Slight of Hand
Remember hearing or reading something like this?
The subprime mess has triggered the most destructivefinancial crisis since the stock market crash of 1929. It’s not surprising, then, that the hunt is on for culprits. And for many, there’s no reason to look beyond financial derivatives in general, and credit derivatives in particular.
Or something like this?
Oct 17, 2008 8:00 PM EDTIf some banks are too big to fail, $600 trillion has become the number too big to question. That's $600,000,000,000,000—the rough figure cited in many news reports for the total size of the derivatives market, now blowing up to such alarming effect.
That was before the crash
Let's look at today
Well – how about this – did you hear or read this within the last month or week?
Or thisSome derivatives, such as typical stock options, trade onexchanges. But many are simply private contracts between banks or other sophisticated investors. As a result, it’s hard to know the total volume of derivatives now outstanding. The worldwide nominal value – also known as the notional or “face” value – of derivatives tripled in the five years leading up to the recession, at which time it was around $600 trillion, according to the Bank for International Settlements. Since then, although some specific categories of derivatives have shrunk, the total value of the derivatives market has not been reduced at all, but has actually gotten bigger.SNIPThe very fact that reliable figures are hard to come by is itself part of the problem. The $638 trillion currently reported by the BIS is only a floor. Estimates for the total capital employed in derivatives trading is somewhere between $10 and $20 trillion, roughly comparable to the capitalization of the NYSE. That means that each actual dollar in the derivatives market is supporting between $35 and $70 of nominal value. Losses of only a few percent of face value therefore would be enough to wipe out even the best-capitalized derivatives traders.
Avalanches of new financial products such as currency derivatives, credit-default swaps, and mortgage-backed securities have quickly proliferated especially in the 1990s. In the new century, the market of derivatives began to spiral out of control. It embraced almost anything at hand, from trading the future value of currencies, food and oil, to gambling with the prospect of weather conditions. In 2008, credit-default swaps reached over $50 trillion,  while mortgage-backed securities rose to about $3 trillion in 2007.  By 2010, over-the-counter derivatives grew to a staggering $600 trillion,  about 10 times higher the global gross domestic product.
The world’s scariest story: trading in derivativesBad as these scandals are and vast as the money involvedin them is by any normal standard, they are mere blips on the screen, compared to the risk that is still staring us in the face: the lack of transparency in derivative trading that now totals in notional amount more than $700 trillion. That is more than ten times the size of the entire world economy. Yet incredibly, we have little information about it or its implications for the financial strength of any of the big banks.Moreover the derivatives market is steadily growing. “The total notional value, or face value, of the global derivatives market when the housing bubble popped in 2007 stood at around $500 trillion… The Over-The-Counter derivatives market alone had grown to a notional value of at least $648 trillion as of the end of 2011
And then you have this - - - - -
May 21, 2013The $700 trillion derivatives market allows companies to essentially gamble on deals made on Wall Street. Such activity nearly destroyed insurance giant American International Group before the federal government rescued it.
And then you have this - - - - -
Jay: Okay. Let me quickly try to explain what this is forpeople that don't follow this kind of story at all, and tell me if I'm right. Essentially, these derivatives, this $7 trillion--Black: No, no, seven--.Jay: --are rich people bidding--betting against rich people about things they don't actually own. It's like going to a racetrack, sitting in the stands, and betting on somebody else's horses.Black: That's one part of derivatives. There are many different kinds of derivatives. But this is not $7 trillion; this is $700 trillion.Jay: Yes. I'm sorry. I mispoke. Yeah, $700 trillion.SNIPBlack: But you're quite right. The substance is: the banks have become the parasite. Or to go back to my earlier metaphor, they are the scorpion still. And they sting not just workers; they sting an enormous part of the real economy, what's sometimes called Main Street.
But derivatives are not the only story here folks
Not by a long shot
The lie of Wall Street – is compounded by this.
Margin borrowing implies buying investments with money borrowed from a bank or broker, using part of your portfolio as collateral backing the borrowed money.
And why is that important?
Because of the dangers caused by the derivatives - you have this.
The New York Stock Exchange is showing something that concerns some analysts. The margin debt at the NYSE grew for the 9th month running, and hit another record high in April.Investors have now borrowed on margin some $384.37-B. This is about 1.3% higher than the $379.52-B in March, but it is almost 29% higher on a Y-Y basis, Vs the $298.50-B from April 2012.The prior margin borrowing high was $381.37-B, in July 2007.