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Here There Be Big Nymbers (Sic)
The earlier discussion of CDS, Einhorn, and the US UST-CDS basis trade, sparked a flurry of queries on the topic of "really big numbers." Therefore, even as ZH staff awaits the most recent data out of the BIS, we present for your numeric (in)comprehension pleasure lots and lots of zeroes. The chart below summarizes the biggest relevant numbers currently out there, appearing as pixels occasionally on every single computer in the financial world. And what does it say? That the total notional value of all OTC derivative contracts as of the most recent count (sucks to be on the recount committee), was $592,000,000,000,000.00 at the end of 2008. Fear not: this number is actually a reduction from the most recent previous read of $683,700,000,000,000.00 in June of 2008. Well wait, that thing we said about fear not, ignore that: because the net notional, or the market value of all OTC contracts, i.e. what someone (cough taxpayer cough) would be on the hook for when the Fed's plans go astray, increased by 66.5% over the same period, to $33,900,000,000,000.00. Like we said, big numbers - and this is just OTC. The real number includes regulated exchanges, and to estimate that, double the numbers above. In totality, the "sidebets" on everything from interest rates, to F/X to corporate default risk, amount to about $1.3-$1.4 quadrillion (that's 15 zeroes before the decimal comma) in terms of uncollateralized liquidity (think inflation buffer): take all those zeroes away and the value of the dollar would go down by 1E10-15: you listening yet American middle class? And the actual exposure, or "money at risk" is roughly $60 trillion: a number which is about the same as the world GDP if one were to remove all the various stimulus programs. Take away Goldman, JP Morgan, and all the other wannabe BSD's, and this is what you end up with: the heart and soul of the Too Big To Fail monster itself. And there is no way on earth to stop that mangled, mutated heartbeat without destroying the very fabric of both our capital markets and societal system. Please give the Federal Reserve a golf clap for this truly amazing accomplishment.
So with everyone and the kitchen sink focused on CDS and the neutron bomb that they undoubtedly must be if even such anointed shamans of CDSology as David Einhorn (one wonders, will David donate the billions of dollars he has made while trading CDS to charity?) say they are evil incarnate, here is the truth about CDS courtesy of the Fed's Fed- the Bank of International Settlements.
The volume of outstanding CDS contracts fell 27.0% to $41.9 trillion against a background of severely strained credit markets and increased multilateral netting of offsetting positions by market participants. This was a continuation of the developments seen in the first half of 2008. Single-name contracts declined by 22.8% to $25.7 trillion while multi-name contracts, a category that includes CDS indices and CDS index tranches, saw a more pronounced decrease of 32.7%, to $16.1 trillion.
Despite the lower outstanding volumes, the gross market value for CDS contracts increased by 78.2% to $5.7 trillion as a result of the credit market turmoil. Gross market values grew 95.6% to $3.7 trillion for single-name contracts and 52.5% to $2.0 trillion for multi-name contracts. [As noted previously, the $5.7 trillion number has since collapsed to under $3 trillion as per most recent DTCC data].
Greater use of multilateral netting during the second half of 2008 also resulted in a change in composition across contract types (Graph 3, left-hand panel). Amounts outstanding of multinamecontracts fell 32.7% to $16.1 trillion, while the 22.8% decline in single-name contracts to $25.7 trillion was somewhat smaller.
The composition across counterparties also changed during the second half of 2008 (Graph 3, centre panel). Although the amount of CDS contracts between reporting dealers declined 24.4%, this was smaller than the 29.8% decrease in outstanding contracts between dealers and other financial institutions and the 47.7% drop in contract volumes between dealers and non-financial institutions.
Developments in gross market values across counterparties reflected the uneven declines in the outstanding volumes for the different market segments (Graph 3, right-hand panel). The market value of contracts between reporting dealers grew by 89.3% to $3.2 trillion, representing 56.2% of the total market value of outstanding CDS contracts. The market value of contracts between reporting dealers and other financial institutions increased by 66.3%, while the market value of contracts between dealers and non-financial institutions was 51.0% higher.
Less than $3 trillion? I mean, how is that even worthy of an FT op-ed? Most people won't even bend over to pick up a $3 trillion bill on the street: sorry - if it doesn't have a quint-, or at least a quadr- in front of the -illion, people frankly don't give a shit, thank you Tim Geithner. Trillion is just so..... pre-Obama.
Yet where it gets moderately interesting is when analyzing Interest Rate derivatives (swaps, options and forwards), not only because the numbers suddenly really perk up, but because of the $420 trillion in notional OTC total, about $200 trillion is held by none other than the usual zombie stooges: Goldman, JPM, BofA, C and WFC. Do you see now why the Fed will kinda, sorta always and forever be forced to bail out this unholy pentagram? The shitstorm as a result of the collapse of one or more of the five major spokes of at least $420 trillion (and as much as $840 trillion) in IR derivs would basically wipe out anyone and everything in its path. No exceptions.
BIS on Interest rate derivatives:
In the second half of 2008 the market for OTC interest rate derivatives declined for the first time, after recording an above average rate of growth in the first half of the year. Notional amounts of these instruments fell to $418.7 trillion at the end of December 2008, 8.6% lower than six months before (Graph 2 and Table 3). Despite the decrease in notional amounts outstanding, declining interest rates resulted in a notable 98.9% increase in the gross market value of interest rate derivatives, to $18.4 trillion. [yes, that is a lot]
The amount outstanding of interest rate swaps decreased 8.0% to $328.1 trillion. Outstanding volumes of US dollar- and yen-denominated interest rate swaps remained virtually unchanged relative to the previous quarter. In contrast, interest rate swap markets denominated in euros (–10.6%), sterling (–24.2%), Australian dollars (–27.8%), Canadian dollars (–16.7%), Swedish kronor (–21.2%) and Swiss francs (–6.9%) all saw declines in the amounts outstanding.
The gross market value for interest rate swaps – the largest market by far – grew 105.7%, from $8.1 trillion to $16.6 trillion. The most significant increase took place in the US dollar swap market, where the gross market value surged 201.2% to $9.3 trillion. [gee, whose favorite Federal Reserve was singlehandedly responsible for this dollar swap love explosion?]
Outstanding volumes of options contracts declined 17.5% to $51.3 trillion. The gross market value of options grew by 51.3% to $1.7 trillion. The amounts outstanding of forward rate agreements (FRAs), the smallest of the interest rate derivative segments, remained stable at $39.3 trillion, while the gross market value of outstanding FRAs grew 74.4% to $153 billion.
Thus net notional exposure in IR land is nearly $20 trillion or almost double the US GDP (or triple if one excludes the impact of Obama funny-money). So why are we reading again how CDS is anti-social? By that logic IR swaps, sloshed around by the JPM-Goldman-BofA trio of Mutually Assured Destructors, is the pinnacle of delusional, schizophrenic, psychotic behavior. Which is not to say that the CDS' destructive impact should be underestimated. On the contrary: CDS, when handled by the current group of greedy, risk seeking idiots, will undoubtedly destroy the world. It is just a matter of time. However, to keep things in perspective, how about we also consider Interest Rate swaps, whose numerical danger is more than 5x that of CDS (again, really big n(y)mbers here). And we haven't even touched on FX, commodity, and equity derivatives.
Which brings us to our point: thank you Mr. Einhorn for finally starting to focus people's attention on one of the many facets of the Fed's uncontrollable liquidity Frankenstein. CDS, while destructive, is merely the appetizer. What will truly annihilate financial markets are all those instruments that are in place only to perpetuate the myth that a 5% interest rate in 30 year Treasurys is somehow exorbitant (based on a quick back of the envelope calc, should prevailing interest rates move higher by 1%, the net IR exposure will rise by $3 trillion... in the wrong direction... at an exponential pace). Yet what better way to keep rates where they are than than to tell China: "Hey guys, you bust one auction, and this spring loaded balloon full of $420 trillion pieces of worthless Washington feces will blow up right in your face (and take us all down with you)." In essence this is an amusing revision of that old fable: the Fed owes the world a few billion here and there: well, Ben, you are out of luck, "You're Fired"; the Fed owes the world $1.4 quadrillion in naked and worthless pieces of paper (whose nudity will become apparent the second someone calls Bernanke's bluff) and the Fed owns the world.
It is, Mr. Einhorn, unfortunately as simple as that. Which is why may we suggest after you are done with your philosphical anti-CDS crusade, that you take a long hard look at this BIS report and consider just who your friends in the business are: something tells us that of the JPM/GS/BofA trio you Prime with at least two of them. If you really want to make a stand against those who are abusing weapons of financial annihilation, maybe you can demonstrate your seriousness by cutting all prime brokerage relationships with Goldman and JP Morgan. Then, and only then, will we, and everyone else, know you are willing to put your money where you mouth is (and where your CDS P&L used to be).
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It is a real pleasure to meet you in freedom.
Just for you associate.... From the banks of the Misssissippi.
http://www.youtube.com/watch?v=KJRA-mU33z4
Thank you for turning me onto this band...I rewired my whole basement in a 1902 farmhouse with BX armored cable (from the old aluminium two wire stuff) with dumpster dived treasures in downtown mpls office remodelling...I always cruise the dumpsters...amazing what people toss...
other treasures include 100's of sci-fi paperbacks, art deco furniture, hot wheels sets for my kids, the list goes on and on...dumpsters fed me on many occasions/quarters when in college, and my oldest son and his friends hit the dumpsters outside the pizza joint at closing...lol..and we are middle-class...heheh.
Money in circulation vs total debt obligations? Hmmm.... When the world decides to stop buying our debt, the printing presses will stop (interest rate spike), and our debt obligations will still exist, right? Is it not the perfect slave currency? China cares not who printed it, but who owes that shizzle... bring it bitches!!! Should we believe that inflation will make us all rich and wipe away our debt? I don't think so... the average American is a slave to FRL. Americans continue to save while dollar bulls are <3%... they are trying to keep the chains off, but the chains are already in place and getting heavier thanks to socialized losses and debt monetization. China is having fun with monetary cycles, much like a predator plays with his prey... sad. Very sad.
Better think about that carry trade big fella.
humor....http://twitter.com/shitmydadsays
I does not get any better than this! wake up Proles! Goldman is doing Gods work!
http://www.timesonline.co.uk/tol/news/world/us_and_americas/article69076...
I am on a roll... you can't make this shit up!
from -http://www.timesonline.co.uk/tol/news/world/us_and_americas/article69076...
it is time that these animals meet their God!
Luckily for him and his firm, he’s a damn good salesman. He starts with a little humility. He understands that "people are pissed off, mad, and bent out of shape" at bankers’ actions. Goldman played its part in the meltdown that almost destroyed the global financial system. It, like most other banks, lent too much money, made its first quarterly loss for more than a decade last year and ended up taking bail-out cash from Washington. "I know I could slit my wrists and people would cheer," he says. But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."
"We have a social purpose."....ROFLMAO...I had series 6, 7 and 63 licenses in late 80's eary 90's...my social purpose was to make my bosses Volvo payments...
They are pious, virtuous, protestants, living an ascetic lifestyle, reinvesting all of their personal gains into the company just so they can help grow the economy.
Every time they front-run...
Every tiny trade they make that they get a commission for...
Every derivative they ever sold to a buyer who could not know what the true market was for them...
Every bonus they ever took...
Every bailout dollar they took at low interest and loaned out at high interest...
For God.
I think I have the real ZeroHedge theme song.
From none other than The Police:
Every breath you take and every move you make
Every bond you break
Every step you take, I'll be watching you
Every single day and every word you say
Every game you play
Every night you stay, I'll be watching you
Oh can't you see you belong to me?
How my poor heart aches with every step you take
Every move you make and every vow you break
Every smile you fake
Every claim you stake, I'll be watching you
Nice MsCreant, now you have that song is in my head very clever. I'm not sure Blankfein is protestant and I'm sure that was tongue in cheeky bastard - not that it matters.
Yes, taking lessons from Cheeky pros! I stole that from Max Weber's Protestant Ethic and the Spirit of Capitalism. I really should cite sources better, but it gets in the way of the presentation of the humor.
The Calvinists and Protestants would not quite know what to do with Blankfeind. They would assume it was a preordained given he was going to hell. It is, after all, visible in his works! :-)
AN, look forward, as always, to seeing you around. Your comments have both depth and breadth. I benefit.
Peace
Coming from you, that's a real compliment.
I always look forward to your posts as well, and a few others that I've noticed are also your favorites. Today your comments have been epic, some of your best work in my opinion - not that I'm judging, just appreciating the beauty of your prose.
How about:
I don't want to spend the rest of my life
Looking down the barrel of an Armalite
I don't want to spend the rest of my days
Keeping out of trouble like the soldiers say
I don't want to spend my time in hell
Looking at the walls of a prison cell
I don't ever want to play the part
Of a statistic on a goverment chart
Or my personal favorite:
When they kick at your front door
How you gonna come?
With your hands on your head
Or on the trigger of your gun
When the law break in
How you gonna go?
Shot down on the pavement
Or waiting on death row
You can crush us
You can bruise us
But you'll have to answer to
Oh, the guns of Brixton
The money feels good
And your life you like it well
But surely your time will come
As in heaven, as in hell
You see, he feels like Ivan
Born under the Brixton sun
His game is called survivin'
At the end of the harder they come
You know it means no mercy
They caught him with a gun
No need for the Black Maria
Goodbye to the Brixton sun
Tom,
Is it okay to ask how it is all going? I hope well. You were looking at getting employment in another country, as I recall.
I got some gold recently. I have already made back the commisions on all but 5 oz. and I am well on my way there too. $1106 as I write.
That advice to rack it up on the card...boy...they may be right. If it turns out like oil though, it would need to be timed well.
"Doing God's work" - that's what the priest says as he violates the altar boy
The tell will be when the Fed orders 128 bit computers.
Interesting Article from
FRBNY ECONOMIC POLICY REVIEW / JUNE 1998
Dealers’ Hedging of Interest Rate Options in the U.S. Dollar
Fixed-Income Market
John E. Kambhu
A quote,
"Because dealers are net sellers of options, however, large
interest rate shocks will drive the sold options into-the-money,causing them to gain value, and as a result, the total
value of the sold options will exceed the bought options’
value. Hence, if the portfolio is not hedged, the aggregate
dealers’ portfolio value becomes negative when interest rates rise more than 125 basis points."
goes on to discuss how hedging difficulties might occur depending on how spread across the yield curve the interest rate move is and whether its short end or long end etc.
The derivatives inventoried by BIS will expire on multiple dates; they will not all not close at the same time. Thus a net-to-0 sum can only be mark-to-market, and even then the market is likely to mark "0" only rarely, if ever.
For example: In trading diagonal backspreads, which offset bullish options with bearish options, a position may be opened at a net-to-0 price, and in a short period of time the position can go deeply into the red, long before the multiple expirations of its components. And, later in time, the same position could be hugely profitable.
Presumably, there is layer upon layer of such offsets across the positions inventoried by BIS. But the ownership of particular directional positions may be highly concentrated. And since the notional value here is so huge, the impact of even a moderate market move could be huge on some very large holders. So, I don't find much comfort in the idea of net-to-0.
This view comes from my own option trading -- I'd welcome clarifications about the limits of its applicability in the context of BIS numbers.
Nice point on the distinction between net exposure for each entity versus net exposure across the entire universe of tracked derivatives. Just like with AIG or Lehman, we know concentrated risks for one entity can cause a domino effect.
How is this any different than the early 20th century bucket shops that sold side bets on the performance of real stocks? How is a company supposed to raise capital at a fair rate when an investor can profit greater from paying some bookie to take a juiced bet on the same outcome? How is the world in any way benefitted from the existance of naked/unhedged bets on these derivatives? I don't think Einhorn is the enemy here. I applaud him for the courage he has shown by putting himself in the spotlight on these and other matters. You can't put a guy in a chess game and expect him to play checkers on moral grounds. It seems to me he is lobbying the judges for a better game. I hope for all our benefit he succeeds.
I spent this year and part of last year on MW and other venues pointing out how platry Madoff, MBS, etc. were in comparison the $1/2-1 QUADRILLION in derivatives. I got a lot of thumbs up, and a lot of thumbs down. A lot of people just did not want to hear it.
Amazing article.
Well done everyone.
ZH- best real-world financial education going.
I wouldn't give up the discourse on this site for a stack of frn's. at this point,any help to tolerate the ignorant oblivion that the general populace entertains, is appreciated. I was beginning to doubt my perception of the situation. now I know paranoia is well justified. I know most of you are just as messed up as I am, and thats reassuring.
You seem conflicted. Depends on what you call messed up. I talk a good game, but I may actually be more deeply captured by the con than I want to admit, even still. You told us about some decisions that definitely breached that boundary. So who is messed up?
"ignorant oblivion of the general populace?"
or
YOU?
Might I suggest... default.
The only way to cure the illusion that you can buy your way our of risk is to have some of these things go tits up. then maybe people will actually start wiping their own asses.
Wow, People here are really all trigger happy alarmist, repeating same thing again and again!! They dont have a clue of IR swps, how trading and valuation is done, leave alone having traded in it!!
But I guess that what you can expect from a unch of equity day traders.
Anony,
A concise and meaningful explication on this would would be helpful and appreciated, if you have the chance to do so.
Regards,
aka_ces
What kind of unit is an "unch?"
Is it like a gaggle, or a pack, school, or herd?
Or are unches exclusive discriptors of day traders.
Inquiring minds would like to know.
Cant read these numbers easily. I have to count the dots and it still needs a while to register it.
I guess it will take only some years or months (after Darwinian evolution) to get those zilions right.
The numbers look massive, because there is no true means to net all the open positions, the notional principal amount would be much smaller and so would the value at risk.
The lack of netting has make the numbers so big. Many swapsare simply an offset of a earlier transacted swap. Generally, a party would want to offset (get out of the position) if the trade was going against them (they were out of the money). However, the counterparty would not want to exit their position except at a hefty profit. So the party simply goes and enters into a new IRS with a new counter party to offset the initial swap. It is cheaper than what the the counter party was offering to get out of the swap. Everything is ok - position is hedged until a major counter party fails. Once they fail, risk is back in play. So is the potential for systematic risk.
Netting all these swaps is what is truly needed. Central clearing would also help. It would provide transparency and better bid/offer spreads. The banks just don't want the gravy train to stop flowing.