http://www.zerohedge.com/article/and-next-aig-public-edition This is exactly what I am talking about when I say these institutions CANNOT hedge their large risks. The number 2 derivative holder in the country (Bank of America) and the number 3 derivative holder in the country (Goldman Sachs) had to be bailed out by the government through AIG (another large derivative holder) when AIG had just $10 billion dollars in collateral calls that it could not pay. AIG was the largest insurer in the world!!! The number 1 derivative holder int eh country (JP Morgan) needed $90 billion or so in bailout monies when its major counterparty failed - Bear Stearns. See Is this the Breaking of the Bear? January 2008 for how easy that was to see coming at least 3 momths in advance! That circle of concentrated risk is even smaller now then it was back then. Now 5 institutions hold 97% of the notional vale and 88% of the market value in derivatives, and they are all basically in the same business and all basically hedge with each other. It is not a true hedge when the other side can't pay, and history has clearly proven how easy it is for the other side not to be able to pay. See a sampling of my many posts on this topic
http://dealbook.blogs.nytimes.com/2009/10/14/dimon-sees-problems-with-derivatives-rule/ What is very interesting is the recent barking from Dimon to mention that JPM earnings would be significantly impacted if their derivative business were out in the open....ie on an exchange etc.... Thus one has to question just how real the profits really are from the top 5.....could it just be a big ponzi scheme....or is their "booking" scheme for real ???? This should really be put into question since a large portion of their assets have not been marked to market....thus claiming value far above the actuals.... Real.....lies.....or real lies....????? ...................................................... Add this to "false profits" in the sense the banks are getting money basically free from the govt.....and loaning it for the rate vs the spread..... Real ? Really ? And compensation......what % of real ? profits....?????