A new definition of insanity has emerged…..
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This is what happens when someone gets a few fancy graphics and doesn’t properly communicate the definition of “notional principal.”
Anyone who is not familiar with notional principal should also look up the definition of “plain vanilla interest rate swap,” which accounts for roughly 60% of all that money.
Finally, if I remember correctly, the Bank of International Settlements estimated that less than 3% of outstanding notional principal would actually have to change hands in order to settle all outstanding OTC derivative contracts. Meaning the money at risk, is less than 3% of those big fancy pictures.
^^ This guy knows whats up.. It’s hilarious seeing the uneducated freak out about this kind of thing.
left’ & Artistic’,
so take notional down to nominal and you have $600 billion in exposure by most accounts.
the matter is valid if the models do not account for extreme events. or if the models were tweaked to perform in a set range that does not account for occurrences outside of the preset range.
that is precisely how the financial debacle got started from the housing market.
Yes Cronkite, problems can certainly occur with much smaller amounts. I also assume the banks models are still messed up as they are still spending vast amounts of resources just to clean the last mess up.
But that wasn’t the point of this article. It was propaganda meant to shock and awe. “Look the banks are allowed to gamble completely unregulated with 3x the amount of the entire world economy only a few years after they destroyed it. Criminals!”
I have a problem when information like this gets into the hands of politicians/regulators that can actually do something about it and whom are also themselves largely uneducated on the matter. Do changes need to happen? Of course. But not under this pretense.
I got ya Left’