Banking risk & derivatives

[Nova]

I'm trying to hash out how stable banks are. Per the official reports I've read, the banks are admitting to $160-$180 billion in writeoffs. Which corresponds to the $160 billion the Fed thru TAF has loaned them. But since that hasn't loosened up the credit market, I feel there must be more bad (unaccounted for) debt & writeoffs.

The link is the OCC 3rd quarter report on banking (I can't find more recent numbers.) So the data is old. And reporting derivative exposure is based on what banks state they have-not cross checked against other figures. So the numbers may be fudged.

http://www.occ.treas.gov/ftp/release/2007-137a.pdf

Drop down to the bottom (Table 12) Assets vs Derivatives

TOTAL AMOUNT FOR COMMERCIAL BKS & TCs WITH DERIVATIVES

Assets $9,301,467 (in millions) or $ 9.3 trillion
Derivatives $158,186,116 (in millions) or $158.1 trillion

Which roughly translates into 17 times more in derivative holding vs assets.

Granted most of their derivative holds are good solid investments. But I'm trying to decide how much of them are going to be losses.

Anyone have any more current data or analysis?

[RobertB]

official reports I've read, the banks are admitting to $160-$180 billion in . But since that hasn't loosened up the credit market, I feel there must be more bad (unaccounted for) debt & writeoffs.

Granted most of their derivative holds are good solid investments. But I'm trying to decide how much of them are going to be losses.


It probably isn't a good assumption that the derivative holds are good solid investments, as you say. The truth is that no one knows much of anything about derivatives, their composition, and how solvent they are. Given how many there are, and the assets (supposed assets) they hold, just the collapse of a few could bring down the entire world financial system, from what I have read.

[Nova]

It probably isn't a good assumption that the derivative holds are good solid investments, as you say. The truth is that no one knows much of anything about derivatives, their composition, and how solvent they are.

LOL, yes. I just didn't want people to read this and think that the entire amount in derivatives is a loss. I read something between 3%-6% is likely to be writeoff. But that came from iffy sources. And was hoping someone else had a better feel for the risk.

[jds6958]

From what I understand, many derivatives are only as good as the responsible parties's ability to satisfy the details of the contract. As that ability fades due to increasing economic downward pressure the amount of failed derivitives climbs. This contributes to more write downs and the cycle continues.

Because of this, it is very hard to say what percent will really fail. This is actually the most confusing subject to tackle. Understanding this subject in great detail would be quite an accomplishment. I have personally relied on subject matter experts to explain details and therefore possible consequences and sometimes it is even hard to understand the basics.

I have heard the U.S. amount is now about 180 trillions USD's and the global amount is about 516 trillion USD's. Because this is a global issue, I think focusing on the global amount also has merit.

I have read that if even 2-3% of this mountain fails that it virtually wipes out all that makes up financial entities. Then if you add fractional reserve banking and other over leveraged practices it becomes even more disturbing. Then there is all of the additional fall out to consider related to a failing global economy and its related impact.

I have not seen any more current data yet, I believe I read it comes out this months for 4th qtr.

I have a belief that we have not even come close to seeing even a small percent of all of the write offs. They are doing it in small batchs and pulling from TAF (at least in the U.S.) If there was not much more the IMF would not be asking all banks to disclose all losses and for CB's to inject more cash. Banks are also scared to death to have anything to do with one another. If they are still scared as close as they are to everything, then I am still scared.

The banks do not even know how unstable they are, they do not really know there true losses, and no one knows the true value of the derivitive mountain. That will still not prevent me from making attempts to figure it out but the task is grand. I fear that once it is transparent to me or others who follow it, then it will only be after it is all priced in to all associated markets, and by then it will not matter as far as protecting oneself, but only in finding the bottom.

So I guess once we have full transparency and allow all the markets to absorb all of the information, that should be close proximity to a bottom. We can then go from capital preservation and back to captital accumulation...providing that this is not end times and we are still here.

That is my take...thoughts?

Good thread by the way...I would like to see more discussion on derivatives and what we can learn about these complex financial instraments of destruction...

[RobertB]

From what I understand, many derivatives are only as good as the responsible parties's ability to satisfy the details of the contract. As that ability fades due to increasing economic downward pressure the amount of failed derivitives climbs. This contributes to more write downs and the cycle continues.

Because of this, it is very hard to say what percent will really fail. This is actually the most confusing subject to tackle. Understanding this subject in great detail would be quite an accomplishment. I have personally relied on subject matter experts to explain details and therefore possible consequences and sometimes it is even hard to understand the basics.

I have heard the U.S. amount is now about 180 trillions USD's and the global amount is about 516 trillion USD's. Because this is a global issue, I think focusing on the global amount also has merit.

I have read that if even 2-3% of this mountain fails that it virtually wipes out all that makes up financial entities. Then if you add fractional reserve banking and other over leveraged practices it becomes even more disturbing. Then there is all of the additional fall out to consider related to a failing global economy and its related impact.

I have not seen any more current data yet, I believe I read it comes out this months for 4th qtr.

I have a belief that we have not even come close to seeing even a small percent of all of the write offs. They are doing it in small batchs and pulling from TAF (at least in the U.S.) If there was not much more the IMF would not be asking all banks to disclose all losses and for CB's to inject more cash. Banks are also scared to death to have anything to do with one another. If they are still scared as close as they are to everything, then I am still scared.

The banks do not even know how unstable they are, they do not really know there true losses, and no one knows the true value of the derivitive mountain. That will still not prevent me from making attempts to figure it out but the task is grand. I fear that once it is transparent to me or others who follow it, then it will only be after it is all priced in to all associated markets, and by then it will not matter as far as protecting oneself, but only in finding the bottom.

So I guess once we have full transparency and allow all the markets to absorb all of the information, that should be close proximity to a bottom. We can then go from capital preservation and back to captital accumulation...providing that this is not end times and we are still here.

That is my take...thoughts?

Good thread by the way...I would like to see more discussion on derivatives and what we can learn about these complex financial instraments of destruction...

George Soros, that shyster of a financial wheeler-dealer, commented on this inability to cover derivative losses at the WEF in Davos and noted that derivatives values were unknown.

Banks do not know the true extent of their losses as you note, in fact they do not seem to know much about anything financial these days. Citi is a good example of that. They are going to be a relic of history it seems. It is doubtful that you or anyone else can figure out too much about derivatives. It seems that even the best financial minds cannot decipher them. As for them becoming more transparent, it probably isn't going to happen because that would lead to them being regulated and that is something that Derivatives investors and creators don't want. Derivatives are esoteric and will stay that way. Real transparency isn't going to happen, imo.

[jds6958]

George Soros, that shyster of a financial wheeler-dealer, commented on this inability to cover derivative losses at the WEF in Davos and noted that derivatives values were unknown.

Banks do not know the true extent of their losses as you note, in fact they do not seem to know much about anything financial these days. Citi is a good example of that. They are going to be a relic of history it seems. It is doubtful that you or anyone else can figure out too much about derivatives. It seems that even the best financial minds cannot decipher them. As for them becoming more transparent, it probably isn't going to happen because that would lead to them being regulated and that is something that Derivatives investors and creators don't want. Derivatives are esoteric and will stay that way. Real transparency isn't going to happen, imo.

You are correct in many ways imho, I do not expect to understand it fully, but I can understand it much better than I do now. Human nature and greed mask transparency, so you are likely correct there as well. Good thoughts...

[goinghome]

I once took a course on derivatives and read a few books on it when I was involved in the writing of contracts for the instruments. It's basically Vegas, when you're drunk, fun but stupid. Our current financial system seems viable because nobody really understands it. But it's not. It's a house of cards waiting for a soft wind to blow. Wall street is essentially legalized intelligent gambling, and derivatives are monopoly money that looks real.

[RobertB]

I once took a course on derivatives and read a few books on it when I was involved in the writing of contracts for the instruments. It's basically Vegas, when you're drunk, fun but stupid. Our current financial system seems viable because nobody really understands it. But it's not. It's a house of cards waiting for a soft wind to blow. Wall street is essentially legalized intelligent gambling, and derivatives are monopoly money that looks real.

You are right on target, although I am not sure WS is intelligent gambling, witness the derivatives, as well as other market crapshoots. I think the entire markets have been a sham and shell game for the most part, dating back to the "living real large" days of the Clintonistas, in the nineties. And I believe the first real manifestation of the market crapshooting was the nonsensical dotcom craze that flamed and burned.