In New York State, there is a mortgage recordation tax (1.75% of the principal of the mortgage, I think). I wonder if the banks were collecting the tax, but pocketing it instead of using it to record the mortgages.

Pepper spray is a just food product, and waterboarding is just a beverage.

I have never litigated an interest rate or currency swap, and I have never even heard of one defaulting. I am currentlly defending a large bank that bought a credit default swap from another large bank, and the bank that sold the swap is unhappy about making payments under it.

Interest rate and currency swaps are real swaps in the sense that two streams of payments that are expected to be very close in value are exchanged. They are done by hung-over fraternity boys with bachelor’s degrees in psychology, perhaps 100 times per day. In fact, a huge portion of interest rate and currency rate swaps are made between two different deparments of a large bank (such as the lending department and the foreign exchange department), so that the right cost center is credited for managing foreign exchange or funding properly.

A credit default swap is not really a derivative in the sense that a currency swap is. It is functionally the same as a financial guaranty with one side payng a small fee, and the other side taking all of the risk of loss on the underlying assets. They responds to a whole different set of rules. There is not theoretical price where both sides would enter into it for no fee. In a credit default swap, the seller of credit protection is betting the entire amount of the swap, not just upticks or downticks in interest rates. They are set up by teams of PhD working with sophisticated (and largely worthless) models that are right about 99% of the time, which means they have to potential to catastrophically wrong about once every three months.

Oh, I agree that it is a big number, but it is not trillions of dollars. I don’t think I said otherwise.

“I don’t understand what you said, so you must be wrong” is not a winning argument. Anything specific quibbles? Or even citation of an obvious contraction? Can you explain under what circumstances the whole notional amount of an interest rate swap would be at risk, anad the notional amount of a credit default swap would not? I would be most eager to learn. Can you point out any disruptions in interest rate or currency swap markets? If they are out there, someone on the internet must have noticed.

Here’s a simple test. Explain how the risks of a split strike differ depending upon whether you are long or short on the underlying security, and when the whole notional amount is at risk and when it is not? Can you explain when more than the notional amount is at risk? You may assume a share valued at $100, the purchase of a put at a strike price of $99, and the sale of a call at $101. To simplify, you may ignore counterparty risk. If you can answer a routine question like that, maybe we can get into the specifics of what I said.

None of this depends on modeling. It’s no more than arithmetic, not even algebra, and arithmetic on the trading floor works just like arithmetic everwhere else. You may use modelling to set the strike prices, but the function of the swap does not depend on any modeling.

Because pennies on the dollar over trillions of dollars of notional amount is still a lot of money. It’s just not trillions of dollars.

I litigate failed swaps.

That article is really misleading and shows a deep lack of understanding of derivatives.

While the article correctly points out that the notional amount can represent a leveraged position, most of the time notional amount has very little to do with the amount that can actually be lost. For example, if you buy a bond future for $1 to buy $100 notional amount of a certain bond at a strike price of $$99, the only amount that can be lost is $1.

As for the $75 trillion notional amount number, it is cited in a deeply misleading and misinformed waay.

(1) For example, on an interest rate or currency swap, for $100 of notional amount, the amount that can be lost or gained over the term of the swap is generally pennies on the dollar. $100 is the notional amount, but not the amount that can be gained or lost. To imply that the notional amount is the amount that can be lost is simiply deceptive. That’s different from a credit default swap, where the entire notional amount is at risk.

(2) On a true swap, the payout is a zero sum game. For every penny lost, someone earns a penny, and you don’t know which way that penny is going to flow. That’s different from a credit default swap where all of the losses are borne by one party.

(3) One of the reasons the notional amount is so large is becuase parties to swaps hedge by selling the samw swap that they buy. That doubles the notional amount, but on a net basis reduces the risk of a loss, and may even reduce the amount that can be lost to zero.

(4) Many swaps simply expire worthless, with no payment going either way. Because many derivatives are insurance against a bad event, if that bad event never happens, no payment is made. Without knowing what portion of that $75 trillion is in or out of the money, it is close to a meaningless number.

Interest rate swaps and currency swaps are by notional amount the largest financial transactions in the world, about $420 trillion dollars, but many of the swaps will esxpire worthless, many offset each other, and in any case only pennies (or fractions of pennies) on the dollar are at stake. As far as I can tell, the interest rate and currency swap markets have not run into any major problems, even in the deepest part of the recession.

Macaca moment!