I had been hoping your course would discuss the nature, emergence and explosive growth of the many types of derivatives, and its implications.
What for example is the meaningof the claim that derivatives are a $500 trillion or $600 trillion market? Does that really mean that there are people out there who count all of that as their personal wealth? Or is this something like $25 trillion that gets turned over 20 times a year? How much of it has seeped into the capitalization of supposedly responsible financial firms? To what extent is it being used as money, used for or underpinning investment? How and when will this structure come down, with what consequences, and what else will it bring down with it?
don’t know what derivatives are. anyone willing to try to explain it?
Derivative: A thing that derives from something else. Think of it like a side bet.
In other reading on CDOs (collateralized debt obligations)
A short excert from
If this CDO life is 10 years, banks can book the whole 10 years of phantom
profits this year, even if this CDO defaults sometime in next 10 years. And
I don’t need to mention its implication to the bonuses of the structured product
groups at Wall St firms, or hedge funds with 2/20 fee structure.
In other words, who cares whether this CDO defaults next year, let us just
realize the next 10 years of bonuses today! There is a common secret at Wall
St. — it doesn’t matter whether a product is good or bad, the only thing matters
is how you structure it. As former Secretary of the Treasury, John Connely,
said to European central banks in 1970s "It might be our currency (US dollar),
but it is your problem". Same thing here. If CDO defaults, they have already
bumped up the stock price, cashed out the stock options and vested shares,
collected the yearend bonuses, now it is investors’ problem.