[Krruqgwt]

http://www.globalresearch.ca/index.p...t=va&aid=30944

Its more than a quadrillion...........


Top Derivatives Expert Estimates Size of the Global Derivatives Market at $1,200 Trillion Dollars … 20 Times Larger than the Global Economy

How Large Is the Derivatives Market?

Everyone paying attention knows that the size of the derivatives market dwarfs the global economy. But how big is it really?
For years, there have been rumors that there is over a quadrillion – one thousand trillion – dollars in notional value of outstanding derivatives. But no one really knew.
Even though the Bank of International Settlements regularly publishes tables showing the amounts of different types of derivatives, some of the categories are ambiguous, and so it has been hard to get a good handle on what’s really out there.
For example, one blogger wrote last year: Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.
Smart guys like bond trader Jeffrey Gundlach said last year that we’ve got a quadrillion dollar derivative overhang, the government hasn’t done anything to fix the basic problems in our economy, and so we’ll have another crash.But I’ve now found an estimate from a top derivatives expert who confirms the claim.
Specifically, Paul Wilmott – who has written numerous books on the subject – estimated the number last year at $1.2 quadrillion:
The… derivatives market … is 20 times the size of the world economy.
According to one of the world’s leading derivatives experts, Paul Wilmott, who holds a doctorate in applied mathematics from Oxford University (and whose speaking voice sounds eerily like John Lennon’s), $1.2 quadrillion is the so-called notional value of the worldwide derivatives market. To put that in perspective, the world’s annual gross domestic product is between $50 trillion and $60 trillion.
A Clear and Present Danger to the World Economy

The size of the derivatives market is a huge threat to the world economy:
One of the biggest risks to the world’s financial health is the $1.2 quadrillion derivatives market. It’s complex, it’s unregulated, and it ought to be of concern to world leaders ….
***
How big is the risk to the world economy from these derivatives? According to Wilmott, it’s impossible to know unless you understand the details of the derivatives contracts. But since they’re unregulated and likely to remain so, it is hard to gauge the risk.
But Wilmott gives an example of an over-the-counter “customized” derivative that could be very risky indeed, and could also put its practitioners in a position of what he called “moral hazard.”
***
Another kind of market conduct that makes markets volatile is what Wilmott calls positive and negative feedback loops. These relatively bland-sounding terms mask some really scary behavior for investors who are not clued into it. Wilmott argues that a positive feedback loop contributed to the 22.6% crash in the Dow back in October 1987.
As we noted last year:
Bloomberg reported in May: Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.
“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said …“Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”***
The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008.
Credit default swaps were largely responsible for bringing down Bear Stearns, AIG (and see this), WaMu and other mammoth corporations.
And unexpected changes in interest rates could cause a major bloodbath in interest rate derivatives.
And, no, there have not been any reforms or attempts to rein in derivatives, and the Dodd-Frank financial legislation was really just a p.r. stunt which didn’t really change anything.
But the big banks and their minions claim that the huge amounts of derivatives themselves is unimportant because these are only “notional” values, and – after netting – the notional values are deflated to much more modest numbers.
But as [Tyler] Durden – who has a solid background in derivatives – notes: At this point the economist PhD readers will scream: “this is total BS – after all you have bilateral netting which eliminates net bank exposure almost entirely.” True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small… Right?
…Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.
The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd’s bank “resolution” provision would do absolutely nothing to prevent an epic systemic collapse.

[Leczyslaw]

I think the number they were bandying about in '08 was 1.4 quadrillion so sounds like things are improving.

Of course if it all went pop, who's it really going to impact?

[Krruqgwt]

I think the number they were bandying about in '08 was 1.4 quadrillion so sounds like things are improving.

Of course if it all went pop, who's it really going to impact?

What like a balloon and everyone just looks at the remains

[Nfxutkpa]

I spent much of 2008 on Marketwatch posting about 1 quadrillion in derivatives. At some point there was some duobt, and I changed it to 1/2-1 quadrillion, but I think the 1 quadrillion was about right (based on what we know).

[JimmyHas]

Is quadrillion an actual word? These numbers are so fucking large that the average person can't even comprehend it.

[Nfxutkpa]

Yes. For instance, energy use by nations is measured in quadrillion BTUs.

[Krruqgwt]

Is quadrillion an actual word? These numbers are so fucking large that the average person can't even comprehend it.

Yea it is a word but no body had heard of it until derivatives where invented.

[soyclocky]

Good find, Serpo.

If Mark Mobius is saying this.....we may very well be f*cked.

Derivatives are a time bomb. I cannot believe they are even allowed. It's all for the elites. And we regular folks pay the price.

[FilmCriticAwezume]

The derivative market is essentially leverage on top of leverage, keeping the leverage from blowing up.

Derivatives, functioning as credit insurance, make it possible for bad investments to be carried as good investments, because they are allegedly "hedged" or protected against loss. It's the same thing as, say, buying a termite-infested house while also buying termite insurance. You buy the house without really caring its quality because at the same time you buy insurance against any of the hidden problems, and as soon as the damage becomes evident, you file a claim with your insurer. This makes possible a huge market for houses with hidden problems, and pretty soon people are buying and selling ay old pile of bricks right along with new houses, and at similar prices. As soon as the problems crop up, people start filing claims with their insurers. Once enough people file claims, the insurers blow up, and then the value of the underlying homes is revealed as crap.

Home property titles are IMO similarly clouded by MERS issues. Once MERS blows up, the title insurers will be swamped, and your title insurance will be worthless. Just another derivative.

But financial derivatives on Wall Street are all interconnected, and the thing derivatives can't paper over is counterparty risk. As soon as the first counterparty blows up, all of the hedging blows up with it, and right away. When that happens, expect the Fed to step in again like they did with Lehman and start guaranteeing everything with the alphabet-soup funding windows.

I have always seen the derivative market as a means to keep the underlying fractional reserve system from blowing up. The already-known-to-be-bad debts could be called good debts through hedging. This is why the ISDA successfully lobbied to have bankruptcy laws changed in 2005 to push derivative holders to the head of the line of creditors in a bankruptcy.

If derivatives are 20:1 versus earth's GDP, and if the fractional reserve system banks are leveraged at 20:1 or 30:1, does this mean that real leverage is 20X20 or 400:1?

[MARMELADINA]

Could the Global Derivatives Market Tip Over?



By: David Chapman

-- Posted Friday, 25 May 2012 | Share this article | Source: GoldSeek.com


TECHNICAL SCOOPCHART OF THE WEEK26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2
Phone (416) 604-0533 or (toll free) 1-866-269-7773 , fax (416) 604-0557
david@davidchapman.com
dchapman@mgisecurities.com
www.davidchapman.com
The picture is rather stark. This is a chart shown in an article at Global Research (www.globalresearch.ca) – Financial Implosion: Global Derivatives at 1,200 Trillion Dollars 20 Times the World Economy. It bears repeating.

Specifically the chart shows the assets of five of the USA’s largest banks vs. their respective derivative position. Derivatives dwarf the asset position of the banks. Wachovia and HSBC (USA) are not even amongst the top five derivative players in the US. The top five in order are JP Morgan Chase, Bank of America, Morgan Stanley, Citigroup and Goldman Sachs. There is a huge drop off in derivative positions after the top five players.

The global derivatives market is estimated by some at $1,200 trillion ($1.2 quadrillion). Estimating the size of the market is difficult. The Bank for International Settlements (BIS) shows a size of $647 trillion as of December 2011. However, some market followers who have written books on the subject have estimated the market as being even larger at upwards of $1.2 quadrillion. At that level it is 20 times the size of the global economy estimated at $60 to $70 trillion.

The global derivatives market is unregulated and quite possibly under reported. The financial institutions have successfully lobbied for years to block any attempt at regulating the market. Roughly 75% of the market is interest rate contracts (i.e. forward rate agreements, interest rate swaps (the largest component) and options on interest rates). The next largest component is foreign exchange contracts and that only constitutes roughly 10% of the market. The third largest category is credit default swaps (CDS) and that makes up roughly 4% of the market. The rest of the market consists of commodity contracts and equity linked contracts.

As noted the BIS estimates the size of the global derivatives market at $647 trillion as of December 2011. But the BIS number only includes the over the counter market (OTC). It does not include exchange traded derivatives. Overall the global OTC derivatives market has a gross credit exposure of $3.9 trillion. What that effectively means is that if all of the derivative contracts defaulted the hit to the financial institutions would be $3.9 trillion. According to www.banksdaily.com the market capitalization of the world’s largest banks who are the most likely to be involved in the global derivatives market is $2.6 trillion. The potential credit exposure of derivatives exceeds the bank’s capital.

In the global derivatives market the big five US banks dominate the market. In a total global derivatives market using the BIS number of $647 trillion JP Morgan is the world’s largest with at least $70 trillion of derivatives and possibly as high as $80 trillion. JPM’s derivative position is against an asset base of $1.8 to $2.2 trillion. JPM is estimated to have credit exposure for their derivatives of 256% of capital. For the top five US banks the ratio is 316%. This far exceeds the estimated global credit exposure of derivatives when compared to the market cap of the world’s largest banks.

The top five US banks are estimated to hold at least $290 trillion of derivatives making them 44% of the global market using the BIS estimate. The banks have netting agreements which are supposed to cover upwards of 90% of the market. Except the netting agreements are merely a piece of paper to cover the reality that if a major player collapsed it could threaten the entire system. Think of American International Group (AIG-NYSE) in the 2008 financial crash where netting agreements were meaningless in the face of AIG’s collapse. AIG’s share capital was wiped out. The bail out of AIG with taxpayer money was effectively a circle in order to protect the integrity of Goldman Sachs, Morgan Stanley and the other major derivative players.

JP Morgan initially reported a $2 billion loss on their derivatives book because of a hedge that had gone offside. JP Morgan later admitted that the loss was now $3 billion. A few days later a Wall Street Journal article raised the estimate to an $8 billion loss. Then several sources raised the loss to $18 billion. Trouble is JP Morgan has been quiet on any of the rumours neither denying nor confirming these numbers. So what is going on?

The global derivatives market is huge. Losses in the sector could quickly wipe out the capital of some of the world’s largest banks which could require a bail out on a scale even larger than was seen in 2008. Some have described the global derivatives market as a huge gambling casino.

Could an accident in the global derivatives market cause the next financial panic? It happened in 2008 and since then very little has changed. Except the derivatives market has become even larger.



http://news.goldseek.com/UnionSecurities/1337951460.php

[Olympicdreams]

Serpo, Thanks.

According to Sinclair, more derivatives blow upSSSSS have just occurred as the follow-on result of JPM's recently disclosed OCI(sp?) losses. Also last count of these losses was north of $6B v the original "estimate of $1-2B."

Since Derivatives are between 40:1 and 100:1 in leveraged numbers, his understatement of "JPM's losses must be a humdinger" looks absurdly laughable.


beefsteak