least Fukushima Daiichi before
it failed and melted down, while the utility company and the government were blithely assuring themselves and everyone else that nothing could go wrong. Just as
Greenspan and other very
important people said nothing
could go wrong with the US housing market and the wholesale collateralization of debt. Nothing to see here, move along.
I was working on my own update, between the usual distractions,
of the Sept 2012 BIS
information, when Peter Miller sent this nice summary
of the situation my way.
A relatively small number of very large banks represent enormous counterparty risk to the world financial
system because of the almost
geometric growth of the largely unregulated and historically unprecedented derivatives market.
The distortions caused by
such massive leverage ripple through the financial system, with both intended and unintended consequences, including the distortion of
real markets and the transfer
to and concentration of wealth in the money
manipulation sector. And the marriage
that the financial sector has made with politics is particularly
dangerous to the average person.
This affects every country through
the transmission power of the US Dollar and its pre-eminent role in decision making in our financialized world economy.
Big Bank Derivative
Bets Nearly Double In Six
By Peter G. Miller
October 4th, 2012
America’s major banks
now hold derivatives with a notational worth of $225
trillion – about a third of the world
total. No kidding. Trillion.
And that’s up from
a mere $120 trillion six years
ago. Rather than being weened
off derivatives, America’s
big banks are more deeply entrenched then ever.
Hopefully Wall Street has it
figured out just right
and there won’t be any major losses, say a few billion here or there. After all, when has Wall Street
ever been wrong about financial instruments?
“Derivatives are dangerous,”
says Warren Buffett.
“They have dramatically
increased the leverage
and risks in our financial system. They
have made it almost
impossible for investors to understand
and analyze our largest commercial banks and investment banks.”
While many in Washington would like to limit derivatives trading, make such trades open to public scrutiny or both, Wall
Street is vehemently against regulation.
In fact, there’s
a simple way to resolve derivative worries. Allow unlimited derivatives trading — but
only by individuals and partnerships willing to personally take the risk of profits and losses...
According to the Bank for International Settlements (BIS), the notational
value of derivatives at
the end of 2011 was $648 trillion.
The gross credit
exposure from these securities was believed to be $3.912 trillion according to
the BIS — that’s up from $3.5 trillion at the end
But what if the estimates
are wrong? For instance, let’s
say losses are just one tenth of one percent bigger than expected.
Not a big deal, except in
the context of international derivative
levels that’s more than $640 billion.
Do taxpayers have exposure?
You bet. According to the
FDIC, at the end of June
2012 all depository institutions held derivatives with a notational value of
$224,998 trillion. However, such
bets are not spread across the entire banking system. Banks with at least $10 billion in assets hold virtually all derivatives, securities with a notational value of
$224.803 trillion. While the FDIC insures deposits in some 7,200 banks and savings associations, only
59 FDIC-insured institutions have deposits of more than $10
billion. Your little community bank, savings association or credit
union likely has no derivatives
Derivatives are simply
bets. They finance no factories, no research, no colleges, no homes and no cars. Any
jobs they produce are incidental and inconsequential
relative to the potential risk
they represent, the risk that credit
exposure has been incorrectly
figured by hundreds
of billions of dollars if not more. Since
big banks hold virtually all derivatives, and since taxpayers can face massive costs if big banks fail, it
follows that something should be done to limit
Read the entire story with
an explanation of derivatives
Here is a glossary of terms which you might
wish to keep.