Skip to comments.$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives
Posted on 11/27/2011 8:16:41 PM PST by TigerClaws
While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments. Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.
(Excerpt) Read more at zerohedge.com ...
707 trillions dollars?
We’re not getting out alive.
I guess all bets are just going to have to simultaneously be “off”.
Well the article may not mention it but the fed reserve (taxpayers) are holding the bag on about 60 trillion in derivatives. Banks handed them over to us. Add that to the national debt number.
Just putting the pedal to the metal to hold it together a while longer. They’ve thrown up their hands and despaired of repairing it and are getting theirs while they can.
its monopoly money - Derivatives by definition have no inherent value - who is going to break the bad news to these dumbbells?
What do they mean by notional?
I think you just hit the nail on the head. The country is being looted right now while you can convert the dollar into gold, silver, whatever. Once the system collapses, the looters will own everything.
Notional value is like debt? Great, tell me who loaned those banks $60 trillion? Thanks!
What's your source on that? Are you talking about derivatives still owned by U.S. banks where the banks are FDIC insured? And the bank would have to fail in order for the U.S. to pick up the assets.
Why do farmers use them to insure the values of their crops?
Great post and comments at the source (470 comments at ZH).
Basically, it means interpreted.
You have a classic car that you think is worth 60 000 dollars. However, I think your hunk of junk is worth only 1500 dollars.
The real value is what you end up agreeing to sell it for and what I’m willing to pay for it.
Just look at the Greek debt with its tiny fraction of derivatives on its debt: it was recently determined that nobody will have to pay out the derivative “insurance policies” that were purchased to protect bond holders for defaults. Under real pressure, those holding swaps are going to be flat out of luck.
It is analagous to all of the insurance companies deciding that they cant pay out on all of those insurance policies for which they’ve been collecting premiums for years.
The difference is that insurance companies actually hold assets as reserves against the policies.
Derivative issuers, however, just offset their risks/bets with bets made with others; others who also likely are not truly covered to make payouts. It is a ponzi scheme of unimagineable scale. Sure, there were mathematical models which made it all “work out” on paper, but not in the nonlinear real world in which things and economies can go south in a big way in a hurry.
Finance hasn’t been behaving responsibly or ultimately rationally for close to a decade. Business ethics are largely a thing of the past, and what government oversight there has been just added to the collusion and the ultimate scale of the debacle. I have a hard time believing that this was ever thought to be a successful longterm strategy.
Makes sense of certain captains of industry and former political figures securing their little hidey holes for themselves years ago. Convinced themselves that keeping order and peace in the face of a looming financial catastrophe was more important than coming clean and informing the populace while it could still be turned around. We’re past the point of no return now.
They have to give the bank an idea as to what the farmer thinks the crop will be worth, at harvesting and shipping, to be able to get a loan for their supplies.
The difference is that insurance companies actually hold assets as reserves against the policies."
So, please explain AIG.
Doctor Evil never held the world hostage for that much money!
Well, if interest on the debt were to rise above 9 percent, worldwide, the debt payments would exceed the entire worldwide GDP.
Maximum notional debt would be around 1260 Trillion, and would expand at 5x the increase in global GDP, assuming 5 percent on the debt.
Wow, no wonder the government is trying to keep interest as low as it is.
It would have been nice, if they had kept all national debts very low too.
AIG sold derivatives - CDS’s without reserves to enable them to pay off the bets. They lost, and couldnt pay Goldman Sachs and others, and had to be bailed out. It wasn’t AIG’s insurance divisions that bet and lost the farm... It was their division that sold the swaps/CDO’s...
I have heard the same thing as TigerClaws on this... (but dont recall the source).
The story, if true, is that Bank of America, that too-big-to-(let)-fail Zombie Bank of America, had moved $60 trillion of its credit default obligations over into its FDIC insured subsidiaries.
Outrageous if true.
Except derivatives aren't debt.
Maximum notional debt would be around 1260 Trillion
Notional debt? What's that?
The way I look at it as this, and I’ve been increasingly sanguine about the numbers.
The choice for my generation is simply to avert outright bankruptcy.
We’ve been sold into debt slavery, and thanks to the boomers for this, btw. Since they came into power, they’ve completely destroyed the wealth that was handed down into them.
Default isn’t -yet- impossible to avoid. Interest rate at 5 percent is about half what the world makes in a year.
However, we’ve only got an 8 year buffer. If things take a turn for the worse, or current conditions continue, then yes, default will be inevitable.
It’s what is propping up the market from complete collapse.
Your bad definition is propping up the market?
AIG was not exactly pure going way back.
AIG’s business insurance business was rotten with bid rigging, that goes way back. Benefits consulting firms, instead of truly shopping for the “best price” (this is big insurance contracts for business), they would feed customers to AIG and IIRC a couple others.
I had that on good authority back in the late 80’s from someone at a consulting firm. HR departments aren’t exactly the sharpest tools in the shed, so they welcome consultants for things like coming up with real numbers. This creates a situation where they’re primed to pay more than they should.
The case went to trial in 2004 I think.
So AIG would have extra profit out of a lot of it’s business for I don’t know, since the 70’s, 80’s ? I guess they got even more greedy and got into derivatives.
Yeah, but the fractional banking multipliers that were making them a fortune during the growing of the bubble are now destroying them as there is no longer enough suckers to bring into the system to replace all the losers who got nuked and left the system from 2008 to 2011. That is why the FED is sprinkling trillions of dollars all over the place and the total derivatives jumped up $100 trillion in 2011 ... to just maintain the current market levels of the last two years ... business as usual has never been so expensive.
You’ve been shilling for the banksters before.
Yes, debt is debt, and default is default. If the derivatives are not worth the paper they are printed off of, then they aren’t really a ‘hedge’, are they?
They aren’t really worth anything, and we saw their power in the AIG debacle where their default on credit default swaps lead to the massive bail out package, where all of us are responsible for the bad, and stupid banking decisions made by the bad banks.
So instead of ‘worthless’ notional debt, this is being transformed, gradually, into sovereign debt. The repercussions are huge.
Yes, I’m convinced that the derivatives market is propping up the current market to the cost of the inflation that we see on the dollar. Which is good for the banksters, up to the point where the derivatives debt starts enforcing deflationary effects.
Price derivatives out to their real price, and drop to a real ecoonomy based on real output and production, you’ll see a market drop to around 3000 or so.
The spending is just to put off the coming deflationary depression as long as possible. If the economy remains flat, 100 trillion a year will last them 4.5 years, then the total notional debt will force a default. Worldwide.
Which, unfortunately, is the goal of many to force the world into using a one world banking system. There will be no escape.
This is why this election is so crucial. We have to get the adults in charge to rein in massive boomer excessive overspending.
1991 Orange County... Two Words—Robert Citron.
Yes. And derivatives aren't debt.
I'm not trying to be a smart guy, but your post was "insurance companies". So it sounds like if I'm going to do this type of business I should find out if they have a "division" that sells/swaps CDOs and, if they do, find another company. Because when they steal my money I will get the excuse that it was the guy's in the CDO office's fault. A bad situation when a formerly trusted industry is destroyed.
This is old news but has grown worse while everyone focuses on other things. BIS can only report the amount of derivatives reported to them because derivatives are private contracts done over the counter and reporting of them is voluntary. Sure the US tried to change the reporting laws recently but there are foreign markets to trade these in plus exemptions thanks to Congress.
Derivatives are mainly an insurance contracts but lobbied by banks to avoid oversight of any insurance agency’s guidelines so derivatives continue to be underfunded but sold for enough money for commissions to be paid for.
AIG problem was selling derivatives (insurance contracts) that executed when the Lehman Bothers failure caused a chain reaction and there was not enough money to payout the insurance claims. Enter Paulson and his TARP plan with taxpayer’s money to pay his pal’s (banks) bets off but let the rest of the investors eat cake then had the taxpayer’s take ownership of the company and incur more losses. All thanks to Congress for going along with TARP.
With the latest accounting change, banks value their own holdings i.e. real estate, derivatives, bonds, etc. Doesn’t even need an explanation according to FASB rules, GAAP, whatever, just make a number up. (ex. Bank owns a mortgage on a property worth $1 million at the height of the RE boom and now says it is worth $1.5 million because that is the pretend value if held to maturity in 30 years. Sold on today’s market fetches $300,000. Doesn’t matter what it is worth in the real world per FASB accounting rules.) The entire world operates on lies following FASB fantasy accounting methods including BIS (the banker’s bank).
Why did they change the accounting rules? Because Lehman Brothers and the ensuing chain reaction caused over-leveraging to become exposed (underfunded derivative bets) and the only way to avoid a complete financial meltdown was to change accounting methods, do bailouts and wait until the economies recover in 20 or 30 years...maybe, I really doubt it, look at Euroland today and know that the US banks wrote over 90% of the current derivatives that insure the bond issues there and continue to write more. You are damn right the US will bailout Euroland just to save US banks from having to payout on default SWAPS, CDS, whatever.
When Greece defaulted recently but survived with about a 50% haircut on their bond debt to keep them in the game, the US bankers changed the definition of a default so they wouldn’t have to pay out any claims on their derivatives. A 50% haircut was deemed not to be a default and bond holders took the beating even though they had bought default insurance, hence MF Global goes belly up with money missing causing another chain reaction. Big banks saved themselves on that one with a definition change.
BIS use to report the known derivatives were worth over 1 quadrillion dollars a couple years (’09?) ago but used the new accounting techniques to half that amount. It continues to grow.
I don't see how establishing some correct definitions is shilling for anybody.
At least that's what their brokers at MF Global told them. The family farmers were just no match for Goldman Sachs speculators who could drive down their prices by using 40;1 leverage. and had no interest in ever taking delivery of any corn wheat or cotton.
$707,568,901,000,000 - $707,568,901,000,000 = $0
“The problem” isn’t $707,568,901,000,000. The problem is the $0. Individual hedgers act as if the $707,568,901,000,000 is real or at least their slice is real to them. As a whole it’s a lie because a market can’t hedge itself against the economy it derives from.
I believe that story is true. But that doesn't mean the FED owns them. BofA owns them, and BofA has to fail before the government gets involved.
The credit default obligations came from the failed Merrill Lynch. But the underlying credit obligation is Fannie Mae and Freddie Mac mortgages, which the government is basically on the hook for anyway, given that these were quasi federal agencies. Technically the government wasn't on the hook for them, but nobody ever believed that the government would let even a quasi federal agency fail, so they were.
So given that the government was on the hook for the mortgages in the first place, being on hook for the derivative products is not really an additional risk. And those mortgages are secured by real property.