5 Banks Hold US$ 250 Trillion in Derivative Exposure

Amazing report from the US Office Of The Comptroller's Quarterly Report on Bank Trading & Derivative Trading in the second quarter of 2011.

It is showing that 5 major US banks hold 96% of US$ 250 trillion in gross notional amount of derivative contracts outstanding. The top 25 commercial banks hold US$ 333 trillion in derivative exposure.

So what, you say, does this mean to me and what are credit derivatives?

Credit derivatives are like insurance. If you hold debt of a given company, say company bonds you have bought, and you want to insure that you are paid, you buy a credit derivative to insure your investment in the company goes if it goes bankrupt. You bought a credit derivative and you still get your money. But Credit Derivatives are not like regular insurance, with regular insurance you buy fire, flood, etc. coverage to pay for property that you own and have a financial risk. With credit derivatives, you have the ability to buy insurance on any house and collect money on that property without ownership of that property. You are essentially gambling on that house burning down and actually are betting that the said house will burn down.

Some people bought credit derivatives to protect their bonds or mortgage backed securities, or any other time of security to protect their interests. But many people have bought credit derivatives by people who were NOT purchasing insurance to protect their insurable assets, but wanted to gamble that certain companies would fail. And an even more sinister plot could take place where people bought credit derivatives, not just to gamble, but because they had inside info on a certain company, that was shaky or they had the ability to push a shaky company to fail and collect
on that companies failure.

Here is where the problem gets really sticky. Credit derivatives are unregulated, thank you Congress, and because of this we have no real idea of  what the true market is. But from the story above, we can see it is more than US$ 333 trillion which is more than 22 times the size of the USA's GDP.

We used to have Glass-Steagall and other security regulations that came out of the depression to protect us. That is all gone now, regulated away by greedy lobbyists and politicians looking for a cash payout.

So we are seeing the bigger banks getting bigger with their risk exposure reaching unheard of highs. To big to fail? I doubt it. But when these trees in the worlds forest of financials crash to the ground, they will burn and so will you, because we have nothing left to bail them out.

You can read more about this at Zero Hedge here.....