Tuesday, September 29, 2009

Have We Learned Anything?

Lots of interesting information in the Office of the Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter of 2009. Regarding Derivatives... risk is highly concentrated and banks are making a lot of money from them. In other words, not much has changed.

Most derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. Five large commercial banks represent 97% of the total banking industry notional amounts and 88% of industry net current credit exposure.
The top five exposures (in order) are held at JP Morgan, Goldman Sachs, Bank of America, Citibank, and Wells Fargo. Looking at Table 4, we can compare the credit equivalent exposure of those banks' derivatives (equal to the netted current credit exposure and potential future exposure of those contracts) to the risk based capital of those banks (tier one plus tier two capital).

After the financial system blew up the global economy, the key question is why isn't the use and concentration by these large banks being reduced (we know how well the banks' controls worked out last year)?

I think this quote from Satyajit Das (hat tip Paul Kedrosky) sums it up nicely:
Warren Buffet once described bankers in the following terms: “Wall Street never voluntarily abandons a highly profitable field. Years ago… a fellow down on Wall Street…was talking about the evils of drugs…he ranted on for 15 or 20 minutes to a small crowd…then…he said: “Do you have any questions?” One bright investment banking type said to him: “yeah, who makes the needles?

Derivatives and debt are the needles of finance and bankers will continue to supply them to all the Dr. Jekyll’s and Mr. Hyde’s alike for the foreseeable future as long as there is a buck to be made in the trade.
Source: Treasury

1 comment:

  1. Fascinating and thanks.Das btw is one of Jon Markman's favorite insider sources on derivatives and a great expert. You might find these two longish posts complementary as they address the growth and impact of debt (using the Flow of Funds recent reports)and the chances for regulatory reform. In particular Summer's speech as well David Wessel's discussion (pointers provided) are worth your time imho.