Value of Derivatives Held By U.S. Commercial Banks Has Plunged By $8 trillion

There is a new report from the Comptroller of the Currency titled “OCC’s Quarterly Report on Bank Trading and Derivative Activities, Fourth Quarter 2007”, which shows that total bank holdings of derivatives is estimated to be “only” $164.2 trillion, whereas I seem to remember that the global glut of derivatives is upward of $700 trillion, which are both numbers so big that I cannot even begin to comprehend the enormity of them.

The report shows that the notional value of derivatives held by U.S. commercial banks has suddenly plunged by a whopping $8 trillion, which is (unbelievably) still only 5% of the total, and which merely takes the total down to the aforementioned-yet-still-staggering $164.2 trillion.

When I realized that $8 trillion is more than half of America’s GDP, that is when I realized that “Houston, we seem to have a problem, as we are on fire, and we are tumbling out of control into the sun where we will soon be fried to a cinder.”

And let’s not forget that even this baleful news is the best that the banks can come up with, as the whole report is based on banks volunteering to tell stories about themselves, which is unbelievably the same as with, according to an article in the Financial Times , Libor rates, which are the agreed-upon interest rates that London bankers agree to charge on short term loans to each other.

The upshot of asking lying, greedy bankers (the villains of history) to tell the truth and let everyone know what disreputable, untrustworthy scum they are has now proved to be an unreliable system of self-regulation, and thus the Libor rate may be understated because the rate is based on self-reports of people who are bankers, which means that they are lying scumbags who falsely report that their short-term borrowing costs are lower than they are, because they know it looks bad that they are getting charged a high interest rate, which proves that the people who are loaning the money to them know what kind of lying, scumbag bankers (as redundant as that is) they are.

But it is these self-reports, like the American O.C.C reports, that are the backbone of the Libor rate, which affects lots and lots and lots of other rates.

By how much is the Libor lending rate understated? Maybe as much as 0.3%, which doesn’t sound like that much, but when you are talking about trillions and trillions of pounds and euros of debt, it adds up to a lot of money! Now you see why they are so interested in lying!

And the last thing we need is higher interest rates, as reports that “U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit”, which is being made manifest by noting that a Merrill Lynch index showed that “The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007.” Wow! What’s that, an increase of 5,000% or something?

And another scary Bloomberg item was that loans are becoming harder to get, regardless of the interest rates, and “Banks worldwide are demanding 60% more in collateral from investors such as hedge funds to cut the risk of derivative trades going bad, the International Swaps and Derivatives Association said.”

And another horror is that the stock market went up, which is Pretty Freaking Strange (PFS) since Barron’s reports that the earnings of the Dow Jones Industrials went down, dropping to $225.53 from $234.49. This has produced the unbelievable price-to-earnings ratio of 57! Earnings are going down, but the stocks are going up! To a P/E of 57! Un-freaking-believable!

And not only that, but DJ Transportation index saw its earning drop, too, to $218.60 from $230.91, taking this index’s P/E to 23!

And while the venerable S&P500 has not yet shown any more deterioration in its earnings, the fact that the market went up made the P/E of this index go to a lofty 21! All of this in the face of deteriorating conditions and economic collapse! This is beyond incredible!

How can you NOT run to gold in such crazy times? Ponder this question well, as a lot depends on your answering it correctly, much like when the minister asked you, “Do you take this woman to be your lawfully wedded wife?”, and you know how well that turned out. So, like I said, ponder it well!

The Mogambo Guru
for Markets and Money

Mogambo Guru
Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

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13 Comments on "Value of Derivatives Held By U.S. Commercial Banks Has Plunged By $8 trillion"

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Coffee Addict
The very high default rate on commercial paper is the key message here. If US defaults were to hit the predicted 16% the impact on Australian commerce would be terrible. I thought Australian politics (and media bias) was bad but it is nothing compared to what is going on in the US at the moment. Personally I hope that Obama wins though any of the three will do a better job than Bush. As an aside, the US networks are saying that US citizens should offended by some silly preacher’s notion that the US reaps what it sows in relation… Read more »
Complete agreement on Obama winning. He’ll get the nomination for sure but as to the presidency – he’s their best hope but I’m sadly betting on McSame to win. Not that it matters much. You can bet the farm (or the farm mortgage) on the US entering a recession at the least – and frankly, there’s no reason not to expect a depression until the US gets a solid manufacturing base again. At this point Bernanke is damned if he drops rates and damned if he raises them. The US impact on Aussie commerce is a given. The only variable… Read more »
Jack Carlson
America is a second rate power in the world today and it does not matter who the US president might be. You have the UK, EU and of course Australia, all of which are more capable than the USA in world affairs not to mention global finance and commerce, so no risk there. We on the Pacific rim are perfectly content to have the PCR dominant in the Pacific and Australia and India suzerain to the new Chinese super state. As for Obama, bring him on! He knows how to deal with Pacific interests – ignore them! You have nothing… Read more »
jack Bonner

For gods sakes stand back, no telling what the USA will do next. Can you still get gold in Australia?

steve b
PFS (Pretty Freaking Strange) sums it up pretty well. I remember seeing a doco on the unbelievable amount of debt the US had run up in 1990 and people were talking about the collapse of the dollar and the rise of gold. Well many have underestimated how long this bubble has stayed inflated despite the debt levels increasing every year. Understanding time frames is essential to any investment decisions so it may go pop in the next 24hrs but i doubt it. I expect Obama to be the next president but I sure as hell wouldn’t want the job and… Read more »
Unpopular Truth

I hope you guys that are looking forward to the demise of the US understand that they donate more money to developing countries than any other by a long way.

They also fund around 80% of the United Nations too, so don’t look to them for leadership when it happens. When the US falls, the world as we know it falls with it.


Unpopular Truth should get his facts straight, the US does NOT fund “around 80% of the United Nations”, it used to fund about 25% of the regular budget and that figure is going down gradually . Countries like Japan pick up the slack, as UN Membership dues are based on population and GDP. Since the Reagan era , the US was not paying its entire dues for political reasons forcing other wealthy nations to pay their dues a year in advance!


Right, the US share is a bit under 25%. Japan picks up just a shade less all on its own (much smaller population) and the EU nations are collectively in for about 36%, which is also a higher per-capita rate. Add to this the US has a nasty record of withholding dues based on objections to programs and policies.

You might be right about donating more money to developing nations. Dunno.

Unpopular Truth

I stand corrected on the figures. I was misinformed. Looking at the wikipedia entry you’re about right on the percentages there.
Ok, so the UN loses a quarter of its funding rather than three quarters.

Regardless of the difference, they’re still the top of the contributions list by a long way. The net result would be similar should the US collapse, whether its 25% or 80%. You can’t run an organization like this without a lot of money, and the world will be a poorer place literally for it without the philanthropic efforts of the USA.

Unpopular Truth Although the USA might contribute a bundle to philanthropic efforts, have you considered the huge costs to other countries brought on by US foreign policies, including various invasions, trade embargoes, protectionist philosophies etcetera? I do not wish to see the demise of any nation and take no joy for the suffering of said nation’s people during the demise. However I do not see the nation of the USA as having some great record of concern for other nations and their people, unless that concern translates into the USA’s own benefit. Bearing that in mind, maybe a little less… Read more »
Unpopular Truth
I wont try and sugar coat it that all countries act in their own best interest most of the time (they all do. It’s human nature). However where you see it as a problem, I see rampant consumerism as the key to elevating certain countries out of poverty though. Consider that China and India compared to where they were 50 years ago, because of Westerners need to produce goods at a lower price. They now have an aspirational middle class, not just the rich and poor, and this class is the vital element to promoting democracy and egalitarian values in… Read more »

I highy recommend putting your new Plasma TV out on the street for the next city clean up campaign and not buying another. (Make sure you smash the screen first) What a difference! Done en masse, might solve some of above mentioned problems….


[…] there are all sorts of derivatives at the top of the inverse pyramid. Those derivatives were wildly inflated and at one pointed passed the one quadrillion mark, which is greater than the value of all […]

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