Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

8 posts / 0 new
Last post
Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

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

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."

 

 

What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows. Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads (there is a reason banks want to keep them OTC and thus off standardization and margin-destroying exchanges) are also terrific annuities for the status quo. Just ask Buffett why he sold a multi-billion index put on the US stock market. The answer is simple - if he ever has to make good on it, it is too late.

No_Fiat's picture
No_Fiat
Status: Silver Member (Offline)
Joined: Oct 20 2011
Posts: 104
 I know nothing on these so

 I know nothing on these so called Derivatives, can you shed some light on it in plain language so I can understand. 

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Re: I know nothing on these so

http://en.wikipedia.org/wiki/Derivative_(finance)

A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.[1][2] The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.

Under U.S. law and the laws of most developed countries, derivatives have special legal exemptions which make them a particularly attractive legal form through which to extend credit. [3] However, the strong creditor protections afforded to derivatives counterparties--in combination with their complexity and lack of transparency--can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks. [3]Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to both the financial crisis of 2008 in the United States and the European sovereign debt crises in Greece and Italy. [3][4] Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives--including greater access to government guarantees--while minimizing disclosure to broader financial markets. [5]

From the above post: 

Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows.

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Kudos Johnny

Johnny

Excellent info at that link.  Here is a related one cited in the article that explains in more detail the lie of bilateral netting that will doom this pyramid scheme once the daisy chain is broken.

http://www.zerohedge.com/news/how-us-banks-are-lying-about-their-europea...

Travlin 

idoctor's picture
idoctor
Status: Diamond Member (Offline)
Joined: Oct 4 2008
Posts: 1731
Johnny you might like to

Johnny you might like to watch this Kyle Bass youtube which was done in late 2010 I believe.

'Confessions of a Dangerous Mind'

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Very good

Idoctor

Thanks for the video.  I haven't seen him talk before and I was impressed.

Travlin 

dshields's picture
dshields
Status: Platinum Member (Offline)
Joined: Oct 24 2009
Posts: 599
pretty amazing stuff

I saw this yesterday on zerohedge.  Pretty amazing.  The fun just never stops.  When all this implodes the result is going to be simply astounding.  The entire world financial system will go belly up.  I can't even imagine what all the various ramifications will be.  Everyone (big financial institutions) is trying to hedge everything because they know what is coming.  The problem is when it implodes the hedges also fail.  I suppose it is alll coming down to a huge bailout of some kind.  When Lehman went south AIG was on the hook for many billions.  The Fed Res and Fed Gov moved in to bail it all out so the CDSs AIG had written could pay.  What if they had not ?  What if they had let AIG tank and the CDSs did not get paid ?  I guess that looked so bad they decided to do the bailout. 

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
dshields wrote: I saw this
dshields wrote:

I saw this yesterday on zerohedge.  Pretty amazing.  The fun just never stops.  When all this implodes the result is going to be simply astounding.  The entire world financial system will go belly up.  I can't even imagine what all the various ramifications will be.  Everyone (big financial institutions) is trying to hedge everything because they know what is coming.  The problem is when it implodes the hedges also fail.  I suppose it is alll coming down to a huge bailout of some kind.  When Lehman went south AIG was on the hook for many billions.  The Fed Res and Fed Gov moved in to bail it all out so the CDSs AIG had written could pay.  What if they had not ?  What if they had let AIG tank and the CDSs did not get paid ?  I guess that looked so bad they decided to do the bailout. 

It can all be summoned up in a very old saying:

"You can't get blood from a stone."

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments