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KILLER_CLOWN
09-24-2011, 03:38 PM
Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/OCC%201.jpg

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?

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/Netting.jpg

...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.

...

Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/09/Morgan%20Stanley%20FX.jpg

http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de

teedubya
09-24-2011, 11:24 PM
< crickets >

KILLER_CLOWN
09-25-2011, 01:51 AM
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suzzer99
09-25-2011, 11:28 AM
Stupid hippy liberals. The banks clearly have our best interests at heart and certainly don't write their own laws or anything. We sure as hell shouldn't even try to do anything like Dodd-Frank to reign them in a little. I mean it's imperfect, so doing nothing is clearly better. Also all regulations are bad by definition.

petegz28
09-25-2011, 11:35 AM
Stupid hippy liberals. The banks clearly have our best interests at heart and certainly don't write their own laws or anything. We sure as hell shouldn't even try to do anything like Dodd-Frank to reign them in a little. I mean it's imperfect, so doing nothing is clearly better. Also all regulations are bad by definition.

WTF? :deevee:

suzzer99
09-25-2011, 12:49 PM
We'll all be wahhhing when they wreck the global economy, take a gigantic govt bailout because they're still too big too fail, and walk away scot-free with billions again.

Do you know what moral hazard means? The bailout + zero accountability + killing Dodd/Frank = the mother of all moral hazards. It's only a matter of time til they raid the piggy bank again.

Bewbies
09-25-2011, 08:53 PM
We'll all be wahhhing when they wreck the global economy, take a gigantic govt bailout because they're still too big too fail, and walk away scot-free with billions again.

Do you know what moral hazard means? The bailout + zero accountability + killing Dodd/Frank = the mother of all moral hazards. It's only a matter of time til they raid the piggy bank again.

Yeah, no shit. You bail them out why would they ever be worried about making bad decisions?

'Hamas' Jenkins
09-25-2011, 09:01 PM
Yeah, no shit. You bail them out why would they ever be worried about making bad decisions?

You can bail the company out and still simultaneously liquidate the assets of the guilty parties and jail them.

It's a nice mixture of systemic risk and moral hazard.

BigChiefFan
09-26-2011, 12:04 AM
There is a solution... get the masses to pull out of these establishments, ASAP.

suzzer99
09-26-2011, 01:26 AM
You can bail the company out and still simultaneously liquidate the assets of the guilty parties and jail them.

It's a nice mixture of systemic risk and moral hazard.

Not in today's climate you can't. You bail them out and let them keep their $200M bonus as punishment.

Bewbies
09-26-2011, 01:59 PM
You can bail the company out and still simultaneously liquidate the assets of the guilty parties and jail them.

It's a nice mixture of systemic risk and moral hazard.

I'd prefer someone else just buys them out of bankruptcy.

KC native
09-26-2011, 03:19 PM
Too big to fail is getting even worse. We should have went the swedish route on the bailouts. Just want to point out that I told many of you that we were heading right back into the same shit that we just went through

KILLER_CLOWN
09-26-2011, 04:12 PM
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Cave Johnson
09-26-2011, 04:35 PM
$250T is a ton of exposure. I'm sure the U.S. banking system will do just fine after Greece defaults, setting off a second financial crisis.

Detoxing
09-26-2011, 04:36 PM
More reason to hate the white man.

Stewie
09-26-2011, 05:23 PM
The current banking crisis in Europe is because of these derivatives. More precisely, Over-The-Counter derivatives. That's why they need to print Euros to no end. The dollar will look strong, but it's next. It's a race to the bottom.

KILLER_CLOWN
09-26-2011, 05:25 PM
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Detoxing
09-26-2011, 05:38 PM
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Even more reason to hate the white man.

KILLER_CLOWN
09-26-2011, 06:05 PM
Even more reason to hate the white man.

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