In case you have not heard the news, China has announced that it will be instructing its state-owned enterprises to potentially default on their derivatives contracts. As I have written extensively in the past, the derivatives market is a massive time bomb just waiting to go off. China's latest move may be the match that lights the fuse.
All told, US Commercial banks own $202 trillion in derivatives in notional value. To put that number into perspective, it's roughly four times the global GDP. And 96% of this exposure sits on five banks' balance sheets. I've shown the below chart before, but it's worth re-visiting (chart is denominated in TRILLIONS).
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Now consider that, combined, the top five banks (JP Morgan, Goldman, BofA, Citi, and HSBC) have roughly $700 billion in equity.
And that represents only 1% of the outstanding derivatives that are actually "at risk." Given the over-leveraged, stupid plays Wall Street made on mortgage-backed securities and credit default swaps (both investments that had SOME degree of oversight, even if it were paltry), as well as the fact that derivatives are COMPLETELY unregulated, I would argue it's quite possible that as much as 5% or even 10% of the derivatives outstanding could be "at risk."
In that case, we're talking about $10-$20 trillion in "at risk" capital. If even 10% of these bets go wrong, you've wiped out ALL the equity at all five banks AND THEN SOME.
LINK HERE
China never puts their money where their mouth is just like all the talks for replacing the US$ and then what nada nill nothing.
ReplyDeleteDo you believe Chinese are stupid. If they make that move the entire financial system will be in trouble and so would they. As much as they don't want to admit it, they depend on the US as much as the US depends on china to hold the entire economic system.
You decide do you think Chinese will default?
Story is linked to a "gold" trader site. Need a stronger source. IMO.
ReplyDelete