$291 Trillion Dollars! /Dr. Evil

[pmbug]

The entire US GDP is less than $15 trillion each year. The gross notional amount of derivatives issued in the USA is more than $291 trillion. Does that sound like a lot? Apologists for derivatives dealers don't like it when we talk about derivatives in terms of the notional totals. Large numbers, like these, discussed publicly, frighten too many people. According to the apologists, gross "notional" is misleading, because it does not include "hedges," offsets and the limits on interest rate risk.

In fact, the total amount of derivatives cannot be accurately presented in any other form but gross notional obligations. The risk to society cannot be judged in any other way. That's why the FDIC, US Comptroller of the Currency and the Bank for International Settlement (BIS) all use gross notional.

Final net obligations can only be determined when and if derivatives are triggered. The net can be significantly lower, but neither we, nor the banks themselves actually know exactly what that is. It depends upon the balance sheets of every counter-party, and the extent to which interest rates will change in the future. Not even the banks have full information about either topic...

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In reality, it is impossible to know the true risk of $291 trillion in New York issued derivatives (ignoring the additional $417 trillion issued out of London). A sudden very large increase in interest rates, alone, could trigger trillions of dollars in payments. One could argue that the Federal Reserve could force interest rates down at any time, but that is not entirely true.

If the US dollar came under heavy selling pressure, for an extended period of time, as has happened to the British pound, Chinese yuan, Japanese yen, German mark, Austrian shilling, Argentine peso, and a host of other currencies in the course of history, the Fed would be able to defend the dollar only at the risk of inducing widespread systemic failure.

That is why interest rates cannot rise for many years, regardless of whether that destroys its status as the world's reserve currency, and/or creates extreme levels of inflation or hyperinflation. It is also one more reason for the government to lie about the true inflation rate, to avoid pressure to raise interest rates (see shadowstats.com.)

All the too-big-to-fail (TBTF) banks, with the exception of Morgan Stanley (which uses its SIPC-insured division) are using FDIC-insured depository divisions to house derivatives. That provides them with lower collateral requirements because FDIC depositary units usually have higher credit ratings than investment banks and/or bank holding companies. It also means that, ultimately, the American people will pay for losses.

While no one can determine the exact exposure, it is safe to say is that the risk is astronomical, and imposes a grave risk upon American taxpayers. It is not surprising that FDIC staff is not thrilled with US bank derivative exposures. In fact, Sheila Bair, who until recently ran the FDIC, is as disgusted with the Federal Reserve slush fund and the banking cartel as you and I. A few days ago, she penned a satirical article heavily critical of Fed policy and published it in the Washington Post.

The FDIC staff doesn't like the fact that the Federal Reserve keeps allowing banks to put their derivatives inside insured depositary institutions. This is mostly for the same reason the banks want to put them there. Insolvency laws provides priority to derivatives counter-parties over the FDIC. If and when a bank is liquidated, the FDIC will be on the hook to repay depositors, but the failing bank will be stripped of all assets.

The US government's full faith and credit guaranty means massive amounts of new US Treasuries will need to be sold, massive numbers of new counterfeit dollars will need to be printed under color of law, and significant tax hikes will need to be levied to pay the bill.

FDIC opposition, however, has had little to no effect on keeping derivatives out of insured units. The Federal Reserve, and not the FDIC, has the authority to approve the practice and it keeps doing so. The FDIC staff can complain privately, and issue regulations forcing disclosures, but little more. But, because of the disclosure requirements, more detailed information than ever is now available concerning derivatives.

In fact, FDIC has made far more information about derivatives public, over the last 3 years, than the Fed and OCC ever disclosed over decades. The numbers reveal a frightening concentration of risk. Five large "TBTF" US banks hold 96% of derivatives issued in the United States.
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More: http://seekingalpha.com/article/503...tives-to-which-american-taxpayers-are-exposed

 

[bushi]

...Derivatives market some 20 times larger than GDP, I think I've heard this ratio somewhere already - I remember reading that global GDP is something about $60T, and global derivatives market somewhere around $1400+T. Ratios seems to be very similar.

That is actually a good news, because, there is no f..g way, it could be possibly repaid, ever, not in this universe (well maybe parallel universes or hidden dimensions could come to the rescue, but I'd need to rely on DCFusor's take on that theoretical possibility ) => ergo, once SHTF, there will be no nonsense "bailouts". There's not enough trees to make paper for all this monopoly money.

 

[rblong2us]

Derivatives market is supposed to be a 'zero sum' game
Works until it doesnt, then everything falls apart.
Except they neatly sidestepped this when Leahman was allowed to fail, by letting AIG pay out on a select few of the bets and then deciding that AIG was too big to fail, so it had to be given lots of taxpayers wonga.

Think they couldnt do something similar if an opportunity presented itself ?

 

[DoChenRollingBearing]

Sure we can pay off the derivatives, no sweat. The US .gov is so big that I am sure they have some artists ready to go. Design and print:

$500 Paulson FRN
$1000 Geithner FRN
$5000 Obama FRN
$10,000 Bernanke FRN

Printing presses running at capacity? No problem, just stop printing $1, $5, $10 and $20s.

 

[ancona]

This is all going to implode in on itself like a black hole at the event horizon. It will happen so swiftly that nothing will be implemented and no one will even try to stop it. There are not enough resources on the entire planet to backstop one and a half quadrillion in paper.Derivatives are nothing more than financial arsenic in the bloodstream of the world, and eventually, you reach a lethal dose and the patient cannot be rescued.

 

[vox]

This is all going to implode in on itself like a black hole at the event horizon. It will happen so swiftly that nothing will be implemented and no one will even try to stop it. There are not enough resources on the entire planet to backstop one and a half quadrillion in paper.Derivatives are nothing more than financial arsenic in the bloodstream of the world, and eventually, you reach a lethal dose and the patient cannot be rescued.

Most likely one of the best posts I've ever read.

Bravo, sir...

 

[rblong2us]

Sorry, it isnt a credit event .........

bet void ...... Next ?

The meltdown will happen but not as a result of something we can forsee.

 

[pmbug]

The derivatives industry is squeezing Washington like a python. Desperate to control the tone and thrust of derivatives regulation, industry lobbyists have been swarming over the Commodity Futures Trading Commission and the Securities and Exchange Commission, each of which is writing derivatives rules as mandated by the Dodd-Frank reform law.

In case their lobbying falls short, the industry — largely dealer banks and commodities firms — has been pushing legislation that would pre-empt the rulemaking process and tie the agencies’ hands. So far, no fewer than 10 such derivatives bills have been introduced in the House; two have passed and several more have cleared committee.

Not satisfied with that, influential lawmakers have been not so subtly warning regulators to go easy on derivatives. This is incredibly intimidating: Congress controls the agencies’ budgets, and the increase in workload mandated by Dodd-Frank leaves them woefully short on funds.

And should a derivatives rule unpalatable to the dealers somehow survive this Beltway obstacle course, the agencies face an explicit threat of a lawsuit. This has had a chilling effect. As Bart Chilton, a CFTC commissioner, told me, regulators fear there is “litigation lurking around every corner and down every hallway.”
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More: http://www.bloomberg.com/news/2012-04-17/derivatives-lobby-has-u-s-regulators-on-the-run.html