Hedges and DerivativesInfo only
We always hear the terms "hedges and derivatives". If you took the top
10 CEOs of American Corporations and Banks they couldnt tell you what"hedges and derivatives" are. Yes, they know that they are
highly "leveraged financial instruments" that are "unregulated"
by the US FEDERAL RESERVE, the SEC, the CFTC. What they dont know
is that derivatives are "performance contracts" involving many counter
parties. If "A" happens "B"( the counter-party) will perform "this".So
on "paper" everyone has "insurance" against a bad outcome. The problem
is two-fold. First the structure of "derivatives" looks like an
"upside-down" pyramid (very instable), with the apex on the bottom and
the broad base on top.Thus "value" at the top is "derived" from the
small value at the bottom. So $10 million at the bottom can secure
$300 million at the top. Remember there isnt a problem unless something goes "wrong". Secondly, why would any financial institution
sell such a "dangerous" financial product. Very simple, "GREED". Banks
and Brokerage Houses take 90% of the money in fees. If nothing happens
everyone is "happy". The PROBLEM is when an unforeseen event occurs
some "counter parties" might be unable to "perform" their insurance
function. An example is the current "the sub-prime rate mortgage"
fiasco. Then "all hell" breaks loose and millions of dollars are
lost by investors in a matter of days. This is what happened to Bear
Stearns.