Monday, January 21, 2008

Derivative exposure

Now that everyone is worried about the contra party risk, look for investors to hammer J.P. Morgan, with contra party concerns regarding it's derivative exposure.

For the third quarter of 2007, the notional amount of credit derivatives, the fastest growing product in the derivatives market, increased 19% from the second quarter to $14 trillion. Credit default swaps represent 98% of the total amount of credit derivatives.

What is most interesting that when we deal in these "shadow regulated" markets, nobody loses any money. The netted total credit exposure on $172.2 trillion of derivatives exposure, is $1.06 trillion dollars. On these huge amounts, the banks took charge offs in the third quarter of just $119 million dollars. How ironic is that? We have over $107 billion in writedowns due to subprime, but we can't find anything wrong but a hundred million or so in $172 trillion of derivatives. Now we know why they are so opaque!

And the bank with the largest derivative exposure is JP Morgan. Now you know why it was able to "sidestep" all the problems the other banks faced. They wrote their contracts on derivative "napkins," instead of in the exchange markets!
(Page 22 in the link below)

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