OMG: $707 TRILLION in Derivative Contracts?

[JimBowie1958]

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months | ZeroHedge

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." Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments.

Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.

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.

Can someone please explain to me why this is not as insane as it seems to be?

 

[snjmom]

No.

 

[Douger]

Don't be such a worrier. WW3 is in the works. You'll be fine.

 

[editec]

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months | ZeroHedge

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." Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments.

Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.

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.

Can someone please explain to me why this is not as insane as it seems to be?

I confess that the games played in the dereivatives markets are beyond my ken, JB.

The frightening conclusion that I have come to is that the mathamatics of dereivatives appears to also be beyond the ability of most of the PLAYERS THEMSELVES to fully understand their complex machinations.


But one thing I DO know?

It was the derrivative games that took down AIG.

And I sense that AIG isn't the ONLY too big to fail organization that could collapse as a result of them blowing up in their faces.

 

[Mad Scientist]

I've seen articles that state the total derivatives debt to be 1,500 Trillion and higher, and those are 2007 numbers.

Rather than just go bankrupt, this is what the International Bankers are trying to get individual countries to sign on to through their corrupt leaders.

 

[expat_panama]

...someone please explain to me why this is not as insane as it seems to be?

I confess that the games played in the dereivatives markets are beyond my ken, JB...

This happens a lot, people don't understand something so they decide it's bad. My experience is that the lack of understanding is by choice, as I've tried explaining the mysteries on these forums and nobody seems to want to find out that their new found enemy isn't so bad after all.

My take is that this kind of behavior is so common that it's probably part of human nature, and it's the same humanity that's some how been raising an ever advancing civilization. I don't know how that can be possible but while I study it I'll accept the fact that it is. That's the smart thing to do. Derivatives have been around for centuries and they work. Refusing to learn about them and see their benefits is not smart.

 

[JimBowie1958]

No.

lol

 

[JimBowie1958]

...someone please explain to me why this is not as insane as it seems to be?

I confess that the games played in the dereivatives markets are beyond my ken, JB...

This happens a lot, people don't understand something so they decide it's bad. My experience is that the lack of understanding is by choice, as I've tried explaining the mysteries on these forums and nobody seems to want to find out that their new found enemy isn't so bad after all.

My take is that this kind of behavior is so common that it's probably part of human nature, and it's the same humanity that's some how been raising an ever advancing civilization. I don't know how that can be possible but while I study it I'll accept the fact that it is. That's the smart thing to do. Derivatives have been around for centuries and they work. Refusing to learn about them and see their benefits is not smart.

As I understand it, for any equity of value X there are at least 8*X in credit default swaps written on it. So how does the company selling all those CDS cover their obligations when a company LARGER than they are goes bankrupt?

Editec is right about AIG and most of what took down AIG was all the CDS written on the derivatives market.

There is not $707 TRILLION worth of capital in all the damned banks combined so this is all just electronic digits in some computer somewhere and the banksters are probably praying right now that they can keep running their ginormous Ponzi long enough to bail out and let the whole damned thing crash and burn after they got theirs.

As to derivative contracts being around forever, maybe, though I doubt it. I do know that as recently as the 1940s most bankers regarded them as fools gold and wrote regs to keep them under control. Cant help but wonder what idiots let that demon out of the bottle.

 

[JimBowie1958]

I've seen articles that state the total derivatives debt to be 1,500 Trillion and higher, and those are 2007 numbers.

Rather than just go bankrupt, this is what the International Bankers are trying to get individual countries to sign on to through their corrupt leaders.

Wow, if you have asource for that I would really appreciate it. Not that I dont trust you, but I cant find it and the guys I talk to what hand me my head on a platter (in a friendly way) if I mentioned that kind of money without a good source, lol.

 

[JimBowie1958]

$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months | ZeroHedge

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." Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments.

Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.

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.

Can someone please explain to me why this is not as insane as it seems to be?

I confess that the games played in the dereivatives markets are beyond my ken, JB.

The frightening conclusion that I have come to is that the mathamatics of dereivatives appears to also be beyond the ability of most of the PLAYERS THEMSELVES to fully understand their complex machinations.


But one thing I DO know?

It was the derrivative games that took down AIG.

And I sense that AIG isn't the ONLY too big to fail organization that could collapse as a result of them blowing up in their faces.

I think you are exactly right.

Did you read the blog article I linked to?

Here's more:

All else equal, this move may well explain the massive surge in bank profitability in the first half of the year. It also means that with banks suffering massive losses, and rumors of bank runs and collateral calls, not to mention the aftermath of the MF Global insolvency, the world financial syndicate will have no choice but to increase gross notional even more, even as the market value continues to get ever lower, thus sparking the risk of the mother of all margin calls: a veritable credit fission reaction. ...

So ex-sarcasm, the now parabolic increase in derivatives means that when the bilateral netting chain is once again broken, and it will be (because AIG was not a one off event), there will simply be trillions more in derivatives that no longer generate a booked cash flow stream for the remaining counterparty, until at the very end, the whole inverted credit money pyramid collapses in on itself...

It is logical that the BIS will advise everyone to ignore the bigger number and focus on the small one: just like everyone was told to ignore gross exposure and focus on net... until Jefferies had to dump all of its gross PIIGS exposure or stare bankruptcy in the face; so no - the correct thing to say is "gross market values provide a more accurate measure of the scale of financial risk transfer" if one assumes there is no counterparty risk. Because one the whole bilateral netting chain is broken, net becomes gross. And gross market value becomes total notional outstanding. And, to quote Hudson, it's game over. ...

And here again, what they ignore to add is that the measure of economic significance is only relevant in as much as the world's banks don't begin a Lehman-MF Global tango of mutual margin call annihilation. In that case, no. They are not measures of anything except for what some banks plug into some models to spit out a favorable EPS treatment at the end of the quarter.

Expect to see gross market value declines persisting even as the now parabolic increase in total notional persists. At this rate we would not be surprised to see one quadrillion in OTC derivatives by the middle of next year.

And, once again for those confused, the fact that notional had to increase so epically as market value tumbled most likely means that the global derivative pyramid scheme (no pun intended) is almost over.

So what I take from all that is that:

1. Banksters play with Nominal amounts in order to derive profit from the notional amounts outstanding. For example, they offer contracts worth (in theory) $100 million in order to derive profits in the millions USD. For the banksters the notional is not relevant as they never expect to have to pay up on the whole contract.

2. These contracts are used to balance their books in some bean counter sort of way (I guess said contracts are assets or debits depending on what side you are on), and so one way of making up a short fall on their fractional reserve lending rate is to sell more of said derivative contracts to be able to list them as an asset. This is particularly troubling to me since I know alot of bad equities that contain poisonous subprime mortgage debt is sitting on the books as level three assets and have no real value to them, but as long as they dont try to sell them, the banks can continue to list them at the value they paid for them. In effect, probably most of these banks are already insolvent but can pretend to get by by fantasizing that their worthless Mortgage Backed Securities and CDOs are actually worth what they paid for them.

3. So for banks to remain solvent and have a fig leaf of credibility in the bull shit stress tests, they have to sell ever more derivatives of some kind. But the more they sell, the more they expose themselves and their investers to collapse if the whole thing starts to crumble like it did in 2008.

4. The events in Europe are essentially a matter of banks with all this hidden debt, worthless assets and growing obligations, getting their national governments to bail them out, while not fully informing the government of the whole picture. The governments foolishly take responsibility for these banks by bailing them out, and as time goes on the governments find out that the picture is worse than they had previously thought as the bankers come back with more and more bad news. And the governments get deeper and deeper into debt because they agreed to bail out these fuckers.

5. As Europe unwinds all these intwined debts, one chain link slides off ( a bank or a government) and that then gives more weight to the total pulling more links off. Greece defaults and haircuts cause problems for banks in Italy, which in turn cause problems for banks in Spain and France, which in turn threaten the solvency of banks in the UK and Germany and they in turn might drag us over the cliff. Meanwhile the Chicoms are sweating like dogs hoping no one notices the collapse of their own little real estate bubble that they foolishly thought a totalitarian state could maintain indefinately.

6. So take your pick which event will make the whole thing collapse. My bet is on Italy collapsing because the myth of European unity wont be enough to persuade the Germans and Brits to bail out Frances problem (Italy) in order that their potential problem (France and Spain) does not become reality. Like the stupid clod who would rather not pay his bill this month so he can have more cash to burn now, he gets caught with more obligations later. But he doesnt care because later is not now.

Since the institution of politically correct ideology among our national elite, we stopped promoting our best and brightest to the top of our society in its various roles.

Instead we are led by lap dogs who are not so good at analysis and corrections as they are at sycophancy, fast talking and pretending that looming problems will be put off long enough for them to grab their loot and run for the hills.

God save us all.

 

[editec]

...someone please explain to me why this is not as insane as it seems to be?

I confess that the games played in the dereivatives markets are beyond my ken, JB...

This happens a lot, people don't understand something so they decide it's bad.

YES! We see that with the cluelessness of the TPM AND OWS. I quite agree with that complaint.

My experience is that the lack of understanding is by choice, as I've tried explaining the mysteries on these forums and nobody seems to want to find out that their new found enemy isn't so bad after all.

I must have missed your emplainations. I understand them in principle, but the niceities of the actual mechanics?

Well if AIG's actuaries couldn't see how they were leading AIG to insolvency?

I sort of doubt you fully understand them.

And if Warren Buffet couldn't fathom the complexities of these (each almost entirely unique BETS) I rather doubt you can sum them up in this venue, either.

Hey, I might be wrong. You may already be a genius.

My take is that this kind of behavior is so common that it's probably part of human nature, and it's the same humanity that's some how been raising an ever advancing civilization.

I think you're SPOT ON right there, Xpat. People fear what they do not understand.

I don't know how that can be possible but while I study it I'll accept the fact that it is. That's the smart thing to do. Derivatives have been around for centuries and they work. Refusing to learn about them and see their benefits is not smart.

Do tell us about the difference between the DERIVATIVEs of say 16th century Venician businesses versus the derivatives of the day, would you?

I'm always happy to learn something and the absolutely stunning growth of the dereivatives event flummoxes my limited understanding of that game.

Hell! please do start a thread devoted to explaining to us how derivatives took down the largest insurance company in the world, would you?

I'd like to know the blow by blow explaination for that DERIVATIVE GENNERATED meltdown in AIG.

I've read various versions of it and confess I still don't quite GET IT.

 

[rdean]

Don't worry. Republicans call this good capitalism.

 

[rdean]

I confess that the games played in the dereivatives markets are beyond my ken, JB...

YES! We see that with the cluelessness of the TPM AND OWS. I quite agree with that complaint.



I must have missed your emplainations. I understand them in principle, but the niceities of the actual mechanics?

Well if AIG's actuaries couldn't see how they were leading AIG to insolvency?

I sort of doubt you fully understand them.

And if Warren Buffet couldn't fathom the complexities of these (each almost entirely unique BETS) I rather doubt you can sum them up in this venue, either.

Hey, I might be wrong. You may already be a genius.





I think you're SPOT ON right there, Xpat. People fear what they do not understand.

I don't know how that can be possible but while I study it I'll accept the fact that it is. That's the smart thing to do. Derivatives have been around for centuries and they work. Refusing to learn about them and see their benefits is not smart.

Do tell us about the difference between the DERIVATIVEs of say 16th century Venician businesses versus the derivatives of the day, would you?

I'm always happy to learn something and the absolutely stunning growth of the dereivatives event flummoxes my limited understanding of that game.

Hell! please do start a thread devoted to explaining to us how derivatives took down the largest insurance company in the world, would you?

I'd like to know the blow by blow explaination for that DERIVATIVE GENNERATED meltdown in AIG.

I've read various versions of it and confess I still don't quite GET IT.

It's been explained many times.

When Republicans controlled both houses and the presidency, they deregulated Wall Street. At the same time, there was an accounting scandal at Freddie/Fannie which caused them to pull back on mortgages. More than 70% of the market was moved to Wall Street. Those on Wall Street handed out mortgages to anyone who could sign their name. Those mortgages were bundled to together as "securities" and sold overseas. Now this is where derivatives come in. It was knows those securities were worthless and they would fail. This is why the were heavily insured. When they did fail, Wall Street collected on the insurance. Foreign investors were out their money and insurance companies failed due to huge payouts. Notice, NO ONE went to jail. Because of Republican "deregulation" nothing done was illegal. At least, not after they deregulated. Republican politicians are the best politicians money can buy.

That's pretty much it in a nutshell.

 

[Mad Scientist]

rdean lies:

When Republicans controlled both houses and the presidency, they deregulated Wall Street.

The Glass/Steagal Act, which kept commercial banks separate from investment banks, was rescinded by a Republican Congress and signed by a Democrat President, Billy Jeff (Bubba). Make all the excuses you want, that's the truth. Both Parties fucked us with that one.

Total derivatives debt according to this article from 2010:
Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP - DailyFinance

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 that its notional value is 20 times the size of the world economy.

 

[expat_panama]

...As I understand it, for any equity of value X there are at least 8*X in credit default swaps written on it...

As written the statement doesn't make sense. The act of creating an equity does not involve selling any CDS's. Maybe you could share a link to the source that led you to your understanding or maybe you could reword the sentence.

...how does the company selling all those CDS cover their obligations when a company LARGER than they are goes bankrupt? ...

Let's start with how a CDS can work in real life. A bank pays an underwriter to guarantee repayment of a $1M mortgage that only has $1 pending. If the UW turns around and sells the CDS to a broker that bundles it into a package and the note ends up showing up on a million ledgers, then we've got a 'notional value' of a trillion dollars. The instant the last $1 is paid and the mortgage is canceled, it voids each of the CDS's and the entire $T 'notional value' disappears.

Really no point in anyone getting a bee in their pantyhose over this '$707,568,901,000,000 notional value', although I'll concede that some poeple just want to run up and down the street in their pantyhose and the reason's never that important.

 

[rdean]

rdean lies:

When Republicans controlled both houses and the presidency, they deregulated Wall Street.

The Glass/Steagal Act, which kept commercial banks separate from investment banks, was rescinded by a Republican Congress and signed by a Democrat President, Billy Jeff (Bubba). Make all the excuses you want, that's the truth. Both Parties fucked us with that one.

Total derivatives debt according to this article from 2010:
Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP - DailyFinance

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 that its notional value is 20 times the size of the world economy.

Then why didn't it happen under Clinton?

 

[snjmom]

Let's start with how a CDS can work in real life. A bank pays an underwriter to guarantee repayment of a $1M mortgage that only has $1 pending. If the UW turns around and sells the CDS to a broker that bundles it into a package and the note ends up showing up on a million ledgers, then we've got a 'notional value' of a trillion dollars. The instant the last $1 is paid and the mortgage is canceled, it voids each of the CDS's and the entire $T 'notional value' disappears.

And when the last 1 is not paid?

 

[Mad Scientist]

rdean lies:

When Republicans controlled both houses and the presidency, they deregulated Wall Street.

The Glass/Steagal Act, which kept commercial banks separate from investment banks, was rescinded by a Republican Congress and signed by a Democrat President, Billy Jeff (Bubba). Make all the excuses you want, that's the truth. Both Parties fucked us with that one.

Total derivatives debt according to this article from 2010:
Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP - DailyFinance

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 that its notional value is 20 times the size of the world economy.

Then why didn't it happen under Clinton?

"Billy Jeff" is Clinton. William Jefferson Clinton. And it's continuing now under Barry Soetoro. You know him as Barack Obama.

First attempts to work around Glass/Steagal were in the 60's. But of course, that can't be true as the President AND the Congress were in Democrat Party hands right?
From PBS:
Mr. Weill Goes To Washington - The Long Demise Of Glass-Steagall | The Wall Street Fix | FRONTLINE | PBS

 

[editec]

Expat is kind enough to teach me something about dereivatives

Let's start with how a CDS can work in real life. A bank pays an underwriter to guarantee repayment of a $1M mortgage that only has $1 pending.

Lost me already. $1 pending?

Meaning what?

A million dollar mortgage means there's a million dollars PENDING, yes? If some of it is paid off, then the value of the insurance on it ought to be its current outstanding principle owed, no?


No, I am really not trying to be obtuse.

Presumably derivatives aren't written on debt contracts that are obviously going to be paid, so I must not understand what you're trying to tell me here.

Want to try again?

 

[expat_panama]

...The instant the last $1 is paid and the mortgage is canceled, it voids each of the CDS's and the entire $T 'notional value' disappears.

And when the last 1 is not paid?

LOL! The underwriters forclose, sell of the property, and pocket the difference. In real life most real estate is worth more than the mortgage enough to pay off those that aren't and still cut a profit. Either way, the CDS is voided and the owners pocket their fees.

What's not to like?