13 Reasons to be Terrified of OTC Derivatives

As simple as Warren Buffett lets himself seem, he is a man of high intelligence with an intricate knowledge of the financial instruments. If he says that many of these are incomprehensible, I’d imagine that the average investor buying them doesn’t have a clue.

Without further a due, Jim Sinclair presents to us 13 reasons to be terrified of over-the-counter derivatives.

1) They have no regulation.

2) They have no standards.

3) Without standards there can be no viable market.

4) They are unlisted.

5) They are traded by private treaty negotiation.

6) They are valued by “mark to model,” which is a total cartoon.

7) They have no financial guarantee such as a clearing house.

8) They are unfunded special performance contracts floating in cyberspace. All funds in OTC derivatives are taken out as spreads and commissions.

9) More than 50 percent of the earnings of major international investment banks come from granting in the private treaty negotiation of these instruments of mass financial destruction.

10) Financial performance of OTC derivatives depends on the financial capacity of the loser in the transaction.

11) Control has been loose in interest-sensitive OTC derivatives because of multiple dealings outside of the initiating two parties until no one knows who has what.

12) The replacement value of these instruments is in the multi-trillions of dollars.

13) The massive expansion of these instruments has come in interest-sensitive and debt-guarantee instruments. Those are the most vulnerable.

The way the rich get richer, is by buying easy things they understand and working from there. Everyone understands commodities, many understand stocks, but very few understand the contracts being traded by the investment banks that offer them.

The advise is simple: Buy what you know.


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