February 1, 2008 (LPAC)--The South Korean Newspaper Chosun Ilbo warns "of the dangers of financial derivatives, as massive derivatives-related financial crises, including the subprime mortgage crunch in the U.S. and the Societe Generale trading scandal in France, are threatening the global economy." Derivatives "have now emerged as a threat to the framework of the global financial market."

Chosun Ilbo's acknowledgement of this risk is a first for a Korean publication, since up to now analyses of the Korean economy, while noting a U.S.-based slowdown, have concentrated on the growth factors internal to Korea alone, even though Korea's economy is heavily dependent upon exports.  And, of the entire world's financial press, the Chosun Ilbo's analysis is also unique in recognizing and clearly stating that sub-prime mortgages are a species of derivative transaction. It is exactly the derivative nature of the bundles of sub-prime mortage traches that initially allowed them to carry high investment ratings when they were marketed as income streams, and that have ultimately turned out to make the sub-primes so toxic.

The article notes that "the wide variety of derivatives, such as stock index futures, options, forward exchanges, and credit default swaps (CDS), were developed to reduce investment risks that occur in the process of trading stocks, bonds and foreign exchanges. The trading size of derivatives has increased by the day. In case of CDS, the annual transaction amount was a mere $920 billion in 2001, but that figure jumped to $40 trillion in 2007.

"But derivatives bring about serious side effects, since they have leverage effects that can multiply 'seed money' by geometric progression. One such typical side effect is the sub-prime mortgage crisis in the U.S.

"Most of the past supersize financial crises were related to derivatives. Barings Bank, a British investment bank that was more than 200 years old, suffered a huge loss after one of its young bankers speculated on futures contracts. Barings Bank was sold in 1995 for the nominal sum of one British pound."

It is standard for the financial press to treat each type of derivative as a separate class of investment that really has no common denominator with any of the others, and each particluar instance of a derivatives failure as a thing-in-itself, similar unrelated to any other instance. Chosun Ilbo correctly identifies them as just sub-types of a single species of dangerous transaction, the derivative that can fail in any number of fatal ways.

"Korea", it notes, "is relatively outside the sphere of direct influence of the sub-prime mortgage crisis, given that its derivatives market is still immature. But legally and systematically, it is already possible for Korean financial firms to develop and sell secondary and tertiary housing mortgage bonds as in the U.S. Some commercial banks in Korea are already selling primary asset-backed securities based on housing mortgages in the global financial market."

Chosun Ilbo doesn't make the final connection -- that a global collapse of the linked derivatives markets would take down the Korean (and other Asian) economies in a dynamic of global catastrophe.