“Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings, prospects are sound.”
– Fox-Pitt analyst David Trone in a research note, today
Here we go again. A giant bank has some weaknesses, but it is, in all respects, a going concern — except that short sellers are peddling rumors and phantom stock, so the share price is plummeting. With the share price in peril, the rating agencies (perhaps over vigilant after taking so much criticism from short sellers and the media) put the bank’s debt ratings on review for a downgrade.
Meanwhile, short sellers corner the market for the bank’s credit default swaps, and point to the value of the CDS as evidence that the bank is doomed. They feed the media with analyses and bogus indexes that mark the bank’s assets to nothing. They spread the news that the bank’s counterparties and trading partners could bail.
The clients and partners stay with the bank. Up until now they have no reason not to.
But then, there’s more naked short selling, the hedge funds flooding the market with stock they do not possess – phantom stock. Maybe the hedge funds send a fax to CNBC with one last rumor. Over the course of a day or two, the stock price is slashed in half.
Then, suddenly, the stock is in the single digits.
As a result of the low stock price – not as result of the balance sheet – the bank’s partners and clients freak out. This time, they really do pull their money.
End of bank.
And if there are one or two more like this — end of story. The financial system will be fried.
We’ve seen precisely the same scenario with Bear Stearns, Lehman, Merrill Lynch, Washington Mutual, and IndyMac. A variant of this scenario took down AIG, Fannie Mae, Freddie Mac, and perhaps 200 other companies before them.
Morgan Stanley could be gone by next week.
We have new data for September that shows that there was plenty of short selling of Morgan Stanley (and other companies) even during the SEC’s ban on short selling, which ended Wednesday at midnight. Some hedge funds ignored the ban, and the SEC did nothing.
Worse, in place of the ban, the SEC has offered only tepid new rules (cheered by the short seller lobby) that do little to prevent the sale of phantom stock. Under these rules, short sellers do not have to borrow real stock before they sell it. They merely have to “locate” the stock. The SEC doesn’t say how it’s supposed to know whether a short seller has actually located real stock as opposed to telling his broker, “yeah, I located it, it’s in your mother’s wig” (which is pretty much how these conversations go).
Furthermore, the SEC gives hedge funds three days to deliver the stock they sell. This would be fine if they were required to possess real stock before selling. But since they are not, a hedge fund can offload a large block of phantom stock and let it eat away at the financial system for at least three days.
Sometimes, the hedge funds settle the trade with another block of phantom stock, transferred to them by a friendly broker. But even if they fail to deliver the stock, the SEC stipulates no serious penalties. Meanwhile, it shows no inclination to actually prosecute anyone for the jailable crime of short-side market manipulation.
I’m willing to bet anybody a sizeable amount of money that when the SEC releases its “failures to deliver” numbers for October, they will suggest unbridled illegal naked short selling of Morgan Stanley during this past week, even on days when the ban on all short selling was in place. The data will show that naked short selling rose to unprecedented levels just before somebody floated Wednesday’s false rumor that Morgan Stanley was going to lose its $9 billion deal with Mitsubishi.
And the data will show that after the ban was lifted, the law-breaking shorts went nuclear – with failures to deliver of well over a million shares every day. Ultimately, many millions of Morgan Stanley’s shares will be sold and never delivered, just as hedge funds have yet to deliver more than 10 million shares of Bear Stearns that they sold during that bank’s final days last March.
As I write this, Morgan’s stock price is in the single digits, trading around 7 bucks, down an astounding 70% in the 36 hours since the short selling ban was lifted. A death spiral like that does not happen naturally. Because of the short-battered stock price – and only the stock price (again, this has nothing to do with the balance sheet) — Moody’s today put Morgan’s long-term debt ratings on review for a downgrade.
I suspect another 15% off the stock price, and one more well-placed rumor, will do the trick. There will be a run on the bank. Morgan will be gone. And the global financial fire will blaze still hotter.
It is beyond surreal that our most prestigious financial media continue to allow this to happen. It is beyond comprehension that journalists – in possession of the evidence, and presumably in possession of their faculties – continue to spout the line, originally formulated by short-sellers and now woven into conventional wisdom – that this crisis is only about bad mortgages and bad managers and bad balance sheets.
One can argue that, in the long run, the world is better off without half of Wall Street – without its ponzi schemes and paper profits, the sickening salaries and arrogance. Certainly, anyone with a Shakespearean state of mind will appreciate the fates of Morgan Stanley, Lehman, and Bear – all of which eagerly pimped their dodgy prime brokerage services to the very short sellers who destroyed them.
But it does not require Shakespearean nuance to see that this crisis is not just about scandalous banks. It is about criminals destroying banks that are tawdry, yes, but possessing of some virtue, and capable, if left unmolested, of carrying on and contributing to society – perhaps even staving off a global calamity.
Moreover, these same criminals are destroying many other companies, most of which are run by honest people who labor far from the insalubrious alleyways of southern Manhattan. The SEC maintains a list of companies whose stock has failed to deliver in excessive quantities. As I explained in an earlier dispatch, many victims of naked short selling (including some of the big banks) do not appear on that list. But surely it is a scandal that more than 300 companies, many of them financial firms that have nothing to do with Wall Street, do appear on the list.
Surely, it is an even bigger scandal that around 100 of those companies have appeared on the list chronically, day after day, for months on end, and though the sheriff posts the names of these rape victims on its wall, it has yet to prosecute a single rapist. The SEC tells us that a billion shares remain undelivered on any given day — and yet it doesn’t bother to find out which hedge funds sold the phantom stock.
It might be too late, but if Washington and the financial media really want to save the world, they ought to start by demanding that hedge funds borrow real stock before they sell it. And what the heck: Maybe some newspaper could offer the radical suggestion that the SEC should tell hedge funds that they can either go to jail or close out all unsettled trades – today.
If one hedge fund manager were to get cuffed, all the others with outstanding “failures to deliver” might scramble to buy real stock so they can settle. The markets might soar. The innocent victims might get some relief. And the delinquents on Wall Street would get some time to clean up their acts.
Meanwhile, would anyone care to guess which company the naked short sellers will take down after Morgan Stanley?
And would anyone like to share a bunker with canned goods and weapons?
* * * * * * * *
If you’d like to place that bet on the Morgan Stanley data (I’ll give 2:1 odds that it will show short sellers offloading massive amounts of phantom stock , with more than a million “failures to deliver” every day) feel free to contact me. Mitch0033@gmail.com.
* * * * * * * *
In the adult novelty & video arcade shop that is our New York financial establishment, one of the mop-and-bucket spooge-boys is Roddy Boyd, formerly of the New York Post (for folks who move their lips when they read Entertainment Weekly), and currently, of Fortune Magazine (also known as “People Magazine for Capitalists”). I have met Roddy on occasion, and a more seedy and furtive character would be difficult to name. I once knew a one-eyed Chinese guy named “Chaney” who ran a Bangkok pawn shop/mail-drop who turned out to be working for Taiwanese, Chinese, and Soviet intelligence, simulatenously, but by appearances anyway, Chaney was a model of probity and fair-dealing when compared to Mr. Boyd.
Admittance into Roddy’s New York financial journalism spooge-bucket-brigade is conditional upon acceptance of The Fundamental Principle and First Corollary of that illustrious fraternity:
The Fundamental Principle – Hedge funds can do no wrong, particularly if they belong to a small constellation whose brightest lights are Stevie Cohen, Dan Loeb, David Einhorn, Jim Chanos, David Rocker & Marc Cohodes.
The First Corollary – If any corporation or individual appears to have been wronged by activities of any of these hedge funds, using methods up to and including stock counterfeiting and manipulation, blackmail and intimidation, use of private eyes and internal moles, inciting endless and expensive investigations that go nowhere, and so on and so forth, it must only be because they deserved it (for proof, see The Fundamental Principle).
Today Fortune Magazine’s Roddy Boyd gives fine illustration of these rules in an article on Copper River Partners (née Rocker Partners). This is the same Copper River/Rocker Partners whose exploits are chronicled throughout DeepCapture, and who have been frequent beneficiaries of reportorial lotion-jobs from Karen Richardson, Roddy Boyd, Herb Greenberg, and Jim Cramer, and have been long-time recipients of Bethany McLean’s highly-regarded regulars-only service. (Full disclosure: Copper River is also on the business end of a Marin County lawsuit filed by Overstock.com, in which I played modest role.)
In today’s think-piece, Roddy treats us to such insights as:
- “But for noted short-sellers Copper River Management, a $1 billion hedge fund based in Larkspur, Cal., the month turned into a perfect storm. A devastating combination of counter-party failure, sudden regulatory edicts and margin calls conspired to turn the fund’s performance on its ear, leading to a 55% loss in just two weeks.” Translation: In the last two weeks Copper River lost over half of its billion dollars, not through any decisions made there: instead, counter-party failure, regulators, and those pesky margin calls “conspired” to create “a perfect storm” that lost the half-billion dollarts.
- In case the point was lost that none of this had to do with the quality of Copper River’s investments, Roddy Boyd writes it out. He really does, in those words: “What’s worse for Copper River is that the battering had nothing to do with the quality of its investments.”
- We are treated to a bit of financial arcana: “On top of that, as Lehman unwound its own internal hedges to the Copper River trades, its trading desks bought shares of these companies, driving up their prices and leading to losses for Copper River.” Translation: Lehman sold Copper River puts that Lehman then hedged by shorting stock, most likely in more flagrant abuse of the option market-maker exception, and when Lehman covered its shorts it hurt Copper River, whose investment strategy assumes an environment where shorts don’t have to cover (and understandably so). As far as Copper River and Roddy Boyd are concerned, the possibility that shorts would have to “cover” (that is, “at some point come into the possession of”) things they sell is a damn imposition.
- As though that litany of impositions were not harrowing enough, Roddy chronicles the further injustices suffered by Copper River: “That was bad enough, but on September 19, the bottom fell out for the fund. That was when the Securities and Exchange Commission ordered unprecedented restrictions in short sales” (as our nation’s financial system was imploding). And further, “As prices in those stocks shot upwards, Copper River was forced to cover – or buy back – some of its positions at steep losses. “ Clearly this further injustice is intolerable: how could a hedge fund such as Copper River ever be expected to make money if it sells things expecting them to go down, and they go up? And lastly, “The rising stock prices also led to a series of margin calls (demands for additional cash collateral to be deposited in a margin account) from Goldman Sachs, Copper River’s prime broker.” I’m with Roddy on this one: it’s just damn inconsiderate of Goldman Sachs to insist that Copper River have funds to back its play.
Perhaps I am too hard on Roddy. “Out of the crooked timber of humanity no straight thing will ever be made”, and all that. A gal moves to the big city, gets behind, does things of which she is not proud. Molded are we all of imperfect clay.
But normally, she doesn’t write home about it.
It’s just Roddy’s ill fortune to have to do these things in national print.
So the SEC today lifted its ban on short-selling, and all but declared open season for law-breaking naked short sellers to start destroying companies again – and who does CNBC have on for two hours as its honored “guest host”?
None other than Jim Chanos, the salamander-slick director of the short-seller lobby.
Asked about naked short selling, Chanos said, with a straight face: “Anytime a hedge fund or short seller shorts a stock, it is a legitimate short. We have to get a locate or pre-borrow from the broker….”
Chanos continued: “The one thing I have in common with Patrick Byrne, chairman of Overstock.com [and Deep Capture reporter], is that we are calling for strict, strict delivery…in terms of delivering shares…that is how to end this naked short selling…”
CNBC, which serves as a sort of seedy massage parlor to the short selling community, gave Chanos the usual treatment – lubrications and sweet nothings. No tough questions. No retorts to his outlandish assertions. No wondering aloud as to his absurd and self-serving logic.
Let’s get this straight.
Not long ago, Chanos insisted that naked short selling did not occur.
Now, he says naked short selling occurs. But it’s not short sellers who are naked short selling. Short sellers make sure their brokers borrow real stock before they sell it.
In any case, Chanos acknowledges that short sellers’ brokers are not borrowing real stock before they sell it. That is why they are not delivering the stock. And that is why he claims to agree with Patrick Byrne that there needs to be “strict, strict delivery.”
But Chanos is against a ban on naked short selling (which would force short sellers to borrow real stock, thus ensuring delivery). Chanos says that a ban on naked short selling would destroy “market efficiency.”
So, to summarize the Chanos position: Naked short selling didn’t occur, but now it occurs, except short sellers don’t do it, and the SEC shouldn’t ban it because the market would cease to function properly if short sellers were forced to stop doing what they don’t do.
And given that so many shares are failing to deliver (after being sold naked by short sellers who never sell naked), Chanos is calling for “strict, strict delivery” of stock (while praising the SEC for its “strict” new rules which stipulate that nothing happens to short sellers who fail to deliver stock).
CNBC treated us this morning to two hours of Chanos nonsense. At one point this charlatan even insisted that short sellers aren’t short selling financial stocks at all. Really, he said short sellers aren’t short selling. Period. Take his word for it. CNBC did.
That was around 7:30 AM, right after CNBC’s Becky Quick referred to Chanos as “the legendary short seller….er, investor.”
At 9:30 AM, the markets opened and the criminal naked short sellers…er, investors…went back to work, unfettered by the SEC’s “strict” new rules.
Within an hour, Morgan Stanley was down 25%.
* * * * * * * * *
In a few hours, the SEC will lift its ban on short-selling of 900 stocks. That is well and good, except that it appears that hedge funds will also be permitted to resume abusive naked short selling – offloading stock that they do not possess in order to dilute supply and drive down prices.
Given that naked short selling precipitated the collapse of Lehman Brothers, which triggered global panic, it seems fair to say that the resumption of naked short selling could precipitate the collapse of another big bank, which will fuel still more panic, and then we will really be screwed.
Say what you will about Lehman’s balance sheet, that company was not going out of business until its stock price hit rock bottom, making it impossible to raise capital, and triggering a run on the bank. The stock price hit rock bottom because it was bombarded by naked short selling and false rumors.
Some financial media have been cheering the imminent lifting of the short-selling ban. According to these journalists, the ban did not prevent the stock market turmoil of the last couple weeks. Therefore, lifting the ban should not make things worse and short-selling is good for the markets and blah blah blah.
The media never cease to astound on this issue. The fact that markets have been bad does not mean they wouldn’t have been a whole lot worse without the ban. And if short-selling is good for markets, this is fully besides the point. The point is that naked short selling is most definitely not good for the markets, and, as of tomorrow, that very not-good-for-the-markets activity is going to be allowed to resume with the full acquiescence of the SEC and the financial media.
Look, on September 16, Morgan Stanley was trading around $26. On September 17, it hit a low of $11. The stock was slashed in half in less than a day. That tends to happen when a company is under a full-scale attack by naked short sellers.
On the day after Morgan Stanley was slashed in half, the SEC banned short selling. It is fair to say that if the SEC had not acted, Morgan Stanley would not be with us today.
After the SEC banned short selling, hedge funds stopped circulating false rumors about the companies they had been attacking. Today, in anticipation of the short selling ban coming to an end, hedge funds began circulating false rumors about Morgan Stanley – the most damaging being that Mitsubishi had pulled out of an agreement to inject $9 billion of capital into the bank.
What happens tomorrow when those rumor-mongering hedge funds resume naked short selling?
As one prominent economist said, forebodingly, “We will see.”
In testimony before Congress yesterday, Richard Fuld, the former CEO of Lehman Brothers, said that (criminal) naked short selling precipitated the demise of Bear Stearns and Lehman, and nearly toppled Goldman Sachs and Morgan Stanley.
Given that not only Fuld, but also the CEOs of Goldman Sachs, Morgan Stanley, JP Morgan and a good number of traders on Wall Street – along with John McCain, Hillary Clinton, the Chairman of the SEC, the Secretary of the Treasury, and countless others in Washington — have all now implicated naked short selling in the hobbling of the American financial system, you would think that the mainstream media could produce just one investigative report – just one story taking a serious look at this criminal activity and its recent effect on our markets.
Instead, we get the usual platitudes from the likes of Joe Nocera at The New York Times. He writes:
“Mr. Fuld, in typical C.E.O. fashion, claimed to take ‘full responsibility’ for his actions — but spent the entire time blaming others for Lehman’s downfall. Early in his testimony, he even blamed [emphasis mine] ‘naked short-sellers’ who passed along “false rumors” that started a run on his bank.”
By Nocera’s standards of anti-investigative journalism, a serious issue is settled not with data or evidence, but with one word – “even.” Could naked short selling have triggered the bank run that has Chernobyled our financial system? Can’t be, writes Nocera, because Lehman’s CEO “even” said it can be.
Nocera continues: “As both The New York Times and The Wall Street Journal pointed out in lengthy stories on Monday, Mr. Fuld had assets on his books that were wildly overvalued.”
So, apparently, Lehman could not have been a victim.
A woman who once shoplifted is raped in an alley. Was she raped? No, because she was a shoplifter and she “even blamed” the rapist.
Keep in mind that Nocera once encouraged an assembly of his media colleagues not to investigate naked short selling. “Life’s too short,” he told a panel audience at the annual conference of the Society of American Business Editors and Writers. “I don’t want to do it.”
Well, somebody should do it – and fast – because the SEC is going to lift its ban on short selling tomorrow, and there are no signs that it’s going to force hedge funds to borrow real shares before selling them.
So it will once again be open season for naked short selling – and market destruction. Countless more companies will fall prey to an easily preventable crime. And more CEOs will “even” point fingers at the criminals while Joe Nocera and the Media Mob stand idly by.
* * * * * * * *
If any journalists are interested, here is Fuld’s testimony:
“The second issue I want to discuss is naked short selling, which I believe contributed to both the collapse of Bear Stearns and Lehman Brothers. Short selling by itself can be employed as a legitimate hedge against risk. Naked short selling, on the other hand, is an invitation to market manipulation. Naked short selling is the practice of selling shares short without first borrowing or arranging to borrow those shares in time to make delivery to the buyer within the settlement period – in essence, selling something you do not own and might not ultimately deliver to the buyer.
Naked short selling, followed by false rumors, dealt a critical, if not fatal blow to Bear Stearns. Many knowledgeable participants in our financial markets are convinced that naked short sellers spread rumors and false information regarding the liquidity of Bear Stearns, and simultaneously pulled business or encouraged others to pull business from Bear Stearns, creating an atmosphere of fear which then led to a self-fulfilling prophecy of a run on the bank. The naked shorts and rumor mongers succeeded in bringing down Bear Stearns. And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers. In our case, false rumors were so rampant for so long that major institutions issued public statements denying the rumors.
Following the Bear Stearns run on the bank, we and many others called on regulators to immediately clamp down on naked short selling. The SEC issued a temporary order that went into effect on July 21 prohibiting “naked” short selling of certain financial firms, including Lehman, Merrill Lynch, Fannie Mae and Freddie Mac. This measure stabilized the share prices of Lehman Brothers and the other firms. However, this restriction was temporary, and on August 13 it expired after 17 trading days. History has already shown how wrong and ill-advised it is to allow naked short selling.
Many of the firms that have recently collapsed or have been forced into emergency mergers, takeovers, or government bailouts – Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, AIG – did so during the gaps of time in which there was no meaningful regulation of naked short selling. On September 15, when the market opened after the collapse of Lehman, naked shorts appeared to turn their attention to Morgan Stanley and Goldman Sachs. In the three days between the announcement of Lehman Brothers’ bankruptcy and the SEC instituting an emergency ban on short selling,
Goldman Sachs’ and Morgan Stanley’s share prices fell 30% and 39% respectively.
None of this was a coincidence.
After seeing this stock price reaction in the week following Lehman Brothers’ bankruptcy, the SEC, like the Federal Reserve, took immediate action to stabilize the system. On September 18, following the decision of the Financial Services Authority in the United Kingdom a day earlier, the SEC instituted an emergency ban and other restrictions on short selling financial institutions. In taking these steps, Chairman Cox explained: “Given the importance of confidence in our financial markets as a whole, we have become concerned about the sudden and unexplained declines in the prices of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence without a fundamental underlying basis. The crisis of confidence can impair the liquidity and ultimate viability of an issuer, with potentially broad market consequences.” These new restrictions are set to expire no later than October 17. Permanent regulation of naked short selling is needed to prevent a similar demise for the firms that survived with the government’s help.”
Starting in 2008, the exchanges and broker-dealer owned and controlled DTCC are requiring companies to make all their outstanding shares eligible for DRS (Direct Registration System), otherwise known as the “dematerialization” of stock certificates. If they succeed in this scurrilous scheme, it will mean the elimination of all paper stock certificates and any way of EVER reconciling the actual number of real shares extant in the clearance and settlement systems. Just like attempts to eliminate paper ballots and any paper trail via electronic voting machines, the elimination of stock certs would enable the criminals to eradicate the only existing physical evidence of their wrongdoing. No oversight. Just trust us.
Re: Lenin: Repeat A Lie Often Enough….
By wiki on 12/9/2007 9:25 PM
– swaps to simulate a call off balance sheet.
“The first swaps were commonly used as a way to hedge exposure to market risk for a low fee. For instance, if a trader decides to short sell a stock, there is considerable “market risk” if the stock price rises. In order to hedge that risk, the trader could enter a swap agreement for the same stock, paying a small fee to “hold” it while not actually having to pay for the stock itself. In this case if the stock price does rise, they simply end the swap and use the stock to pay off the short. In effect, they are buying insurance against their position. Known as total return swaps, in these contracts all cash flows, dividend payments for instance, are payed or received by the holder as if they owned the stock directly. Yet for accounting purposes they are off-balance sheet and do not appear as an asset (they do not legally own the stock in question).”
Re: Lenin: Repeat A Lie Often Enough….
By wiki on 12/9/2007 9:26 PM
This swap thing could be REALLY important.
As I understand it:
Let’s say Mr. Short has attacked a victim company and is short $10 million worth of that company’s stock. He is at great risk if the stock goes up, so he does a deal with the prime brokerage. He explains to them that he is going to continue to short the sh_t out of the victim company, so it likely won’t go up, but he enters into this deal.
He agrees to pay the prime brokerage the 5% interest on $10 million if they agree to pay him any capital gains and dividends on $10 million worth of the victim shares.
He hasn’t put up a dime for this agreement. At 5%, he pays $42,000 per month to in effect insure his short position. He pays them interest on money that doesn’t exist and they agree to pay him the upside on shares that don’t exist. Because the SEC has said a long contract is the same as owning the shares, he isn’t technically short. His long contract cancels out his short position, so he doesn’t need to borrow real shares.
He shorts 40 million shares of victim co. at $25
He needs to put up 102% of the net value, but he has the proceeds from the sale, so he has to put up 2% or $200,000 as collateral.
A) Outcome A, stock down 20%: He’s bet well and the stock has gone down to $20 six months later. He’s only tied up $200,000 of his own money + ($42,000 x 6). He buys back in at $20, for 8 million and the prime brokerage gives him back his $200,000 collateral.
He makes $10 million – $8 million – $252,000 in swap fees or $1,748,000. I’ll say it again, on risking $200,000 in collateral and promising to pay $42,000 per month, he has made almost $2 million.
B) Outcome B, stock running like stink and is up 100% to $50. No problem, he just collapses the swap. His profit on the swap is exactly equal to his loss on his short position.
He gets back his collateral, so that doesn’t matter. His loss is only 6 x $42,000 or $252,000.
C) Outcome C, stock goes to zero. He makes $10,000,000 – $252,000 or $9,748,000
Both sides can’t lose. The prime brokerages don’t care as they’ve agreed amongst themselves to just net to create infinite numbers of claims on real shares. They know they can’t ever be bought in and they make fees on every transaction they do with their hedge fund customers. Most of the time it will go down and they get paid interest on money that doesn’t exist. They also keep the interest on the 102% cash while it is being held as collateral and the profits will likely continue to sit in their coffers for the next deal.
The hedge funds can manipulate stocks down without any fear of a squeeze. The worst that can happen to them is they lose their interest payments for the time they were short.
The contract is off balance sheet and not taxable to either party as no one bought anything and there is no capital gains. It’s only a swap of cash flows that nets to nothing.
Imagine if you are the SAC Capital sized hedge fund manager. For the cost of the interest payment, you can balloon your assets by 50 times, then collect your three percent management fee, EVEN IF YOU LOSE.
What I’ve described is an equity swap, but they do it for interest rates, currencies, etc., putting the whole world financial system at risk. No wonder they are afraid to buy anyone in.
“The five generic types of swaps, in order of their quantitative importance, are: interest rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps.
The Bank for International Settlements (BIS) publishes statistics on the notional amounts outstanding in the OTC Derivatives market. At the end of 2006, this was USD 415.2 trillion (that is, more than 8.5 times the 2006 gross world product).”
The reason they are called “OTC derivatives” is these agreements trade over the counter similar to the way options trade and the cash flows are tied to the percentage change in the underlying asset.
ABOVE, FROM: http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryID/6
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