Derivatives Bubble Over Global Economy
Reports state that according to the Bank for International Settlements, the total notional value of derivatives contracts around the world has ballooned to an astounding 710 trillion dollars ($710,000,000,000,000), with other estimates putting the grand total at well over a quadrillion (a thousand trillion) dollars. Michael Snyder, writing in the DCClothesline.com, states that the global derivatives bubble is now 20 percent bigger than it was just before the last great financial crisis struck in 2008 and concludes that: “A financial crisis far greater than what we experienced in 2008 is coming, and it is going to shock the world.”
So what exactly is a derivative? One definition offered is that a derivative is simply a contract between two parties whose value is determined by changes in the value of an underlying asset. Those assets could be bonds, equities, commodities or currencies. The majority of contracts are traded over the counter, where details about pricing, risk measurement and collateral, if any, are not available to the public.
Based on this definition, Snyder explains: “In other words, a derivative does not have any intrinsic value. It is essentially a side bet. Most commonly, derivative contracts have to do with the movement of interest rates. But there are many, many other kinds of derivatives as well. People are betting on just about anything and everything that you can imagine, and Wall Street has been transformed into the largest casino in the history of the planet.”
An perspective of how just how mind –boggling the size of this 710 trillion –dollar derivatives bubble is, can be illustrated based on projections that the U.S. GDP will be in the neighborhood of around 17 trillion dollars for 2014. Although insignificant in amount relative to the total notional value of derivatives contracts globally, 17 trillion dollars still represents a major and crippling debt crisis for the United States.
Snyder states that the United States has contributed to this imminent global derivatives crisis with some of the following actions:
1. U.S leaders have allowed the derivatives bubble and the big Wall Street banks to get larger than ever. Snyder explains: “They are collectively 37 percent larger than they were just prior to the last recession. “Too big to fail” is a far more massive problem than it was the last time around, and at some point this derivatives bubble is going to burst and start taking those banks down. When that day arrives, we are going to be facing a crisis that is going to make 2008 look like a Sunday picnic.”
So what exactly is a derivative? One definition offered is that a derivative is simply a contract between two parties whose value is determined by changes in the value of an underlying asset. Those assets could be bonds, equities, commodities or currencies. The majority of contracts are traded over the counter, where details about pricing, risk measurement and collateral, if any, are not available to the public.
Based on this definition, Snyder explains: “In other words, a derivative does not have any intrinsic value. It is essentially a side bet. Most commonly, derivative contracts have to do with the movement of interest rates. But there are many, many other kinds of derivatives as well. People are betting on just about anything and everything that you can imagine, and Wall Street has been transformed into the largest casino in the history of the planet.”
An perspective of how just how mind –boggling the size of this 710 trillion –dollar derivatives bubble is, can be illustrated based on projections that the U.S. GDP will be in the neighborhood of around 17 trillion dollars for 2014. Although insignificant in amount relative to the total notional value of derivatives contracts globally, 17 trillion dollars still represents a major and crippling debt crisis for the United States.
Snyder states that the United States has contributed to this imminent global derivatives crisis with some of the following actions:
1. U.S leaders have allowed the derivatives bubble and the big Wall Street banks to get larger than ever. Snyder explains: “They are collectively 37 percent larger than they were just prior to the last recession. “Too big to fail” is a far more massive problem than it was the last time around, and at some point this derivatives bubble is going to burst and start taking those banks down. When that day arrives, we are going to be facing a crisis that is going to make 2008 look like a Sunday picnic.”
2. Goldman Sachs has been increasing its derivatives volumes since the crisis, and it had a portfolio of about $48 trillion at the end of 2013 and is reportedly planning to sell more derivatives to clients. Citibank, too, has been increasing its derivatives portfolio which has risen by over 65 percent since the crisis to $62 trillion. In percentage terms, this derivatives portfolio growth is the highest of any of the four banks: JP Morgan, Citibank, Goldman Sachs and Bank of America. Collectively they are responsible for about 218 trillion dollars of derivative products, compared to a paltry $4.8million estimated value of their combined assets.
3. Virtually none of the underlying problems that caused the last financial crisis have been fixed: the problems and the financial bubbles have just kept on growing. According to official government numbers, the top 25 banks in the United States now have a grand total of more than 236 trillion dollars of exposure to derivatives.
Snyder decries the fact that most Americans are blissfully ignorant of imminent disaster, trusting that their leaders are able and willing to sort out the mess, and lulled into complacency by “the bubble of false stability that we have been enjoying for the last couple of years.”
Is there any way to avert this catastrophe? Snyder infers that there may be little hope left other than a stay of execution, a temporary reprieve: “If the stock market keeps going up, interest rates stay fairly stable and the global economy does not experience a major downturn, this bubble will probably not burst for a while. But if there is a major shock to the system, we could easily experience a major derivatives crisis very rapidly and several of those banks could fail simultaneously.”
With the five largest banks reported to account for 42 percent of all loans in the entire United States, and the six largest banks controlling 67 percent of all banking assets, they would certainly bring down the whole country with them.
It’s worth remembering however that it’s not just a U.S problem either: German banking giant Deutsche Bank is said to have more than 75 trillion dollars of exposure to derivatives, which is more than any single U.S. bank has. Matters are not helped by indications that the global community seems to equally hapless in this respect.
A recent report from The International Financing Review in an article titled ‘Derivatives: Work needed to spot next crisis’ highlighted some grave concerns that were raised at the Centre for Economic Policy Studies in Brussels (excerpted below):
•There remains widespread concern within the regulatory community over their ability to spot future blow-ups due to cross-border fragmentation and the sheer volume of data being collected. According to Uzma Wahhab, member of the secretariat at the Financial Stability Board, “Regulators are concerned they may not know how to predict the next crisis. I’m not sure anyone is in the position to say they have the confidence… to know specifically what they’re looking for.”
• Trade reporting is seen as a vital plank of the G20 reforms to help regulators identify AIG-like scenarios, but the practical implementation of the mandate has left many participants disillusioned. Rather than designating a single trade reporting utility to which global regulators enjoy unfettered access, around 20 trade repositories have sprung up worldwide, leading to issues around data fragmentation and potential duplication.
• Discrepancies in privacy laws and financial regulation across jurisdictions have caused further headaches. For instance, the European Market Infrastructure Regulation requires two-sided trade reporting for both futures and OTC transactions, while the US Dodd-Frank Act holds no such provision. The overall result is a complex web of reporting entities and venues, which leaves substantial room for overlap of data, or for it to slip through the cracks altogether.
Not a pretty picture. What hope is there to forestall any doomsday scenarios, when even global experts seem to be grasping at straws and seem more reminiscent of the language-confused builders of the historic Tower of Babel rather than capable solution providers who are in control?
No wonder Snyder commented: It is a financial bubble far larger than anything the world has ever seen, and when it finally bursts it is going to be “a complete and utter nightmare for the financial system of the planet.”
Snyder decries the fact that most Americans are blissfully ignorant of imminent disaster, trusting that their leaders are able and willing to sort out the mess, and lulled into complacency by “the bubble of false stability that we have been enjoying for the last couple of years.”
Is there any way to avert this catastrophe? Snyder infers that there may be little hope left other than a stay of execution, a temporary reprieve: “If the stock market keeps going up, interest rates stay fairly stable and the global economy does not experience a major downturn, this bubble will probably not burst for a while. But if there is a major shock to the system, we could easily experience a major derivatives crisis very rapidly and several of those banks could fail simultaneously.”
With the five largest banks reported to account for 42 percent of all loans in the entire United States, and the six largest banks controlling 67 percent of all banking assets, they would certainly bring down the whole country with them.
It’s worth remembering however that it’s not just a U.S problem either: German banking giant Deutsche Bank is said to have more than 75 trillion dollars of exposure to derivatives, which is more than any single U.S. bank has. Matters are not helped by indications that the global community seems to equally hapless in this respect.
A recent report from The International Financing Review in an article titled ‘Derivatives: Work needed to spot next crisis’ highlighted some grave concerns that were raised at the Centre for Economic Policy Studies in Brussels (excerpted below):
•There remains widespread concern within the regulatory community over their ability to spot future blow-ups due to cross-border fragmentation and the sheer volume of data being collected. According to Uzma Wahhab, member of the secretariat at the Financial Stability Board, “Regulators are concerned they may not know how to predict the next crisis. I’m not sure anyone is in the position to say they have the confidence… to know specifically what they’re looking for.”
• Trade reporting is seen as a vital plank of the G20 reforms to help regulators identify AIG-like scenarios, but the practical implementation of the mandate has left many participants disillusioned. Rather than designating a single trade reporting utility to which global regulators enjoy unfettered access, around 20 trade repositories have sprung up worldwide, leading to issues around data fragmentation and potential duplication.
• Discrepancies in privacy laws and financial regulation across jurisdictions have caused further headaches. For instance, the European Market Infrastructure Regulation requires two-sided trade reporting for both futures and OTC transactions, while the US Dodd-Frank Act holds no such provision. The overall result is a complex web of reporting entities and venues, which leaves substantial room for overlap of data, or for it to slip through the cracks altogether.
Not a pretty picture. What hope is there to forestall any doomsday scenarios, when even global experts seem to be grasping at straws and seem more reminiscent of the language-confused builders of the historic Tower of Babel rather than capable solution providers who are in control?
No wonder Snyder commented: It is a financial bubble far larger than anything the world has ever seen, and when it finally bursts it is going to be “a complete and utter nightmare for the financial system of the planet.”
Read more at http://www.prophecynewswatch.com/2014/June03/035.html#SlZuwSMxf6jiTdCP.99
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