frank miller

[alice wellintown]

> I'm sorry -- you're busting my chops for posting a link to something needlessly esoteric? Is this still the Pynchon list?

I meant, actually, to criticize the person giving the testimony and
not you, sorry. Derrivitives, like rocket science can be quite complex
and describing the equivalnt of mass to a person who is very bright
but no an expert is never simple, but the industry and media, have
shrouded the markets in mystery and have, at times,  deliberately
obscured and obfoscaed. The testimony stuck me as such even if, as I
suspect, the speaker did not want to confuse the listeners or muddle
the message. This is, of course, one of the problems in the current
markets, communication. The speaker bounces about in an eratic
testimony that would be difficult to follow if he were talking to
baseball fans about last night's ballgame.

But, WIKI does a fine job here:

Under U.S. law and the laws of most developed countries, derivatives
have special legal exemptions which make them a particularly
attractive legal form through which to extend credit. [3]

I'm not going to copy and paste in the wiki notes but you may want to
take a look. This is where we have a concern, right? How is Pynchon
related to the law, to the law that pertains to derrivitives. The law,
saome might argue, has shifted too much power to extend too much
credit to "banks" that are then too big to fail.


Wiki Again:
However, the strong creditor protections afforded to derivatives
counterparties--in combination with their complexity and lack of
transparency--can cause capital markets to underprice credit risk.
This can contribute to credit booms, and increase systemic risks. [3]


What is credit risk? That's the key phrase in the wiki quote above.
Again, we needn't get into the complex and esoteric European soverign
debt issues and why, for example, the recent auction of German
government bonds was weak or how the US keeps it's cost down by
auctioning it debt and even buying its own auctions, we can use the
common example most people can understand: the mortgage they gave to a
bank. When you buy a home you get money from a bank and give them a
mortgage on the property. To evaluate the risk the bank is taking it
looks at several important things and one of them is your credit
rating or score. They need to know what the risk, credit risk is, in
this derrivitive. Of course, most mortgages, or rather the money that
is exchanged, your payments of the debt plus interest, will be
securitized and made into other kinds of derrivitives. Most mortgages
will then have an asset in the property and then, after say, they
monthly payments are streamed into a derrivitive, be part of a large
security contract that is often sewcured with US treasuries and thus,
before the recent downgrade of us debt, carry a AAA, the highest
rating. SO, the capital markets, basically, the markets for debts not
equities, would look at these securities as quite safe in terms of
credit risk. But credit risk in only one type of risk. And, when other
types increase, credit risk may increase exposing investors who, as
wiki says, underpriced or payed to much for what they thought was a
low credit risk and is now a high or at least a greater credit risk.
Evaluating these other types is difficult. That's what wiki calls the
complexity. Yup, quite complex. Compunding this complexity are a
plethora of factors, communication is one such. Transparency is
another. And all of these are often mangled together. And, as I noted,
the industry and the media needlessly obscure and obfuscate.



 Indeed, the use of derivatives to mask credit risk from third parties
while protecting derivative counterparties contributed to both the
financial crisis of 2008 in the United States and the European
sovereign debt crises in Greece and Italy. [3]

[4] Financial reforms within the U.S. since the financial crisis have
only served to reinforce special protections for
derivatives--including greater access to government guarantees--while
minimizing disclosure to broader financial markets. [5]