Bank stock safety and derivatives It appears from the OCC that 96% of the total derivatives in US banks are held by five US banks. The derivatives apparently are not classified as to the whether they are collateralized or not, nor as to risk assessment. I was planning on purchasing some BAC stock for a long term hold, but am concerned about the credit risk impact of these derivatives on the security of the BAC stock. For example, BAC total assets are $1 trillion with total derivatives of $18 trillion. http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=MC44FU0H.xml http://www.occ.treas.gov/ftp/deriv/dq205.pdf Is there anyone who can shed some insight on the downside of these derivatives and what events would make the risk higher? In otherwords, how do you assess the safety of bank stocks that have large derivative profolios?
This is an interesting question. I wish that I had an answer, although if you look at who holds the derivative portfolios, you would not be suprised (JPM & Citibank). If those two go under I would expect you're going to be in a lot worse shape simply because that would be akin to wiping out the US banking system. In fact, if you think about it, perhaps you might prefer to be holding their securities rather than some other smaller issuer's as the smaller bank can go belly up, but these two aren't likely to barring some sort of apocalyptic scenario.
drsteph Found an article on JPM. It appears that for every dollar of shareholder equity, that JPM is controlling $626. worth of notional derivatives. JPM controls $26 trillion dollars in notional derivatives while its sharholder equity is only $42Billion. http://www.zealllc.com/commentary/monster.htm These are staggaring numbers when you consider the total US GDP is $12 trillion. The obvious quesiton occurs-- how safe are these derivatives and what are the downside aspects?
============= Not likely the FED would let the banking system be ruined; but with 1 to 18 BAC ratio, why bother ???????????????, especially for a long term hold, especially with so many more to choose from. Think those are what Buffet called financial WMD.