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Far More Derivative Exposure Today Than Two Years Ago
RealClearMarkets ^ | 10//8/2010 | Interview with Maria Bartiromo

Posted on 10/08/2010 6:51:26 AM PDT by WebFocus

Harold Bradley, chief investment officer for the Kauffman Foundation, discusses the increase in derivatives held by commercial banks with CNBC's Maria Bartiromo and Herb Greenberg.

Maria Bartiromo: Why do you think we should care much about derivatives that the banks are holding?

Harold Bradley: Well, you know, I'm just sitting out here in the Midwest looking at government statistics, and the Bank for International Settlements is showing a chart that, to me, just seems so counterintuitive. When you look back at the last time they peaked in late '08 and early '09, when Ned Davis was issuing his first warnings, and he's been constant ever since, we saw about two quarters where the notional value of derivatives came down as the market was, quote, deleveraging, right? So, we're talking about the 'new normal' and saying markets are deleveraging, they're getting more transparent, we're derisking, and yet I look at this explosion in notional derivative values, and I'm thinking there's something broken. If you divide it by, say, U.S. GDP or divide it by U.S. credit markets, or you divide it by market cap, on all three scores, we have far more derivatives exposure today than we did two years ago. And I think that's the reason that I would be concerned about what this is telling us about the risks that banks are taking in a nominal zero interest rate environment.

Herb Greenberg: I'm very curious on one issue here. Harold, these are all supposed to net to zero. That's what we're told, not to worry because everything's going to revert back to zero.

Bradley: Well, I think we did that in '08, didn't we Herb? Didn't we revert back to zero as we settled all this stuff out?

Bartiromo: Oh, we sure did.

(Excerpt) Read more at realclearpolitics.com ...


TOPICS: Business/Economy; Culture/Society; News/Current Events
KEYWORDS: derivatives; exposure; financialcrisis
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1 posted on 10/08/2010 6:51:30 AM PDT by WebFocus
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