Derivatives…what are they?

"My derivatives are hurting me!"

DERIVATIVES ARE USELESS AND A THREAT TO CIVILIZATION

You cannot eat derivatives. You cannot live in a derivative. You cannot wear derivatives as clothing, nor can you drive a derivative work. You cannot sail in them or fly in them. They cannot be used as tools of any useful trade. They are not computers, not machine tools, not pharmaceutical equipment, not agricultural implements. Derivatives are therefore totally outside the realm of capital goods production needs, no matter how these may be defined.

FOR RECOVERY, WIPE OUT, SHRED, DELETE ALL DERIVATIVES

J.P. Morgan Chase, therefore, performs no useful or productive social function, and there is absolutely no reason in the world why the people of the United States should want to bail out this pernicious and socially destructive institution. It has probably been several decades since J.P. Morgan Chase created a single modern productive job.

J.P. Morgan Chase’s strategic commitment in favor of the derivatives bubble means essentially that we can easily dispense with most of the functions of this self-styled “bank,” really a casino. Instead of being bailed out, J.P. Morgan Chase ought therefore to be seized by the Federal Deposit Insurance Corporation, and put through chapter 11 bankruptcy.

In the course of that bankruptcy reorganization, the entire derivatives book of J.P. Morgan Chase must be deleted, shredded, used as a Yule log, or employed to stoke a festive bonfire of the derivatives. The world did much better when there were no derivatives, and will get along just fine without them. Derivatives were of very dubious legality in general and were illegal in some of their specific forms until the mid-1990s.

INSTRUMENTS MEANS DERIVATIVES

According to Paulson’s pact with the devil published in the New York Times on September 20, 2008, the Secretary of the Treasury is supposed to be empowered by Congress to spend $700 billion on mortgage related securities, obligations, and instruments. That last word instruments is the favorite euphemism of television commentators and journalists who want to propose a derivatives bailout without using this word, which has now become to some degree unmentionable and taboo, presumably because of its highly negative connotations left over from the crises of more than a decade ago. Accordingly, one very good killer amendment that ought to be added to this pact with the devil should state that not one penny of taxpayer money should ever be used to finance the purchase of derivatives, no matter how they may be euphemistically referred to.

WHY BUY MORTGAGE BACKED SECURITIES THAT HAVE NO PRICE BID?

Paulson wants to buy up derivatives. But at what price? Derivatives have no intrinsic value.

Like the rasbucknik in the old L’il Abner comic strip, derivatives have negative value, since somebody has to be paid to cart them away. Counterparty derivatives currently have no price, since there is no market where they are trading, and nobody would want to buy them if there were such a market. Collateralized debt obligations were selling at 5 cents on the dollar a few weeks ago, but that was well before the current crisis broke in its full fury.

So how will Paulson know how much to pay for the derivatives he wants to purchase? Will he use the discredited Black-Sholes model, which led to the bankruptcy of the Long Term Capital Management hedge fund ten years ago?

Given all this, the only price which can be assigned to the mass of derivatives is not their notional value, but rather a big fat ZERO. Anything else is stealing from the government.

(to be continued)