US Commercial banks own $202 trillion in derivatives.

Discussion in 'Economics' started by wildfirepow, Aug 6, 2009.

  1. Few commentators care to mention that the total notional value of derivatives in the financial system is over $1.0 QUADRILLION (that’s 1,000 TRILLIONS).

    US Commercial banks alone own an unbelievable $202 trillion in derivatives. The top five of them hold 96% of this.

    Goldman Sachs alone has $39 trillion in derivatives outstanding. That’s an amount equal to more than three times total US GDP. Amazing, but nothing compared to JP Morgan (JPM), which has a whopping $80 TRILLION in derivatives on its balance sheet.

    Bear in mind, these are “notional” values of derivatives, not the amount of money “at risk” here. However, if even 1% of the $1 Quadrillion is actually at risk, you’re talking about $10 trillion in “at risk.”

    What are the odds that Wall Street, when allowed to trade without any regulation, oversight, or audits, put a lot of money at risk? I mean… Wall Street’s track record regarding financial instruments that were ACTUALLY analyzed and rated by credit ratings agencies has so far been stellar.

    After all, mortgage backed securities, credit default swaps, collateralized debt obligations… those vehicles all turned out great what with the ratings agencies, banks risk management systems, and various other oversight committees reviewing them.

    I’m sure that derivatives which have absolutely NO oversight, no auditing, no regulation, will ALL be fine. There’s NO WAY that the very same financial institutions that used 30-to-1 leverage or more on regulated balance sheet investments would put $50+ trillion “at risk” (only 5% of the $1 quadrillion notional) when they were trading derivatives.

    If Wall Street did put $50 trillion at risk… and 10% of that money goes bad (quite a low estimate given defaults on regulated securities) that means $5 trillion in losses: an amount equal to HALF of the total US stock market.

    This of course assumes that Wall Street only put 5% of its notional value of derivatives at risk… and only 10% of the derivatives “at risk” go bad.

    Do you think those assumptions are a bit… low?
  2. Daal


    Who you think is more LIKELY to have higher counterparty risk, a bank with $1m notional derivative exposure or a bank with $1T exposure?(Remember I said LIKELY, dont try to spin the facts by saying you cant use notional to measure counterparty risk)
    Now go ahead and yell that nobody knows shit and how everything is meaningless because you are the derivative god, then look at the stress test and the $100B figure in trading and counterparty losses for the largest banks and see how meaningless they really are with a egg on your face
  3. Repetitive, yes. Sensationalist? No.

    The derivatives market is one of the biggest factors taken into consideration by the White House, regardless of who is in power. The derivatives market is the reason banks and AIG were bailed out as they were.

    Unlike the great depression when PECORA hearings were held and massive structural changes adopted, this time the banks were prepared. They scared the crap out of both the Bush and Obama administration, and rather than face structural changes when they were at their weakest, they de facto took over the government. They swindled billions, and used that same money to own the Congress as well. The beast only got stronger.

    Think about it - highly leveraged bets made for wonderfully fattened balance sheets in good times. When the bets went sour, the highly leveraged and thus magnified losses were tied (rightly or wrongly) to a financial armageddon prompting a massive bailout. No clawbacks, just a combination of cheap or free money. And soon enough, back to business as usual.

    What a racket.

    My tinfoil view is that this massive leveraging and betting could have been done on purpose. It's jihad suicide style hezbollah control. Give me what I want, or we're all going down.
  4. Precisely.

    Goldman played the game perfectly.

    This is the largest transfer of taxpayer wealth to private financial firms, or any other entities, in the history of the nation or world.

    It's nothing less than the ultimate heist - trillions of money from those struggling, given to some of the most corrupt, reckless, and overpaid companies and individuals in history.
  5. Calm down, pls...

    All these numbers remind me of that fantastic TARP estimate of $23.7trn. Complete nonsense.

    Now, I agree that a bank with $1trn notional exposure is LIKELY to have higher counterparty risk than one that has $1m notional exposure (assuming they are roughly similar banks doing similar businesses).


    This information is utterly meaningless and provides zero insight into the ABSOLUTE amounts at risk as I have said time and time again. Why? You don't have to be a derivatives God (which, btw, I never claimed to be, but thx), to see why. It's just basic arithmetic. You have no way of assessing what fraction of the total notional your counterparties actually owe each other (and that's even without the netting and including exchange-traded derivatives).

    Seeing as how you decided to bring the stress test into this, let's perform a small exercise. Which bank, in your view, has higher risk: one with $10trn exposure or one with $194trn (96% of $202trn)?

    Your logic would suggest that the first one should be inherently a lot less risky. Well, guess what, bank losses on mtges and credit cards, a mkt with a total notional value of $10trn, are projected to be arnd $260bn, according to the stress test. Trading and cpty losses (even assuming they are all derivatives-related) are only arnd $100bn.

    So please help me understand how you intend to logically convert notionals into exposures?

    Again, I would be even willing to consider notionals as estimates, if we had no better measure. But the whole point is that there are journalists and bloggers out there who have actually done the analysis right. Read those articles instead of all the "quadrillion" bullshit.

    Apologies for a long post...
  6. please stop posting this garbage.
  7. Apart from blaming all the world's ills on the derivatives mkt, I actually don't completely disagree...

    This is a post that summarizes my thoughts on the matter exactly:

    But this has NOTHING to do with sloppy, sensationalist, lazy reporting. If you want to make a point about excessive leverage, don't make it using numbers that, on scrutiny, mean nothing. Maybe then people, including the people that make the relevant decisions, will actually listen.
  8. Who you think is more LIKELY to have higher counterparty risk, a bank with $1m notional derivative exposure or a bank with $1T exposure?

    In theory, this should not matter. I do a deal with Pat Byrne for a dollar and then do a deal with Buffett for $1,000. How's my risk profile? The gov't assumed entities would ensure the viability of counterparty risk because the ISDA said they would.
  9. fhl


    I still say it doesn't matter.

    If it blows up the fed will bail everyone out whether it's a dollar or a trillion. Then the s&p will go up fifty percent.

    You might even say that it's all a blessing in disguise.
    #10     Aug 6, 2009