3/17 BSC chart for last 5 days, making dot com bubble stocks proud!
http://finance.yahoo.com/q/bc?s=BSC&t=5d
\_ "Unless derivatives contracts are collateralized or
guaranteed, their ultimate value also depends on the
creditworthiness of the counter-parties to them. But
before a contract is settled, the counter-parties record
profits and losses--often huge in amount--in their current
earnings statements without so much as a penny changing
hands. Reported earnings on derivatives are often wildly
overstated. That's because today's earnings are in a
significant way based on estimates whose inaccuracy may
not be exposed for many years. The errors usually reflect
the human tendency to take an optimistic view of one's
commitments. But the parties to derivatives also have
enormous incentives to cheat in accounting for them...The
two parties to the contract might well use differing
models allowing both to show substantial profits for many
years.
Another problem about derivatives is that they can
exacerbate trouble that a corporation has run into for
completely unrelated reasons. This pile-on effect occurs
because many derivatives contracts require that a company
suffering a credit downgrade immediately supply collateral
to counter-parties...The need to meet this demand can then
throw the company into a liquidity crisis that may, in
some cases, trigger still more downgrades. It all becomes
a spiral that can lead to a corporate meltdown.
A participant may see himself as prudent, believing his
large credit exposures to be diversified and therefore not
dangerous. However under certain circumstances, an
exogenous event that causes the receivable from Company A
to go bad will also affect those from Companies B through
Z.
The derivatives genie is now well out of the bottle, and
these instruments will almost certainly multiply in
variety and number until some event makes their toxicity
clear...In my view, derivatives are financial weapons of
mass destruction, carrying dangers that, while now latent,
are potentially lethal." --Warren Buffett, 2002
http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf
-tom |
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