Saturday, February 26, 2011

Derivatives Assets contributing to too big to fail

This is scary. This is gunpowder that regulators and governments are kept awake at night wondering how to keep it wet.

From the WSJ Feb 26, 2010

In a recent report, Credit Suisse analyst David Zion estimated S&P 500 companies would show $7.5 trillion in derivative assets, if they weren't netted off against liabilities. Of these assets, about 98%, or about $7.37 trillion, are held by financial firms. The biggest nonfinancial holders, by comparison, are utilities with $52 billion in gross derivative assets, energy companies with $31 billion and industrial concerns with $18 billion.

 J.P. Morgan ChaseBank of AmericaCitigroup, Goldman Sachs Group and Morgan Stanley account for about 95% of the derivatives total, in line with data from the Office of the Comptroller of the Currency.

Mr. Zion wrote: "With the financial sector having so much more exposure to derivatives than all of the other sectors combined, it makes you wonder: Who is on the other side of all those derivative contracts? If it's not primarily with corporate America, could it be with hedge funds, individuals, pension plans, governments etc.? Or are the companies in the financial sector simply entering into derivative transactions amongst themselves."

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