Bengt Hahlin en Directors and Executives, Marketing, Finance / Banking Business Intelligence Analyst • NewsMachine 21/5/2017 · 3 min de lectura · +500

The U.S. banks huge exposure to derivatives-222 trillion dollars

The U.S. banks huge exposure to derivatives-222 trillion dollars

The recklessness of the “too big to fail” banks almost doomed them the last time around, but apparently they still haven’t learned from their past mistakes. Today, the top 25 U.S. banks have 222 trillion dollars of exposure to derivatives. In other words, the exposure that these banks have to derivatives contracts is approximately equivalent to 12 times the gross domestic product of the United States. As long as stock prices continue to rise and the U.S. economy stays fairly stable, these extremely risky financial weapons of mass destruction will probably not take down our entire financial system. But someday another major crisis will inevitably happen, and when that day arrives the devastation that these financial instruments will cause will be absolutely unprecedented.

During the great financial crisis of 2008, derivatives played a starring role, and U.S. taxpayers were forced to step in and bail out companies such as AIG that were on the verge of collapse because the risks that they took were just too great.

But now it is happening again, and nobody is really talking very much about it. In a desperate search for higher profits, all of the “too big to fail” banks are gambling, and at some point a lot of these bets are going to go really bad. The following numbers regarding exposure to derivatives contracts come directly from the OCC’s most recent quarterly report:


Total Assets: $1,792,077,000,000 (slightly less than 1.8 trillion dollars)

Total Exposure To Derivatives: $47,092,584,000,000 (more than 47 trillion dollars)

JPMorgan Chase

Total Assets: $2,490,972,000,000 (just under 2.5 trillion dollars)

Total Exposure To Derivatives: $46,992,293,000,000 (nearly 47 trillion dollars)

Goldman Sachs

Total Assets: $860,185,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $41,227,878,000,000 (more than 41 trillion dollars)

Bank Of America

Total Assets: $2,189,266,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $33,132,582,000,000 (more than 33 trillion dollars)

Morgan Stanley

Total Assets: $814,949,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $28,569,553,000,000 (more than 28 trillion dollars)

Wells Fargo

Total Assets: $1,930,115,000,000 (more than 1.9 trillion dollars)

Total Exposure To Derivatives: $7,098,952,000,000 (more than 7 trillion dollars)

Collectively, the top 25 banks have a total of 222 trillion dollars of exposure to derivatives. (That is $222,000,000,000,000).

Curious what 1 trillion dollars look like? The following picture shows that, (it is one hundred rows x 100 pallets per row is 10,000 pallets of $100 bills. Notice those pallets are double stacked):

As a contrast, here is a “mere” 1Billion

And it is not only U.S. banks who have this huge exposure, all big EU banks have the same problem. As just one example Deutsche Bank (from last year):

14 times the gross domestic product of the Germany. And 3 times the gross domestic product of the whole of EU. And that’s just one bank.

Those that trade derivatives are essentially engaged in a form of legalized gambling, and some of the brightest names in the financial world have been warning about the potentially destructive nature of these financial instruments for a very long time.

In a letter that he wrote to shareholders of Berkshire Hathaway in 2003, Warren Buffett actually referred to derivatives as “financial weapons of mass destruction”:

“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Warren Buffett was right on the money when he made that statement, and of course the derivatives bubble is far larger today than it was back then.

In fact, the total notional value of derivatives contracts globally is in excess of 500 trillion dollars.

This is a disaster that is just waiting to happen.

And if you connect this gigantic exposure to derivatives by U.S. Banks with new figures of US Household Debt you get a very worrying picture.

Total debt held by US household reached $12.73 trillion in the first quarter of 2017, finally surpassing its $12.68 trillion peak reached during the recession in 2008 according to the NY Fed's latest quarterly report on household debt. This marked a $479 billion increase from a year ago, and up $149 billion from Q4 2016 after 11 consecutive quarters of growth since the deleveraging period immediately following the Great Recession.

Non-Housing Debt

◦Auto loan balances increased by $10 billion Q/Q and $96 billion Y/Y, continuing their 6-year trend. Auto loan delinquency rates were flat, with 3.8% of auto loan balances 90 or more days delinquent on March 31.

◦Credit card balances declined by $15 billion Q/Q but increased by $52 billion Y/Y to $764 billion, while 90+ day delinquency rates deteriorated, and now stand at 7.5%.

◦Outstanding student loan balances increased by $34 billion Q/Q and $83 billion Y/Y, and stood at $1.34 trillion as of March 31, 2017, marking an increase in every year throughout the 18-year history of this series.

For the moment, financial markets continue to remain completely disconnected from the hard economic data, but as we saw in 2008 the markets can plunge very rapidly once they start catching up with the real economy.

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Bengt Hahlin 23/5/2017 · #13

#11 Hi Dean,
I agree completely with you “but HFT is basically legal front running”

Bengt Hahlin 23/5/2017 · #12

#10 Hi Phil,
I agree, why should they change when they are protected from failure and the consequence of their illegal actions.

Banks globally have paid $321 billion in fines since 2008 for an abundance of regulatory failings from money laundering to market manipulation and terrorist financing. Banks paid $42 billion in fines in 2016 alone, a 68 percent rise on the previous year,

And no one goes to jail.

+1 +1
Dean Owen 23/5/2017 · #11

#6 You make some fair points. It certainly is not sustainable. With regard to HFTs, I fear politicians are blinded by one sided studies that show HFTs reduce commissions and provide for tighter spreads. It is a unfair game and has become a race to zero. HFTs with the fastest connections to data win, even if their connection is one nanosecond faster than their competitor. I've worked with many of the largest HFTs in the business implementing proximity hosting/co-location. I asked the Global CRO of one of the largest what their biggest losing month was and his reply "Losing month? We've not had a losing day since we were founded!". They "have zero market risk". All their risk is operational. My argument for the last few years has been, in a zero sum game (futures, not stocks), HFTs come in to the market and take big chunks of money out of the system and how can that be good for the market? They do it under the guise of "market making" and justify it by the "provide liquidity, tighten spreads, reduce commissions" argument. But the huge bucks they are making are coming out of someones pocket. Michael Lewis suggests that it comes from the hedge fund/pension fund users, but in actuality this money is taken from every other market user, including the guy on the street who placed an order to buy a stock and was puzzled as to why he couldn't buy it at the level shown on the screen and ends up buying at a higher price. A sweeping generalisation, but HFT is basically legal front running.

Phil Friedman 23/5/2017 · #10

#8 Bengt, my remark was intended to point out that you are talking to the wall, when it comes to the banking sector in the U.S. As long as they continue to be bailed out, and as long as they continued to be treated as too big to fail, and as long as they continue to profit from each and every crisis, and as long as no major banking executive goes to jail, they will contintue to do exactly as they have done in the past. Why not?

+1 +1
Bengt Hahlin 23/5/2017 · #9

#4 Hi Brian,
Yes especially the car market. About a third of the risky car loans that are bundled into bonds are considered “deep subprime”. The percentage of subprime auto-loan securitizations considered deep subprime has risen to 32.5 percent from 5.1 percent since 2010, according to Morgan Stanley.
And consumers are falling behind on most subprime car loans, but deep subprime borrowers have deteriorated the fastest.

Bengt Hahlin 23/5/2017 · #8

#3 Hi Phil,

See my comment to David. Also this “Too big to fail” concept has been sold very effectively to our politicians.
The Federal Reserve Bank in Richmond got it quite right when the defined TBTF:

“The federal financial safety net is intended to protect large financial institutions and their creditors from failure and to reduce the possibility of "systemic risk" to the financial system. However, federal guarantees can encourage imprudent risk-taking, which ultimately may lead to instability in the very system that the safety net is designed to protect.”

A history of emergency government loans to distressed institutions and markets deemed "too big to fail" has created an expectation that certain parts of the financial sector will be protected from losses.

• This government safety net effectively subsidizes risk-taking. Investors that feel protected by the government will be less likely to demand higher yields as compensation for risk, and creditors will feel less urgency to monitor firms that are assumed to be protected.
• Excessive risk-taking makes firms more likely to experience distress and require bailouts to remain solvent. Additional bailouts can then further erode market discipline.
• This self-reinforcing cycle suggests that the safety net will grow ever larger over time. The safety net has increased by one-third since the Richmond Fed's first estimate in 1999. It covered 62 percent of financial sector liabilities as of 2015.
• Resolution plans — "living wills" — could be an important tool for establishing credibility against bailouts by making the government safety net a less attractive option in a crisis.

Bengt Hahlin 23/5/2017 · #7

#2 Hi David,

Well the “problem” is it is not going to be a bail out; it is going to be a bail in. They tried that for the first time in Cyprus in March 2013. Since then OECD, G20, the Financial Stability Board (FSB), EU, U.S. have been pushing massively for this. And now it’s the rule of most of the countries in the west.

I.E. Bondholders, creditors and depositors are forced to bear some of the burden by having a portion of their debt written off and forced to write-off a portion of their holdings.

The problem: a critical aspect of what the bail-in scheme is intended to do is to prioritize the payment of banks’ derivatives obligations to each other, ahead of depositors.

Bengt Hahlin 22/5/2017 · #6

#1 Part 2 The Fed’s QE1, QE2, and QE3 added a total of $4.5 trillion. The there’s ECB monthly purchases which started at €13 billion and increased to €60 billion. To add more fuel to this there the central banks ZIRP and NIRP policies.
So there has been a lot of money created by central banks were most of it is not going to productive investments or loans to small and medium businesses but to speculations.

Another example: the British government released statistics last week showing that debt judgments and bankruptcy filings across the UK soared 35% in the first quarter of 2017 to the highest level in a decade. British consumers are on a debt binge, borrowing (and now defaulting) at record levels. Does that sounds sustainable?
So you can easily say that there are “some” problems in the U.S. economy. But they are not alone, a lot of western countries fit this “profile”.

And yes the algos/HTF need to rein in. Credit Suisse wrote in a report that outlines the huge impact that high-frequency trading has had on Wall Street, resulting in much higher overall trading activity and a bias toward parts of the market that are easiest to trade with high-frequency strategies. In other words, high-frequency has reshaped the financial industry in its image.
So the algobots are fighting against each other now, and those fights don't end in trades. They end in fakes quotes—or "spoofing"—that the algobots send to try to draw each other out. Indeed, Johannes Breckenfelder of the Institute for Financial Research found that HFTs change their strategies when they're competing against each other like this. They don't make markets as much, and make directional bets on stocks instead—because those are the kind of things they can actually beat each other on. The result is actually less liquidity and more volatility, at least within each trading day. (HFTs don't hold stock overnight, so interday volatility isn't affected).