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And, yes, I DO take it personally: Between $596 trillion and $1.2 QUADRILLION worth of derivatives outstanding...! Talk about a TIME BOMB...!
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Sunday, April 12, 2009

Between $596 trillion and $1.2 QUADRILLION worth of derivatives outstanding...! Talk about a TIME BOMB...!

this la times opinion piece carries a headline that says it all...
Global Meltdown Rule No. 1: Do the math
We can't start fixing things until we can get a handle on the toxic assets behind the financial crisis.

Economist Hernando de Soto is the author of the "The Other Path" and "The Mystery of Capital." He has helped carry out property-reform programs for heads of state in about 20 countries.

[I]magine how I have felt watching my role models go to war over weapons of mass destruction that they never actually assessed, or now, watching them wage a losing war against derivatives -- which both Warren Buffet and George Soros have called "financial weapons of mass destruction" -- without locating or counting them either.

And, man, do those financial instruments need measuring: pooled, packaged and traded around the world, they are now the principal reason for today's massive credit contraction. The fear among financial institutions that potential borrowers and users of credit and capital could be burdened with so many nonperforming derivatives that they would be unable to repay their loans and protect their investments has plunged the global economy into a recession.

The Securities and Exchange Commission estimates that derivative paper is worth $596 trillion (10 times the value of total world production), while studies at the Bank for International Settlements in Basel, Switzerland, conclude that it could be twice as much -- $1.2 quadrillion. And exactly how many of those derivatives are actually nonperforming and would have to be surgically removed to stop their toxicity from spreading and destroying trust among creditors and investors? Nobody knows that for sure either. U.S. Treasury Secretary Timothy F. Geithner has set aside $1 trillion to assist in buying those toxic assets, but the SEC has guesstimated that there might be upward of $3 trillion worth.


If you want to get credit flowing again, you must restore trust in paper as soon as possible. And that means measuring the assets, recording them, finding and purging those that are toxic and preventing future debasement of the paper -- in essence, submitting it to property law just like all the other assets that we own and value.

Before we can get out of this recession, we need to concede that we just don't have the right information. At present, the world of derivatives is devoid of useful facts and a structure from which we can extract the meaning, knowledge and confidence required to end the credit crunch.

i have neither the background or the intelligence to comment intelligently on the arcane world of financial instruments, but i know solid wisdom when i read it...

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