Still reading through the below article.
How To Bring The Cancerous Derivatives Market Under Control
by Christopher White
Printed in the American Almanac,
September 6, 1993http://american_almanac.tripod.com/derivcw.htm"...Those who do know what derivatives are, will, if asked, for the most part regurgitate what the bankers and others have told them to say: that derivatives are a necessary part of what they call the ``financial industry ... they hedge risk, ... they make the markets more efficient,'' and so forth...
....Purchases of stocks and bonds would once have been seen as investment for the long haul. Trade in commodities would have been seen not as investment, but as purchases and sales.
With what are now called derivatives, we move from investment, and purchases and sales of hard commodities, to speculating on the future price or yield performance of what were once investments, and relatively simple, economically necessary transactions. It would be like going to the horse races to bet, not on the race, but on the size of the pot. Who would care about what's involved with getting the runners to the starting gate?....The so-called Over-The-Counter instruments account for about half of the total derivatives outstanding in the U.S.A., And they are almost exclusively issued by the large money center banks. Of roughly $6 trillion at the end of 1991, Citibank, accounted for 25 percent of the total, and J.P. Morgan and Bankers' Trust the next largest chunk. That is $1.5 trillion for Citibank alone. The banks insist that this is not only safe, it is a socially useful and valuable service which they are providing to their clients. ``Why, you must be naive if you do not know that. Let me tell you all about it.'' That is the approach which they adopt..."
UPDATE: BANK DERIVATIVES EXPOSURE
February 2000http://contraryinvestor.com/moarchive2000/mo020300.htm"Update Time...In fact, quite timely, really. Surely with the volatility in the bond market these days, it's high time we checked in on those wacky money center banks and their highly flammable derivatives exposure.
All sarcasm aside, the reason we continue to update you each quarter on these numbers is that derivatives are part of "what's different this time". In 1990, the total notional value of derivatives outstanding "off" the balance sheet of the commercial banking system in the U.S. was $6.2 trillion. As of 3Q 1999 (the latest numbers released), the value has skyrocketed to over $35 trillion. Needless to say, the number is quite significant. See what we mean?
....Enough of the optimistic, lighthearted banter. A second, and equally important, reason we continue to focus in on derivatives is that these instruments have become so widespread in use that derivatives themselves can have a significant impact on price volatility in the cash markets that underpin the very values on which the derivatives contracts are based.
The last point regarding the derivatives markets that truly gives us pause is how little is spoken about them on Wall Street (despite every major trading firm heavily relying on their use). The striking characteristic of derivatives use is the sheer lack of mandated disclosure. There isn't even an attempt at some type of simplified analysis. Every time the SEC/FASB seems near requiring that firm's account for their derivatives activities in their SEC statements, the proposal mysteriously seems to be scuttled at the last minute. Every time. It's like the great mystery of the margin requirement. Just don't bring it up and it will go away. If you simply ignore it, it's not there. After all, it's a new era. Certain things just aren't discussed.......There you have it. Another quarter under the belt for the Derivatives Report card. As we have said many a time, the more money and credit we have created in the entire US financial system, the demand for derivatives increases. The more volatility in the financial markets, the more the demand for derivatives increases. It truly is different this time.
Maybe financial derivatives will remain peaceful and quiet for decades to come, but so far they have only really been tested in the halls of academia or in computer models. We have not experienced a financial market crisis in this country throughout this decade of explosive derivatives growth. We may have come close with LTCM, but that experience was contained as around the toxic area an isolation perimeter of credit and liquidity was quickly and efficiently constructed. What is untested is coincident failures on the part of multiple institutions. Let's hope that day never arrives. These numbers say it won't result in a graceful resolution." March 2008 updated report on derivatives
http://www.contraryinvestor.com/2008archives/momar08.htm"...What is obviously apparent, we believe very meaningful, and perhaps little understood in the greater investment community, is the growth in magnitude over the 2004 to present period in the CDS market. From about $1 trillion in notional value outstanding at year-end 2003, we're looking at just shy of $14 trillion in notional exposure as of September 2007 for the US banking system singularly. A near fourteen-fold increase in three and one half years. We ask you, do you see this fact being discussed or at least being mentioned on the "front page", if you will? Do you even see this mentioned in discussions or articles regarding what led up to the current mortgage credit debacle? Do you see Senators and other assorted politicians grandstanding in their demands for investigations about how this could have come to pass? We need to at least think through potential investment consequences if indeed credit default swaps become the next credit market shoe to hit the floor in some manner. Why? Because at the periphery it’s already starting to happen.Very quickly, who are the major players among the US banking system elite? The usual suspects, who else? Here's how it shakes out at present:..."
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