Some market observers believed there was a specific reason the bulls were unleashed late in the afternoon of the Tuesday, May 25 U.S. stock market session, the one that opened frighteningly with a 200-plus point drop on the open amidst tensions in the Koreas and widening global debt contagion fears.
What was the specific reason? Goldman Sachs. Momentum trading in the shares of the once venerated, oft-bashed banking powerhouse led a late, last-half-hour-of-the-day rally that erased much of the day’s losses.
Why did Goldman rally? Probably because Congressional kingpins signaled they were just bluffing when it came to restricting Federal Reserve backed investment banks from dabbling in derivatives.
Oh, and North Korean troops were said to be in no certain state of heightened alert. So World War III is or isn’t imminent, but banks are likely still going to be poised to make some serious money dealing swaps instruments over the counter. It is, after all, a multi-trillion dollar market.
Is it really?
Remember that for all of the hype over the slow decline of the mainstream media and journalsim in general, headlines in the major media, splashed in ink on physical newspapers, strewn across cable television screens, and instant messaged across digital venues, still drive markets, and influence policymakers. The point being that the reason the derivatives marketplace is so frightening to people is the size of the dollar amount that can be pegged to it: North of $600 trillion.
I’m not going to try to explain that number in terms anyone can get their head around; suffice to say that Mott’s would have to sell an extreme amount of applesauce at $4,000 a jar to make that much over the course of eternity. The derivatives market carries such an uncomfortably mind numbing number people become comfortably numb.
It didn’t necessarily have to be this way. But it is so, because back in the day the Street lawyers and leaders who created and play in this world decided that that’s how they wanted things to be described, in notional terms, the theoretical face value of every side deal, every contract written. But more realistically, when money changes hands, what may have been up to a $70 billion payoff, or might have been, or what technically could have been, ends up, in actuality, being a $12 billion score for some lucky trader on the right side of the transaction, at the right moment in time. When the music’s over, turn out the lights, turn out the lights...
I’m not sure how the bank honchos can ever try to explain that the lurking, gigantic, shadowy Godzilla of unparalleled ferocity is really more like a fluttering Mothra. Sure, a 20 story insect-like creature is going to scare the daylights out of some people and knock out a few power lines but it won’t necessarily level entire city blocks with a violent thrash of its reptillian tail.
There may come a day when more reporters and headline writers begin to attempt to get underneath the sensational figures that can be attached to derivatives and use phrases and conventions that moots shock value and hamstrings the ability to put the number 600 in front of the word trillion. But even then, like dubious creditworthiness ratings or conflicted sell-side research, the legacy of the enormity of speaking notionally will be long embedded in the system.
Rich Blake is a New York City-based freelance financial journalist. He currently contributes to Institutional Investor magazine, Reuters HedgeWorld and ABCNews.com, among others.
