Remember those time bombs called derivatives which threatened to economically blow up the world in 2008? Not only were they never really regulated, they are back with a vengeance. A new report, by the Comptroller of the Currency, on Bank Trading and Derivatives Activities, Q2 2011, shows derivatives have increased 11.6% from one year ago to a U.S. holdings of $249 trillion dollars.
Five large commercial banks represent 96% of the total banking industry notional amounts and 86% of industry net current credit exposure.
According to DealBook, those banks are, pretty much the same banks who were given massive bail outs via TARP. BoA especially is already in trouble due to their Countrywide holdings. 99% of all derivatives are held by just 25 banks.
The nation’s four biggest banks — JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs — are the biggest players, holding roughly 95 percent of the industry’s total exposure to derivatives. JPMorgan, which holds the most among commercial banks, carries some $78 trillion worth of derivatives on its books, according to the report. Citi is next on the list, with $56 trillion, up from $54 trillion in the first quarter.
Seeking Alpha has a good explanation of how the actual loss risks are much less than the frightening $249 trillion dollar amount.
Yet, the OCC report still shows a huge financial risk associated with derivatives:
Credit exposure from derivatives increased in the second quarter. Net current credit exposure increased 3%, or $11 billion, from the first quarter of 2011, to $364 billion.
According to Reuters, the OCC data is the only information disclosed to date on commodities types of derivatives:
The OCC, an arm of the U.S. Treasury that supervises all national banks, provides detailed trading revenues for the top five commercial banks in the United States. Its report is the only public gauge of the earnings of commodity trading operations among the big bank holding firms, which don't otherwise report a detailed breakdown by type of asset.
Still, what the OCC breaks down for commodities is considered imperfect due to the inclusion of revenue from other categories such as credit or housing-related securities.
The SEC is also seeking comment on mutual funds getting into the derivatives game, yet supposedly are split on any sort of, watered down Volcker Rule.
Now, we have the inevitable Greek default and an analysis by Paul Krugman showing strong deflation needs to happen in order avoid a disaster in Europe.
The market seems to expect price stability for Germany — an inflation rate of 1 percent or so over the next 5 years. And that has a clear message: it’s signaling catastrophe for the euro.
Why? I tried to lay this out a while ago. A reasonable estimate would be that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent. If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery — which would imply an overall eurozone inflation rate of something like 3 percent.
But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.
Yet any sort of regulation of derivatives was pushed off until 2012.
A top federal regulator will further delay a flood of new rules for the $600 trillion derivatives market, another setback for the sweeping overhaul passed in the aftermath of the financial crisis.
Gary Gensler, chairman of the Commodity Futures Trading Commission, announced on Thursday plans to wrap up the agency’s rule-writing in the first few months of 2012.
Previously we showed U.S. Banks are 4th in exposure to a Greece default. The EU is already talking about derivatives taking a hair cut, instead of taxpayers.
European Union regulators may write down the value of outstanding derivatives contracts issued by banks in crisis as part of broader plans to protect taxpayers from having to bail out failing lenders
So, as we can see, derivatives have increased, are even more concentrated in a few banks, while Europe is on the precipice and only the same people who foresaw the last crisis are sounding the alarm.
Rational for Derivatives and Nukes is identical
Why $600 Trillion in derivatives world wide is the same
question in the economic sphere as having over 70000
nukes (not sure how many U.S. and Russia have destroyed
but clearly not enough) in the military sphere.
A sane world would get rid of weapons like these in the economic and milatary sphere. The usual defense of derivatives is hedging. How are you hedging when your portfolio is 6 times global output? These derivatives are being written as simple speculation but the banks can't say that, otherwise regulation ensues. Yet, derivatives regulation was fought harder than anything.
What would banks do instead to hedge against risk? Build bank equity world wide with preferred or common equity.You cannot keep pushing more debt from the central banks on the member banks without eroding capital ratios. The more bank equity the more the banks can lend and the lower the fear level.
That fear level in Europe is showing up a a drought in inter-bank lending, a classic liquidity squeeze like 2008-2010 and 1929-1933. ECB and Fed need to build bank equity on an doing the preferred equity buying. Who is paying attention to this?
parsing the comptroller report
I couldn't find a breakdown in actual sovereign CDS (I might have not read the report right), but I know U.S. banks are exposed from previous reports. The majority of derivatives were in currency swaps, but it's unclear the stability with the Euro crisis.
I did catch that credit derivatives risk taking appears to have increased.
That said, the fact that 96% of these are in just 5 banks is clearly some sort of circle jerk. How can that possibly be stable when they are seemingly trading among themselves?
You can see the one watching the hen house, the OCC is turning around and arguing against any sort of faux paus version of the Volcker rule, which I also am not too impressed with.
As I was writing this article up, I looked over to see Ritholz picked up on this report too and was noticing the same thing (with a much less dramatic article title), so I included his article at the last link.
So Who Was Responsible for Leaving This Door Open?
Geither? Dodd? Frank?
What a bunch of dummies.
Saw this at Huffington Post, from statement made by a London trader on a BBC video:
"This is not a time right now for wishful thinking that governments are going to sort things out," Rastani said on an interview with BBC on Monday morning. "The governments don't rule the world, Goldman Sachs rules the world."
The statement came towards the end of an almost three and a half minute interview in which Rastani warned viewers to "get prepared" for the inevitable: "The savings of millions of people are going to vanish" in less than a year, he said.
"This economic crisis is like a cancer, if you just wait and wait thinking this will go away, just like a cancer it's going to grow and it's going to be too late," he continued.'
"But the crash will be good news for traders, Rastani told the stunned BBC anchors.
"For most traders we don't really care about having a fixed economy, having a fixed situation, our job is to make money from it," he said. "Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession."
Forget Links to Trader's Story
HuffPo trader says Goldman Sachs rules the world:
traders comment edited to embed video, format
Folks, registered users have the ability to create glorified mini-posts in comments.
To embed a video, which you should do, in youtube, click on share, click on embed, set the video size to 480, copy the code, paste it here in the plain text editor.
Alternatively, click on the switch to the rich text editor and use the buttons to embed media.
It's very easy, but remember people are reading your comments so please, if you want to share a video, simply copy the embed code and paste it here.
That way someone doesn't have to go through 4 steps to watch a video.
Also, yes, GS owns the world and we covered their loans, CDSes on Greece earlier.
You know MNCs control the media as well. Notice how Republican candidates who want to do something about China, trade, reform banking are literally blacked out not only from the debates but any mention at all in the media that they are even running.
It's pathetic, I might do up a "links" style post on the people exposing this massive global corruption today.
But the comments here are really enabled for you to write, communicate and use media.
Please format links too, that helps people reading your comment and makes it look more like a post to which the comment is attached.