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Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

Tyler Durden's picture




 

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), 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.

At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely." True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?

...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

...

Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

 

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Sat, 09/24/2011 - 14:18 | 1705618 Kayman
Kayman's picture

Tao 4 the Show

VaR

"a number invented by purveyors of panaceas for pecuniary peril intended to mislead senior management and regulators into false confidence that market risk is adequately understood and controlled."

Formerly sane humans should at this point bifurcate into those weeping uncontrollably in their soup and others laughing maniacally while shaking their fists at the gods.

That $250T is built on 30-40x a base and that base is essentially fabricated from nothing. It's all complete madness - just air. And the wizards of finance magically extract billions in salaries and bonuses from that air. Or so it would seem. In truth, they extract it from those who work for a living, and increasingly, from those not yet even born.

Beautiful, Succint, worth repeating.  Thank you.

Sat, 09/24/2011 - 10:21 | 1704998 disabledvet
disabledvet's picture

"we the people" had no choice in this. this was "choiced" upon us. i sense ferment among the natives. i recommend wads of cash...just in case.

Sat, 09/24/2011 - 07:33 | 1704736 PaperWillBurn
PaperWillBurn's picture

$333 Trillion - The derivative exposure of 25 banks

$6 Trillion - The value of all gold ever mined in the last 5000 years

 

any questions?

Sat, 09/24/2011 - 09:10 | 1704889 LeonardoFibonacci
LeonardoFibonacci's picture

Yes.  How do i get some gold?

Sat, 09/24/2011 - 10:25 | 1705002 disabledvet
disabledvet's picture

that's easy Leonardo. "i am a banker and i have much gold. i will sell you some provided you don't mind me lending you money." Of course "you realize your government has already agreed to this deal."

Sat, 09/24/2011 - 11:46 | 1705164 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You could try panning.  It is a nice workout too.

Sat, 09/24/2011 - 07:34 | 1704741 BennyBoy
BennyBoy's picture

If its insurance, where are the regulators?

If its gambling, where are the regulators?

These "banks" aren't too big to fail.

 

They are too big to succeed. 

 

Sat, 09/24/2011 - 07:40 | 1704743 HD
HD's picture

Wait. Just wait. 250 TRILLION? TRILLION...with a "T"?   2010 World GDP was approximately 63 Trillion.

HOW THE HELL DO YOU UNWIND 250 TRILLION? 

 

Sat, 09/24/2011 - 07:49 | 1704752 Motley Fool
Motley Fool's picture

'Gradually... then suddenly'

;)

Sat, 09/24/2011 - 08:20 | 1704802 Withdrawn Sanction
Withdrawn Sanction's picture

+1.618

Sat, 09/24/2011 - 08:24 | 1704808 Sri
Sri's picture

Two words: Bernanke and FED

Sat, 09/24/2011 - 11:52 | 1705174 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Three words:   Bernanke, the FED....lose.

Sat, 09/24/2011 - 09:15 | 1704896 PAUL LEO FASO
PAUL LEO FASO's picture

The answer on how to unwind $250 Trillion lies here with the ultimate solution;

http://www.zerohedge.com/print/365866

 

 

Sat, 09/24/2011 - 14:10 | 1705593 Hulk
Hulk's picture

 

"HOW THE HELL DO YOU UNWIND 250 TRILLION? "

 By taking out a  second you silly!

Sat, 09/24/2011 - 08:03 | 1704744 Smithovsky
Smithovsky's picture

Regulators:  "$250 trillion?  There's no way anything can go wrong there. Back to sleep, boys, we got government jobs so that we would have high pay and job security, not to actually do something useful."

Sat, 09/24/2011 - 07:49 | 1704745 AssFire
AssFire's picture

The Bible teaches, "The rich ruleth over the poor, and the borrower is the servant to the lender" (Proverbs 13:22). 

The Bible also teaches, "The wicked borroweth and payeth not again" (Psalms 37:21a).


So, I think these fuckers must have felt as they had seen it and dealt with it all before...but 250 trillion?? lmao

 

 

Sat, 09/24/2011 - 07:53 | 1704759 HD
HD's picture

Something wicked this way comes...

Sat, 09/24/2011 - 08:22 | 1704805 Withdrawn Sanction
Withdrawn Sanction's picture

"Wicked" is just not a word that comes up in everyday conversation. But how appropriate in this context. Wicked, man. Wicked.

Sat, 09/24/2011 - 08:36 | 1704815 Pseudo Anonym
Pseudo Anonym's picture

The Bible teaches..

using somebody else's ideas, are we?  Giveth credits when you cut & pasteth.

http://lewrockwell.com/north/north1039.html

Sat, 09/24/2011 - 09:41 | 1704938 AssFire
AssFire's picture

Nice article.. uh, I cited the fuckin bible?

 

Sat, 09/24/2011 - 07:44 | 1704748 Robslob
Robslob's picture

Yes, just spit balli here but would that make my gold worth $50,000 + per ounce?

Sat, 09/24/2011 - 07:52 | 1704758 Smithovsky
Smithovsky's picture

Jokes aside, is the main reason no one is too eager to start regulating derivatives because the banks wouldn't have anywhere close to the needed collateral and would have to unwind these positions leading to financial armageddon?

Sat, 09/24/2011 - 07:54 | 1704762 Motley Fool
Motley Fool's picture

Yup. So they keep ignoring the problem hoping it will go away. Instead it grows, until one day soon...

Sat, 09/24/2011 - 11:06 | 1705051 X.inf.capt
X.inf.capt's picture

HELLO, MOTLEY,

when i wtote that comment in 'disapointment with the fed' about people dumping phyiscal at $39. you were one of the few who didnt run me through a woodchipper.

THANK YOU.

what a difference 72 hrs makes,,,

i guess we both know wnat was going on now. i think those people had more than an 'educated guess'. ya' think.

oh well, such is life in the ZH gladiator school for a newbie....

see ya around, bro.

Sat, 09/24/2011 - 11:55 | 1705190 Motley Fool
Motley Fool's picture

:P

Sat, 09/24/2011 - 08:04 | 1704780 AssFire
AssFire's picture

Nonetheless those fees and markups on imaginary money was great while it lasted.

I get that same power kick when I'm the bank in a good Monopoly game.. I play where the market prices on the board mean nothing, IOU's are permitted and encouraged (if I handle the paper) and instead of "go to jail" you just get an additional $2,000,000 (same for passing Go). Unfortunately the games end when the exponets get too great for my calculator...

Sat, 09/24/2011 - 08:24 | 1704807 Withdrawn Sanction
Withdrawn Sanction's picture

"no one is too eager to start regulating derivatives because the banks wouldn't have anywhere close to the needed collateral..."

I suspect you are right. If so, then even on a net basis, these guys are in hot water....and I think they know it.

Sat, 09/24/2011 - 14:30 | 1705648 Kayman
Kayman's picture

Withdrawn Sanction

The evidence is hidden in plain sight.  Bonuses are paid today from liquidity- so long as Bernanke keeps the cash flowing to these boys, they will continue to spray perfume over their shit.

Sat, 09/24/2011 - 08:25 | 1704761 AssFire
AssFire's picture

I moved the company accounts to Chase...Was supposed to be 100% insured if non-interest bearing. I guess so many people did the same because now there is talk of service charges coming because the banks are paying so much insurance on all the cash parked in these accounts.

Anyone else heard the same?

Sat, 09/24/2011 - 08:57 | 1704870 snowball777
snowball777's picture

HAhahahaha....dumbfuck.

Sat, 09/24/2011 - 09:55 | 1704931 AssFire
AssFire's picture

http://seekingalpha.com/article/290525-get-ready-for-negative-interest-r... I've heard it mentioned elsewhere...

You might not understand.. this is the working capital for my company and it is hard to feel safe just putting it anywhere. It had to be spread over several banks before the limit was lifted.

or

You might be a dick

Knowing you are a product of Berkeley, I'll go with the latter.

Sat, 09/24/2011 - 14:10 | 1705598 snowball777
snowball777's picture

a) I didn't go to Berkeley (just a bear who likes gold)

b) You must have some DCF if you're so desperate you'd stash your capital with known felons

c) You calling me a dick is some serious pot kettle action with your long history of abusive trolling here

Eat a bowl of dick and pay the piper, assfucked.

Sat, 09/24/2011 - 14:36 | 1705664 Kayman
Kayman's picture

Negative interest rates have been around a long time- its called banking fees. Smart move, though, to split up your working capital.  I don't trust any of these slimy banking sons-of-bitches.

Sat, 09/24/2011 - 08:00 | 1704773 WiZlon
WiZlon's picture

So, how long is it before Tyler gets hired as a consultant by the top-four (or more) big banks.  His job will be...to stop researching and especially to stop publicly-reporting on the banks.  Great work again ZH!

Sat, 09/24/2011 - 08:59 | 1704873 fingulas
fingulas's picture

I hear he can do this job from home.

Sat, 09/24/2011 - 14:42 | 1705684 Kayman
Kayman's picture

Warren wants Tyler to replace Becky Quick, but TD is negotiating $5 billion of common, the preferreds are locked up./sarc/ (for you ultra-sensitive types)

Tyler's stock-in-trade is honesty, raw, often brutal.  If Tyler sells out, all is lost.

 

Sat, 09/24/2011 - 08:01 | 1704777 Belarus
Belarus's picture

Kind of makes physical look attractive no matter what spot prices they reach. It's hard not to think of the all the folks advice who nailed it in the financial crisis that have not wavered, Burry, Taleb, etc: own physical, hard assets. It kind of makes me rethink my deflation on ideas on the moment patch. inflation/deflation: won't matter. 

Sat, 09/24/2011 - 08:04 | 1704779 Pseudo Anonym
Pseudo Anonym's picture

interesting, rob kirby has been reporting on this issue well over 2 years that I am aware of.  Here's one example:

http://www.marketoracle.co.uk/Article12522.html

Sat, 09/24/2011 - 11:14 | 1705077 Tyler Durden
Sat, 09/24/2011 - 14:44 | 1705690 Kayman
Kayman's picture

Tyler Durden

Some of the newbies ought to read the archives. 

Sat, 09/24/2011 - 14:59 | 1705730 Hulk
Hulk's picture

Its a full time job just reading and digesting the new shit...

Sat, 09/24/2011 - 15:38 | 1705803 Kayman
Kayman's picture

Hulk

Too true...

Sat, 09/24/2011 - 08:08 | 1704786 Sequitur
Sequitur's picture

Banks should be like utilities. Lend some money, earn a reasonable return. High capital requirements, and lots of insurance (FIDC, SIPC) to cover any bank that goes bust.

And to think that in may ways, USA has a better system than many foreign countries. Yes we have deep flaws, but at least we have some form of regulations, SEC filings, and audits. Yes the banks lie and their numbers are gamed, but, it's still better than what you will find almost anywhere else. I believe this is a key reason people still see USA as safe haven: regulations and courts, which are still the envy of many countries. Good luck trying to enforce a contract or recover from a fraud in China if you are up against a Chinese citizen, I've firsthand experience how foreign business gets hometowned like you wouldn't believe in China.

If only our stupid politicians and regulators understood that vigorous enforcement and cleaning out fraud = healthier economy, albeit at the expense of banker bonuses, which is the only thing that seems to matter.

Sat, 09/24/2011 - 08:09 | 1704789 conork
conork's picture

So if it all implodes, which is better physical precious metals or having cash?

Im exposed 50/50 at the min

Sat, 09/24/2011 - 11:10 | 1705072 centerline
centerline's picture

Anyone who says they know for sure is full of shit. The ride from where we are today to whatever is in store for us tomorrow is going to be bumpy. That is about the only thing we can say for sure. The rest boils down to probabilities, staying nimble, staying on step ahead of the crowd, etc.

Hedged both ways seems like a smart place to be right now. That could change tomorrow of course.

Sat, 09/24/2011 - 08:10 | 1704790 Sri
Sri's picture

Now, apparently those in the know no longer  even want on of those top five as swaps counterparty.

 

BTW, look at the top five orignators of mortgages in the United States (who now control 60% of all mortgage originations).

 

And how long did it take for the MS and GS to become FDIC insured institutions anyway? Two days?

 

It's that damned Dodd Frank legislation and those loans to those damn minorities that are causing all the problems.

Sat, 09/24/2011 - 14:47 | 1705697 Kayman
Kayman's picture

"It's that damned Dodd Frank legislation and those loans to those damn minorities that are causing all the problems."

Are you giving the Fed and its owners a pass ????

Sat, 09/24/2011 - 08:12 | 1704793 Withdrawn Sanction
Withdrawn Sanction's picture

These guys look like they keep doubling down on bad bets knowing that eventually one of the bets has to pay off. And in theory, this is true. However, at some point, the doubling and redoubling of the bets gets so large that no one can pay them off (even on a netted basis).

Then add to that TD's analysis that a non-linear event in one counterparty bank wrecks the whole system and you've got a house of cards just waiting for the slightest puff of a breeze. No amount of QE will be able to stop this inverted pyramid from imploding once it starts this time. It's just too big relative to the abilities of counterparties (or their government surrogates) to pay.

PS Thanks for the data and analysis TD. Good work. WS appreciates your efforts.

Sat, 09/24/2011 - 08:14 | 1704797 Belarus
Belarus's picture

Once last thought for the night: GoldMoney and Sprottmoney is saying demand is surreal for physical right now which is contrarty to what any conventional wisdom would ever tell you in a quadrillion year lifetime. And, here we have, you know, Bank of America completely on the brink (jsut see ZH post). And here we have this mad dash out of paper and into physical with spot prices falling off a cliff?

Okay, let me guess who the buyers might be: BAC, JPM, GOLDMAN, CITI, et al executive and board members as they dump all paper through businesses while the cocksuckers are loading up. There are no words to describe these cocksuckers.

 

 

Sat, 09/24/2011 - 08:26 | 1704811 Withdrawn Sanction
Withdrawn Sanction's picture

Lower prices induce an increase in the quantity demanded.

Sat, 09/24/2011 - 08:26 | 1704810 o2sd
o2sd's picture

At this point the economist PhD readers will scream:

Interesting. I had long been under the assumption that one or more of the Tylers were Quants (front office), which are usually Math PhDs rather than economics. Still ...

Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total

Which, when written, are NETT ZERO.

Morgan Stanley, ... has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion.

Which begs the questions:

1) Which currencies?

2) What moneyness?

3) What maturity profile?

3) Are they actually XCCY IR swaps that they report as FX?

4) Are they nett long or short the USD?


Sat, 09/24/2011 - 09:08 | 1704885 Sri
Sri's picture

XCCY IR Swaps require exchange of principal at maturity (and perhaps more frequently) so the risk is far greater than vanila IRS

Sat, 09/24/2011 - 10:12 | 1704981 o2sd
o2sd's picture

I thought only XCCY swaps swapped the principle.

XCCY IR uses a notional, no?

 

Sat, 09/24/2011 - 10:44 | 1705027 Sri
Sri's picture

Maybe we are mixing terms. To me an XCCY IR swap each side has a different currency (USD on side 1, GBP on side 2). They rate can be fixed/fixed, fixed/float (pay 3% USD receive GBP 3M LIBOR), float/float(saw this a lot with USD/JPY)

XCCY IR Swaps usually exchanged the principal at initiation and maturity -- there were big red buttons on the  IR swap entry screens that said principal exchange (usually at initiation an matuirty). 

There were also these 'market value swaps' or some such thing that were more like total return swaps and the currency gain/loss was exchaned periodically (either in cash or the notional balance was increased). 

Sat, 09/24/2011 - 19:11 | 1706161 o2sd
o2sd's picture

There are two types of cross currency swaps. There are cross currency swaps and cross currency interest rate swaps. In THEORY, because of Interest Rate Parity, there should be no difference in those two swaps, but in practice, there is.

Cross Currency Swaps do exchange a principle, but XCCY IR swaps (I believe) do not (coupon based on notional). I could be wrong though, it's happened before.

It just doesn't seem possible that MS has 1.7T in real FX exposure with so little economic capital, hence my speculation that their FX outstanding is largely notional, tied up in XCCY IR swaps. 

If that is not the case, then they truly are fucked.

Sat, 09/24/2011 - 08:27 | 1704812 arkel
arkel's picture

"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."

Given that the bulk of the derivatives are interest rate swaps, doesn't Operation Twist lower the spreads causing them to get EVEN bigger to make a profit?

 

Sat, 09/24/2011 - 08:34 | 1704831 lolmao500
lolmao500's picture

Yes. Because of Operation Twist, the banks are gonna up the ante even more.

Now it's 250 trillion, but by June 2012, it'll be way way higher than that. If they did $5.3 trillion in Q1... you betcha they can do, in Q4-Q1-Q2, in 3 quarters.... X5.3 trillion + operation twist factor ... they can add to that at least 20-30 trillion, EASY.

They basically gonna add, in 9 months, half of the world GDP in derivatives to the system.

Little Ben just assured that the collapse would be even bigger when it goes down.

Sat, 09/24/2011 - 10:29 | 1705008 RSloane
RSloane's picture

I don't believe 'the system' will still be up and running in 9 months time but that maybe giving it a wider view than it deserves. To your last point, the collapse is going to be well and truly financial armageddon. Jim Rogers is right, buy a farm and learn how to work it.

Sat, 09/24/2011 - 08:28 | 1704813 J_man
J_man's picture

Well what are we doing about it lads?

Sat, 09/24/2011 - 08:30 | 1704819 lolmao500
lolmao500's picture

Ban CDS, problem solved.

Sat, 09/24/2011 - 08:35 | 1704823 spanish inquisition
spanish inquisition's picture

I had posted a few times that one of the things the Fed needed to do was keep the Big 3 (Euro, $,Yen) rangebound to help with liquidity flows around the world. Never even thought about Fx derivatives...... I shall sign this as The Blind Pig

Questions based on the latest meeting where the Bernanke disappointed and the gold margin increase.

What levels the Fx derivatives are set at and compare against Fed, market rumor action and the Swissy peg?

How much of MS money is being moved to work Fx markets against their clients, or are they being helped by the "idiotic" Fx GS calls? I think the ones at the top realize at this point "you go, I go".

 

Sat, 09/24/2011 - 08:33 | 1704827 Zola
Zola's picture

Quick question, based on the wisdom of ZH , which prime broker do you think will survive the crisis ? Any in the US/EU ? Or is it only in Asia ... ? 

Sat, 09/24/2011 - 08:42 | 1704838 ZeroPower
ZeroPower's picture

There's a reason why the IRS market is the largest by notional $$ derivative outstanding.

As long as basis risk is managed (counterparty risk need not be mentioned..) there is nothing that can happen to those $200tr of exposure.

IRS basically allow a party to enter into synthetic fixed/floating rate financing for firms that need it - and many many do. Yet of course, none of the above posters actually knows squat about swaps and yet the comments come, ridiculing the size of the market. Too funny.

If one wants to ridicule IRS for anything, you can look at their inbred cousins - off market swaps, deferred swaps, circus swaps. Bit more risk involved there, but again, most of the risk is tied into being in the contract with an unworthy counterparty, not to mention not understanding what the fuck kinda of contract one has entered into. OTC IRS clearing will remove the former risk. There is no cure for stupidity however.

Sat, 09/24/2011 - 09:31 | 1704917 Sri
Sri's picture

So I'm paying 6% fixed for thirty years -- I have nothing to worry about? 

How does OTC clearing remove any risk?  How much capital does LCH have? 

Sat, 09/24/2011 - 11:17 | 1705064 jm
jm's picture

I think his point is that IRS are not exclusively a bank issue.  They hedge interest rate risk for businesses, alleviates funding pressure and liquidations and readers don't realize this.

Regarding clearing, I can't think of anything more bullet-proof than SwapClear and payers of a 6% 30y can offset that with an <insert number>y30y.

Sat, 09/24/2011 - 11:21 | 1705090 Sri
Sri's picture

That is the sad part, SwapClear is considered bullet proof. SwapClear is bullet proof because the top ten members can go to the FED, Bank of England, Bank of Canada, Bank of Japan, ECB, RB of Australia (maybe all of them) and borrow at a negative rate with bogus collateral.

And GS and MS were not banks until 2008. They became banks to avail themselves to be able to feed at the pubic trough. And keep SwapClear safe.

Sat, 09/24/2011 - 11:30 | 1705105 jm
jm's picture

Point well taken.

Sat, 09/24/2011 - 10:25 | 1705003 o2sd
o2sd's picture

none of the above posters actually knows squat about swaps and yet the comments come, ridiculing the size of the market. Too funny.

Amen.

Even counterparty risk is small, given that the principal is notional, and the coupon is the delta of the fixed/floating rate.

Yeah, it might be nasty to lose a coupon (in the case of a default), and there might be some cascading/ripple effect in credit markets, but not really a show stopper.

Given the historically glacial pace of Central Bank changes to overnight cash rates, managing basis risk should be fairly trivial matter. The problem recently is the huge volatility in the yield curve due to Fed meddling and Government muddling, which makes basis risk a little harder to manage, but from memory, the maturity profile of the bulk of IRS is <10Y

Good to see you back ZP.


Sat, 09/24/2011 - 10:56 | 1705047 Sri
Sri's picture

Let met get this straight, in 2001, my counterparty agreed to pay me fixed at 6.01% on $100 million for the next thirty years. He decides that he's tired of paying and walks away from the deal.  My loss is not worth mentioning? 

Granted, if I had collected margin over time, I'd be reasonably okay. 

Sat, 09/24/2011 - 19:18 | 1706140 o2sd
o2sd's picture

Let met get this straight, in 2001, my counterparty agreed to pay me fixed at 6.01% on $100 million for the next thirty years. He decides that he's tired of paying and walks away from the deal.  My loss is not worth mentioning? 

First, 6.01% on $100mio with a 3M coupon period is coupon of around 1.5 million. Remember, you only get to default once, so if the counterparty misses a coupon payment, you are 1.5 million in the hole, bonus mangling, but not armageddon.

Second, you are swapping that 6.01 against some agreed floating rate. Current LIBOR 30Y is 4.29%, so the coupon is simply the difference i.e. 2.7%, which means a 3M coupon is roughly 675,000.

Last, if you really don't want to lose that 675k, you could always buy a CDS on the counterparty :)

 

edit: sorry, my calculations above are wrong, the coupon is actually much smaller than that, but I cbf working it out. Suffice it to say, the risk is small.

Sat, 09/24/2011 - 10:33 | 1705013 disabledvet
disabledvet's picture

this is...a government. "is repayment part of the contract?"
Lehman Brothers: "hell, no bitch! we're SWAPPING!"
John Paulson: "so would you trade this worthless piece of shit paper for a billion dollars then?"
Wall Street: "Hell yeah mother-fucker. Have all the billions you want!"

Sat, 09/24/2011 - 10:45 | 1705033 hack3434
hack3434's picture

.

Sat, 09/24/2011 - 10:57 | 1705052 hack3434
hack3434's picture

As long as basis risk is managed

Basis risk is ALWAYS "managed" one way or another and yet, the financial wizzardz always manage to fuck it up as complexity grows. $200tr is a ridiculous number regardless of being notional and "risk" free. 

Sat, 09/24/2011 - 15:09 | 1705753 Absalon
Absalon's picture

yet the comments come, ridiculing the size of the market.

 

So there is over $300 trillion in interest rate swaps.  Not every borrower or lender will want to swap interest rates.  There is not enough debt in the world to justify the size of the swap market.

Sat, 09/24/2011 - 15:15 | 1705764 Kayman
Kayman's picture

 

ZeroPower

most of the risk is tied into being in the contract with an unworthy counterparty

And, of course, you will provide ZH a list of "worthy" counterparties. 

Too smart by half, n'est pas ?

 

 

Sat, 09/24/2011 - 08:45 | 1704842 eddiebe
eddiebe's picture

Ironically and sadly it is the poorest of the poor who are grubbing for every dollar trying to stay above water or even alive that are carrying this monster on their back. Wicked is a milk toast word to describe the monsters that are perpetrating this faux banking scheme. The derivatives monster makes the biblical tower of Babel look like an ant heap.  In terms of the I Ching: The ridge post sags to the breaking point.

Sat, 09/24/2011 - 08:52 | 1704858 overmedicatedun...
overmedicatedundersexed's picture

as long as King FRN is here it can go on..seems China Russia and the Oil states can't get a handle on how to bring it down.

Mr Q in libya took a shot at gold back african money and we see what happened there..not one MSM outlet even guestioned that coup..the biggest news never sees print these days.

PM's whipped ties into this nicely..for a while PM's looked to be an out on the FRN...they must kill PM's for the threat they are to the whole game..invest accordingly until there is a real chance the debt risk heats back up thru defaults of EU members.

So to the point: TBTF banks have unlimited FRN's via the FED

why not keep doing what brings the bonus money in??

If Ron Paul got elected well then we might get a new game but by the way the MSM avoids him..he has little chance..and if he did win hope he stays out of Dallas Tx.

 

Sat, 09/24/2011 - 08:56 | 1704869 Kina
Kina's picture

Ron Paul would be executed by the banks the moment he talks about Fed audit, gold audit, gold standard, tighter banking controls, issuing silver notes.....anything that threatens their position.

 

They did it before they will do it again. Paul should invest in full body armor. Forget terrists...the banks are the global mafia extrordinaire.

Sat, 09/24/2011 - 08:53 | 1704861 Delmar
Delmar's picture

Morgan Stanley is fine:

http://www.foxbusiness.com/markets/2011/09/23/morgan-stanley-bounces-aft...

See, nothing is f%^&ed, you're being very undude.

Sat, 09/24/2011 - 10:17 | 1704989 Dapper Dan
Dapper Dan's picture

Thanks for the heads up Del,

from the fox article.

He confirmed that the firm was in the market buying its own debt to show skittish investors that it had enough cash and liquidity to survive not just the European banking crisis, but the rumors of its own pending demise, which began with a blog posting.

From  a 1929 crash article.

 Thursday October 25, 1929 the markets crashed, on Friday several of the nation’s largest bankers met to decide what they could do about the situation. Among the attendees were the heads of Morgan Bank, Chase National Bank, and National City Bank. The bankers ultimately decided to purchase a number of U.S. Steel shares above market price. A similar tactic worked to end a previous stock market scare in 1907 when the New York Stock Exchange plummeted, causing many banks and businesses to file bankruptcy. American banker J.P. Morgan and a few other bankers bailed out the banking system using their own money. The bankers who tried to thwart the 1929 stock market crash were unsuccessful. There were positive results, but they were short lived.

Short lived!

 

 

Sat, 09/24/2011 - 17:26 | 1706009 spankthebernank
spankthebernank's picture

When I watch shit like this it makes me so happy I tossed my tv out the window 5 years ago.  Watching Gasparino and that piece of ass just makes me sick.  Cheerleading ass clowns.

Sat, 09/24/2011 - 08:55 | 1704864 fdisk
fdisk's picture

"Economic Collapse, Financial Manipulation and the Dollar Crisis"

http://www.globalresearch.ca/index.php?context=va&aid=26756

Good article.

Sat, 09/24/2011 - 08:56 | 1704867 blindman
blindman's picture

...
.
.
http://english.aljazeera.net/programmes/meltdown/2011/09/201191410551861...
.
The men who crashed the world
The first of a four-part investigation into a world of greed and recklessness that led to financial collapse.
Meltdown Last Modified: 21 Sep 2011 09:26

Sat, 09/24/2011 - 08:59 | 1704871 Atomizer
Atomizer's picture

It all boils down to this... This is why the EU has failed. US needs to reverse course or it too will become the EU.

 

Free Shit 

The folks who are getting the free shit, don't like the folks who are paying for the free shit, because the folks who are paying for the free shit, can no longer afford to pay for both the free shit and their own shit,

And, the folks who are paying for the free shit, want the free shit to stop. and the the folks who are getting the free shit, want even more free shit on top of the free shit they are already getting!

Now...  The people who are forcing the people who pay for the free shit, have told the people who are RECEIVING the free shit, that the people who are PAYING for the free shit, are being mean, prejudiced, and racist.

So... the people who are GETTING the free shit have been convinced they need to hate the people who are paying for the free shit by the people who are forcing some people to pay for their free shit, and giving them the free shit in the first place.

We have let the free shit giving go on for so long that there are now more people getting free shit than paying for the free shit.

Now understand this.  All great democracies have committed financial suicide somewhere between 200 and 250 years after being founded. The reason? The voters figured out they could vote themselves money from the treasury by electing people who promised to give them money from the treasury in exchange for electing them.

The United States officially became a Republic in 1776, 235 years ago. The number of people now getting free shit outnumbers the people paying for the free shit. We have one chance to change that in 2012. Failure to change that spells the end of the United States as we know it.

A Nation of Sheep Breeds a Government of Wolves!

Sat, 09/24/2011 - 09:33 | 1704920 Oh regional Indian
Oh regional Indian's picture

Atomizer, the America as you think you understand it, never even took off...

http://www.edrivera.com/?page_id=2

 

ORI

Sat, 09/24/2011 - 16:46 | 1705930 Dan Watie
Dan Watie's picture

it took off but was hijacked to Lower Manhattan.

 

55 Water St

Sat, 09/24/2011 - 09:13 | 1704876 boooyaaaah
boooyaaaah's picture
From Overstock.com DTCC Announcement on Sep. 13, 2011   DTCC Announces Initiative To Revamp Processing of Continuous Net Settlement Obligations   New York, September 13, 2011 – The Depository Trust & Clearing Corporation (DTCC) has proposed changing the way its clearing agency subsidiaries, The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC), process Continuous Net Settlement (CNS) transactions. The enhanced process would align CNS processing into the risk management control structure used by DTC to reduce risk and boost liquidity efficiencies in the settlement of almost $870 billion in equities that trade in the U.S. markets each day.   The proposal is presented in a white paper – CNS Settlement as Delivery Versus Payment in DTC (CNS for Value) – issued to the industry today. In the paper, DTCC asks for feedback on the initiative. NSCC and DTC together clear and settle virtually all broker-to-broker equity, corporate and municipal debt securities transactions in the U.S. In addition, NSCC serves as the equity markets’ central counterparty and guarantees trades by becoming the buyer for every seller and the seller for every buyer for CNS-eligible securities.   Under the methodology currently used for CNS obligations, the securities are moved via a book-entry transfer that is free of payment at DTC with the related money settlement occurring at NSCC.   With the initiative, called CNS for Value, DTC will process both aspects of the CNS settlement obligation, moving security positions and credits/debits simultaneously through DTC’s settlement system, leveraging DTC’s existing risk management controls (net debit cap and collateral monitor).   CNS for Value offers several important benefits to members. It will:   • Give them a single, transparent intraday settlement process that allows them to better monitor settlement activity and manage liquidity needs,

• Continuously net members’ CNS credits and debits with DTC credits and debits which may reduce a member’s intraday funding requirements, and

• Position DTCC to support more robust intraday settlement finality and liquidity management by supporting a multi-cycle settlement process.

  "With the implementation of CNS for Value, we will be able to mitigate systemic risk and promote harmonization of the U.S. settlement system with evolving international standards for financial market infrastructures," said Susan Cosgrove, DTCC managing director and general manager, Settlement and Asset Services. "This change will give DTC, NSCC and their members more robust and transparent methodologies for managing intraday settlement liquidity risk."   CNS transactions processed as DVP at DTC will be subject to DTC’s collateral monitor and net debit cap risk management controls. The net debit cap control limits the net debit balances of DTC participants so that DTC will have sufficient liquidity to fund end-of-day net settlement with sufficient collateral support based on the collateral monitor. The use of DTC’s collateral monitor and net debit cap controls on CNS transactions will protect DTC from potential spillover risks from NSCC.   "The concept of moving DTC from a single end-of-day settlement model to a more robust intraday multi-cycle settlement model is also being explored," said Julie Krill, vice president, Settlement and Asset Services. "This multi-cycle model would further mitigate certain risks by providing members and the market with intraday settlement finality."   DTCC anticipates implementation of CNS for Value in early 2014.   Details of the CNS Settlement as Delivery Versus Payment in DTC (CNS for Value) initiative and the multi-cycle settlement proposal can be accessed at www.dtcc.com under Thought Leadership, White Papers.  

http://www.dtcc.com/news/press/releases/2011/press_release_dtcc_announces_initiative.php

Sat, 09/24/2011 - 09:24 | 1704899 Atomizer
Atomizer's picture

Ctrl f + Basel III

http://www.iss-mag.com/sitemap

Edit: Just in case you missed the small ad to the left.

http://finance.flemingeurope.com/basel-forum/

Sat, 09/24/2011 - 09:34 | 1704921 chubbar
chubbar's picture

I have no idea what this article means but my hand instinctively covered my wallet when I started reading it.

Sat, 09/24/2011 - 09:31 | 1704918 johnnymustardseed
johnnymustardseed's picture

Who invented derivatives?? Blythe Master, enough said!

Sat, 09/24/2011 - 19:34 | 1706227 clagr
clagr's picture

I cannot tell a lie. I was involved in the development and sale of the first CMO (Collateralized Mortgage Obligation)

 

Sat, 09/24/2011 - 09:34 | 1704923 YHC-FTSE
YHC-FTSE's picture

This is something I've actually been looking forward to reading. Many thanks to whoever posted and to Reggie.

Saved for (In)digestion later. 

Sat, 09/24/2011 - 09:41 | 1704939 digalert
digalert's picture

What a pain in the austerriere!

Sat, 09/24/2011 - 09:43 | 1704941 celticgold
celticgold's picture

Atomizer ...u mean like  hope and CHANGE?

 

Sat, 09/24/2011 - 09:58 | 1704960 Caviar Emptor
Caviar Emptor's picture

But But But.....Plan A for the economy was "Prosperity and Peace Through Financialization!" 

That's what all the collective brains promised in the 1980s in response to the plan of De-Industrialization that followed Nixon's China accords. They were supposed to make stuff, we were supposed to buy it on credit. That was supposed to be the deal!! We would all become capitalists to the world: doing the developing world's lending and banking, counting all the beans in CHina and the rest of the developing world! 

What a vision! What a world it was suposed to be that was promised to us! 

Of course it all rested on accords that only the biggest governments could ever make let alone enforce. China would only make such a deal on the full faith and credit of the US gov for a start. And ironically it was the high priests of small government who pushed the plan, preaching small government while at the same time making the grandest of grand plans to change the enitre US economy over to "The Service Economy", "Financialization" and "The Ownership Society" and also implementing large transfers of wealth using "Trickle Down Theory". 

So of course it's only the next logical step to nationalize the TBTF banks that are already running under a hybrid nationalized model now with both implicit and explicit bailout guarantees. Europe will be the guinea pig. When that pig can fly, the US only needs to take the next step and copy. And we might finally be able to go back to our iPads and browse porn and eye candy in peace from anywhere on the planet!

 

Sat, 09/24/2011 - 10:02 | 1704964 PulauHantu29
PulauHantu29's picture

It's all about Bonuses.

80:1 leverage allows each bank to pay out $15 Billion in Bonuses to their execs when the trade is postivie.

If it's a losing leveraged trade, the massive loss is passed over to the Central Bank (aka, taxpayers).

Sweet if you are a Banker.

How about a law requiring these fellow to pony up their personal assets backing their trades?

Sat, 09/24/2011 - 10:03 | 1704971 Seasmoke
Seasmoke's picture

CLAWBACKS

 

a claw thru the skull of all the banksters and take back all assets of the past 10 years

Sat, 09/24/2011 - 10:07 | 1704975 Caviar Emptor
Caviar Emptor's picture

@Pulau: Or....you could go the other way and work for a banker. As a domestic servant, exotic dancer, pyramid construction worker, 'lady' in waiting or whatever! If you can't beat 'em, spoil 'em! 

Sat, 09/24/2011 - 10:02 | 1704970 Seasmoke
Seasmoke's picture

when losing at the track and the day is getting late, the only way to get out is to bet bigger and bigger longshots, that usually doesnt work out to well and go home broke

Sat, 09/24/2011 - 10:13 | 1704985 Lee
Lee's picture

these "derivatives" are satanic. the people who created them worship satan. the fact that they are legal makes our legal system satanic. the fact that lawyers will defend the creators of said satanic devices is proof that all lawyers are evil. Sanhedrin, our judicial system.

 

But no. don't discuss that.

 

lets get lost in the satanic labyryth and intellectual madness of the technicals of denial.

Sat, 09/24/2011 - 10:24 | 1705000 dwdollar
dwdollar's picture

I agree. They're meant for one thing and one thing only. A doomsday unwind that's only waiting for Satan's nod. It's just a matter of time.

Sat, 09/24/2011 - 10:19 | 1704992 Caviar Emptor
Caviar Emptor's picture

The correct buzzword is "Federally Subsidized Gambler".

That's the unofficial but correct job description for today's bulge bracket ibanker. Not a bad gig 

Sat, 09/24/2011 - 10:25 | 1705001 Lee
Lee's picture

an oldie but goodie:

 

"The few who understand the system, will either be so interested from it's profits or so dependent on it's favors, that there will be no opposition from that class."

Mayer Amschel Bauer Rothschild

Sat, 09/24/2011 - 10:35 | 1705018 EHM
EHM's picture

Mayer didn't foresee Zero Hedge.

Sat, 09/24/2011 - 10:26 | 1705004 Caviar Emptor
Caviar Emptor's picture

You never have to go looking very far to confirm the grand plan: YUM dumps 2 US restaurant chains while accelerating investment to expand in India

http://www.businessweek.com/news/2011-09-22/yum-brands-sells-a-w-long-jo...

Sat, 09/24/2011 - 13:00 | 1705368 falak pema
falak pema's picture

That's bad news for our Long John Silver at ZH. Does he know about this? He may not want to sell chili beans in India!

Sat, 09/24/2011 - 10:26 | 1705005 wannabe traitor
wannabe traitor's picture

and here i am being told robbers and pirates are evil!

 

 

Sat, 09/24/2011 - 11:02 | 1705062 RSloane
RSloane's picture

How can you think that? That describes our governments throughout the globe. Where is your confidence?

Sat, 09/24/2011 - 10:36 | 1705019 blindman
blindman's picture

who is that man behind the curtain?
.
pay no attention...
http://www.youtube.com/watch?v=YWyCCJ6B2WE

Sat, 09/24/2011 - 10:44 | 1705025 Surly Bear
Surly Bear's picture

And Moses said 'Let my people go.'

Sat, 09/24/2011 - 10:44 | 1705029 Yes_Questions
Yes_Questions's picture

 

 

The first step is admitting you have a problem.

 

 

Sat, 09/24/2011 - 10:45 | 1705031 FLUSA.com
FLUSA.com's picture

Bernanke: "Duhh Winning!"

Sat, 09/24/2011 - 10:52 | 1705039 monopoly
monopoly's picture

Does anyone sleep around here? Getting all riled up early today. These numbers have been known at Zero Hedge for ions now. Just does not matter...till it does. And that day is coming. And also enjoy Reggies posts, but admit a link would be better and a little less of me, me. But he does a great job.

My dealer was so busy late Friday could not get an order in for silver. Hopefully it moves lower on the open. And check out almost every blog advising doomsday for us. It is over, gold moving lower, silver a lost cause for decades. The cockroaches come out in droves once the food spills off the table. Just gives us more opportunity to buy more of what we want.

I am pretty good with numbers but these are so mind boggling I have to think about it again and again. And the brilliant ones want us to sell our gold, silver and miners. Think I will just keep what I got.

Sat, 09/24/2011 - 10:52 | 1705041 blindman
blindman's picture

http://www.thehindu.com/news/international/article2479928.ece?homepage=true
.
NASA’s “errant satellite” plummeting to earth at 27,000 kph
Narayan Lakshman
.
...
"“Components which do survive are most likely to fall into the oceans or other bodies of water or onto sparsely populated regions like the Canadian Tundra, the Australian Outback, or Siberia in the Russian Federation,” NASA explained, adding that during the last 50 years an average of one catalogued piece of debris fell back to Earth each day and “no serious injury or significant property damage caused by re-entering debris has been confirmed.”

Yet obviously no place on earth was entirely safe from the dead satellite’s descent – in a small footnote on its website NASA recommended: “If you find something you think may be a piece of UARS, do not touch it. Contact a local law enforcement official for assistance.” This of course assumes it missed the individual in question.

Keywords: UARS, NASA, Upper Atmosphere Research Satellite
"

Sat, 09/24/2011 - 11:01 | 1705057 Michelle
Michelle's picture

When TBTF were bailed out and CDS contracts were honored, this action only reinforced the validity of the derivatives markets which explains why this market has grown since then.  At that time, CDS notional was approximately $60T and after all the blowups shrunk to about $28T. Interestingly, global wealth destruction was about $30T. Coincidence? I think not. Now imagine an FX implosion with the failure of the Euro, how much will be sucked out of the markets? What have our puppet leaders learned since then? Only Angela Merkel has banned naked CDS in her country so obviously she has a clue.

As for allowing derivatives to exist to hedge risk, they only create MORE risk. How has  credit and capital been extended prior to the creation of derivatives? The old-fashioned way - performing due diligence and and knowing and trusting the borrower. Reputation and character often was the only basis for extending credit as credit history may not have existed, but only a handshake and a promise were required. The derivatives market has made it possible to forgo the basic concept of trusting and knowing your borrower for repayment and instead the notion that all risk can be hedged is a misnomer. The layers and layers of derivatives make for a very unstable system and has only become more unstable as nobody has the first clue how to regulate or unwind them in an orderly fashion. Therein lies the crook of the problem and the only solution is to allow failure to the point where none of these contracts are honored. If the players don't own the actual asset, no payoff, ever. My belief is that the damage would be much smaller as money doesn't change hands and forced-selling would not occur, thus reducing systemic risk. The best way to regulate this market is to make it impotent.

Sat, 09/24/2011 - 11:53 | 1705184 disabledvet
disabledvet's picture

"provided the government can afford it" since the entire idea of securitization was...just like the internet...an invention that without the government could not possibly exist. What say you? Are we "affording it"?

Sat, 09/24/2011 - 12:01 | 1705209 headless blogger
headless blogger's picture

Ya, this is really a great overview. Good point about the risk actually being worse when created to reduce risk.

 

Sat, 09/24/2011 - 11:02 | 1705061 centerline
centerline's picture

Bilateral netting? Give me a break. Modern PhD economists don't "get it" because they cant the see the forest for the trees. That the macro design of the system is a ponzi scheme that concentrates assets and distributes liabilities. A system built on the paradigm of perpetual growth.

Sat, 09/24/2011 - 11:11 | 1705073 D.O.D.
D.O.D.'s picture

The simple answer is "Yes"...

Sat, 09/24/2011 - 11:17 | 1705081 reader2010
reader2010's picture

Gold needs to go to the moon to reflect this fact.

Sat, 09/24/2011 - 11:17 | 1705085 RobotTrader
RobotTrader's picture

 

 

If the Derivatives Casino collapses, then the only thing worth holding will be U.S. Treasuries and U.S. Dollars.

Everything else will get sucked down into the vortex.

Even stocks like WFM, SBUX, ANF, etc.

So it is imperative that the Fed starts printing even faster.

Sat, 09/24/2011 - 11:58 | 1705202 disabledvet
disabledvet's picture

THAT IS THE ONLY THING WORTH HOLDING RIGHT NOW. We know this for a fact. So i ask you again Mr. Robot: "why are equities rising?" Let us observe:

http://www.youtube.com/watch?v=g53S4zRbo-k&feature=player_detailpage

Let's face it. We're Americans. We love our Robots!

Sat, 09/24/2011 - 15:46 | 1705826 Kayman
Kayman's picture

Robo - you should stroke it "even faster"

Sat, 09/24/2011 - 11:25 | 1705094 Doug Eberhardt
Doug Eberhardt's picture

Tyler,

Thanks for the article...I have been writing about the nations top 5 banks exposure to sub-investment grade derivative risk for the last year or so. CNBC, etc. won't ever discuss this issue. These derivatives sit at over $4 trillion now, more than at the height of the 2008 financial crisis.

Increase In Bank Sub-investment Grade Derivatives Reveal A Need For Gold Insurance

http://buygoldandsilversafely.com/economy/increase-in-bank-sub-investment-grade-derivatives-reveal-a-need-for-gold-insurance/

There will be no real counterparty to these lower grade derivatives except the lender of last resort, the Fed. The Fed's balance sheet is already a mess and it will be a natural conclusion that "faith" in the Fed will be fleeting.

Add to the banking mess the fact they don't mark to market their assets, with the full blessing of the Financial Accounting Standards Board (FASB) and it's plain to see the dire straits they are in. Yet again, CNBC et al never discusses this issue.

Thanks for bringing it up...again... The banking crisis is what will bring this Humpty Dumpty economy to its knees.

 

 

Sat, 09/24/2011 - 12:02 | 1705212 ivars
ivars's picture

Oh, and here is the oldest and most miserable one-DJIA and correspondingly, economy forecast made in Feb6, 2011:

http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&start=0#p30485

Whole 2012 will be a recession in the USA (and many other places)-that was clear long ago.

Sat, 09/24/2011 - 12:18 | 1705256 headless blogger
headless blogger's picture

I don't know...maybe we are better off investing in a tent and a solar generator. Maybe a pitbull and fishing pole. If you live in an area like I do, hardly any jobs, and its suppose to get worse, maybe its better just to opt out of the system and buy a copy of Walden Pond. I really don't know...

Sat, 09/24/2011 - 12:14 | 1705247 headless blogger
headless blogger's picture

250 Trillion!! Oh my shit..

Somebody needs to do something. And people are bitching about some minimum wage dude collecting food stamps? At least the food stamps contribute to the community they are spent in.

What are these derivatives doing for anyone but helping to clean our clocks out? And its growing.

How depressing...

Sat, 09/24/2011 - 15:05 | 1705744 Michelle
Michelle's picture

It is depressing, and the players know that liquidity and capital will keep flowing to help defer the inevitable. We ARE the liquidity and the capital, folks. We are coming close to a stalemate, reminds me of the Cold War. Are the players with their WMD going to win or are our governments going to take control and reign in this insanity? Currently the players are ahead in this game as they make up the rules as they go along, and if they don't like something they throw a temper tantrum like a bratty two-year-old and throw a fit. Sadly, there are just too many two-year-olds.

Sat, 09/24/2011 - 12:16 | 1705252 Quixote2
Quixote2's picture

Too big to get my head around.  My simplified take, the banks collectively are one big Ponzi scheme.  You go in to get money (fiat) and they always have the paper and ink or electrons to provide you with your request and to pay the executive bonuses, with or without the central bank printing. 

The fall of the banks will start when someone goes in and asks for cash..... then the bank runs commence.

Sat, 09/24/2011 - 15:52 | 1705842 Kayman
Kayman's picture

Banking cash is paid promptly in Bonuses.  "You covet what you see, Clarice..."

Wall Streeters have 2 eyes- one looking at the Bonus Pool and one looking at Cash-On-Hand.

Sat, 09/24/2011 - 12:35 | 1705305 Ellesmere
Ellesmere's picture

Good article...

Sat, 09/24/2011 - 12:36 | 1705312 MFL8240
MFL8240's picture

They can all eat shit and die!

Sat, 09/24/2011 - 12:57 | 1705359 falak pema
falak pema's picture

the question that comes to mind is : How does this derivatives exposure face up to the sovereign debt exposure of French/Italian/ Belgian/Dutch/UK/German banks. 

The sums involved are so huge in both cases that we have difficulty evaluating the downside potential risk...for the financial community as a whole.

Sat, 09/24/2011 - 15:54 | 1705844 Kayman
Kayman's picture

Don't worry Falek.  They are all backed by Worthy Counterparties.

Sat, 09/24/2011 - 12:59 | 1705367 matrix2012
matrix2012's picture

WOW, the figures of the derivatives' $$$$$$$$$$$$$$$$ involved here do thwart the issues of the USA's debt and all the debts from other regions/countries... also making the surplus reserves of many countries even the world's highest insignificantly tiny :D One single company of the TOP FOUR is even "worth" more than any medium to big country. OMG...those companies are soooo RICH!!! TBTBF

It's really amazing to learn the "wealth" of those behemoth companies like JP MORGAN, CITI, BANK OF AMERICA, GOLDMAN SACHS, also the newcomer, the fifth: HSBC

OTOH it also makes the entire Planet Earth seems to have much higher values..... JUST IMAGINE ALL THE FIGURES mentioned ON THE PAPER there!!! And the USA is fully loaded of such high value industry...the most lucrative one: FINANCIAL INDUSTRY!!!  LOL!  Please forgive and save me, The Almighty!

Sat, 09/24/2011 - 14:13 | 1705488 Atomizer
Atomizer's picture

Repost..

TPTB to peasants.. We will use all available resources to contain our derivatives nest.

Sat, 09/24/2011 - 13:36 | 1705483 Forgiven
Forgiven's picture

That's the genius of their evil plan...make themselves a weapon of mass destruction.  The way to defuse the bomb is simple, unlace all the wiring of the fraudulent paper mills and announce both sides of the fraud are null and void.

Sat, 09/24/2011 - 15:55 | 1705847 Kayman
Kayman's picture

And the criminals get to keep their bonuses.

Sat, 09/24/2011 - 14:06 | 1705581 Atomizer
Atomizer's picture

The whole concept of Global Governance is to fleece the existing system(s). When the host is dead, many geniuses will appear on camera pitching the new system. These peeps will be speaking to you behind 10" bullet proof glass. The solution will be spun as "removing fraud" and limiting freedoms to restore sovereign state entities. It's all a lie.

Enjoy the next chapter of your central planning comic strip. Don't really care if you disbelieve this warning, you've simply been told.

 

Sat, 09/24/2011 - 15:02 | 1705739 you enjoy myself
you enjoy myself's picture

The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank

this is probably the quote/warning of the decade.  when you've exposed yourself to such gigantic, unfathomable counterparty risk it makes no difference whether you've supposedly netted it out.  the exposure to just one couterparty's contracts likely exceeds 100% of the assets of the buyer -- one default will blow everyone up completely.  especially when the issuing bank has sold CDS insurance worth many, many multiples of their own net assets -- what can't be paid out, won't.

Sat, 09/24/2011 - 15:58 | 1705853 Kayman
Kayman's picture

But...but...but... aren't they all backed up by Worthy Counterparties ?

Sat, 09/24/2011 - 15:42 | 1705815 theprofromdover
theprofromdover's picture

The dirty rotten scoundrels are going to make Au & Ag radioactive. They'll find a way.

They need to take it out, they can have no safe havens for anything outside the system, otherwise the game is up.

How dare they. The very definition of evil.

Sat, 09/24/2011 - 15:46 | 1705824 HROLLER
Sat, 09/24/2011 - 15:48 | 1705830 robertocarlos
robertocarlos's picture

Canadian banks are safe. Thank G-d.

Sat, 09/24/2011 - 16:01 | 1705861 Kayman
Kayman's picture

The 4 Greatest Lies:

1. I luv you

2. The check's in the mail

3. I promise not to ____ in your mouth.

4. Canadian Banks are safe- none of them hold Ontario and Quebec debt and no more Asset Backed Paper shit exists on our books.

Sat, 09/24/2011 - 18:32 | 1706113 e2thex
e2thex's picture

250 Trillion.

That's forty light years away. 

"If you get an early start tomorrow morning, we can be back by...."

Sat, 09/24/2011 - 20:33 | 1706365 blindman
blindman's picture

what is this?
.
2,250,000 Contracts Betting Against October S&P 500
http://www.moneyteachers.org/Put+Options+S&P500.htm
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October 2011 Stock Market Mega Crash !!!
http://geraldcelentechannel.blogspot.com/

Sat, 09/24/2011 - 22:21 | 1706544 paul_Liu
paul_Liu's picture

http://mobile.reuters.com/article/idUSTRE78M3R120110923?irpc=932

 

MS CDS costs rise after record high - highest among all US Banks. Market is smelling something big to happen for MS.
Sat, 09/24/2011 - 23:35 | 1706641 ricocyb13
ricocyb13's picture

great video at the bottom of this page

http://rt.com/usa/news/wall-street-arab-spring-899/

 

Sat, 09/24/2011 - 23:40 | 1706646 paul_Liu
paul_Liu's picture

Hope Tyler could write something about MS's CDS costs so to help investors not to lose money anymore on this stock

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