THE GOVERNMENT SHUTDOWN & THE FINANCIAL MARKETS RICK TOBIN
What’s a Derivative?
The ongoing LIBOR Scandal in which numerous
banks and investment banks rigged the directions
Why should you care about derivatives (a hybrid of
an insurance and financial contract)? A derivative,
once again, is a glorified form of a financial “bet.”
In the bet, one party wins while another party
loses. The winner may happily earn returns of 10
to 30 + times their original investment amount. The
loser, sadly, may also lose upwards of 10 to 30 +
times their dollar amount invested, which can
of the LIBOR interest rates is a prime example of
the potential fraud involved in the derivatives and
financial markets. In this LIBOR Scandal, it has
been alleged that several large banks knew what
the exact LIBOR rate would be in the near term, so
they could place their derivatives bets accordingly.
How can you lose a bet if you know the outcome
ahead of time?
financially wipe them out.
Some financial analysts and economists suggest
that the total combined value of all of the world’s
derivatives combined may equate to over $1,500
trillion. As a comparison, the combined value of all
of the world’s stocks, bonds, and real estate may
be closer to just $175 trillion. As such, the
derivatives markets dwarf all combined assets on
planet Earth by a multitude of times. Any potential
derivatives
market
collapse
would,
obviously,
negatively impact potentially most or all of the
world’s assets either directly or indirectly.
For example, an Interest Rate Option derivative
investment “bet” may be placed by Party A, who
believes that the LIBOR (London Interbank Offered
Rate – one of the world’s primary benchmark
rates) interest rate will drop in the near term. If
Party A bets that the LIBOR rate will continue
downward and then the LIBOR rate increases,
then Party A may lose his billion dollar bet plus
upwards of at least 10 times that amount. If so,
that $1 billion investment can turn into a $10 billion
loss in a very short period of time.
My perspective and belief is
that we will continue onward
with our “Quantitative Easing”
(QE) strategies in that the
Federal Reserve creates more
money “out of thin air” in order
to keep acquiring financial
assets like stocks, bonds, and
mortgages