The U.S. banking industry had its first loss in derivatives trading last year, driven by a fourth- quarter $9 billion rout in credit markets.The MIT brainboxes came up with these algorithms that the big banks bet the house on. Reducing risk actually raised the risk. Doublespeak in action.
U.S. commercial banks lost $836 million in 2008 from trading over-the-counter cash and derivatives contracts, compared with a $5.5 billion gain in 2007, the Office for the Comptroller of the Currency said in a report released today.
“The poor results in 2008 reflect continued turmoil in financial markets, particularly from credit instruments,” according to the report.
Did you know the top five banks [JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Goldman Sachs, and HSBC Corp] accounted for 96 percent of the $200 trillion in derivatives contracts held by U.S. banks, according to the OCC report?
These contracts are effected somewhat counter to what the Government intervention is trying to do. By supporting the banking industry, the value of what banks had to pay to trading partners increased, causing losses to mount.
"The amount the banks would be owed if all derivatives contracts were liquidated, known as the net current credit exposure, soared 84 percent from the third quarter to a record $800 billion, largely because of a drop in interest rates that increased the value of swaps protecting against rate fluctuations. Interest rate derivatives make up 82 percent of all contracts."Trillions in derivatives are out there that are just bets on the interest rates going up or down. Unregulated. Scary. Reducing risk by betting on it. Orwell predicted the future pretty well.
Source: Bloomberg
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