Coming Soon: The $600 Trillion Derivatives Emergency Meeting 77 comments
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Here is an update on the size of the derivatives market with the latest official figures (.pdf) from the Bank for International Settlements (BIS). Hold your breath, as we are not anymore talking paltry billions but TRILLIONS of whichever fiat currency.
Current emergency meetings on banks and markets are still only in the stage where politicians and central bankers are bickering over how to create a few more hundred billions Euros and FRNs. But toxic MBS pale in comparison to the mushrooming growth of the derivatives market. According to figures released in the quarterly review of the BIS (pp A103) in September the total notional amount of outstanding derivatives in all categories rose 15% to a mindboggling $596 TRILLION as of December 2007.
Two thirds of contracts by volume or $393 TRILLION fell into the category of interest rate derivatives. Credit Default Swaps had a notional volume of $58 TRILLION, seeing the sharpest relative increase after a volume of $43 TRILLION a year earlier.
Currency derivatives reached a volume of $56 TRILLION.
Oh, and every grand balance sheet comes with a trash can. Unallocated derivatives with a notional amount of $71 TRILLION are looming over the heads of the disintegrating investment community too.
However You Look At It, This Is an Accident Waiting To Happen
Don't lose your sleep because of these numbers that KO my desktop calculator. In an ideal world - in which we are not - long and short derivatives would net out each other, leaving only a fraction of risk. The BIS tries to assess this net risk with a total of $14.5 TRILLION (2006: 11.1 TRILLION) in gross market value for all contracts but comes up with a second figure.
The so called Gross Credit Exposure appears almost moderate at $3.256 TRILLION after $2.672 TRILLION a year earlier.
Even when taking the lowest of these figures shudders run down my spine. All emergency talks have so far focused on a few hundred billions in fiat currencies, but the current nervousness demonstrated by hectic talks of finance ministers and central bankers all over the globe should give everybody a vague idea that something here may blow up any day. This pool of so far silent derivatives without a major bust can come to life any day with the failure of a multinational financial firm.
The BIS review is a good way to grasp the dimensions long term monetary expansion has brought upon us. A net risk of $14 TRILLION compares with the annual GDP of the USA. Nobody, absolutely nobody can afford this tab in the case of an unorderly unwinding of this market that is roughly 12 times the size of the global economy. I conclude a lot more paper promises will be burnt in the coming derivatives tsunami. As a reminder, most of these contracts have been moved off balance sheets into under capitalized subsidiaries that profited from the good rating of the parent company. But in case of a default it is this nasty, nasty huge notional amount that becomes a liability.
As the vast majority of these contracts have no market, failure will come in the form of counterparty risk. This makes all the current emergency meeting a bit more understandable if politicians are already aware of the biggest bubble that may find no other way of deflation than a sudden burst. I base my sense of urgency on the rapid growth of the net risk in only one year, rising a stunning 30% at a time when the first signs of the credit crunch appeared.
German chancellor Angela Merkel said ahead of an emergency meeting with French president Nicolas Sarkozy in a TV interview that she would present a rescue package for German banks on Monday. This is also expected from several other European countries. Italian president Silvio Berlusconi went so far as to suggest a concerted stock exchange holiday. It would fit the other crooked nails in the coffin of free markets.
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Giant bubbles,
Given time,
Giant bubbles,
Blowin' my mind.
Giant bubbles,
Make me tremble all over,
I've got a feelin' that I'm gonna,
Owe ya 'til the end of time.
I'm sure you're not the first to think of that, but here's the rub: economic activity is completely based on trust, on faith that financial contracts will be upheld by courts and can be enforced. Which country wants to be the first to say "we're abrogating contract enforcement"? While I agree with you that we're headed there, the choruses of "what about me?" from Main Street will become a deafening roar when that happens.
I'm still not seeing a way out of this.
To the author: I'm now hearing that we are actually into the quadrillions of dollars in derivatives. It's just silly, it's not even scary anymore. Desensitization has set in. Antal Fekete wrote recently: "you cannot hedge debt risk by owning more debt." Of course he's right. I think Paulson and Bernanke know it too, I just wish they'd stop before they completely destroy the USD.
Too late. Just ask WaMu bondholders.
There is a great Star Trek episode from the late 1960s entitled “Specter of the Gun”. Kirk, Spock, McCoy, Scotty and Chekhov are compelled to fight Wyatt Earp and his gang in a showdown at the O.K. Corral. Curious aliens have, of course, orchestrated the battle: some kind of a moral psychodrama. Anyway, in this episode Mr. Spock develops a “knock-out” gas from ingredients found in Doc Holiday’s office. The protagonists logically figure that if they can render the Earp Gang unconscious, then they won’t have to fight them at the O.K. Corral. (And as we know, the Earp’s defeat the Clanton’s at the gunfight at the O.K. Corral. And as Mr. Spock so aptly points out, “history cannot be changed.”)
All are certain that the gas will work; but just to be sure, Scotty volunteers to be the test subject for the agent. Spock, for one, is spellbound, when the potion fails to work. “Fascinating” he quips. Spock goes on to explain the enormity of this paradox. “The potion” he explains, “must work. By all laws we know, it simply cannot fail. And yet it has failed”. Spock goes on to theorize that a massive manipulation of the crew’s brain patterns must be occurring. He also explains that this knowledge, if used correctly, can save the crew from certain demise at the O.K Corral.
Back to 2008. At some point, the massive manipulation of our brains, orchestrated by Spanky Paulson and all of his uber-wealthy cronies, will end. Reality will intrude. The global economy MUST crash because there are simply too many dollars "worth" of worthless assets gathering dust in the safes and hard drives and account ledgers of the world's financial instutions. Tens of Trillions of dollars worth! And no amount of mass hypnosis (in the form of 'pundits optimism'), or empty words (in the form of government guarantees on EVERYTHING), or spin can change reality. Get that? Reality cannot be changed.
Very well said........period.
Like the article states very trufhfully, "absolutely nobody can afford this tab"
This thing is astronomical, I was recently talking with one of the best financial heads this world has ever seen. (my opionion)
I made the statement that I feel this thing is going to come unwound and hard.
He replied, "I agree, it is coming apart, and it is so much more serious than most realize,...........muc... more."
Dave
daveeriqat.wordpress.c.../
Where is the line between reasonable investing and manic gambling?
Who has been risking what has not been produced by their sweat to play in an arena only they sort of understand?
Is the driver greed, aka love of money for it's own sake, or is it insecurity, aka fear of lack of money?
It is an idea worth pursuing. The alternative may be to see the banks that are counterparties come crashing down and the billions of public money that has been plowed into those banks lost to credit speculators.
Also note that GM has 1 trillion against it for it's bonds on a derivative contract. GM doesn't even have that amount in bonds. It is a bet in GM's default. Why do think the auto industry asked for 25 billion in gummint gimme's ?
Jump, because you do not deserve any bailout, especially with what remains of the taxpayers' money.
Jump, it is only right, as you have looted and plundered the land of your birth without any regard of the consequences for your friends and neighbors or the future of our children.
Jump, you rotten bastards in your three-piece suits, your wingtip shoes, your Rolex watches and your damned suspenders, you who threw good hard-working men with dirt under their fingernails out of work.
Jump, you stinking rats who lied to the American worker, who bribed and corrupted the representatives of the people to send Americas good paying jobs to sweatshops in Mexico, China, to India, leaving in their wake minimum wage jobs while you stuffed your pockets at the expense of your fellow Americans.
Jump, you bastards, who called it business when it was really treason when you sold out your Nation for profit.
Jump, you miserable scum, as you have destroyed the American family, forcing mothers to leave their children with strangers to make ends meet.
Jump, for having sold your fellow human beings into financial slavery, chained to a lifetime of debt without end.
Jump, for making Americas currency all but worthless.
Jump, for throwing families off their farms, for taking away peoples homes, for the stagnating wages.
Jump, you bastards for influencing the foreign policy of America to make war in order for your corporations and banks to seize and control the resources of other nations.
Jump, for you have the blood of the innocent on your hands, murdered in the name of corporate greed.
Jump, you bastards, for helping to give us Bush and Cheney who would turn America into a corporate controlled fascist state.
Jump, you capitalist exploiters of humanity, at least give us, your victims, the satisfaction of seeing you jump, along with all the other Wall St practitioners of soulless greed and exploitation.
Jump!
Just like a casino, some will win and some will lose and you're trying to convince us that we will all lose. Economies will de-leverage, that we've seen, but as everything becomes worth less, they also cost less. Sure, this will continue to tear apart people's retirement savings, IF you are expecting anything less than capital preservation in your elections.
the biggest danger is that the non-lending by banks leads to corporate defaults by otherwise sound companies which in turn would trigger CDS-events. The net-net amounts even in the case of LEH will be far, far less than the fear mongerers predict here. it may be anywhere bewteen 8 billion and 100 but that#s about it and even if a couple of counterparties were to default you may not even hear about it. restv assured, the BIS, the fed, ecb and the IMF are all in close contacts with the big players. the cds market may be absolutely intransparent and unregulated - but right here right now he powers that be will absolutely ensure that it will not go into a collapsing mode.
1 week from now, when the LEH case has been finally settled and the derivatives world has not turned into a supernova people will slowly start to realize that the wordl is not coming to an end. and all of a sudden, bank lending will slowly start again . and stock markets will see some heavy upward spikes.
too optimistic? maybe. but not unlikely. in any case, the staggering notional amounts involved seem to confuse people and lead them to underestimate the vast resources of the combined central banks
Where do you think we are headed?? As a member of Myinvestorsplace.com, we are seriously looking for solutions. Any ideas/
If this is the case why is there even a stock market trading - If these debt dollars or whatever debt currency come into existence are they blackholes which will suck every dollar printed or on a computer into it ?
these derivatives sound stranger then quantum physics or string theory -
when one explodes will the fed just state it doesnt matter the dollar is just a piece of paper - he will type the number in the computer (if it fits ) with a plus sign in front and press send - Then say see how easy that was to fix - because he presses send -your house will then be worth an easy 100 million dollars -
so the way I see it is look on the bright side you will soon be as rich as warren buffet is today -
the only way to deal with this at this point is with a sense of humor otherwise it hurts to much