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Do you want to know the real reason banks aren't lending and the PIIGS have control of the barnyard in Europe?
It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States.
In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.
The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).
Derivatives played a crucial role in bringing down the global economy, so you would think that the world's top policymakers would have reined these things in by now - but they haven't.
Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.
Think I'm exaggerating?
The notional value of the world's derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position's assets. This distinction is necessary because when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.
The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.
It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States.
In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.
The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).
Derivatives played a crucial role in bringing down the global economy, so you would think that the world's top policymakers would have reined these things in by now - but they haven't.
Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.
Think I'm exaggerating?
The notional value of the world's derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position's assets. This distinction is necessary because when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.
The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.
Compounding the problem is the fact that nobody even knows if the $600 trillion figure is accurate, because specialized derivatives vehicles like the credit default swaps that are now roiling Europe remain largely unregulated and unaccounted for.
Imagine the fallout from a $600 trillion explosion if several banks went down at once. It would eclipse the collapse of Lehman Brothers in no uncertain terms.
A governmental default would panic already anxious investors, causing a run on several major European banks in an effort to recover their deposits. That would, in turn, cause several banks to literally run out of money and declare bankruptcy.
Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible.
And that's why banks are hoarding cash instead of lending it.
The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents. So they're doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny.
What really scares me, though, is that the banks
think this is an acceptable risk because the odds of a default are allegedly smaller than one in 10,000.
But haven't we heard that before?
Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back.
According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy - the countries most at risk of default. But they've lent $275.8 billion to French and German banks.
And undoubtedly bet trillions on the same debt.
There are three key takeaways here:
News and Related Story Links:
Tick...Tick...Tick
To be fair, the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.Imagine the fallout from a $600 trillion explosion if several banks went down at once. It would eclipse the collapse of Lehman Brothers in no uncertain terms.
A governmental default would panic already anxious investors, causing a run on several major European banks in an effort to recover their deposits. That would, in turn, cause several banks to literally run out of money and declare bankruptcy.
Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible.
And that's why banks are hoarding cash instead of lending it.
The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents. So they're doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny.
What really scares me, though, is that the banks
think this is an acceptable risk because the odds of a default are allegedly smaller than one in 10,000.
But haven't we heard that before?
Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back.
According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy - the countries most at risk of default. But they've lent $275.8 billion to French and German banks.
And undoubtedly bet trillions on the same debt.
There are three key takeaways here:
- There is not enough capital on hand to cover the possible losses associated with the default of a single counterparty - JPMorgan Chase & Co. (NYSE: JPM), BNP Paribas SA (PINK: BNPQY) or the National Bank of Greece (NYSE ADR: NBG) for example - let alone multiple failures.
- That means banks with large derivatives exposure have to risk even more money to generate the incremental returns needed to cover the bets they've already made.
- And the fact that Wall Street believes it has the risks under control practically guarantees that it doesn't.
News and Related Story Links:
- Money Morning:
Don't Get Duped by Derivatives - Money Morning:
Deutsche Boerse/NYSE Mega-Merger More About Derivatives Than Stocks - Money Morning:
The Next Banking Crisis Starts Here - Money Morning:
Death Derivatives: Wall Street's Latest Ill-Advised Maneuver - Money Morning:
Credit Default Swaps: Why Washington Ignored Our Warning - Money Morning:
Avoid Financials: Bank Earnings Are Set to Slide
More on this topic
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The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System
(Phil's Favorites, 10/21/11)
Satyajit Das: Will a Central Counter Party Tame Derivatives Market Risks?
(naked capitalism, 10/23/11)
Citigroup Inc. (NYSE:C) To Launch New Derivative Trading System
(eMoneyDaily, 10/12/11)
Big US Banks Afraid of Derivatives Rules
(A Slacker's Quest For His First ..., 5/6/11)
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Derivatives, swaps, treasury bills/bonds, government deficit/debt, &c. The whole rat bag is just what Karl Marx identified as "ficticious capital", or to use a more contemporary term "junk cash"! to attempt to pass this paper off as real 'capital' is just plain FRAUD!
In Marx' time "ficticious capital was primarily the debts of governments and landed gentry for wars and other ways of living beyond their means but as these usually maxed out ar 15% or less of a country's GDP, absorbing them and the misery they inflicted upon REAL producers was containable; I.e. it did not implode the total mass.
TODAY though, as K.Fitz Gerald, M hutcinson, S Gallani have frequently pointed out, the NUMERICAL amount of this (worthless) paper (& electronic) rubbish at $700trillion is some ten times the WORLD"S GDP of $70trillion.
Now even the most vugar appologist for bankers' "business as usual" will be forced to concede there is just nowhere near any REAL value to secure this mess; a mess that was created by not facing up to periodic crises as normal and looking for (humane) ways through what must be faced head on, or if put off will only be exponentially worse the next time around. Past put-offs are now catching up; it is no longer containable!
That is what we have on hand today where the (Central) bankers are trying to off load worthless paper as debts on the backs of those (enterpreneurs and workers) who are the ONLY source of REAL value.
REAL value consists of living (current) labour plus accumulated labour, put to use as means of production (capital) and NOTHING else; so in order to realise "value" for paper rubbish in itself worthless, it is necessary for the financial establishment (Central Bankers, Ministers of Finance and their private conterparts,&c.) to attach their paper in the form of liability on to the backs of workers and enterpreneurs. I.e. let the REAL producers live in the streets and eat garbage whilst they replace ficticious capital with real capital. This is occuring in most visibly in Athens, but conditions in New York, Detroit, Cleveland, Lisbon, Milan, Madrid &c. are catching up.
Taxpaying workers in France, Germany, Finland, Slovakia, Canada, countries not yet on the brink as well as those in the thick are also catching on an beginning to resist the prospect of being swindeled out of their futures and forced to work for subsistance only (or less) for the next 20 years or more.
OWS and Occupiers everywhere are a significant factor in that resistance;
Peace be with them!
If they
If your couterparty fails your are exposed to the gross position- duh……
How many counter parties are MF globals? Answer- Plenty
$600,000,000,000,000 sounds more like a financial BIG BANG, than pressure waiting to explode. Come to think of it, isnt that the estimated wealth of the Royal family of banking, the Rothschildes?