The Mother Of All Infographics: Visualizing America's Derivatives Universe

Tyler Durden's picture

A month ago we presented the latest derivatives update from the OCC, according to which the Top 5 US banks held 95.7%, or $221 trillion of the entire US derivative universe (which in turn is just a modest portion of the entire $707 trillion in global derivatives as of June 30, 2011). And while the numbers of all this credit money, because that's what it is, and the variation margin associated with all these trillions in bets is all too real, appeared impressive on paper, they did not do this story enough service. So to present, visually this time, the US derivatives problem, we go to our friends from Demonocracy, who put the $229 trillion derivative 'issue' in its proper context. For those curious what a paper equivalent of bailing out the US derivatives market would look like, now you know.

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blu's picture

If they had then they would not have needed to put the world down for destruction in December.

firstdivision's picture

Derivatives are ways to spread the that we're all fucked.

mayhem_korner's picture



Bailouts are pretty effective at spreading risk.

blu's picture

They're justing being extra careful. Between CDS and bailouts, it's gonna be covered.

centerline's picture

Just add a shitload of zero's on the bills and that pile won't look so big.  What's to worry about?  I always wanted to be a millionaire!

(... wait, don't answer that).

reTARD's picture

I prefer to call them Federal Reserve Notes. Some many prefer Toilet Paper. Others only computerized digits.

jarrollin's picture

did you get a haircut btw?

reTARD's picture

No, bankers don't really take haircuts. I just running the show with my eyes sealed shut. LOL

SilverRhino's picture

Definitely seconding what that other poster said.   They should put silver, gold and platinum cubes representing all the known metals mined in all of history just to drive the comparison home.

And a stack of 100's to demonstrate comparisons. 

Silversem's picture

A credit implosion of this magnitude asks only for one thing: Gold

a cfd position against the big financials can also be interesting

manhunter's picture

In what sense is credit money all too real?

TMT's picture

$221 Trillion ... come on TD that is GROSS exposure.  NET exposure is around $1.3 million.

Nothing to worry about.


mayhem_korner's picture



I attended a conference of CROs earlier this week, and one of the bankers said, in earnest, that "everyone" missed the boat on the the MBS/CDO play.  I slipped a question to the moderator as to whether or not the dood had heard of Micheal Lewis and The Big Short.  Never got asked.

jarrollin's picture

Unfortunately, most posters see this graphic all wrong.  These were just some things Blythe Masters was browsing for at London's World Famous Sex Toy Shop.  Apparently, such things aren't as taboo in Europe.

Yorick7's picture

But they all net to zero.  For every buyer of a derivative theres a seller and vice versa.  The real risk is that if one of these too big banks fails it takes the rest with them and most of the banking system because the market is very intertwined.  Also these are notional numbers and don't really reflect the true size of the risk.  Any way, neat to see visually how big a trillion is.

Tyler Durden's picture

They all net to zero, but by the time one bank's gross exposure is var margined to zero (because there is real money exchanging hands every EOD), it will blow up several thousands times in a row courtesy of real Tier 1 capital ratios of 4-5% or so.  So unless the counterparty is willing to bail out the bank on the other side of the trade, it will be the Fed over and over.

Read more here.

ZeroIQ's picture


prains's picture

But they all net to zero.


didn't laffer say the same thing 06'

Seer's picture

One could also say that the velocity of money would hit zero; and you know what this would mean...

Geez, people!  Wake up!  That which cannot continue forever won't!  Pretty simple to assess, no need for fancy graphics or complex numbers!

amadeusb4's picture

Thank you.

I am more than a bit disappointed for a site like ZH to fear monger this way. This is akin to saying that every lotto number issued IS a winner and multiplying the jackpot times the number of tickets outstanding to scream about the state's shortfall in paying out winnings. Clearly not every option will be in the money when it expires. In fact the vast majority of options expire worthless!

This kind of sensationalism misdirects focus from institutional exposure to derivative risk.

centerline's picture

Wrong.  the argument you guys are posing is about as realistic as Krugman's arguments about debt levels not being of concern because it is debt we owe ourselves (one man's debt is another man's asset - feel free to laugh).

In the "real" world of endogenous money creation, the risk is in what is different between banks, agreements, timing, borders, etc.  Assuming it all nets to zero is a fallacy of double-entry accounting which does not take into account the dynamics of money, let alone human behavior.

In short, a swelling market of private debt (or contracts made against private debt that would force government debt to be pulled into existence to avoid debt deflation in a calamity) ought to scare everyone.

Yorick7's picture

derivatives arent debt in the sense that a bond is.

centerline's picture

The are contracts for/against debt.  What happens when they trigger?  Money (debt) is called.  The derivatives market is a massive pile of conditional private IOU's for government IOU's.

DaveyJones's picture

why don't people see that??

centerline's picture

Too busy watching American Idol.  I like to think the public at large has the ability to process this.  But, I know better.  Rather than turning against those who have perpetrated this, they will turn on themselves and you and I - by design.  This is what really pisses me off.

Bear's picture

By the way ... who got kicked off this week?

engineertheeconomy's picture

@centerline - I think you are the one thats wrong here. If I remember correctly, there's an equal sign in the middle of every equation. I think they call it mathematics or physics or something. Of course, all the mathamaticians and physicists in the world COULD be wrong. Not

mayhem_korner's picture



No.  Centerline has it right.  But let's try a little math experiment to help some of y'all understand.

If you bet $1 on the outcome of a flip of the coin coming up heads, the expected value is $0.50.  So you can come up with a whole bunch of equations using the $0.50 expected value.  Here's the problem: $0.50 will never be the outcome - it will always be $1 or $0.  So if you get too many tails in a row, you are out of cash before the expected value comes to be.

The expected value of every (correctly priced) option is $0.  Yet, somehow, some way, they (almost) never payout $0.  Guess what happens if enough of that $229T comes up tails too many times in a row?  (And, unlike flipping coins, the behaviors of the underlyings in options tend to be pretty correlated = more risk, yeehaw!)

engineertheeconomy's picture

I think you are wrong.

If we both bet $1 on the outcome of a flip of coin, the expected value would be $2 since you also would have to put a dollar on the table.

So, you got an F in math.

I'm sure you're good at something.

Why are your pants all worn out around your knees?

mayhem_korner's picture



The expected value is $2?  And you think I got an F in math? 

Oh dear...

tmosley's picture

Good lord, you both get an F.

If two people each put a dollar on the table, the expected value for each player is ONE DOLLAR.  There are two possible outcomes, one where you walk away with nothing, and one where you walk away with $2.  You get the expected value by taking the weighted average of all possible outcomes.

mayhem_korner's picture



Thanks Tmosley, but I got that part.  I never said that there were two dollars at stake.  I said one dollar, bet against a 50% outcome of success yields an expected value of $0.50.  I didn't expect Vinny Barbarino to show up and confuse you and everyone else...

engineertheeconomy's picture

I stand corrected. There is a value of $1, but a net pot of $2. Either way the math works out. My point is that the bankers would have us believe that 1+1=3 or something like that. They use a lot of technical nutshell nonsense to hide good ol fashion money printing. Did anyone actually believe that Quantitative easing was  any different from what happens every day?

Seer's picture

"There is a value of $1, but a net pot of $2."

But it's a magical pot...  The $2 doesn't exist in this game.  There is, just like with fractional banking, only a fraction (IF THAT!) behind each bet.  There's not enough "liquid" to fill the glasses.  Someone MAY get a full glass, but after that that's likely it.

Nothing like making all of humankind one big bluffing game.  And now that things are getting serious the big players expect REAL money is to be paid out, and that's NOT going to happen.  Thus commences wide-scale war...

EvlTheCat's picture

'you also would have to put a dollar on the table.'

You're still assuming everyone is betting with "tangible assets" instead of leveraged IOU's..

hedgeless_horseman's picture



You all have the wrong perspective.  Try this...

You are Jon Corzine. 

You have had a run of bad luck at the casino.

You borrow a dollar from Jamie Dimon, with two of your client's dollars as collateral, and you put it on the table...

The Alarmist's picture

... and your expected outcome (and likely outcome) is $1.0B ....

Seer's picture

Via the taxpayer-funded payout window!

Yorick7's picture

Someone has the other side of the bet.  You can't create a bet out of nothing.  The net value of your bet and the guy/gal who lays the bet is zero in your example.

mayhem_korner's picture



So you're ok if you give me $10 million today and I give it back to you next week?  Net value is zero, right?  There wouldn't be a solvency issue in there anywhere, would there?

Yorick7's picture

Thats a credit issue, not betting.  Betting is slightly different from derivatives because with derivatives you can hedge in the underlying, thus the name "derivative", the price is derived from an underlying asset which you can buy or sell to reduce your exposure.  But it still all nets out when you consider the value of payout on the derivative and the hedge.  

This is not to say that derivatives in the hands of people who don't understand them aren't dangerous, rather that you end up with zero and the other side gets all your money.


centerline's picture

It is all betting.  Period.  There is no fundamental difference except the instruments of betting are usually pretty simple.  In the case of the financial world, the bets are constructred by teams of lawyers.

Real world productive use for "betting" (err.... hedging) is okay.  Just a part of doing business.  Hell, life insurance is a bet.  What we have here though is a ponzi profit machine based on betting.  The consequence is that once put in motion, you can't stop it without breaking it.  The gains are recursive though - so there is an end.  But, by then the stakes will be too high to avoid a major calamity.

Now, if this were a closed system (say just one island nation with no ties to the rest of the world) we might be get through it okay.  But, the counterparty exposure here crosses many borders, political regimes, ideologies, etc.  It simply won't end well.

mayhem_korner's picture

But it still all nets out when you consider the value of payout on the derivative and the hedge. 


Not if

a)  You don't have the underlying...

b)  Don't have access to the underlying...

c)  and/or there doesn't exist sufficient underlying on the planet.


I think you're assuming these banks have no naked positions, which is a wrong assumption.

Seer's picture

"I think you're assuming these banks have no naked positions, which is a wrong assumption."


I don't think anyone here would state that standard, run-of-the-mill banks and their fractional reserve requirements is anywhere nearly as potentially fucked up as the derivative "market."  HOWEVER, one has to ask what happens to those nice, up-front banks when people all of a sudden feel like they need to get their hands on the Fractions...

tmosley's picture

DINGDINGDING.  We have a winner!

Thing is, these derivatives are sort of like betting your buddy "a million billion dollars" about something, and then expecting him to pay up when he loses the bet, and worse, betting everything that you have somewhere else, assuming that if you lose that bet, you will win big off of your buddy.