Global Exposure in Financial Derivatives Surpasses One Quadrillion Dollars (Update)
When I posted the lowest responsibly sourced figure for global exposure in financial derivatives, $592 trillion, published May 19, 2009 by the Bank of International Settlements, all sorts of hoodoo apologists for Obama, Geithner, Summers, and Goldman Sachs crawled out the woodwork to claim that this figure is ridiculously exaggerated, there's really nothing to worry about, it's just a few bucks, and so on.
All the same hoodoos unfailingly claimed that it's stupid to consider worst-case scenarios when you calculate risk, because...
They have learned absolutely nothing from the ongoing financial meltdown which annihilated some of the oldest and largest investment banks in the world, and plunged the global economy into an almost vertical downturn.
So, since even the lowest reasonable figure for global exposure in financial derivatives attracts so much obfuscation and denial, I might as well be hanged for a sheep as a lamb, and offer up a much larger and probably more accurate estimate, which also includes the huge market in off-the-books derivatives, instead of only considering the OTC market upon which the previous calculation by the Bank of International Settlements was based, and that estimate is...
That's more than one million piles of money, with a billion dollars in each pile.
In previous posts I also considered the total exposure of the federal government from various programs designed to bail out the banking establishment, $23.7 trillion, which was calculated by Special Treasury Department Inspector General Neil Barofsky, one of the very few watchdogs charged with overseeing Geithner/Paulson/Summer's infinite generosity to the banks, and why should we believe a mere inspector general, when we can rely on unsourced estimates from right-wing hoodoos?
So in the interests of complete fairness, balance, impartiality, and pandering to ignorant hoodoos who insist on nothing but sunshine in the news, I am also offering up a much smaller figure for the total bailout exposure of the federal government, extracted from the most reputable of the many sunshine blogs selling all-is-well scenarios all over the internet, and that low-ball estimate for federal exposure is... $13.9 trillion.
Added to those figures are $4.4 trillion in other possible Treasury programs, and $2.3 trillion in F.D.I.C. guarantees of deposits. The final $7.2 trillion comes mostly from various mortgage-related programs.
"Possible Treasury programs!"
"Various mortgage-related programs!"
And that's really just about all anybody knows about them, except for Tim Geithner, Larry Summers, and Goldman Sachs, because the US Treasury and the Federal Reserve don't have to tell you anything, and they don't even have to disclose much to inspectors-general like Neil Barofsky, who says...
Treasury also should report the values of its investments in banks and other financial institutions, disclose the identity of borrowers under a nonrecourse loan program and disclose trading activity under a public-private investment fund.
Treasury should report the values of its investments in banks!
What a silly idea!
Special Treasury Department Inspector General Neil Barofsky is obviously insane, and I'm only posting this article to give a bunch of right-wing hoodoos yet another chance to correct his absurd misinformation.
Most of the media and population are just as much in denial about the dangers of financial derivatives now as they were before the ongoing meltdown began, and I don't deny that it's a horribly unpleasant subject, but instead of subscribing to bullshit apologetics by friends of Obama/Geithner/Paulson/Summers, it's much more elegant to distract yourself with something beautiful like this...
http://www.youtube.com/watch?v=_dfG6BM75uY
July 21, 2009 4:07 PM | Reply | Permalink
Thanks for this RR! (I think?) Definitely rec'd!
Most incredibly, I've recently heard a number of Wall Street bankers complain that they are deeply worried the government will try to improve the regulation of the financial industry. What a concept!
Indeed, CitiBank and others are attempting to repackage the mortgage based securities (formerly known as "toxic assets) to once again assign them triple A assurances and let everyone get back into the game just like the old days. Hell, there are bonuses to be "earned" after all! And far be it from the rest of us to stand in the way of pigs heading for the trough.
This expressed concern includes a warning that the earnings potential of Wall Street will be severely limited if the government tries to limit the Street's ability to design and sell these creative instruments that few understand.
My sense is that if the bookie on Main Street or the casino on the Strip would be precluded from selling these kinds of bets, then they probably aren't appropriate for Wall Street, either. And I can only imagine what kind of reception MGM Grand would get from the Gambling Commission if the casino proposed putting on the boards bets for/against my neighbor's ability to pay his home mortgage.
But then, I'm not a member of the club that includes Paulson, Behrnanke, Geithner, Rubin, and the rest of the insiders who do so well in this Wall Street Casino.
July 22, 2009 2:32 PM | Reply | Permalink
Oh, and Lisa Ono ... how beautiful is that, eh? Great video!
July 22, 2009 2:34 PM | Reply | Permalink
The way the large number comes about is as follows:
Suppose that one day AIG sells a CDS on $100 million of GE capital bonds to JPM. Next day JPM sells a CDS on $100 million of GE Capital bonds to GS. Next day GS sells a CDS on $100 millon of GE Capital bonds to Barclays.
This becomes $300 million of notional value of derivatives outstanding. Even though due to the offsetting transactions only $100 million is really outstandin in notional value.
And the actual value at risk is much smaller.
In other words, the $1,400 trillion (if it is actually that big) is equivalant to the kind of number that you'd get if you added up the dollar value of stock trades on all the world's stock exchanges for several years.
July 21, 2009 5:47 PM | Reply | Permalink
Isn't it surprising that financial derivatives are so simple that "Merrill" can explain away almost all the risk in one brief comment?
Meanwhile, back in reality, nobody can estimate the catastrophic risk attached to financial derivatives any more accurately than they could estimate it in June 2008, immediately before a mysterious chain reaction gutted the American economy.
July 21, 2009 6:21 PM | Reply | Permalink
In the blog I linked from the Times, the blogger is obviously determined to undermine the inspector-general's report, and supplies his own sensational paraphrase of Barofsky's language...
But anyone who runs a simple search on the report itself will discover that it does not contain that language, and in spite of tremendous pressure from the media and Congressional Democrats, what Mr. Barofsky actually said was...
This is the real contractual exposure of the federal government, and the question whether it's possible that every single penny of it could be lost is a separate issue, which Barofsky did not address.
So does notional exposure really matter, since the full amount is virtually never lost down to the last penny?
Yes.
It matters because nobody knows exactly how much of the notional exposure the federal government may eventually have to cover, and that's exactly the sort of uncertainty about monstrously complicated, interlocking financial derivatives which produced the ongoing financial meltdown.
July 21, 2009 10:04 PM | Reply | Permalink
Welcome to the Age of Change!
I bet someone will be incensed that this seems to suggest Obama isn't as TRANSPARENT and CHARTING a different course from Bush as he should be.
July 22, 2009 3:43 AM | Reply | Permalink
Oh, qwerty! Are you suggesting Obama might be owned by the same interests that have owned the Administrations and the Congress that has preceded him these lo so many years?
Say it isn't so!
There will be no significant reform of Wall Street. We will not achieve significant health care reform, although we will probably gain a strengthened health insurance program. We will not achieve energy independence nor will we make headway against global warming.
We will not make significant progress on any of these important issues unless we somehow first realize actual campaign finance reform that places ownership of this government back in the hands of WE the People.
July 22, 2009 2:43 PM | Reply | Permalink
SleepinJ, it would take an extraordinarily courageous politician to stand up to the Oligarchy and turn the country around. I once thought Obama just *might* be The One. The other one sure wasn't. However, when he unveiled his cabinet and staffed the crucial departments with the "old hands", I knew he is already bought and paid for.
July 24, 2009 8:33 AM | Reply | Permalink