The Bankwatch

Tracking the consumer evolution of financial services

Banks are unwinding derivatives

My next target is to try and highlight the derivatives market, and the status.  The size of the derivative market and in particular the infamous Credit Default Swaps represent a gigantic ponzi scheme of artificial liabilities between banks around the world.

Quietly banks have been unwinding those contracts, which by the way they could only do if there is no substantive asset behind them.  One dollar of debt can be translated into $3 + of derivatives as if by magic.

This from the Financial Times in January that I missed then.  But read on – this is only the beginning (yes that is 30 trillion)

$30,000bn of credit derivatives cancelled

Banks’ efforts to clean up credit default swaps began with modernising and speeding up the processing and confirmation of trades, then moved last year into pruning the large volumes of older, outstanding trades. The $30,000bn excised from the market last year was three times the $10,000bn taken out in 2007.

The first half of last year saw the first decline in outstanding notional volumes, which shrank from $62,300bn to $54,600bn by June 30 2008, according to the International Swaps and Derivatives Association, the main lobby group for the industry.

We are so accustomed to trillions now, so lets place these amounts in perspective.

  • The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007[1] and rose as high as US$57.5 trillion in May 2008[2] before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008 (wikipedia)
  • World GDP $55 trillion (wikipedia)

To place in perspective the derivative markets referenced here were valued more than the entire value of all the stock exchange values in the world or more than all the GDP in the world.  The amount just unwound in this FT story is worth 60% of the entire World GDP.  Such is the insanity of financial markets over the last 20 years.

Written by Colin Henderson

February 27, 2009 at 02:59

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