Jump to content
House Price Crash Forum
Sign in to follow this  
interestrateripoff

Five Banks Account For 96% Of The $250 Trillion In Outstanding Us Derivative Exposure

Recommended Posts

http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de

.....a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf

Nice at least the risk isn't held by just a few. It's a pity Noel isn't around to offer some reassuring words about how it all cancels out.

Still I'm sure the financial genius's that came up with all this won't have shafted the entire global economy.....

Nothing that a few trillion dollar bill couldn't sort out.

Share this post


Link to post
Share on other sites

I just glad they passed a law in the US to prevent these things being regulated- that would have thrown grit into the wheels of the wealth creation process for sure. :lol:

Though I do wonder how these unregulated 'over the counter' ( opaque and concealed) arrangements between private entities have any legal standing- why do these contracts have any validity in the first place?

I mean if I promise to pay my postman a billion quid if united win the cup and then fail to deliver, can he take me to court?

Share this post


Link to post
Share on other sites

I mean if I promise to pay my postman a billion quid if united win the cup and then fail to deliver, can he take me to court?

Yes and the postman would get every last penny out of you (that's possible) and then you'd become bankrupt. He may not get his billion but you'd be fooked.

Share this post


Link to post
Share on other sites

Though I do wonder how these unregulated 'over the counter' ( opaque and concealed) arrangements between private entities have any legal standing- why do these contracts have any validity in the first place?

I mean if I promise to pay my postman a billion quid if united win the cup and then fail to deliver, can he take me to court?

I believe the contracts (like the gambling debt example) can be enforceable within civil law. The difficulty arises because enforcement doesn't necessarily mean you'll get paid - it may mean you only get to bankrupt your counter-party and collect the crumbs.The problem with derivatives is that they're brokered by banks - who our government is not inclined to allow to be declared bankrupt - and, in any case, these same banks have spread the risks such that any genuinely unforeseen even will bring them into joint and several bankruptcy with the order of collapse being impossible to determine at the outset.

Share this post


Link to post
Share on other sites

Well thats the US up the creek then as they cant bail this out when it bursts and its only a question of when not if imo.

Kind of makes Europes problems a mere ripple in amongst the white water rapids. :D

that is why the ratings agencies and the shadow banking systems and hedge funds have been turned on Europe, to divert attention away from the US, get Europe printing so the US can printing some more to keep the plates spinning.

That derivatives complex has been allowed to grow further over the last few years is totally shocking.

Share this post


Link to post
Share on other sites
I believe the contracts (like the gambling debt example) can be enforceable within civil law. The difficulty arises because enforcement doesn't necessarily mean you'll get paid - it may mean you only get to bankrupt your counter-party and collect the crumbs.The problem with derivatives is that they're brokered by banks - who our government is not inclined to allow to be declared bankrupt - and, in any case, these same banks have spread the risks such that any genuinely unforeseen even will bring them into joint and several bankruptcy with the order of collapse being impossible to determine at the outset.

So all that is required to become fabulously wealthy is to be in control of any too big to fail institution and collude with other such institutions to create unregulated agreements that generate huge profits that are paid out- if required- by the state?

This may turn out to be the biggest welfare scam in the history of scrounging. :lol:

No wonder the banksters gave up capitalism- why bother when you can just print your own money?

Edited by wonderpup

Share this post


Link to post
Share on other sites

[ It's a pity Noel isn't around to offer some reassuring words about how it all cancels out.

In his absence I'll try.

It's like Ladbrokes saying they have a £1bn liability on the Grand National but that is the liability of all the bets on all the horses. However the net liability is much less because only one horse can win so they pocket the losing bets on all the other horses.

See..... it's contained.

Share this post


Link to post
Share on other sites

In his absence I'll try.

It's like Ladbrokes saying they have a £1bn liability on the Grand National but that is the liability of all the bets on all the horses. However the net liability is much less because only one horse can win so they pocket the losing bets on all the other horses.

See..... it's contained.

http://uk.eurosport.yahoo.com/11042010/58/bookies-broke-mccoy-national-triumph.html

Champion jockey Tony McCoy almost broke the bookmakers as well as his Grand National hoodoo with victory on Don't Push It on Saturday.

...

He estimated the betting industry in Britain would have lost £50 million on the race.

http://www.betasia.com/how-to-win/459822/bookies-who-lose

Perhaps the most devastating loss to bookmakers ever came in the 1946 Epsom Derby. It was the first Derby after the end of World War II and everyone who had ever served in the Royal Air Force – or who had relatives in the RAF or paratroops – went for an outsider called Airborne. The horse, whose form until then was more akin to a donkey than a thoroughbred, hacked up at 50/1. More than half the bookmakers in the UK went bankrupt on the back of that one result, something that has never been repeated since.

More recently, bookies have been stung by slightly sharper punters, who relied more on mathematics than picking an attractive name. The self-styled Hole In One Gang realised after studying the form that the chances of any of the golfers in a given tournament scoring a hole-in-one was around 50%. But talking with friends, the two men realised that most people thought it was nearer a one or two per cent probability. So they decided to tour the country asking bookies for bets on this happening in any one of the four Majors, making small bets of £20 here and £50 there at huge odds. When there were hole-in-ones in three of the four tournaments, the two picked up just short of £1 million. Plenty of bookies squealed that they had been cheated – some just refused to pay up – but some of the more honourable ones admitted they had not done their homework and handed over the keys to their business in lieu of payment.

The problem with bookmaking is that bookies are trained to blindly follow the statistics, rather than going for the emotional choice. At Ascot racecourse on 28 September 1996, jockey Frankie Dettori had ridden the first six winners on a seven race card. The bookies has rated his mount in the last – Fujiyama Crest – a 16/1 shot in the morning and refused to believe it good enough to complete his clean sweep. The large bookmaking firms – who had huge liabilities from multiple bets on all Dettori’s rides – tried desperately to cut the price but some bookies carried on laying it as though it couldn’t possibly win. Fujiyama Crest led all the way and held on by a rapidly diminishing neck from the fast-finishing Northern Fleet, forcing several bookies to sell their palatial houses and to start all over again.

Great analogy, it's just like banking. :lol::lol:

Edited by interestrateripoff

Share this post


Link to post
Share on other sites

In his absence I'll try.

It's like Ladbrokes saying they have a £1bn liability on the Grand National but that is the liability of all the bets on all the horses. However the net liability is much less because only one horse can win so they pocket the losing bets on all the other horses.

See..... it's contained.

In reality the exposure is much less than that. Most of these quoted are interest rate swaps. The notional on these are really just used for calculations.

Say if LIBOR is 3% and you construct a swap of Fixed 3% vs LIBOR-0.5%. No money changes hands until fixing and then it's just the difference between the fixed and floating legs. If LIBOR went up to 5%, the payment would be 1.5% of the notional ($1.5m). No only that, but the bank would normally try to hedge this off, so they'd try and sell a swap of LIBOR-0.25% vs Fixed 3% .... so there's no exposure to LIBOR movements and a small profit to cover costs and counterparty risk.

These products are OTC, but it's not to hide them. They're OTC because they're tailored to the customer. (Normally the customer is a retail bank trying to manage their the IR or FX exposure - caused by fixed/float mortgages vs savings/bonds). This is really what investment banks should be doing: servicing retail banks.

There's a lot of work going on to try to move these to exchange traded, but it's no so easy. They have started with regular 'netting off' processes.

The CDO world is more mucky. I can understand wanting insurance on a couterparty defaulting, but if you don't have a liability in the first place..... !

Share this post


Link to post
Share on other sites

London Borough of Hammersmith and Fulham

Great example of how things can go wrong, but the total losses were only a small fraction of the notionals.

The question that needs to be asked is how a local council was allowed to take speculative gambles like that? That's not to say that they shouldn't use swaps in certain conditions .... but that was mad.

Edited by 57percent

Share this post


Link to post
Share on other sites

Great example of how things can go wrong, but the total losses were only a small fraction of the notionals.

The question that needs to be asked is how a local council was allowed to take speculative gambles like that? That's not to say that they shouldn't use swaps in certain conditions .... but that was mad.

How small a fraction are we talking here? If it's even 1% that's $2.5tr needed. 0.1% then we only need $250bn to cover the losses.

Have these 4 banks got a spare $250bn to cover the losses?

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 334 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.