$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives

http://www.zerohedge.com/news/707568901000000-how-and-why-banks-increased-total-outstanding-derivatives-record-107-trillion-6 ^

[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.

[DannyTN]

"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."

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.