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  • Satayajit Das: A Call for Cooperation Among Key Finance Ministers

    Satyajit Das --global banking expert and author of several books on banking and trading, including Extreme Money: The Masters of the Universe and the Cult of Risk --says that the global economy is in for a lot of pain this year if policymakers don't start working together. In an interview with the Institute for New Economic Thinking 's Robert Johnson , Das argues that we need to return to the approach that finance ministers took in 2008-2009, when the consequence were clear and the need for cooperation was better understood. Here is an excerpt from that interview: Watch the full interview here .

  • Derivative Holding Even More Centralized than in 2008

    If you subscribe to the idea that banks holding a lot of derivatives increases exposure to risk (see WaMu, Bear Stearns), and you hoped that after the events of 2008 that such exposure might be less centralized, then you will surely be disappointed, or concerned, with this chart from Tyler Durden of ZeroHedge : Durden writes: The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return. Durden goes on to say that he does not accept the notion that bilateral netting limits exposure. Read Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb? here . Hat tip to Washington Blog at The Big Picture .

  • Derivatives on the Whiteboard

    If you are still having trouble explaining what in the world credit default swaps are and their role in the near meltdown of the global economy, Paddy Hirsch and the Marketplace Whiteboard are here to help: Derivatives from Marketplace on Vimeo .

  • 'The Warning' from Frontline

    As head of the Commodities Futures Trading Commission , Brooksley Born was concerned about secretive trading practices of derivatives. She wanted more oversight of the derivatives market. But Alan Greenspan, Larry Summers, and others wouldn't listen--and blocked her attempts to put more regulations into the financial system. When 2008 hit, her worst fears started coming true, as she tells Frontline : It was like my worst nightmare coming true. I had had enormous concerns about the over-the-counter derivatives [OTC] market, including credit default swaps, for a number of years. The market was totally opaque; we now call it the dark market. So nobody really knew what was going on in the market. And then it became obvious as Lehman Brothers failed, as AIG [American International Group] suddenly appeared to be on the brink of tremendous defaults and turned out had been a major credit default swap dealer and needed hundreds of billions of dollars to keep it alive, the contagion in the marketplace from those failures brought many, many of our biggest financial services companies to the brink of collapse. And it was very frightening. Born's story is at the center of a new Frontline documentary called The Warning . Here's a preview: You can watch the full program here .

  • Geithner on Derivative Regulation and Executive Pay

    Treasury Secretary Timothy Geithner spoke with Newsweek's Jon Meacham at the National Press Club yesterday. While he said "things have clearly stabilized" with the economy, Geithner is not ready to say the economy has bottomed out. And he told Meacham that he expects recovery to be slow and painful. He also calrified his views on a few key issues: -The nature of this financial crisis: Geithner says, like all economic crises, we have gone from "excessive confidence" to excessive fear. But this recession is much more damaging...as Americans haven't seen anything like it in two generations." And he says the Obama Administration response is "the most aggressive approach to solving a financial crisis than we've seen from any serious country in a very long period of time." -Derivatives: The new regulations the federal government placed on derivatives last week would "have helped" lessen the crisis, "but they would not have been decisive" -Executive pay: Geithner says the government has no plans to cap pay, and he opposes such caps. Instead, he supports setting compensation "standards" to minimize risks. Here is a segment of the interview from Bloomberg : You can watch the full interview at the National Press Club's website .

  • Robert Merton on Derivatives and the Global Economic Crisis

    Robert Merton was rewarded a Nobel Prize in Economics (along with Myron Scholes ) for his work on " Analytical optimal control theory as applied to stochastic and non-stochastic economics ." Or, to put it another way, he and Scholes were recognized for coming up with new ways of determining the value of derivatives. In this lecture at MIT he explains how put options, a type of derivative, are at the center of understanding the root cause of the global economic crisis: Here's a good one page summation of Scholes and Merton's work on derivatives from Nova . (Hat tip to Greg Mankiw and Arnold Kling)