Next bubble: $600 trillion?

Quote from Martinghoul:

I have already done it in another thread, maybe even two threads. Here's one:
http://www.elitetrader.com/vb/showt...0&perpage=6&highlight=eurodollar&pagenumber=1
Here's another:
http://www.elitetrader.com/vb/showt...393&perpage=6&highlight=notional&pagenumber=1
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ok i read the other posts. i undestand that the absolute value of total outstanding derivatives market might be less bc of the fact that you net out positions and what have you. but this fact itself means two things.

No one truly knows the expsoure of the current banking system. While positions are netted off, it takes one default to change the overall exposure massively. There is lack of tanseprancy here.

I think by arguing against such articles you are missing the overall point of them, that is that the banking system is massively leverage and are not truly equipped to handle of massive change to market valuation that result in a massive default.

it brings me back to my original point, to argue NPV is useless when lets say you become fully exposed to the counterparty on the notional value of the oustanding derivative when that counterparty defaults. especially since this notional amount is well above the paid in capital that the banks are leveraging against.

a systemic shock can be devstating..


what would u say is a measure of expsoure if u dont want to use notional values
 
With all due respect, I am not missing the point of these articles. As I have said repeatedly in the other threads, I never argued with the statement that the banking system is leveraged.

However, you are missing my point. I am saying that one should not accept estimates of leverage based on gross notionals made by dishonest, lazy journalists with ulterior motives. These estimates suffer from a variety of problems that I have gone to great lengths to illustrate.

Moreover, to address one of your specific points. Your statement that I would be exposed to full notional value of a derivative if my counterparty defaults is false for all interest rate vanilla derivatives traded OTC and regulated by ISDA (with or without CSA). At absolute worst, my losses will equal to the NPV of this derivative, but not the notional. If, as I suspect, the majority of the $600trn notional comes from interest rate derivatives, such as swaps, what would your conclusion be? Moreover, I should mention that your statement is also clearly false for exchange-traded IR derivatives, such as Eurodollars (which are included in the tally). My liability on a position in a single Eurodollar contract would be equal to the notional value of this contract only in the case of the reference rate physically moving 100% (I don't mean doubling or halving; I mean moving by 10000 basis points).

Finally, let me say it again, as I have said in the other threads. There are better estimates of leverage represented by derivatives done by more hard-working and conscientious journalists (there was a Slate article that did a pretty good job, if memory serves). All I am trying to do is make sure that people actually stop listening to all the bullsh1t written out there by every Tom, Dick and Harry.
 
Quote from Martinghoul:

With all due respect, I am not missing the point of these articles. As I have said repeatedly in the other threads, I never argued with the statement that the banking system is leveraged.

However, you are missing my point. I am saying that one should not accept estimates of leverage based on gross notionals made by dishonest, lazy journalists with ulterior motives. These estimates suffer from a variety of problems that I have gone to great lengths to illustrate.

Moreover, to address one of your specific points. Your statement that I would be exposed to full notional value of a derivative if my counterparty defaults is false for all interest rate vanilla derivatives traded OTC and regulated by ISDA (with or without CSA). At absolute worst, my losses will equal to the NPV of this derivative, but not the notional. If, as I suspect, the majority of the $600trn notional comes from interest rate derivatives, such as swaps, what would your conclusion be? Moreover, I should mention that your statement is also clearly false for exchange-traded IR derivatives, such as Eurodollars (which are included in the tally). My liability on a position in a single Eurodollar contract would be equal to the notional value of this contract only in the case of LIBOR physically moving 100%.

Finally, let me say it again, as I have said in the other threads. There are better estimates of leverage represented by derivatives done by more hard-working and conscientious journalists (there was a Slate article that did a pretty good job, if memory serves). All I am trying to do is make sure that people actually stop listening to all the bullsh1t written out there by every Tom, Dick and Harry.
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no disrespect taken, its an intellectual discussion:

i can agree on your many of your comments. you are right many of these derivatives have such thing such as ISDA agreements that govern liquidation down to NPV. I understand your comments.

while the articles are written by journalist with no credibility, i still choose to extract what the most important facts are:

too much leverage,
too many participants who do not truly understand the risk.


CMBS are derivatives - and it nearly caused a financial collapse in 2008. And while its hard to get real numbers, who is to say that the overall exposure is acutally understated by journlists. it is this lack of transperancy that makes the whole situation risky, which is another point underlying the articles.

another systemic shock willl can cause the system to deleverage more quckly than it took for the market to grow.

i would like to see in the case of default on derivative contract bank A willl see the NPV on tis derivative pricniple from defaulting bank B which is insolvent. that might take years for ank A to get its money if it gets it at all.
 
Quote from Martinghoul:

With all due respect, I am not missing the point of these articles. As I have said repeatedly in the other threads, I never argued with the statement that the banking system is leveraged.

However, you are missing my point. I am saying that one should not accept estimates of leverage based on gross notionals made by dishonest, lazy journalists with ulterior motives. These estimates suffer from a variety of problems that I have gone to great lengths to illustrate.

Moreover, to address one of your specific points. Your statement that I would be exposed to full notional value of a derivative if my counterparty defaults is false for all interest rate vanilla derivatives traded OTC and regulated by ISDA (with or without CSA). At absolute worst, my losses will equal to the NPV of this derivative, but not the notional. If, as I suspect, the majority of the $600trn notional comes from interest rate derivatives, such as swaps, what would your conclusion be? Moreover, I should mention that your statement is also clearly false for exchange-traded IR derivatives, such as Eurodollars (which are included in the tally). My liability on a position in a single Eurodollar contract would be equal to the notional value of this contract only in the case of the reference rate physically moving 100% (I don't mean doubling or halving; I mean moving by 10000 basis points).

Finally, let me say it again, as I have said in the other threads. There are better estimates of leverage represented by derivatives done by more hard-working and conscientious journalists (there was a Slate article that did a pretty good job, if memory serves). All I am trying to do is make sure that people actually stop listening to all the bullsh1t written out there by every Tom, Dick and Harry.
More...


of the 600 trillion in expsoure, i will do more research on whether or not exchange traded products is part of that, it was my understanding that 600 trn was all OTC.

i undersand your points, let me do more research and come back
with hard facts.
 
Quote from ballsofgold:
too many participants who do not truly understand the risk.
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Exactly... So why we willing to listen to useless journalists, who, instead of presenting a meaningful analysis, engage in sensationalist scare-mongering? Does that actually add to our insights into the risk the system contains? In my view, it only serves to muddle the issue and make the lack of understanding worse.
Quote from Ghost of Cutten:
Looks like the next bubble is in hyperbole. I wonder what possible reason journalists could have to encourage that??
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It's always the same thing, innit? One of the Achilles' Heels (sorry for mangling the phrase) of all human endeavor, the agency problem at work.
 
Quote from ballsofgold:

of the 600 trillion in expsoure, i will do more research on whether or not exchange traded products is part of that, it was my understanding that 600 trn was all OTC.

i undersand your points, let me do more research and come back
with hard facts.
More...
The $600trn number that is referenced in the original BIS article is, in fact, OTC. I was referring to one of the estimates that was given in one of the other threads.
 
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