Presenting The $303 Trillion In Derivatives That US Taxpayers Are Now On The Hook For

[KamaAina]

Last edited Fri Dec 12, 2014, 07:30 PM - Edit history (1)

http://www.zerohedge.com/news/2014-12-12/presenting-303-trillion-derivatives-us-taxpayers-are-now-hook

Courtesy of the Cronybus(sic) last minute passage, government was provided a quid-pro-quo $1.1 trillion spending allowance with Wall Street's blessing in exchange for assuring banks that taxpayers would be on the hook for yet another bailout, as a result of the swaps push-out provision, after incorporating explicit Citigroup language that allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp, explicitly putting taxpayers on the hook for losses caused by these contracts. Recall:

Five years after the Wall Street coup of 2008, it appears the U.S. House of Representatives is as bought and paid for as ever. We heard about the Citigroup crafted legislation currently being pushed through Congress back in May when Mother Jones reported on it. Fortunately, they included the following image in their article:

We say explicitly, of course, because taxpayers have always been on the hook implicitly for the next Wall Street meltdown....

Exhibit A: US banks are the proud owners of $303 trillion in derivatives (and spare us the whole "but.. but... net exposure" cluelessness - read here why that is absolutely irrelevant when even one counterpaty fails):

[postulater]

1. It's all Monopoly money to me.

Made up to make rich people rich and control those who choose not to play the game.

[liberal_at_heart]

2. The banks have such a strangle hold on us they are like vampires not afraid of the sunlight.

They are not even pretending not to own our government anymore. They are coming right out and proclaiming their ownership. Writing legislation and calling politicians to put pressure on them to vote for said legislation.

[econoclast]

3. Oh Please.....

303 Trillion is the NOTIONAL amount. That has nothing to to with the actual risk.

Example. Suppose i have a 10 dollar bet on whether or not the Yankees win the World Series. What is my risk? 10 bucks. What is the notional amount of the bet. Its the value of the thing being bet on. In this case the notional amount is the value of the NY Yankees, which including the YES network is about 64 billion dollars!

[liberal_at_heart]

4. I don't care what the actual amount is. The banks wrote the legislation and called

politicians to pressure them into voting for the bill. That makes our democracy null and void. In 2008, the federal reserve made $9 trillion in over night emergency loans to banks so that we wouldn't have more Bear Stearns collapses, not to mention the $700 million bail out that came later. We should not be passing legislation written by the banks allowing them to take the same exact risks and guaranteeing that we will bail them out all over again.

http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/

[econoclast]

5. That 9 trillion dollars is bogus

Same kind of shell game as the 303trillion

[liberal_at_heart]

8. As bogus as the millions of jobs lost? People may not be able to physically touch

9 trillion dollars, but they sure can feel the effect of losing millions of jobs. You can try and make it look pretty if you want. The American people know better. This is a crap bill and nothing you say will make it seem better.

[econoclast]

12. Im not denying there are real risks

But they cook up these crazy numbers to distract your attention from the genuine issues.

[Warren DeMontague]

9. If the actual amount doesn't matter or is wrong, it shouldn't be in the OP.

It's like that bullshit figure of "18 Trillion Stolen From the US Taxpayers" in the bailout, which Ron Paul pulled essentially out of his ass.

But people were floating that thing here for months, despite it being demonstratively false.

[liberal_at_heart]

10. Oh my God. I can't believe this crap. Bankers are writing legislation and calling

politicians and telling them to vote for the bill and you care about what the numbers are? I have been waiting to put you on ignore for a long time now. I think I am now ready to put you on ignore. Good bye.

[Warren DeMontague]

11. Waaah, however will I survive.

I don't even have the faintest clue who you are, so there's that.

Anyway, again, if the number doesn't matter, why make one up?

[aspirant]

25. To continue the monopoly game

Stop playing the game and wave bye to Wall Street.

[Warren DeMontague]

27. That's deep.

[Travis_0004]

6. Im not sure I agree with that

Lets say I enter a fixed for floating interest rate swap for 20k. The notional value would be 40k (principal amount of both loan) plus future payments.

I pay you 5%. You pay me LIBOR plus 3%. Right now I owe you a bit in this deal. Ill pay 5% minus what you would pay me.

If I default on our agreement with a notional value of more than 40k (100k or more depending on how long the term was) nobody is out 40k. You are effectively of the agreement, and your loan terms back to 5% when maybe you prefered libor plus 3%. You could probably enter a new interest rate swap and maybe get similar terms and nobody looses a dime.

Another way to look at it. I buy a house for 100k. I will pay 150k in interest so the mortgage has a notional value of 250k. At no point in time can the bank lose 250k. I cab burn the house down and the bank looses 100k and the opportunity to earn that interest, but nobody would claim that is a 250k loss.

[liberal_at_heart]

13. You are going on ignore too. I can't believe there are people trying to make this bill

seem not as bad as it is.

[Nuclear Unicorn]

15. The amount should be $0.00 nt

[KamaAina]

16. "and spare us the whole "but.. but... net exposure" cluelessness"

http://www.zerohedge.com/news/how-us-banks-are-lying-about-their-european-exposure-or-how-bilateral-netting-ends-bang-not-whi

A little over a month ago, Zero Hedge started an avalanche in the financial sector, and an unprecedented defense thereof by the "independent" financial media and conflicted sell side, by being simply the messenger in pointing out that the gross exposure of one Morgan Stanley to the French banking sector is $39 billion. The firestorm of protests, which naturally focused on the messenger, and not the message, attempted to refute the claims that Morgan Stanley (and many others) are overexposed to Europe (both banks and countries) by stating that gross is not net, and that when one nets out "hedges" the real exposure is far, far lower. The logic is that bilateral netting, as the principle behind this argument is called, should always work - no matter the market, and that counterparty risk, especially when it comes to hedges, should always be ignored because banks will always honor their own derivative exposure. Obviously that this failed massively when AIG had to be bailed out, to preserve precisely the tortured and failed logic of bilateral netting was completely ignored, after all things will never get that bad again, right? Well, wrong. Because the argument here is precisely what the exposure is when the chain of netting breaks, when one or more counterparties go under (such as MF Global for example, which filed bankruptcy precisely due to its hedged (?) European exposure - luckily MF was not in the business of writing CDS on European banks or else all hell would be breaking loose right now). So little by little the story was forgotten: after all when everyone says gross is not net, contrary to what history shows us all too often, everyone must be right. Today it is time to refresh this story, as none other than Bloomberg pulls the scab right off and while confirming our observations, also goes further: yes, banks are not only massively exposed to Europe, but they are in essence misrepresenting this exposure to the public by a factor of well over ten!...

With banks on both sides of the Atlantic using derivatives to hedge, potential losses aren’t being reduced, said Frederick Cannon, director of research at New York-based investment bank Keefe, Bruyette & Woods Inc.

“Risk isn’t going to evaporate through these trades,” Cannon said. “The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who’s ultimately going to pay for the losses?”

Reread the bolded text enough times until you have enough information to debunk the next time clueless advocates of Morgan Stanley and other banks scramble to say that the banks are hedged, hedged, hedged. No. THEY ARE NOT. And as the AIG debacle demonstrated, once the chain of bilateral netting breaks, whether due to the default of one AIG, one Dexia, one French or Italian bank, or whoever, absent an immediately government bailout and nationalization, which has one purpose and one purpose alone: to onboard the protection written to the nationalizing government, then GROSS BECOMES NET! This also means that should things in Europe take a turn for the worst, Morgan Stanley's $39 billion in gross exposure really is.. $39 billion in gross exposure, as we have been claiming since September 22.

[MFrohike]

30. No

The notional amount is why the risk exists. If the outstanding amount were 300 million, it wouldn't be a big deal because the big banks can cover that without having to run to Uncle Sam.

Your example is wrong. It's not if you had a $10 bet, it's if you had a million $10 bets. That would be a hell of a lot closer to the reality.

[Rex]

14. But but...torture and Obama said and evil liberals and lions and tigers oh my!

That anyone would defend the second robbery of the Treasury speaks volumes toward their character.

[Warren DeMontague]

17. I'm not defending it, but I'm consistently opposed to made-up hyperbole, even if someone thinks

it's being done for a good cause.

The 303 Trillion Figure is fundamentally impossible, economically speaking. Might as well put "A Gadzooko Bajillion Dollars" in the OP.

[Rex]

20. I know that, you are one of the good eggs.

A few other OPs are doing their best CYA possible, but there really is no way to smile after taking a big bite out of a shit sandwich.

[Warren DeMontague]

21. Fair nuff.

Right back atcha.

[Rex]

22. Also I agree, making up numbers is just as bad as

quoting as fact, something a republican is currently lying about in Congress. I didn't think the number could possibly be that high.

[7wo7rees]

18. Going off now into conspiracy land - - -

LaRouche wrote abour this derivative problem a very long time ago.

I saved it, I printed it down.

This is real.

Who gives a shit if it is millions, billions or trillions.

Result is still the same.

We are all being robbed.

[Warren DeMontague]

19. I'm gonna go out on a limb and guess that the Queen of England was ultimately responsible, there.

Just a guess?

[7wo7rees]

24. NOPE! Not at all. n/t

[KamaAina]

31. I don't think there are deriviatives based on cocaine futures.

[Spitfire of ATJ]

23. I keep thinking a computer program INVENTED BY WALL STREET is going to pull a "Skynet"...

It'll look at EVERYTHING and assign actual value and all of these potential speculative futures based on nothing are going to collapse.

[Hoyt]

26. We're probably on the hook for them anyway. Banks tanking won't be good for any of us.

Banks holding on to their money isn't good either. Nationalizing the banks would put us on the hook too.

I wish we could go back to a world with more mom-and-pop, small businesses. But truth is, none of that will produce what we are going to need to take care of the people. We have a lot to do to prepare for the future, I just hope we get there. And, no I don't have the answers.

[xchrom]

28. du rec.

[AzDar]

29. ....

[Mnpaul]

32. If the FDIC is funded by the banks

shouldn't they be allowed to raise insurance rates on banks engaging in this activity. Free market principles would dictate that happen. More risk --> higher insurance costs.