Letters to the Editor
MacK..
Published Letters: 477 Editor's Choice: 49
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eyesay -- as far as what a derivative is you miss the point
[Read the article: Panic on Wall Street]
[Read more letters about this article: Here]You say:
"You define derivative as "a tradeable instrument derived or deriving its value from at least one other tradeable instrument (and maybe more.)" Even if that definition is technically correct, in common parlance, the definition is broader. For example, a future, forward, or option on the CPI would usually be called a derivative, even though the CPI is not a tradeable instrument."
Technically you can call options derivatives (though option is just a better name for a simpler instrument) -- but the key point about derivatives is that they do not go through the standard issuing procedure -- prospectus, etc. This is important because they have more complex risk profiles that buyers often do not really understand. Zero coupon bonds are different from regular-bonds sold at a discount (e.g., US Government Bonds) in a number of respects because they are created by stripping existing bonds, usually mortgage instruments of their coupons. In part they can behave differently because they are redeemed differently -- as people pay off their mortgages early, the bond gets paid off in small lumps -- get a 2% or more downward change in prevailing rates and they get paid off in big lumps as homeowners refinance (while the strip holders get hosed, since the interest dries up.) Bonds by contrast have tio be redeemed in typically one entire issue.
Derivatives are tricky because their behavior can be unpredictable -- in exactly the way the Zero Coupon Bonds are different from discount bonds -- they seem normal most of the time, but then can undergo sudden shifts in behavior that do not tract the typical instrument.
In any event, it is plain English, a derivative is what it says on the label -- something derived from something else, a different security.
By the way, tranches of debt are not strictly speaking derivatives, since each is issued separately, with its own prospectus, issuing documents and explanation of its preferences and associated risks. The underlying problem is that some of the supposed low risk tranches appear to be rather high risk, while derivatives made by combining high risk tranches to, by supposed diversification, to lower risk, turn out to be bundling similarly based risks, so they were mis-rated.
The same issue applies to program trading by Quantitative Hedge funds -- in reality there are so many that they have trouble identifying enough opportunities from their models (that other funds have not spotted) and have often resorted to simple picking (and truth be told a fair bit of activity that looks close to insider trading.) Moreover, they are all working with the same historical data set, and even though some very brilliant mathematicians and math-physicists are building the models, at least some research leads one to wonder if the models, tested and perfected against the same dataset are in fact equivalent - and driving self-fulfilling prophecy, especially because so much price setting trading is indeed done by the hedge funds.
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What shoe is dropping?
[Read the article: The Democrats' responsibility in the wake of Gonzales' resignation]
[Read more letters about this article: Here]Rove, Gonzales . . .
There is a shoe dropping and they are setting up the cop at the car-wreck line "keep on walking folks, nothing here to see [the guilty are gone"
Must be a big shoe . . . what part of the scandals has not come out -- could it be prosecutions by the US attorneys that did not resign. Siegelman/Canary? What?
It's important to get a good AG in, but it is also important to make sure that when the shoe is on the floor the Dems shove it painfully up the White House and Congressional Republicans fundament . . .
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What shoe is dropping?
[Read the article: Alberto Gonzales resigns]
[Read more letters about this article: Here]Rove, Gonzales . . .
There is a shoe dropping and they are setting up the cop at the car-wreck line "keep on walking folks, nothing here to see [the guilty are gone"
Must be a big shoe . . . what part of the scandals has not come out -- could it be prosecutions by the US attorneys that did not resign. Siegelman/Canary? What? I cannot see these departures of Rove and Gonzales as unconnected, they are worried that something big is coming. The only thing that strikes me as likely to be the huge in the next few weeks is the Canary subpoena to turn over everything on the Siegelman prosecution, which if one reads Scott Horton's detailed review in www.harpers.org, is the subject of weeks of "dog at my homework" excuses around a very smelly prosecution.
It's important to get a good AG in, but it is also important to make sure that when the shoe is on the floor the Dems shove it painfully up the White House and Congressional Republicans fundament . . .