ever greater risks and to pass the bomb to an actor even more stupid than you hoping it explodes in his hands. The results are catastrophic. The banking profession must focus on fundamentals again if he wants to one day become responsible.
The term "derivative" includes a large number of investment more or less complex and exist in the money markets, bond, action or raw materials. If the title of this article is obviously excessive, I will try to demonstrate just how many of them destabilize economies and their share of responsibility in the financial crisis we are experiencing.
begin with currency derivatives. They are to be able to exchange 1 week, 1 month, 6 months in advance a certain amount of one currency against another currency at an exchange rate fixed in advance. I can today and I agree with a bank to exchange euros cons XX YY dollars at a rate close to that today with a bank. Their role is to introduce a few certainties in the midst of enormous fluctuations in the exchange market. Indeed, how can companies manage any of his predictions, knowing that exchange rates can vary from 5, 10 or 20% within a few months. For a company that exports, the turnover which range from 5, 10 or 20% with the variation in rates. But the costs, however, are fixed in the national currency. Imagine a plane that Airbus sells for $ 10 million on 1 January. Payment is due on 1 June On 1 January the exchange rate is 1 € = 1.40 $. Airbus estimates that during these six months, the exchange rate may vary between 1 € = $ 1.20 and 1 € = 1.60 $. Thus, Airbus may receive 8.3 million euro in the most positive cases but receive 6.25 million cases in the most negative. If the cost is 6.5 million euro. Airbus can make a profit of 1.8 million euro, but could make a loss of 250 000 euros. This shows how much the currency risk can be critical for a company. To manage this risk, Airbus can subscribe to a derivative that will offer him a monetary bank. Airbus is January 1st to sign a contract under which Airbus will exchange 10 June to 1 million at a rate of 1 € = 1.43 $. Thus, on 1 June, Airbus is sure to receive 7 million euro and make a profit of 500,000 euros.
What wonderful service! The bank through its financial services has preserved our Champion European Aeronautics the terrible exchange rate risks plaguing our beautiful planet. The bank does itself no risk and actually performs arbitration on the interest rate differentials on different financial markets and its service charges by adjusting the exchange rate offered. The bank charges in the end virtually unlimited access to credit in the short-term which does not have businesses. What's wrong with that? The bank has it not done a great service to Airbus?
reasoning thus it completely sidesteps the basic issue: Who is responsible for large variations incurred on the exchange rate? In economic terms, rates exchange have absolutely no reason to change so violently in such a short time. Under the regime of floating exchange rates, changes in theory are supposed to allow trade in goods and capital between currency areas to achieve a balance. There is no deficit or surplus on both sides. The dollar, the yen may vary against the euro from 20 to 30% in 1 year. The terms of trade between different currency areas are very far also vary greatly. This is speculation on exchange rates is the main cause of the violence of these variations. Each day 60 billion worth of goods traded between the different currency areas. 6,000 billion is traded on exchange markets. Find the error. Banks play a dual responsibility. First, because they are speculating heavily on their own account. Second, because they open up credit lines phenomenal speculation on currency markets to other banks or business or to hedge funds. Without this credit, speculation of this magnitude is impossible.
You understood. The banks could spread the virus and then sell the cure of the disease. The bank wins on all fronts : They take significant commissions on transactions and currency conversions on derivatives and also affect the important interests on loans and speculation. More speculation, the larger the bank wins. the financial system has thrived for years on the disorder. But the vice goes even further. Derivatives exchange rates are overwhelmingly purchased for speculative purposes and not to prevent any risk. They allow an alternative method to bet on movements in exchange rates and thus aggravate the exchange rate variations where it is supposed to be a loophole. Turning now to
derivatives on the commodity market. The problem is exactly the same as before. The price of oil, wheat, aluminum can vary violently few months. Again, changes in consumption and production of its raw materials can not explain such violence. The oil price has been multiplied by 7 in 7 years. Suppose that on 1 January, the price of oil is $ 60 per barrel. Air France fears that a significant increase in the price of oil starts to hurt margins. An investment bank offered him to buy in 6 months, oil he will then priced at $ 65. To do this, the merchant bank will borrow money to purchase the required quantity of oil at $ 60, will store these barrels. By selling six months later at $ 65, the merchant bank will repay the loan, pay the financial costs and reap a profit. Again, the bank benefits from access to credit that the company did not.
responsibility of banks is yet again double in large changes in commodity prices. First, they speculate on their own account. Second, it opens monstrous lines credit to any kind of speculator banks, hedge funds ... What's worse is that the very nature of derivatives may cause serious shortages. As we say, when a player buys a derivative, an equivalent amount is stored by the financial institution. Thus, the more people fear (or hope) a higher price, the more they will award contracts for future purchase of raw material at a fixed price. As a result, ever larger quantities are stored. The shortage is greatest. Prices rise even more. This explains how one could see wheat prices, oil soar to such heights. On the contrary when the trend reversed and the majority of players expect a significant decrease, it becomes far less interesting to subscribe to such a contract. Naturally, there are fewer that are signed. The stock set up to honor its contracts no longer serve anything and pours violently on the market. Prices collapsed completely. This partly explains how prices could collapse so fast. But we can also continue to make small calculations to predict future changes in commodity prices.
CDS (Credit Default Swap) took the spotlight by sinking the U.S. insurer AIG literally. Their concept is apparently simple. This is insurance that can be subscribed in case of default of a company that we have a claim. Thus, the insurer reimburses the insured for the amount not payéeen case of default by the debtor. In return the insured to pay interest to the insurer on a monthly or yearly. The very existence of this product is a scandal because it challenges the very principle of credit and irresponsible makes all the players. To have a responsible, the lend money or that of its depositors must be the bearer of risk. Otherwise, all deviations are allowed.
Vice is twofold: the lender expects to achieve an arbitration. If he takes 100 euros to 6% but pays only 2% per year to the insurer, it feels like to touch 4% per year without taking any risk. The lender is completely cleared and to assess the quality of its investments since in case of payment of the claim as in case of nonpayment, the investor wins. The side of the insurer, it can provide a very large number of claims and receive a rent without investing a penny in these transactions which makes this activity extremely profitable.
is exactly what happened in the case of AIG. The group's financial division has launched headlong into the CDS insurance for hundreds or thousands of billions of debt and especially CDOs (collateral debt obligations), the product of mortgage backed securities. These CDOs were mostly rated AAA by major rating agencies or claims considered virtually certain. AIG outsourcing in all its risk assessment in these rating agencies are provided for these ridiculous financial products. Banks and hedge funds are able to jump at the chance to buy these debts can be insured in case of default and depreciation with AIG. Since defects in real estate receivables soared, AIG must repay money monstrous other financial players. This sector is completely deregulated, AIG would not put any money aside, as is the case in conventional insurance, to cover any risk. This is how the world's largest insurer became an endless hole for the U.S. government. The bailout allows the U.S. government not to allowed to spread beyond measure the effects of losses on these financial products today focus largely on the actor.
CDS also have other major problems. The sums insured are estimated at 50 000 and 60 000 billion more than the world GDP. This market is far from coming down to protect against default risk has become a giant casino where you bet on the failure of any particular company. In that market completely deregulated, we can insure against default of a company without ever having paid for the same company. Everyone can also improvise insurer without having to put any money aside. The insurer and the insured may well sell their contracts without consideration being aware. The opacity of the system is extreme. The staggering sums involved. Risks increasingly maddening.
Regulating this market is obvious if we want to avoid further explosions at AIG. But is it enough? We must return to the basis of banking to answer this question. The banker lends. For this loan, he received what he considers the cost of money added what it considers to be the risk premium of the loan. This risk premium compensates the bank where the bank is not actually paid. Assess the risk premium at a time when it will invest money from its depositors is the same job as a banker. Where is the role of CDS in this? How can someone who is not investing money can assess this risk? How the financial system may be responsible just as he clears himself of his task in favor of acting shamelessly.
The CDS issue is symbolic of the drift of the financial sector in recent decades. The perception of the banking business has grown from one to evaluate the risk that eliminate the risk. To eliminate the risk, it must pass to someone as soon as possible in any way whatsoever. How not to see that this spiral can only undermine the whole system. You have created so many beautiful counterpart as you like, the risk will always be held by someone. However, the greater the return, the greater the distance between the one who first took the risk and evaluated and the one who actually holds the risk is more important and this first one is less responsible than the second. Plus he is disempowered, most important risks are undertaken. The overall risk is growing as well as everyone feels protected. The original sin of our financial system was to believe he could ignore the essence of its function.
The same reasoning holds also for the CDO, the famous mortgage backed securities. By bringing together in one product, a large number of real estate debt, investors believed they could protect themselves from risks. Again the main problem is the astronomical distance between the one who takes the first risk and the one who actually holds. Whoever makes the loan in hand is the only one who can properly assess the risk of the mortgage. However, as the financial institution knows that she will be able to resell these claims quickly and they are then passed between many hands, his role is not to assess risk but produce a number needed to meet loan demand for this type of financial product deemed safe. Disempowerment is total.
How to defend this type of system. The lender must hold the risk. If he wants to reduce the risk of the loan, the only way is to assess its value in the risk premium on the loan based on default risks.
can be summed up the situation. There are two types of derivatives. Those where the financial sector creates disorder and then propose a panacea and where the financial sector plays in creating ever greater risks and to pass the bomb to an actor even more stupid than you hoping it explodes in his hands. The results are catastrophic. The banking profession must focus on fundamentals again if he wants to one day become responsible.
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