So Ritchie doesn’t understand what a derivative is then

More important still though is who is making the mistake. Bankers are the supposed all seeing, all powerful, all knowledgeable brains of the universe. And they cannot design simple forms, or even apparently comprehend the need to do so. Now consider that these same banks have derivative loans outstanding at any time for sums vastly greater than the entire world’s GDP which if they go wrong could plunge the whole world economy into a tail spin in a few hours. They can’t prepare a bank statement but we trust them to do that. The question does have to be asked, are we mad?

I’d be fascinated to know what a derivative loan is. Anyone know? I know what a derivative contract is but not a derivative loan.

And of course while the gross amount of derivatives is large (this always being true, derivatives will always, by their nature, be larger than the underlying “real” market) it’s the net that matters. And that’s a very much smaller number.

32 comments on “So Ritchie doesn’t understand what a derivative is then

  1. The best bit being that lots of the complex financial products were designed due to complex tax systems, but Richie opposese the simplifcation of the tax system which would remove the need for them.

  2. As you can guess he probably means a CDS which is essentially a derivative which protects the loss on the default of a bond or loan of some specified company or sovereign.

    But he thinks it is a loan which is just his ignorance blaring forth.

    In any case CDS are a small fraction of the derivatives market which is dominated by interest rate swaps.

    And OTC derivatives are now excessively over regulated with clearing and CCPs and margin and all sorts of new rules. All (allegedly) thanks to Chris Dodd’s wife.

  3. “He means a credit derivative like a Credit Default Swap or other variations”

    If that is what he means then that is what he should say. Or is he “rewriting the language of debate” again?

    One of Ritchie’s many problems is that he is an appalling writer, both in making his point and in proof-reading his work.

    Basic errors slip like this appear all the time (fine, it’s a blog) but they are often central to his argument. It often takes several exchanges in the comments for him to give up on the abuse and accept he has made an error.

    If he believes he can rewrite the laws of the land the he needs to be absolutely precise about what he means. The fallback of “the spirit” of what he meant doesn’t wash.

  4. “And OTC derivatives are now excessively over regulated with clearing and CCPs and margin and all sorts of new rules. All (allegedly) thanks to Chris Dodd’s wife.”

    I’ve been dragged in to the hell that is my company’s project to attempt to comply with Dodd-Frank. When I first read the introductory briefings I thought it was an elaborate joke at my expense. Sadly, it’s going to be at everyone’s expense.

  5. Derivative loan: is it when a blogger rips off an article from, say, the FT, changes a few sentences to pass them as his own work and tells the journalist he’ll do the same for them one day.

    That post is clearly “derivative ” but is it really a loan?

  6. Every single thing he writes contains at least one straw man which he then proceeds, courageously, to demolish.

    In this case, who says bankers are ‘the supposed all seeing, all powerful, all knowledgeable brains of the universe’?

    I know a few of them, and they’re basically fallible human beings. Not as fallible as this twat, but fallible all the same.

    And, in answer to the question at the end, Rich, we’re not but you are.

  7. Interested

    Best me to it. He is ridiculous. That line reads like a teenager moaning at his parents.

    Ironically he believes the State to be all those things, even though that is also run by humans without even the incentive of high personal reward.

  8. Rob

    “without even the incentive of high personal reward.” – there’s a “supposedly” missing from your sentence.

    Look at the fucker Bliar…

  9. “[The Jews] are the supposed all seeing, all powerful, all knowledgeable brains of the universe.”

    It’s not like Ritchie is anything other than totally transparent.

  10. GlenDorran

    Between Dodd- Frank, AIFMD and FATCA, I’m surprised that my building hasn’t barred the windows – all initiatives introduced at the bequest of the likes of Murphy – all fiendishly complex and likely to have the opposite effect to what is intended…..

  11. Is it decent to keep poking fun at this preposterous, ignorant dimwit?

    It’s a bit like laughing at the inmates of Bedlam.

  12. …these same banks have derivative loans outstanding at any time for sums vastly greater than the entire world’s GDP…

    World GDP is something like $77 trillion. Outstanding notional of CDS is $20 trillion or so. So Murphy ought to be talking not about CDS but about interest-rate swaps, which have an outstanding notional approaching $500 trillion.

    while the gross amount of derivatives is large … it’s the net that matters

    That’s not entirely true – if one market participant fails, and collateral and netting agreements are insufficient, gross notional can be a problem. Hence the AIG bailout (I’m back on CDS now).

    The Dodd-Frank regulations are intended to stop this happening again. I have no difficulty in believing that they’re not well designed, but I think the US government is justified in creating a regulatory burden pushing the market away from the need for future bailouts.

  13. Quite honestly, Tim, anybody capable of writing such weapons grade shit as that is beneath our contempt.

    The fact that he apparently has influence goes a long way to explaining our current predicament.

  14. For those who haven’t seen it, this exchange between RM and a couple of posters is a classic:

    Callum ‘What is a derivative loan please ?

    RM – A typo. Corrected

    Andrew K ‘It doesn’t look like a typo to me. A typo would look more like “derivqtive” or “ferivative”.’

    RM – Ever heard of auto correct on a Mac? And paranoia?

    Andrew K ‘So the Apple Mac will take the word “derivative” and automatically add the word “loan” to it. That would certainly induce paranoia – people might think one was a complete idiot! ‘

    RM – It did add loan It does not mean I intended it to I suspect I typed something quite different – I have no idea what now – but who cares

    Only a fool would think this an issue of significance’

  15. @Max Thanks, I literally laughed out loud at that.

    ‘So the Apple Mac will take the word “derivative” and automatically add the word “loan” to it.’

    Priceless.

    He’s a fool in so many ways, but I think mostly he’s a fool to himself.

    If he had somehow learned to keep his rampaging ego in check, and had restricted the scope and number of his prognostications and bloviations a bit, he’d have been on a nice little earner.

    But slowly, slowly, he has made himself look so much of a cock that not even his fellow travellers can have much to do with him.

  16. ‘So the Apple Mac will take the word “derivative” and automatically add the word “loan” to it.’

    Remind me never to write a calculus textbook on a Mac!

  17. @Max Thanks, I literally laughed out loud at that.

    So did I and I’m is a motorway service so I got some interesting stares.

  18. It will add the word loan if you hit 4 keys with your fingers. Perhaps that is indeed what he meant but now accepts he made a mistake – not that he can admit HE made a mistake, its the tools.

  19. @PaulB

    When lehman failed every contract (of 100s of thousands) performed correctly – parties paid what they were due to pay. Likewise for the settlement of CDS linked to lehman.

    AIG was an exception as it was not a bank.

    Also, the initial G20 statement for regulatory changes did not mention interest rate swaps, just CDS. However a few months later interest rate swaps were in Dodd Franks. The rumour is that Dodd’s wife was a member of the CME board and wanted to push OTC derivatives onto exchanges, or at least clearing houses. So she got her hubby to broaden the regulations to include interest rate swaps. Allegedly.

  20. I wrote on his blog

    “If you can’t type properly how are we supposed to trust you”

    You need to see the title of his blog post to get it.

  21. @Frederick – is that the one where he says ‘made to trust’ instead of ‘meant to’? It seemed petty but it got under my skin too. I thought about pointing it out but couldn’t find an elegant enough way – well done.

  22. The problem is the netted worth of many financial instruments will never be realised as many of them are based on counteractive indexes, you can’t win on a bet that the FTSE will go down and go up, only one will yield.

    A CDS and many instruments like it, are treated like insurance, but a bit more complex. I could insure my car for, say, £5,000, against having an accident, but I could also insure my car against _not_ having an accident for the same amount. The total worth of the insurance is £10,000 but logic tells you they can’t both happen.

    Even the classic fractional reserve banking is going to tell you that the value of loans is not the real value of the money deposited. So only a dimwit is going to compare what is essentially an imaginary value against a fixed one (GDP).

  23. “The rumour is that Dodd’s wife was a member of the CME board and wanted to push OTC derivatives onto exchanges, or at least clearing houses.”

    I worked for a Clearing House during the Lehman’s collapse and I can tell you that the rush to exchange backed trading and novation of swaps was well under way before legislation was proposed. It was a simple case of having the sh*t scared out of you once you realise how vulnerable OTC really is.

  24. Oh the exchange got better

    Frederick: I tried it on my mac and it did not insert the word “loan”

    RM: I am sure it didn’t

    But then I have no idea what I typed in the first place, and nor have you

    And who cares

    I made a mistake. So what? Grow up is the polite answer to your comment

    And, just in case you’re a real pedant, there is no law on typos in blogs

    There is on bank loan statements

    No further comments will be accepted

  25. Frederick

    But worries about bank solvency based on the possibility of excessive exposure to Lehman was one of the factors that led to a dramatic reduction in interbank credit. It even extended to problems in international trade finance. In the event it turned out the net positions were negligible, but the worries about the gross were there.

    One interesting point is that while the use of exchanges and clearing houses has reduced the opacity of derivatives, the concentration has led to worries that the clearing houses themselves will lead to financial contagion if a major trader of derivatives goes bust.

  26. A derivative loan is a relatively simple arrangement where the twolegs of a derivative contract, which may have an initial equal value go rapidly in or out of the money, usually because of a large fixed or fairly certain payment under one leg of the contract. This implies a credit relationship for which loan accounting may be more appropriate than derivative accounting.

  27. Blimey, what a bunch of children here! If “derivative loan” was used previously then it will appear in the auto correct, triggered with derivative.

    Did I really have to say that?.

  28. alex there is no such terminology. I know. I spent 10 years working on cds and interest rate swaps. it is true that the two legs of a swap will move after initiation so that the net value is no longer zero but that is no way like a loan since no cash is borrowed and mark to market accounting is used not loan accounting which is totally wrong.

    and by the way, murphy did not think this. he already said it was a typo and now a mistake. so please stop trying to dredge up some phoney defence.

    yes arnald. you are right. thanks for confirming that this was not a one off typo but a mistake that murphy has made before.

  29. Murphy seems to think that retail banking and investment banking are carried out by the same staff. He’ll be blaming the Grauniad for his typos next.

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