Big Five Most Vulnerable to Derivatives

Apr. 13, 2010 4:16 AM ETJPM, GS, BAC, C, HSBC16 Comments
Graham Summers profile picture
Graham Summers

Yesterday I explained the TRUE underlying cause of the Financial Crisis (derivatives). Today, I’m going to show you which institutions are most vulnerable to this massive, unregulated market.

Now, the most common derivatives are based on typical financial entities/ issues: commodities, stocks, bonds, interest rates, etc. However, the vast bulk of them (84%) are based on interest rates:


Let’s put these percentages into perspective. With the total value of derivatives over $1 QUADRILLION, even equity based derivative contracts (a mere 1.1% of the total market) are roughly $10 TRILLION in notional value. Commodities, the smallest slice of the derivative pie at 0.6% of the total derivative market still represent about $600 BILLION in notional value.

However, the largest segment is the Interest Rate Contracts, which comprise 84% (some $800 TRILLION) of the derivatives market. If you’ve been confused as to why Bernanke claims the US is in recovery but promises to keep interest rates at 0% for a long time, there’s your answer.

After all, in 2008 the Credit Default Swap (CDS) market (which incidentally is only 1/10th the size of the interest rate-based derivative market) nearly destroyed the entire financial system. One can only imagine what would happen if the interest rate-based derivative market (which is ten times as large) suffered a similar Crisis.

At some point, and I cannot tell you when, the ticking time bomb that is the derivatives market will implode again. We’ve already had a warning shot with China telling its state owned enterprises to simply default on their existing commodity based derivative contracts with US investment banks.

We are also discovering that Greece and Italy (and likely other) countries have used derivatives to hide their true debt levels. This realization has sparked an investigation into derivatives in Europe, which could of course spark off a chain reaction if

This article was written by

Graham Summers profile picture
Graham Summers is Chief Market Strategist of Phoenix Capital Research, a global investment strategy firm located in Washington, DC. He is a Fuqua Business School MBA graduate, and has over a decade of experience in investment strategy, financial research, and private wealth management. An acclaimed communicator and strategist, Graham’s cutting edge business and research insights have been featured in several media outlets around the world including: CNN Money, Fox Business, Rolling Stone Magazine, Crain’s New York Business, the New York Post, MoneyTalk Radio, and The Huffington Post among many others.

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