Comptroller of the Currency's Qtrly report on bank trading and derivatives

[Winehole23]

http://www.occ.treas.gov/ftp/release/2008-152a.pdf

It's rather lengthy, so I'll only excerpt a few tidbits:

• U.S. commercial banks reported $6.0 billion of trading revenues in cash and derivative instruments in the third quarter of 2008, compared to $1.6 billion in the second quarter of 2008 and a $2.2 billion
average over the past eight quarters.
• Net current credit exposure increased 7% from the second quarter to $435 billion, a level 73% more than the $252 billion exposure of a year ago.
• The notional value of derivatives held by U.S. commercial banks decreased $6.3 trillion in the third quarter, or 3%, to $175.8 trillion.
• Derivative contracts remain concentrated in interest rate products, which comprise 78% of total derivative notional values. The notional value of credit derivative contracts increased by 4% during the quarter to $16.1 trillion. Credit default swaps comprise 99% of credit derivatives.

N.B., the analysis is for 3rd qtr, 2008.

Derivatives activity in the U.S. banking system is dominated by a small group of large financial ins utions. Five large commercial banks represent 97% of the total industry notional amount and 87% of industry net current credit exposure.

These are:

See page 25 of the pdf.

The first step in measuring credit exposure in derivative contracts involves identifying those contracts where a bank would lose value if the counterparty to a contract defaulted today. The total of all contracts with positive value (i.e., derivatives receivables) to the bank is the gross positive fair value (GPFV) and represents an initial measurement of credit exposure. The total of all contracts with negative value (i.e., derivatives payables) to the bank is the gross negative fair value (GNFV) and represents a measurement of the exposure the bank poses to its counterparties.

Price discovery requires default. But for the big five who hold 87% of derivatives exposure, this will never be allowed to happen.

[RandomGuy]

The credit default swaps represent the financial equivalent of an uncharted civilization-ending asteroid.

As long as that asteriod stays in orbit, all is ducky. If not, then we have a *slight* problem.

I dislike such doomsday pronouncements, but the more I find out about the scale and potential impact of these swaps, the more concerned I am.

Trillions of dollars of what amounts to essentially unregulated insurance contracts with no real way to objectively value the risk they pose. Even the most sophisticated financial wizards can't quite tell you what makes these different than outright gambling, and if they tell you otherwise, they are lying.

Measured risk is acceptable and should even be encouraged in business, but this... this...

scares the bejeezus out of me.

[Winehole23]

something more recent on this? anyone?

[Winehole23]

http://www.spurstalk.com/forums/show...ht=derivatives

[FuzzyLumpkins]

http://money.cnn.com/2013/12/10/news.../volcker-rule/