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Posted on 11/10/2008 7:11:54 AM PST by TigerLikesRooster
Coming Soon: The 600 Trillion Derivatives Emergency Meeting
Seeing a lot of Google queries regarding the size of the derivatives market landing at an older post of this blog, here is an update 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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This has been the elephant in the room that is just getting some attention....
I don’t know if you are on TLR’s list but, ping.
Important to remember these are notional values, not market values. In other words, notional is the multiplier you use to find total market value. In CDS or options, for instance, the actualy market value (net present value) will be a small % of notional.
I can almost hear the laughter.
I don’t know about the scariness here. The currency market is larger than all other markets combined and the most liquid. Lots of “derivatives” in the foreign exchange market in the form of hedges against currency moves. Not at all similar to sub-prime lending derivatives.
In this case the couch is most likely to be “Republican policies of the last 8 years that have lead to massive problems with financial instruments”....
I smell a Democrat behind all of this.
This what happens when you take a bunch of spoiled kids from the Ivies to manage trillions of dollars worth of transactions.
They thought they could have morons with only a liberal-arts college degree and a good name into a mathematical genius that can accurately price risk. They thought wrong.
We have genius economists who knew what is going on and who have reported over the years to Congress. This whole thing was allowed to go bad so that the Dems could step in and ‘save the country’. The illusion being presented is that this was unforseen and unavoidable.
This news is all one month old. In the meantime nothing has been fixed but various bankruptcies have been postponed with loans. That's good and bad: prevents the derivatives meltdown, but it also keeps the economy hostage to insolvent banks.
We have genius economists who knew what is going on
-— in fact, one of these geniuses, Krugman, just was awarded the Nobel prize for economics, and is working with Obama now.
I am the least worried about currency derivatives. This is the interbank market, which is the biggest, most liquid, and most importantly, the most accurate “marked to market” center for financial instruments in the world.
They have been doing derivatives before they were called derivatives. IF (big IF) there are any markets out there with a true net zero sum (all the derivatives cancel each other out, the way derivatives are supposed to do) it would be this one.
Easy. Since it’s fiat money, just print 596 ‘one trillion’ dollar bills. Or 60 ‘ten trillion’ dollar bills and have 4 trillion extra in change.
Gotta love fiat currency. Money out of nothing. WHOOO-HOOOO! I mean, “D’OH!”
Obama Wins, Economy’s Doomed:
Peter Schiff, president of Euro Pacific Capital and author of ‘The Little Book of Bull Moves in Bear Markets,’ says a big-government Obama administration will lead to an economic collapse on par with the Great Depression.
Sun 11/09/08 04:59 AM EST — Gregg Greenberg
Check the video linked below to really make your day, week, month, year, decade:
Thanks for the ping.
There's not enough money in the world for a "bailout". Let this bubble burst, then selectively pick up important pieces...
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