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In Financial
Armageddon, I wrote about "four impending catastrophes": debt,
government guarantees, the retirement system, and derivatives. But well
before the first pages of my manuscript saw the light of day, I was
particularly concerned about the latter aspect.
In fact, I'll let you
in on a little secret: the article I published in November 2005, "The Coming Disaster in the Derivatives Market," was actually derived
from material in my original book proposal, tentatively entitled FWMDs:
Financial Weapons of Mass Destruction, after Warren Buffett's famous
remarks on the subject in Berkshire Hathaway's 2002 annual report.
Eventually, the
publisher and I decided that there was a bigger story there, which proved to
be far more accurate than anybody (including me) realized at the time, and I
set forth my vision of how the derivatives menace would come to interact with
the various other threats I saw lurking in the shadows.
Yet even with all
that has happened so far, it's hard to ignore the fact that the house of
cards that was built on this labyrinthine mass of paper promises remains
a serious threat to the financial system and the economy.
To be sure, I'm not
the only one who feels this way. Even some of the better known financial
experts are worried, as CNBC.com reveals in "Derivatives
Could Cause Another Meltdown: Mobius":
Derivatives caused
the market Armageddon of recent years and if left unchecked by global
leaders, the same market could cause another catastrophe, Mark Mobius,
executive chairman of Templeton Asset Management, told CNBC Monday.
When asked by a CNBC
viewer what kind of Armageddon could be expected if the derivatives problem
is not addressed, Mobius replied: “The same kind of Armageddon that we
just had, what we just saw in the last few years has been caused by
derivatives.”
The lack of
liquidity, transparency, coupled with its sheer size means the derivatives
market poses a major risk to financial stability, according to Mobius. The
currency derivatives market is especially at risk of causing problems, but
interest-rate derivatives also, he said.
Mobius thinks that
global leaders meeting for the G20 summit in Pittsburgh next week should
focus almost solely on the derivatives trade. Debates over how much bankers
are paid in bonuses should be bumped down the agenda, he said.
The derivatives
market is ten times the total GDP of the world, or $600 trillion, Mobius
pointed out. And the market has been responsible for numerous bankruptcies in
recent years as companies don’t know what they have on their books and
don’t read the fine print, he said.
“The scary thing for me as
an investor is what a company has in their books. One of the first questions
we ask a company is: ‘What derivatives do you have?’ Because so
many companies have gotten into deep trouble because of that. Why? Because
there’s no transparency, there’s no liquidity,” Mobius
said.
To read the rest of
the article and watch the Mobius interview on CNBC, click here.
Michael J. Panzner
Editor, Financialarmageddon.com
Also
by Michael J. Panzner
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.
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