# The Derivatives Bubble



## onq (22 Mar 2010)

2010.03.22

I saw the redoubtable Ellen Brown on Russia Today's Spotlight programme  this morning talking about the Derivatives Bubble.

This appears to be a current things that isn't yet burst, but its about  to and we're talking debt in the Quadrillions of dollars.

And I wondered, does ayone know anything about this light at the end of our current tunnel?

Here is one clue I found going back to 16th October 2008

http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php


Here is another referred to in one of the responses therein, an overview, if you will:

http://seattletimes.nwsource.com/html/businesstechnology/2008477995_toxicdebt070.html

Than I spotted this thread after googling "Anglo Irish Derivatives"

http://www.irisheconomy.ie/index.php/2009/08/20/nama-to-purchase-derivatives/


The OP notes the following:

_Page 15 of the draft  NAMA legislation tells us that the definition of a “credit  facility” includes instruments such as ”a hedging or derivative  facility.”  Section 56, starting on page 46, then defines eligible  assets for purchase by NAMA as a range of different types of “credit  facilities” as well as “any other class of bank asset the  acquisition of which, in the opinion of the Minister, is necessary for  the purposes of this Act.”_
_In theory, this allows NAMA to purchase  derivatives from the banks. And indeed, it turns out that they are  doing so_


 A respondent notes the following comment and give the links

_Without knowing the contacts that were engaged in, we have no way  whatsoever of knowing the extent of any potential liability. At a high  level, we only know the amounts that have been written and type of  derivative that was entered into. 
_

_Anglo Irish Bank Derivatives Book - Page 76
[broken link removed]_
_[broken link removed]_ 
_AIB Derivatives Book - Page 172
[broken link removed]_
_[broken link removed]_ 
_Bank of Ireland Derivatives Book - Page 139
[broken link removed]_
_[broken link removed]_ 
_The combined sum of derivatives from our banks run into the hundreds  of billions. While this is normal for banks in the course of their  business (they need to be able to hedge against interest rate movements,  currency risk, etc), it is worrying that NAMA has specifically  identified derivatives as being a liability._

This is indeed a scrotum-tightening turn of events.

We're buckled with property debts valued at 50-60 Billion Euro.

How will we manage with Derivative Debts in the hundreds billions of Euro if these instruments don't cancel each other out?

If you read the earlier articles, it seems that it is the need for reliance on others to catch the ball in the Derivatives Market that has provoked what to many has seemed like unseemly and unnecessary coddling of banks that should have been allowed to fail.

It looks as if we, our children, and our children's children are all going to be screwed to prop up the Banks gambling debts.

I'd be most happy for someone to contradict me.

ONQ.​


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## jack2009 (22 Mar 2010)

With these derivitaves is it not the case that these losses have already been incurred and that there is no need to spend any more money? ie just dont exercise your right to buy/sell at execution date!


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## darag (22 Mar 2010)

The notional value of derivatives is practically meaningless but great for producing scary headline figures.

An analogy I used before was; let's say 500,000 Irish people have car insurance policies which provide upto 10m coverage for third party injury.  Oh my god!!!! The Irish insurance industry is sitting on 5 TRILLION worth of potential liabilities - almost 50 times the entire GDP of Ireland!!!!  A great headline but nonsense.

How about I offer to sell you a 3 month option to buy a 10 year-old Punto for 10 million euro?  What would it be worth?  Somewhere between 0 and 1c.  Which figure would end up in the headline?  The 100 million.

Interest rates swaps are vital for retail banking treasury management.  It's what allows them to charge fixed interest rates on loans but pay variable rates on deposits or vice-versa.  Holding these instruments is no more sinister than Ryanair buying oil futures or a small shop owner buying fire insurance for their premises.

An interest rate swap with a notional value of 1 million euro might well involve cash flows of less than 10k a year.

I only looked at one of your links - the BoI one and found nothing peculiar or scary in the type of derivatives they hold.  There are no CDSs for example.  Less than 5% are over-the-counter which means the rest are not exposed to counter-party risk.  I'm not sure what to make of the fact that over a third are "held for trading" - does this mean they have a big proprietary trading desk?

Irish retail banking is screwed because of old fashioned bad lending during a bubble, simple as that.


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## Sunny (23 Mar 2010)

Totally agree Darag. Its scaremongering just talking about notional figures as they do not reflect the banks credit exposure. I don't have time to look at the links but I am willing to bet that the fair value of a few hundred billion euro worth of derivative products is actually less than a billion and is in the banks favour. 

As for Nama using derivatives and buying them from the banks, there is nothing strange in that.


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