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We're also the biggest debtor nation in the world, and our
Posted on: July 20, 2016 at 19:06:12 CT
JeffB MU
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financial institutions have gone off the deep end, just like the biggest financial institutions the world over.
They've been making derivative bets that dwarf the world GDP...
http://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp
The derivatives market is, in a word, gigantic, often estimated at more that $1.2 quadrillion. Some market analysts estimate the derivatives market at more than 10 times the size of the total world gross domestic product, or GDP. The reason the derivatives market is so large is because there are numerous derivatives available on virtually every possible type of investment asset, including equities, commodities, bonds and foreign currency exchange. However, some analysts challenge estimates of the size of the derivatives market as vastly overstated. ...
They go on to assert that the value is lower because many of the derivative bets offset each other. Banks might have big bets on the price of oil going down but have others that would be insurance against the price going up, or against prices in general going up (eg. the dollar dropping in value).
But thinking you can just cancel out some of the bets that way is naive at best. There is significant counterparty risk involved, as we saw in the last financial crisis. If the feds had let AIG go down it would have taken down Goldman Sachs and many others as well. They all have many of these derivative bets (or investments if you prefer) and they are mostly unregulated. Some call them dark pools. If one set of bets crashes and would bankrupt your bank, but you have "insurance" in the form of bets in the opposite direction with some other financial institution, it won't do you any good if that other financial institution cannot pay off on those derivatives to your bank.
Many of these banks are exceptionally highly levered with very little margin for error. If one goes down, or some country defaults on their bonds it could start a domino effect toppling many of them... maybe all of them.
They've been making derivative bets that dwarf the world GDP...
http://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp
The derivatives market is, in a word, gigantic, often estimated at more that $1.2 quadrillion. Some market analysts estimate the derivatives market at more than 10 times the size of the total world gross domestic product, or GDP. The reason the derivatives market is so large is because there are numerous derivatives available on virtually every possible type of investment asset, including equities, commodities, bonds and foreign currency exchange. However, some analysts challenge estimates of the size of the derivatives market as vastly overstated. ...
They go on to assert that the value is lower because many of the derivative bets offset each other. Banks might have big bets on the price of oil going down but have others that would be insurance against the price going up, or against prices in general going up (eg. the dollar dropping in value).
But thinking you can just cancel out some of the bets that way is naive at best. There is significant counterparty risk involved, as we saw in the last financial crisis. If the feds had let AIG go down it would have taken down Goldman Sachs and many others as well. They all have many of these derivative bets (or investments if you prefer) and they are mostly unregulated. Some call them dark pools. If one set of bets crashes and would bankrupt your bank, but you have "insurance" in the form of bets in the opposite direction with some other financial institution, it won't do you any good if that other financial institution cannot pay off on those derivatives to your bank.
Many of these banks are exceptionally highly levered with very little margin for error. If one goes down, or some country defaults on their bonds it could start a domino effect toppling many of them... maybe all of them.
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We're also the biggest debtor nation in the world, and our - JeffB MU - 7/20 19:06:12