It's 2014. Who's holding the bag?

Remember 2008?

"Toxic derivatives"?

The derivatives market continues to skyrocket. The biggest recipients of Federal Reserve money, already into trillions of derivatives by the time the derivatives market froze every other market, have only upped their ante.

The toxic derivatives are supposedly being held by the Federal Reserve System, probably concentrated in the FBNY. But any derivative, already a "weapon of mass destruction" in itself, that gets to be called toxic... It's some serious economic-law magic. It isn't some simple bet on wheat prices. It's layered, interconnected, and huge in value. So, who really has control of these things?

Well, the BIS. The Bank for International Settlements. They have all the statistics, they make the basic laws, they're the reference for these trillion-dollar derivatives. It makes sense, since they're the "central bank of central banks".

So, I think we should pay close attention to what happens in the BIS in the next 3 years. Capitalism can't go over 10 years without some kind of memorable financial crisis...

Ive given up trying to make sense of the financial markets. I called for a crash worse than 2008 since about 2011. All based on what i thought were the principals of the stock markets. Ive been just sitting back and reading since then, and when asked what I think I just shake my head and shrug my shoulders. I have no idea. The can just keeps getting kicked down the road. When is the can going to hit a wall? How long can it go on for? Or is this something that sceptics have always said since the beginning of fiat money?

Here's a possible starting point for research......

Derivatives statistics (B.I.S.)


Added: relevant thread....
5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives

So am I correct in saying that derivatives are "packages" of debts from various sources that are sold off on the markets? I know I am simplifying things but that is the general idea isn't it?

Sort of like how the sub prime mortgages were sold off to investors, sometimes claiming they weren't as high risk (NINJA loans) as they actually were?

a reply to: deuceawesome

Exactly. Some of the toxic ones were secured by AIG.

a reply to: deuceawesome

It''s not about fiat money. It's about the foundation of the creation of wealth itself. You have this elaborate system that was built to prevent the "other", the "totalitarian", "communist", "Marxist-Leninist" system from even taking root, anywhere. The people who built this system cannot fathom a world without private property; without copyright; without states secrets; without a world military, a world police, and systems of world governance. Which is really, really ironic seeing that one of the Communist demands was:

10. All private banks will be replaced by a state bank whose bonds will have the character of legal tender.

The Fed is not quite like it, because it's "independent" from Congress and the Executive Branch. But still, the present "capitalist" system is very much a central-planned, bureaucracy-based, totalitarian system, which does not directly censor (except for "classification"), but tries to control thought through control of the press, of entertainment, and really, truth itself. I mean, Stalin couldn't dream of the type of surveillance the NSA has been conducting consistently ever since its inception. Not to mention the NRO. Or private entities using technology from the military-industrial complex.

Anyway, the thing is, the financial markets simply reflect a very imperfect information distribution technology, yet it's advertised as the high lane, the race for femtosseconds, etc. It's a fiction. And sometimes the market itself gets a glimpse of the fiction, and they panic. Because everything is based on a fiction.

Now there's really some kind of cycle. It has something to do with the maturity of the securities. 5-year, 10-year, 30-year. This discrepancy interacts somehow and it aligns, it coincides with major events - sometimes a sequence of events, in a day - and the market "crashes". So human "emotion" takes over and rationality goes out the window, people get poor all of a sudden and there's a panic. Well, that's not really it, is it? The speculators are blatantly trying to profit whether the market goes up or it goes down. They don't care. And they operate through crisis, over and over again. We can track this. I think it's worth it. Who are the people who don't panic, during a panic?

Simple golden rule....those with the gold....makes the rules....
This is whats happening in the financial end of this mud ball.....and many other areas as well....the system is top heavy and tottering as we speak.....the BIS is a private bank in which the account holders transfer money for countries who need to pay for things internationally....raking a good fee off the top of course......
The elite will make money no matter what happens....and the rest of us will suck slough water....

a reply to: xuenchen

2013:
- $1 415 Trillion globally traded in futures market
- $ 466 Trillion globally traded in options market
- $ 5 Trillion foreign exchange instrument
- $ 2 Trillion interest rates derivatives
- $1 888 Trillion Total trade
www.bis.org...

OTC derivatives markets continued to expand in the second half of 2013. The notional amount of outstanding contracts totalled $710 trillion at end-2013

www.bis.org...

2013 Estimate of market size is around $700 Trillion with a lot of trading going on at 1 888 Trillion in the derivative markets.

The total outstanding credit default swaps for 2013 is $24 Trillion, down about $0.7 Trillion from 2012.
www.bis.org...

In credit default swap (CDS) markets, central clearing and netting made further inroads. Contracts with central counterparties accounted for 26% of notional CDS outstanding at end-2013. Bilateral netting agreements reduced the net market value of outstanding CDS contracts, which provide a measure of exposure to counterparty credit risk, to 21% of their gross market value.

www.bis.org...

The translation I make from this, The BIS has about 1/4 of the toxic assets mopped up. From that it is about 80% clean. There are other arrangements going on for the other 3/4's.

As for when the people are due for their next shearing, about every 7 years has been a common downturn.

Notice how they use the word 'estimate'; most derivatives are "Over the counter" meaning they are not traded on any exchange, and to put together who is holding what you need to aggregate the derivative positions of every issuing entity. That data isnt accurately available.

The BIS isnt mopping anything up in the derivatives market. It's role is central bank clearing and the setting of global banking regulatory standards. The 'tpxic' derivatives that are known are housed on what was called 'bad banks', and are being run-off as the contracts settle, or have already been wiped away through default.

Your last quote talks about the proportion of CDS that are now going through central clearing house (same concept as a stock exchange), so they are "visible" to the markets. It doesnt refer to 'cleaning up' anything. Netting agreements mean that if I have a number of exposures with you through various trades, we can agree to 'net' the positives and negatives and only look at the difference. This means that the total amount out there reduces.

What this all really illustrates is that it is all just too damn complicated.

a reply to: zvezdar

What this all really illustrates is that it is all just too damn complicated.

Good point and thanks for the clarification. The general impression I had a few years ago was that there has been gradual improvement going on with some issues in the more more high risks areas being addressed. Being such a large and complicated system there is still other risks and weaknesses requiring work.

a reply to: zvezdar

May I ask if you have any background in finance?

I didn't say the BIS was buying these toxic assets. I'm just saying "OK, it's a clearinghouse. But if suddenly everything inside the clearinghouse is valueless, the clearinghouse doesn't make sense anymore". It's not that they're mopping up; they're the floor on which the # is smeared on...

You know what is holding this together? We are. Everyday we patch it up the best we can. Both parents AND the grandparents working nowadays. We are going to have to open up child labor laws pretty soon, seriously! A highly advanced society doesn't need so much work to keep it going! I agree this is a fiction, the concept of money, it was supposed to free us but apparently it has become a surreal nightmare. Our economy can't even handle sharp turns, like a new technology that replaces an established one because of the loss and retraining of labor involved. I'll leave the details to you guys, but the whole picture, just wow.

a reply to: SomeoneWatching

Yeah I do work in finance.

Fair enough, I may have missed your point on the BIS. You're essentially right about clearing houses. The idea is that the clearing house model is safer because the clearing house is on the hook if someone within that system goes bust. So they will ask for collateral or margins to be posted etc etc. That is true, in normal circumstances.

But it is also not true in exceptional circumstances. Let's say the AIG derivatives were centrally cleared at the point where they were required to post collateral of a few billion. AIG can't post the collateral, the clearing house is therefore on the hook and starts asking everybody else on the exchange to pony up greater margin to cover the potential AIG losses. You just "smear" as you put it the collateral obligations around to other parties, and the market knows very quickly that someone is in trouble. Things start to shut down all the same.

I dont see that the clearing houses actually solve any problems. I think they just centralise them. It may have been John Hussman (cant exactly remember) who said recently that in 1987 the whole thing almost collapsed because nobody knew if the other side of the trades on clearing houses would be able to pay. That counterparty danger never really goes away.

Well, I think no later than 2017 there's going to be a major crisis.

The calculation is simple: the last major crisis was in 2007, and the system can'1t go more than 10 years without a major crisis.

There's a major crisis brewing through the Federal Reserve. The hike in rates will wreck havoc in the market. This will happen in the next few months. There will be major interferences in the market, and it will backfire.