Wednesday, October 7, 2009

Drinking the red sand

(The notional amount on a financial instrument is the nominal or face amount that is used to calculate payments made on that instrument.

FT Alphaville: 'The notional value of derivatives held by US commercial banks increased $1,500bn in the first quarter, or 0.7 per cent, to $2,035bn. Net current credit exposure - the amount that would be owed to banks if all of their derivatives contracts were immediately liquidated, and the primary metric the OCC uses to measure credit risk in derivatives activities - decreased 20 per cent to $555bn. At the end of Q4 08, that metric stood at $800bn.'

The models denoting risk consider that equilibrium has been achieved therefore leashing the random walk. But if reality is the tail risk oscillations may occur.

To provide scale the CIA estimates 2008 World GDP at $61.07 trillion, with US GDP at 14.26 trillion. -AM

October 6th, 2009

Five large commercial banks represent 97% of the total banking industry notional amounts and 88% of industry net current credit exposure.

What are those five large banks? According to the OCC, they’re JP Morgan Chase, Goldman Sachs, Bank of America, Citibank, and Wells Fargo. Add up their “total derivatives” numbers and you get $197 trillion, which is indeed 97% of the $203 trillion in total notionals.

The report also shows the notional amounts at bank holding companies, rather than banks themselves. Suddenly, the size of Bank of America’s derivatives holdings spikes from $39 trillion to $75 trillion, while Morgan Stanley appears from nowhere to reveal itself as holding a more-than-healthy $41 trillion in derivatives. It seems that at Merrill Lynch and Morgan Stanley, the derivatives are generally held by the holdco rather than the bank, which allows the OCC to ignore them for the purposes of its headline calculations.

Add up the derivatives books at the holdcos, and the total isn’t $203 trillion any more: it’s $291 trillion — an increase of $88 trillion which is very hard to find in the OCC report unless you’re specifically looking for it. And never mind Wells Fargo, which was also something of an also-ran in the top five banks. The top five now comprise JP Morgan, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup, with derivatives holdings between them of $278 trillion. That’s 95% of the true total, or 137% of what the OCC would have you believe was the total.

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