One has to wonder what would happen if this "house of cards" based on derivatives finally collapses.
by Mario Seiglie
The Asian economic crisis has brought to
fore a dangerous new way of making money which has recently been developed
by the banking system-derivatives.
"In just three decades," reports Newsweek,
in the May 25, 1998 edition, "the volume of derivative contracts with
U.S. commercial banks exploded, from practically zero in the early
1970s to more than $25 trillion today, an amount exceeding the size
of the U.S., European and Japanese economies combined. Bankers quickly,
and appropriately, point out that this figure really represents just
the 'notional' amount, or face value of the derivatives, and not what
they could potentially lose. But the amount due, or at risk, is derived
(hence derivative) from those vast notional amounts. Parse the language
and it means many banks have a new sideline: gambling."
The article continues: "Derivatives are
a kind of nuclear financial instrument. They are powerful and highly
complicated agreements designed to offset certain financial risks.
Under steady conditions they work well. But in derivatives, like nuclear
mishaps, there are no small accidents. And as the Asian economic crisis
worsens-and in Indonesia's case near catastrophe-the financial Geiger
counters are beginning to buzz.
"'Derivatives have turned the financial
markets into a hi-tech, international 24-hour casino,' notes Richard
Thomson, a former merchant banker. 'Right now you have a small number
of banks sharing a very large risk. But this could turn out to be a
serious problem if these banks are in the wrong place at the wrong
time.' Thomson points out that if one or two large Asian parties default
on their derivative contracts, computer screens around the world can
be hit within seconds and instantly threaten other contracts. 'It's
like a bunch of climbers on a mountain all tied by a rope. But if one
climber slips and falls into a crevasse, he can quickly drag the other
climbers to their end with little chance of time for rescue.'"
