Zerohedge makes the case that what matters is not net exposure, but gross exposure, because if some of the parties blow up, others are then on the hook for the full face amount of the hedges, because they would then be impossible to net out. If John lends Bob $1,000,000, but takes out an insurance policy with Sue for $1,000,000 against risk of loss, John’s net is basically zero. But if Sue goes bankrupt, John becomes unhedged and becomes on the hook for the full million.
Yeah, Zerohedge is good at panic mongering.
A legally enforceable netting agreement with a counterparty creates a single legal obligation for all transactions (called a “netting set”) under the agreement. Therefore, when banks have such agreements with their counterparties, contracts with negative values (an amount a bank would pay to its counterparty), can offset contracts with positive values (an amount owed by the counterparty to the bank).
The above, from my prior link, shows part of the reason why the "Net current credit exposure (NCCE) fell 6%, or $19 billion, to $279 billion, the lowest level since the third quarter of 2007".
$279 billion at risk, instead of $230 trillion.
If John lends Bob $1,000,000,...if Sue goes bankrupt, John becomes unhedged and becomes on the hook for the full million.
Yes, John lent $1,000,000 and can lose $1,000,000.
Maybe we should outlaw loans?