Derivatives Bombs

Actually the article you linked to reads:

"The total value of derivatives at commercial banks jumped 14 percent to $200.4 trillion..."

So amount doesn't include the amount held by investment banks.

FYI--according to the CIA factbook the total GLOBAL GDP for 2008 was about 70 trillion.

[In my initial post I'd linked to Dow Jones newswire -- which is where my quote is from -- but found that while I could get the article it popped up in the link as a subscription. Anyhow, the phrase "notional value" is key. It's not like there's "X" trillions of dollars invested, it's that nominally the instruments cover that quantity of dollars, but even then it's not clear how or to what binding extent coverage may apply. Perhaps it would be helpful if financial news reports listed both the "nominal value" total and the total of the actual payments for those instruments. Moreover, almost all those contracts net cancel each other out, but when the totals range gets up into the hundreds of trillions of dollars the part that isn't canceled out becomes substantial. Indirectly related to all this I highly recommend last Friday's Bill Moyer's interview with William K. Black. g.]

Seconded on the Bill Moyers interview. Not to be missed.

Also find all you can from David Cay Johnston.

The Moyers show highlights again the complete lack of outrage in any demonstrable form on this issue and the astonishment by Black that Congress has been gulled by the barons of banking. Mr. Black calls these individuals "banksters".

To the first question, the best take I've read comes from Simon Johnson, his article in the Atlantic, "The Quiet Coup."

On another note, today, while making the rounds for the TV pundits, Tim Geithner was asked three times by Bob Schieffer if he could make the banks participate in his program to get their toxic assets off their balance sheets. He would not answer the simple question directly. Of course, the reason is that if they were sold to anyone other than another bank, the truth of their real worth would get out. It appears that the administration is not willing or ready to play hardball with the banks.

Also, I saw an interview by the New York State Insurance Commissioner, Eric Dinallo — I'm not sure that's the correct name. His take was that the financial crisis is not a liquidity problem, but an insurance one. All these securitized sub-prime packages were insured for pennies, and without adequate capital by the Insurance companies, like AIG. The question is, who owns these policies? For example, who got paid when Lehman went down? My guess is, the administration might view that the farther away we are from massive bankruptcies throughout the economy the chances of these insurance bets paying off diminishes.

Derivatives were/are essentially bets placed on financial instruments, so much so that the legislation passed in Congress to remove restrictions on derivatives included verbiage that blocked the states from being able to regulate them under their gaming agencies. Derivatives, otherwise known as credit-default swaps or CDS's, were ostensibly insurance on things like CDO's to be used in case of defaults. What companies like AIG were doing was basically playing the role of the sportsbook because they weren't only "insuring" the person or company holding the CDO, but anyone could take out "insurance" on a CDO. Let me stress this point, because I didn't understand it until recently, but this is what really caused the mess were in. ANYONE COULD TAKE OUT "INSURANCE" ON A CDO, THEY DIDN'T HAVE TO ACTUALLY OWN OR OWE ON THE CDO. Example: A bank sells a CDO worth $1 million to some pension fund. The bank then goes to AIG to cover their ass in the case that everyone paying into the debt in the CDO defaults. They pay their premium for their "insurance". At the same time, 10 other companies take out "insurance" on this same CDO. All of a sudden everyone starts defaulting and it's time for AIG to pay on the policy, but instead of owing $1 million, they now owe $11 million. On top of this, AIG never had the money to cover the $1 million, let alone the extra $10 million because the legislation said that you didn't need to have money backing up what you sold. This is what caused the intensification of the housing crisis into a full on catastrophe. I hope I explained this right, and I hope someone can please point out any mistakes or inconsistencies in my explanation.

By the way, love the show George. I would really appreciate having Mr. Kolko on again. I really think the world could use more of Mr. Kolko's wisdom.

George, I would love to see you interview William Black.

[He's agreed — by coincidence I just heard back from him late this evening — but is particularly busy at the moment so it won't be for at least a couple weeks. g.]

I'd also like to hear Ambrose Evans-Pritchard back on the show.

[That may be possible. g.]