Sunday, September 25, 2011

Well, This Was Not A Boating Accident

That's A Quarter Of A Quadrillion Dollars

Here's a snappy new word to learn: Quadrillion. It's what comes when you have too many Trillions. I've barked about that before.

Zero Hedge (via Counterparties) brings us this little piece of snappy news, too (paragraphing added for clarity):
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.

(Chart: via Zero Hedge)

[There is in all this]... 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 this assumption] 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...

...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 [of] 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 I[terest] R[ate] 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... should perhaps raise some further eyebrows...

And there's this:
The ECB board member accepted that banks bear much responsibility for the economic crisis in Spain and elsewhere, with cheap mortgages and other lending, but said that punishing them could lead to huge unemployment, lower living standards, and a lending squeeze.

"If one just follows the principle that the ones who did wrong should pay (for their mistakes) then the results can be unacceptable," he said.

Absolutely; protect the criminals, forget the crime; let them continue the plunder right up until the last moment. Gosh; I can't wait for the day that the world's first Trillionaire is announced. I'm sure it'll be soon!

I continue to be reminded of a poem someone once told me about -- where a crowd of people, inside a circus tent during an unusual storm, were so preoccupied watching a clown attempt to light matches with his toes that they failed to notice the top had blown off the circus tent, and that the unusual storm was actually the end of the world.