Discussion about derivatives and Morgan Stanley fined record $19m

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2005/01/13/cnmorg13.xml&menuId=242&sSheet=/money/2005/01/13/ixcity.html

Morgan Stanley is to pay the biggest fine ever imposed by the New York Stock Exchange for a string of lapses that included failing to prevent embezzlement and fraud. The $19m (£10m) penalty is the highest in the history of the NYSE, dwarfing the $2.5m paid in 1992 by Drexel Burnham Lambert.

The NYSE fined the bank $6m for its failure to supervise the staff, keep accurate records and monitor customer accounts. The other $13m fine is for seven other regulatory failings between February 2002 and September 2004.

These included the failure to report trading activity to the NYSE, to conduct proper background checks on staff and to deliver prospectuses to customers in a timely manner.

While agreeing to the fine, Morgan did not admit guilt.


This fine just underscores the (unregulated) risks that major U.S. banks are taking with numbers usually only only used in astrology. I'm not an expert on derivatives, so corrections and/or any other feedback is welcome. But I'm going to assume that a lot of the fine given to Morgan Stanley had to do with derivitives, since they are the largest holder of derivatives in the world and the value of them is greater than the world's GDP(Over $37Trillion! as of 09/30/04). Supposedly, OTC derivatives reduce risks and hedge, but that's about as believable as Bush/Snow's "strong dollar policy".

Even the OCC (Comptroller of the Currency) says in it's quarterly report, OTC contracts tend to be more popular with banks and bank customers because they can be tailored to meet firm-specific risk management needs. However, OTC contracts expose participants to greater credit risk and tend to be less liquid than exchange-traded contracts, which are standardized and fungible. Not to mention the fact that derivative transactions stay off the books and away from the eyes of investors and analysts.

Derivatives have caused almost every major economic disaster since in over a decade. They were directly responsible for Black Monday, the Asian crisis, the Long-Term Capital Management (LTCM) hedge fund disaster, the crash of Barings Bank, the bankruptcy of Orange County, and the major collapses of Enron, Parmalat, WorldCom, Global Crossing, Fannie Mae's recent fiasco and even Argentina!

On 12/30/04 A Dec. 15 ruling by the SEC to disallow Washington-based Fannie Mae's derivatives accounting methods sets the stage for the company to record a $9-billion after-tax loss. Derivatives are financial contracts whose value is derived from debt, equity securities, currencies and commodities.
http://www.freep.com/money/business/irep30e_20041230.htm

Fannie Mae's derivatives holdings were chump change compared to major U.S. banks. My guess is that there is some serious cooking of the books going on at these banks because a) they're buddies w/the GOP and b)the threat it poses to the U.S. economy

Any thoughts?

OCC Report: http://www.occ.treas.gov/ftp/deriv/dq304.pdf

And some of the derivatives themselves assume relationships not in evidence!

:toast:

:-)

of Social Security.

thread in "Latest Breaking News" here, you will get some good replies.

It's worrysome. I've wondered why Steven Roach of Morgan Stanley has been issuing warnings for the last few months that a crisis could be coming if interest rates aren't raised. He's been the lone voice at Morgan-Stanley are any of the Venture Capital Investment Brokerages raising the alarm.

There have been many articles posted in the last year warning of derivative and hedge fund melt downs. But, we've not seen a sign of it yet.

Maybe this is the first hint of what's to come. If you look at our stock markets you can see that somethings going on to prop them up and "day traders" can't be doing all of it. Plus the hedging and derivatives are world wide in our new "global economy." I guess whatever happens those who participate in them will be bailed out and it will come on the backs of the taxpayers and poor...like the Savings & Loan Crisis and all the rest have.

With the terrible debt national and personal here in the US and the "wealth factor" coming from re-fi and asset value based mostly on homeownership all kinds of interesting things could happen...:shrug: