Τη πξαγκαηηθά είπε ν Warren Buffet.
Mε αθνξκή ηελ εηήζηα επηζηνιή ηνπ Warren Buffet πξνο ηνπο κεηόρνπο ηεο Berkshire Hathaway Berkshire Hathaway ε νπνία έρεη γίλεη “επίζεκνο” ηξόπνο επηθνηλσλίαο ηνπ πξνο ηνπο κεηόρνπο κεηά ην 1976 (ρξνληά θαηά ηελ νπνία ζήηεπζε ζην SEC Advisory Board for Corporate Disclosure) είλαη ζεκαληηθό λα επηζεκαλζεί ζε πνηα αθξηβώο ζεκεία αλαθέξζεθε ν Buffet γηα ηε ρξήζε παξάγσγσλ πξντόλησλ, ηη αθξηβώο ελλννύζε, θαη ηη αληαπάληεζε ν Alan Greenspan (Πξόεδξνο ηεο Fed) To πιήξεο θείκελν ηνπ Buffet, κπνξνύλ oη ελδηαθεξόκελνη λα ην βξνπλ ζην ηέινο απηνύ ηνπ θεηκέλνπ ή ζηελ δηεύζπλζε: http://www.fortune.com/fortune/investing/articles/0,15114,427751,00.html
1. Aλαθνξά ζην πσο ιεηηνπξγνύλ ζηε βάζε ηνπο ηα ρξεκαηννηθνλνκηθά παξάγσγα πξντόληα.
“Having delivered that thought, which I'll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts. Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction -with your gain or loss derived from movements in the index.”
2. Αλαθνξά ζηελ ύπαξμε παξάγσγσλ πξντόλησλ κεγάιεο δηάξθεηαο, έσο θαη 20 εηώλ. Απηά ηα πξντόληα, όπσο γλσξίδνπλ νη ελαζρνινύκελνη κε ην αληηθείκελν, αθνξά παξάγσγα ηα νπνία δεν δηαπξαγκαηεύνληαη ζε νξγαλσκέλεο ρξεκαηηζηεξηαθέο αγνξέο παξαγώγσλ αιιά ζπλαιιάζζνληαη δηκεξώο (κεηαμύ 2 αληηζπκβαιινκέλσλ) ζηελ εθηόο θύθινπ αγνξά (δειαδή OTC- Over The Counter, δειαδή κε ηελ απεπζείαο ζπλελλόεζε ησλ 2 κεξώλ) θαη έρνπλ σο ππνθείκελεο αμίεο παξαπάλσ από 1 κεηαβιεηέο.
“Derivatives contracts are of varying duration (running sometimes to 20 or more years), and their value is often tied to several variables.“
3. Αλαθνξά ζηνλ πηζησηηθό θίλδπλν πνπ έρνπλ νη αληηζπκβαιιόκελνη ζηελ πεξίπησζε πνπ δελ ππάξρεη εγγύεζε (collateral) ή θεληξηθόο αληηζπκβαιιόκελνο (Οίθνο Εθθαζαξηζηηθόο). Γίλεηαη αλαθνξά όηη ζηα εθηόο θύθινπ παξάγσγα, όπνπ δελ ππάξρεη εγγπεηήο ε απνηίκεζε ηνπ παξαγώγνπ εμαξηάηαη θαη επνκέλσο πξέπεη λα ιάβεη ππόςε ηεο ηελ πηζηνιεπηηθή ηθαλόηεηα ησλ αληηζπκβαιινκέλσλ. Φπζηθά, θάηη ηέηνην δελ ηζρύεη γηα ηα παξάγσγα πνπ δηαπξαγκαηεύνληαη ζε νξγαλσκέλεο αγνξέο θαη εθθαζαξίδνληαη θεληξηθά, αθνύ ππάξρεη ε εγγύεζε ηνπ θεληξηθνύ αληηζπκβαιιόκελνπ θαη ππάξρεη ξεπζηόηεηα θαη ηηκέο. “Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them.” 4. Αλαθνξά ζηελ θαζεκεξηλή απνηίκεζε θεξδώλ ή δεκηώλ πξηλ ηε ιήμε ηνπ ζπκβνιαίνπ. Πξέπεη λα πξνζερζεί όηη εδώ αλαθέξεηαη ζην πσο απηά ηα θέξδε /δεκίεο απνηππώλνληαη ζηηο εθηηκήζεηο εζόδσλ ηεο εηαηξείαο (“…in their current earnings statements…”) θαη ζπγθεθξηκέλα θάλεη κλεία γηα ηα παξάγσγα γηα ηα νπνία δελ ππάξρεη θαζεκεξηλόο δηαθαλνληζκόο ησλ θεξδώλ/δεκηώλ – δειαδή δελ αιιάδνπλ ρέξηα ρξήκαηα - (“…without so much as a penny changing hands …”). “In the meantime, though, before a contract is settled, the counterparties record profits and losses-often huge in amount--in their current earnings statements without so much as a penny changing hands.” 5. Αλαθνξά ζηελ επθνιία κε ηελ νπνία κπνξεί λα θαηαζθεπαζηνύλ παξάγσγα πξντόληα – ηνλ επξύηεξα γλσζηό θιάδν ηνπ financial engineering. Αλαθέξεηαη γηα παξάδεηγκα ζηα καθξάο δηάξθεηαο εμσρξεκαηηζηεξηαθά παξάγσγα “εύξνπο ζπρλνηήησλ”. Γηα απηά ηα πξντόληα γίλεηαη κλεία ηνπ δηκεξνύο ηεο πξάμεο ”…at a price, you will easily find an obliging counterparty…” θαη
έκκεζε αλαθνξά ζην γεγνλόο όηη αθελόο δηαηξέρεη θαλείο ηνλ θίλδπλν αληηζπκβαιιόκελνπ θαη αθελόο όηη δελ ππάξρεη ξεπζηόηεηα γηα λα απνηηκεζνύλ ηέηνηνπ είδνπο ζπκβόιαηα. Ωο γλσζηόλ, ε δπζθνιία δελ έγθεηηαη ζην λα δεκηνπξγήζεη θάπνηνο παξόκνηα ζπκβόιαηα αιιά ζην λα δεκηνπξγήζεη ηελ θαηάιιειε καζεκαηηθή θόξκνπια γηα λα ηα απνηηκήζεη. “The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem--at a price, you will easily find an obliging counterparty.” 6. Aλαθνξά ζην “δια ταύτα” ηεο επηζηνιήο ηνπ πξνο ηνπο κεηόρνπο. Αλαθέξεηαη ζην γεγνλόο όηη αγόξαζε κηα εηαηξεία, ηελ Gen Re, θαη καδί ηεο “θιεξνλόκεζε” θαη ηελ ΕΠΕΥ ηεο, ηελ General Re Securities. Eδώ πξέπεη λα επηζεκάλνπκε γηα όζνπο δελ γλσξίδνπλ όηη ην Re απνηειεί ζύληκεζε ηνπ ReInsurance – Αληαζθαιηζηηθή-. Ωο γλσζηόλ νη Αληαζθαιηζηέο θάλνπλ επξύηαηε ρξήζε εμσρξεκαηηζηεξηαθώλ θπξίσο παξάγσγσλ πξντόλησλ (OTC) γηα λα κεηώλνπλ ηνλ θίλδπλν πνπ αλαιακβάλνπλ έλαληη ησλ πειαηώλ ηνπο (άιισλ αζθαιηζηηθώλ εηαηξεηώλ ή εηαηξεηώλ). Επνκέλσο, νη ηζνινγηζκνί ηνπο είλαη γεκάηνη από ζέζεηο ζε παξάγσγα πξντόληα, σο επί ην πιείζηνλ κε καθξόρξνλεο ιήμεηο, θαη κε αληηζπκβαιιόκελνπο άιιεο εηαηξείεο. Σηελ πξάμε απηά ηα παξάγσγα πξντόληα κπνξεί λα είλαη επί “παληόο επηζζεηνύ”. Ο Buffet δειώλεη όηη δελ επηζπκεί ηνλ θίλδπλν πνπ ελέρνπλ νη ζέζεηο ζε παξόκνηα εμσρξεκαηηζηεξηαθά παξάγσγα πνπ έρεη ε General Re Securities, ην derivatives dealer arm ηεο εηαηξείαο πνπ αγόξαζε. Πξνθαλώο, ζεσξεί όηη ε επηρείξεζε ηεο αληαζθάιηζεο (Gen Re) δελ ελέρεη παξόκνην θίλδπλν (!?). “…When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn't want, judging it to be dangerous….” 7. Δηαπίζησζε όηη ζηελ νπζία ην θιείζηκν ηνπ derivatives dealer arm ηεο εηαηξείαο πνπ αγόξαζε δελ είλαη εύθνιν, θπξίσο γηαηί ππάξρνπλ καθξόρξνλεο ζέζεηο ζε εμσρξεκαηηζηεξηαθά παξάγσγα κε άιινπο αληηζπκβαιιόκελνπο (πνπ πξνθαλώο δελ επηζπκνύλ λα θιείζνπλ ηε ζέζε ή ζα ην θάλνπλ κόλν ζε επλντθή γηα απηνύο ηηκή!). Άξα, πξνδηαζέηεη ηνπο κεηόρνπο όηη δελ ζπκθέξεη λα θιείζεη ηελ εηαηξεία απηή αιιά αλαγθαζηηθά ζα πξέπεη λα πεξηκέλεη αξθεηά ρξόληα, κέρξη λα ιήμνπλ νη δηκεξείο απηέο ζπκθσλίεο.
“…We failed in our attempts to sell the operation, however, and are now terminating it. But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily)…”
8. Δηαπίζησζε όηη ηα παξάγσγα θαη αληαζθάιηζε έρνπλ πνιιά θνηλά ζεκεία, όπσο όηη εύθνια θάλεη θαλείο ην αξρηθό ζπκβόιαην/πξάμε αιιά δύζθνια ην θιείλεη (αλαθέξεηαη ζηε δπζθνιία πνπ έρνπλ ζηε δηακόξθσζε ηηκήο εμαηηίαο ηεο κε ξεπζηόηεηαο νη δηκεξείο ζπλαιιαγέο ζε παξάγσγα όπσο θαη νη καθξόρξνλεο αληαζθαιίζεηο), όηη ππάξρεη ν θίλδπλνο κεγάιεο πιεξσκήο ζην κέιινλ όπνπ θαλείο δελ ηνλ ππνινγίδεη κεξηθέο θνξέο ζηελ αξρή (πρ κηα αζθαιηζηηθή εηζπξάηηεη αζθάιηζηξα έλαληη ζεηζκνύ θαη γηα λα είλαη θζελόηεξε έλαληη ησλ αληαγσληζηώλ ηεο δεηάεη, κεηά από κειέηε ησλ αλαινγηζηώλ ηεο, εηήζην πνζό αζθάιηζεο ρακειόηεξν ηνπ αληαγσληζκνύ. Τν πνζό όκσο πνπ ζα έρεη εηζπξάμεη δελ ηελ θαιύπηεη πιήξσο ζηελ πεξίπησζε πνπ εμαζθήζνπλ ηα αζθαιηζηήξηα νη αζθαιηδόκελνη. Σηηο δηκεξείο ζπκβάζεηο ζε παξάγσγα πξντόληα έρνπλ ππάξμεη ζην παξειζόλ παξόκνηνη θίλδπλνη , πρ ).
“..In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract--which may require a large payment decades later-you are usually stuck with it.”
9. Δηαπίζησζε όηη ππάξρνπλ ζηξαηεγηθέο γηα λα πεξηνξίζεη θαλείο ηνπο παξαπάλσ θηλδύλνπο, όκσο πάληα κπνξεί λα ππάξρεη έλαο θίλδπλνο ν νπνίνο δελ έρεη εμαιεηθζεί.
“True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability....”
10. Δηαπίζησζε όηη κε βάζε ηα ινγηζηηθά πξόηππα, ε απνηύπσζε εζόδσλ ηόζν ζηνλ θιάδν ησλ αληαζθαιίζεσλ όζν θαη ζηα παξάγσγα πξντόληα είλαη «ππνθεηκεληθή” θαη κπνξεί θαλείο λα ππεξβάιιεη “…reported earnings that are often wildly overstated…“. Aλαθέξεηαη ζπγθεθξηκέλα ζην γεγνλόο όηη : ζηα εμσρξεκαηηζηεξηαθά παξάγσγα πξντόληα (επεηδή αθξηβώο δελ απνηηκνύληαη θαη δηαθαλνλίδνληαη θαζεκεξηλά) κπνξεί θαλείο λα είλαη «ππεξαηζηόδνμνο» εμαξηώληαη από ηελ κεζνδνινγία ηεο ινγηζηηθήο απνηίκεζεο ησλ ζέζεσλ “..mark-tomarket accounting….” ε κεζνδνινγία ηεο θαζεκεξηλήο απνηίκεζεο γηα καθξόρξνλα ζπκβόιαηα (distant settlement dates), κε δηαθνξεηηθέο ππνθείκελεο αμίεο (involving multiple reference items), ζε εμσρξεκαηηζηεξηαθέο δηκεξείο ζπλαιιαγέο (for counterparties) είλαη ηδηαίηεξα δύζθνιε θαη επνκέλσο, αλάινγα κε ηελ κεζνδνινγία θαη ηηο ππνζέζεηο ησλ αληηζπκβαιιόκελσλ, κπνξεί λα θαηαιήμνπλ θαη νη 2 αληηζπκβαιιόκελνη λα ....δείρλνπλ θέξδε!! (allowing both to show substantial profits for many years) “…Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That's true because today's earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years. Errors will usually be honest, reflecting only 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. Those who trade derivatives are usually paid (in whole or part) on "earnings" calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and "mark-to-model" is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-tomodel degenerates into what I would call mark-to-myth….”
11. Δηαπηζηώλεη όηη ε General Re Securities ζπκκεηέρεη ζε κηα κεγάιε γθάκα από παξάγσγα πξντόληα (14384 ζπκβόιαηα), κε 672 δηαθνξεηηθνύο αληηζπκβαιιόκελνπο. Είλαη ινηπόλ θαλεξό όηη κηιάεη γηα εμσρξεκαηηζηεξηαθά πξντόληα, αληηκεησπίδεη δπζθνιίεο ζην πσο κπνξεί ν νξθσηόο λα ειέγμεη θαη λα απνηηκήζεη ζσζηά απηέο ηηο καθξνπξόζεζκεο, κε ξεπζηέο ζέζεηο, δηαθαίλεηαη όηη ν ιόγνο πνπ γξάθεη ηελ επηζηνιή πξνο ηνπο κεηόρνπο (λα ηνπο εμεγήζεη ηηο δπζθνιίεο πνπ ππάξρνπλ ζην λα πνπιήζεη ή λα θιείζεη ηελ εηαηξεία απηή). “Of course, both internal and outside auditors review the numbers, but that's no easy job. For example, General Re Securities at year-end (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.” 12. Αλαθέξεηαη ζηα κεγάια πξνβιήκαηα πνπ έρνπλ αλαθύςεη ζην πξόζθαην παξειζόλ από κε ξεπζηέο θαη δύζθνια απνηηκήζηκεο ζέζεηο ζε παξάγσγα πξντόληα από εηαηξείεο (πρ LTCM θιπ).
The valuation problem is far from academic: In recent years some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great "earnings"--until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. "Mark-to-market" then turned out to be truly "mark-to-myth." I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multimillion-dollar bonus or the CEO who wanted to report impressive "earnings" (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Συμπέραζμα Είλαη επνκέλσο θαλεξό όηη ν Buffet αλαθέξεηαη : 1. Σηα καθξνπξόζεζκα, δηκεξή (OTC) παξάγσγα πξντόληα θαη ζηε δπζθνιία απνηίκεζήο ηνπο, αλ κάιηζηα ζπκπεξηιάβεη θαλείο θαη ηνλ πηζησηηθό θίλδπλν ηνπ αληηζπκβαιιόκελνπ. 2. Σην γεγνλόο όηη εμαηηίαο ησλ αληηθεηκεληθώλ δπζθνιηώλ πνπ ππάξρνπλ ζην θιείζηκν παξόκνησλ ζέζεσλ, δελ ζα πξνρσξήζεη άκεζα ζε πώιεζε ηεο General Re Securities. 3. Σηε δηαπίζησζε όηη ε αληηθεηκεληθή απνηίκεζε παξόκνησλ ζέζεσλ ζε παξάγσγα είλαη θάηη αλέθηθην θαη όηη ζα πξέπεη ζπλεπώο λα ην έρνπλ ππόςε ηνπο απηό νη κέηνρνη ηεο εηαηξείαο ηνπ (ε νπνία έρεη ζηελ θαηνρή ηεο θαη ζα απνηηκά επνκέλσο ηελ General Re Securities).
Tέινο, αμίδεη λα ζπκπεξηιάβνπκε ηελ απάληεζε ηνπ Greenspan ζε όζα είπε ν Buffet.
March 8, 2003, 6:31PM
Derivatives worrying Buffett, not Greenspan
By CRAIG TORRES Bloomberg Business News WASHINGTON -- Innovative use of credit derivatives is accelerating the globalization of financial markets as investors hedge some of the risk of investing in foreign assets, Federal Reserve Chairman Alan Greenspan says in what may be an answer to the fears of billionaire investor Warren Buffett. This use of credit derivatives contributes to rising living standards in countries that attract foreign capital, the Fed chairman said. He did not discuss the U.S. economy or the direction of interest rates in the text of his remarks last week to participants at a symposium. Greenspan suggested some concerns about the rise in use of over-the-counter derivative securities, or private contracts between sophisticated financial institutions, are overdone. While the total notional value of such contracts reached $128 trillion in June 2002, or more than ten times the value of U.S. gross domestic product, only about 5 percent of the U.S. banks use such contracts, and only about 0.2 percent of the U.S. banks use credit derivatives, with less than half of the fifty largest using them, he said, citing a study of Securities and Exchange Commission filings. Given that, "the potential for financial innovation to have a broad impact and thereby continue contributing to globalization appears considerable," the Fed chairman said. Derivatives are financial obligations derived from debt and equity securities, commodities and currencies. Their value, measured by the underlying assets, is higher than the amount of money at risk. Buffett, chairman of Berkshire Hathaway, criticized derivatives use in his annual letter to Berkshire shareholders, excerpts of which were published on the Fortune Web site last week. "The range of derivatives contracts is limited only by the imagination of man or sometimes, so it seems, madmen," Buffett said. Greenspan did say the way that OTC derivatives are traded and settled "could be significantly improved."
Παξάξηεκα : To θείκελν πνπ δεκνζηεύζεθε από ηνλ Buffet ζην Fortune.
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WHAT WORRIES WARREN Avoiding a 'Mega-Catastrophe' Derivatives are financial weapons of mass destruction. The dangers are now latent--but they could be lethal. FORTUNE Monday, March 3, 2003 By Warren Buffett
Warren Buffett has been writing annual letters to Berkshire Hathaway shareholders since 1965. In the early years he followed a conventional format, but after serving on the SEC Advisory Board for Corporate Disclosure in 1976, he decided--as he puts it--to "get serious" about communicating with his shareholders. He made another important decision in 1977: to recruit FORTUNE's Carol Loomis, a friend and longterm Berkshire shareholder, to be his editor. Buffett says she has been invaluable--"very friendly, very helpful, and very tough." In this year's letter to shareholders Buffett tells of the difficulties of exiting the derivatives business he inherited in his 1998 purchase of General Re. He also concludes that the explosion in derivatives contracts may have created serious systemic risks. Loomis suggested to Buffett that he publish his section on derivatives in FORTUNE, and what follows is excerpted from the 2002 Berkshire Hathaway annual report, which will appear at berkshirehathaway.com on March 8. Charlie [Munger, Buffett's partner in managing Berkshire Hathaway] and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system. Having delivered that thought, which I'll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts. Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction--with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years), and their value is often tied to several variables. Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses--often huge in amount--in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem--at a price, you will easily find an obliging counterparty. When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn't want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it. But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract--which may require a large payment decades later--you are
usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability. Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That's true because today's earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years. Errors will usually be honest, reflecting only 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. Those who trade derivatives are usually paid (in whole or part) on "earnings" calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and "mark-to-model" is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth. Of course, both internal and outside auditors review the numbers, but that's no easy job. For example, General Re Securities at year-end (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions. The valuation problem is far from academic: In recent years some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great "earnings"--until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. "Mark-to-market" then turned out to be truly "mark-to-myth." I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multimillion-dollar bonus or the CEO who wanted to report impressive "earnings" (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
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