Oxstones Investment Club™From Forbes Blog, Halah Touryalai,
Warren Buffett called them weapons of mass destruction. Now those same products, known as derivatives, are pushing the world closer to another financial crisis.
That’s according to Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group. Mobius, who over sees more than $50 billion in assets, says another financial crisis is “around the corner” because little has changed since recent collapse of the markets.
“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis. Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
That was his response to a question about price swings at the Foreign Correspondents’ Club of Japan in Tokyo today, according to Bloomberg.
Derivatives are financial instruments whose value is based on some underlying asset, like a mortgage for instance, and and can be used to either hedge risk or for completely speculative positions. There are all kinds of derivatives investors can invest in or against including something called the death derivative where, you guessed it, investors bet on people’s deaths.
The most infamous derivatives are the ones tied to residential mortgages and which led to the demise of the financial system back in 2008. When homeowners began defaulting on their mortgages the affect was nearly detrimental to all the financial institutions that shared the risk through these exotic derivatives.
An IMF report from 2010 puts it this way:
Over-the-counter (OTC) derivatives markets have grown considerably in recent years, with total notional outstanding amounts exceeding $600 trillion at the end of June 2009 (Figure 3.1). During the financial crisis, the credit default swap (CDS) market, a part of the OTC derivatives market, took center stage as difficulties in financial markets began to intensify and the counterparty risk involved in a largely bilaterally cleared market became apparent. Authorities had to make expensive decisions regarding Lehman Brothers and AIG based on only partially informed views.
In fact, the derivatives battle at Lehman Brothers is still waging on with the counter-parties in Lehman Brothers derivatives trades still looking to get paid for their bets. Bankrupt Lehman has been in talks for over a year with about a dozen big-bank counter-parties about the value of the their claims.
Meanwhile, Mobius says the derivatives market today is still so rife with bets made in different directions that major volatility is inevitable and the equity markets will suffer. He said the total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, according to the Bloomberg report.
The derivatives market is one that regulators are attempting to reform right now with new rules scheduled to be implemented this year. The new rules would require more disclosure and transparency.
But like in other attempts at regulating lucrative lines of business regulators are facing resistance from Wall Street friendly lawmakers looking to extend the deadline.
Last week, U.S. Rep. Spencer Bachus co-sponsored a bill that would approve a measure to delay the implementation of to September 2012. The legislation to delay the implementation of rules was passed last week with Bachus saying the move was neccessary to “restore order to the Dodd-Frank Act derivatives rulemaking process.”
Tags: derivatives, Dodd-Frank Act derivatives, executive chairman of Templeton Asset Management, Lehman Brothers, mark mobius, Next financial crisis, Warren Buffett