From: http://www.seekingalpha.com/
Of course, Bernanke tells the public and Congress that the reason we need low interest rates is to support housing prices. He doesn’t mention that $188 TRILLION of the $223 TRILLION in notional value of derivatives sitting on the Big Banks’ balance sheets is related to interest rates.
Yes, $188 TRILLION. That’s thirteen times the US’ entire GDP, and nearly four times WORLD GDP.
Now, of course, not ALL of this money is “at risk,” since the same derivatives can be traded/spread out dozens of ways by different banks as a means of dispersing risk.
However, given the amount of money at stake, if even 4% of this money is “at risk” and 10% of that 4% goes wrong, you’ve wiped out ALL of the equity at the top five banks. LINK...
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Dear readers,
This article brings back memories of my days as a derivatives broker in the U.S.A., and part of the reason why my eyes were opened to the REAL financial system and GOLD. I can tell you from experience that 90% of the people who trade derivatives LOSE! The reason for this is extreme leverage and time. Derivatives are a leveraged financial contract that performs based on the value of the physical product it represents. It's similar to a mortgage on a house, you put 5% down to control an asset worth $100,000. If that asset goes down 5% you lose all your money. The big difference is you can't hold the contract for 25 years to pay off the balance. You sometimes have 25 DAYS or less to make a profit, otherwise you lose and have to pay the full balance of the contract at expiration. I had some clients who would only hold positions for 2-3 hours, never mind days or weeks. This is only a basic explanation and I don't want to bore you with all the details, but understanding the shear magnitude of the contracts these banks are holding is cause for serious alarm. BK
