"Any losses [AIG] may realize … under these derivatives will not be material."
~ AIG, Feb. 12, 2008
We all remember how in late 2008, staggering losses on risky derivatives nearly brought down our entire financial system.
With 43 members of the House and the Senate hammering out a final version of the financial-reform bill, one of the biggest contentions remains what to do about the mind-boggling, vast, and opaque derivatives market owned by the nation’s too-big-to-fail megabanks.
The problem is getting worse. Notional amounts of derivatives held by federally insured banks have risen to more than $200 trillion.
Source: Office of the Comptroller of Currency as of Dec. 31, 2009
The blue line you see is the huge profit center of derivatives casinos and squeezing customers. The yellow one is mostly naked credit default swaps, the same instruments for gambling on the bankruptcy of other companies that blew up AIG. Green is what banks use to actually hedge their risk.
Granted, many of these positions cancel each other out, but even assuming the "netting" works, we’re still talking more than $20 trillion.
No matter how you measure it, this is a ton of risk, and it’s concentrated in five hands: JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, and Wells Fargo.
Source: Office of the Comptroller of Currency as of Dec. 31, 2009
There are at least three problems with this picture:
1. This is crazy. At 14 times the size of the U.S.’s gross domestic product, if even a fraction of these opaque and convoluted instruments blow up, as they did in 1998 and again in 2008, it would be bad news bears for everyone who doesn’t live on roots and berries.
June 17, 2010
