 Is Deutsche Bank the next Lehman?

[midas]

How exposed is Deutsche Bank?

The trouble for Deutsche Bank is that it’s conventional retail banking operations are not a significant profit center. To maintain margins, Deutsche Bank has been forced into riskier asset classes than it’s peers.

Deutsche Bank is sitting on more than $75 Trillion in derivatives bets — an amount that is twenty times greater than German GDP. Their derivatives exposure dwarfs even JP Morgan’s exposure – by a staggering $5 trillion.

With that kind of exposure, relatively small moves can precipitate catastrophic losses. Again, we must note that Greece just missed it’s payment to the IMF – and further defaults are most certainly not beyond the realm of possibility

http://notquant.com/is-deutsche-bank-the-next-lehman/

[green job]

Deutsche Bank Exposed ha ha The end is nigh, As I have said, Truly the worst of a bad bunch,we will see.

[BuaBS]

We can only hope.

[fvw53]

For those who understand German ...there was recently a detailed documentary about the looming disaster broadcast on ZDF (Second German TV network)

It is really scary ....Lehman Brothers could be small stuff compared to this.

http://www.zdf.de/ZDFmediathek/beitrag/video/2406624/Der-Fall-Deutsche-Bank#/beitrag/video/2406624/Der-Fall-Deutsche-Bank

[manarak]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

Edited June 12, 2015 by manarak

[green job]

For those who understand German ...there was recently a detailed documentary about the looming disaster broadcast on ZDF (Second German TV network)

It is really scary ....Lehman Brothers could be small stuff compared to this.

http://www.zdf.de/ZDFmediathek/beitrag/video/2406624/Der-Fall-Deutsche-Bank#/beitrag/video/2406624/Der-Fall-Deutsche-Bank

Yep just watched it, They are swine nothing can describe these pigs. Problem they have is they think they are above the rules.

They were also the instigators of the carbon credit carousel fraud,even financed it

All i can say to people in the EU is your currency in the bank is worthless, If i was you I would get out fast The EU will 100% go down IT IS WRITTEN

[midas]

Does anyone remember the very insightful documentary movie that eventually came out after the 2008 crisis called " Inside Job " ? In that movie Alan Greenspan was shown to have fought tooth and nail not to regulate the derivatives market and I could never understand this.

Surely after the world experienced such a huge financial shock last time the one thing you would have expected is that those in charge would want to expedite totally cleaning up the system to avoid any similar risk again but then you read this...

" The global derivatives bubble is now 20 percent bigger than it was just before the last great financial crisis struck in 2008 "

The Size of the Derivatives Bubble Hanging Over the Global Economy Hits a Record High

http://www.globalresearch.ca/the-size-of-the-derivatives-bubble-hanging-over-the-global-economy-hits-a-record-high/5384096

Edited June 12, 2015 by midas

[midas]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

[elgordo38]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

You say isn't good journalism hmm what is now days?. About 6 major players own most or all the news media in the USA and well the rest of the world as well. One is RM possibly the biggest who is retiring. And they are in the hip pocket of politicians and big business. We live in an orchestrated spoon fed news world. They play the tune and we dance mostly to useless crap that is released much like a happiness pill. Its all about the "happiness" (yes we are on a happiness kick here to) stuff sports, movie stars, reality TV, what the K's are doing, KK is pregnant oh joy oh happy day, how to have better sex, how to dress better for better sex, the fab diet, obesity is causing diabetes to skyrocket what cars the rich are buying high end car sales are going through the roof oh yeah somebody that does not trust fiat money just bought a Picasso for $165 million dollars chump change to him. Happiness pills anyone?

[AyG]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

[Loptr]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

So, who is the counter party for the derivatives risk, Daddy Warbucks? As far as the exposure, you might go talk to the tax payers that ultimately bailed out AIG in 2008 to the tune of $85 billion USD...

The two Deutsche Bank co-CEO's resignations this past week was followed closely by a raid on their HQ by authorities to seize documents for a criminal investigation... The stink is about to get worse in Frankfurt...

http://www.nytimes.com/2015/06/08/business/dealbook/co-chief-executives-of-deutsche-bank-resign.html

http://www.wsj.com/articles/german-prosecutors-say-nine-suspects-targeted-in-deutsche-bank-raids-1434010639

Edited June 13, 2015 by Loptr

[SheungWan]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

So, who is the counter party for the derivatives risk, Daddy Warbucks? As far as the exposure, you might go talk to the tax payers that ultimately bailed out AIG in 2008 to the tune of $85 billion USD...

The two Deutsche Bank co-CEO's resignations this past week was followed closely by a raid on their HQ by authorities to seize documents for a criminal investigation... The stink is about to get worse in Frankfurt...

http://www.nytimes.com/2015/06/08/business/dealbook/co-chief-executives-of-deutsche-bank-resign.html

http://www.wsj.com/articles/german-prosecutors-say-nine-suspects-targeted-in-deutsche-bank-raids-1434010639

No reference in either of those links to derivatives exposure being the main issue.

Edited June 13, 2015 by SheungWan

[midas]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

And how does anyone know the exact size of your “ significantly less “ in a totally unregulated market?

Because of the extreme overextension of the use of derivatives Chase Manhattan bank for example only needed to suffer a loss of less than 7% of its one year derivative positions to wipe out their entire asset base. When looking at all derivative maturities, a loss of only 3% would wipe out all of Chase's assets, and only 2% is needed to wipe out the assets of JPMorgan

[midas]

It makes one wonder if concerns over Deutsche bank is what prompted the European Union to give just a two-month deadline for countries to enact “bail-in” legislation under the threat of legal action from the European commission if such legislation is not in place at that time.

Why is the European union in such a rush to get this done?

http://ca.reuters.com/article/businessNews/idCAKBN0OD14Z20150528

Edited June 13, 2015 by midas

[cheeryble]

So, who is the counter party for the derivatives risk, Daddy Warbucks? As far as the exposure, you might go talk to the tax payers that ultimately bailed out AIG in 2008 to the tune of $85 billion USD...

The only way such a huge figure of $75T can be reached would surely be if principals and counter parties all down the line have their whole exposure including to hedges accounted or should I say (very) multiple accounted.

Any sensible bookmaker hedges to limit his exposure and the hedgee may also hedge and so on. One hope DB limits their remaining exposure to what they can afford, of that I have no clue.

(They....and any counterpartiee can of course hedge ALL their exposure or even overhedge to take a reverse position.)

As the Devil's Advocate here I would also hope that that present day derivatives exposure is much better controlled.

This may be evidenced in the very article cited to criticise DB:

"While Deutsche Bank, Germany’s largest bank, has the biggest investment bank not based in the United States, some analysts say it can no longer compete at the same level in an age when regulators are cracking down on banks’ use of borrowed money to do business. "

Edited June 13, 2015 by cheeryble

[manarak]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

And how does anyone know the exact size of your “ significantly less “ in a totally unregulated market?

Because of the extreme overextension of the use of derivatives Chase Manhattan bank for example only needed to suffer a loss of less than 7% of its one year derivative positions to wipe out their entire asset base. When looking at all derivative maturities, a loss of only 3% would wipe out all of Chase's assets, and only 2% is needed to wipe out the assets of JPMorgan

First what you financially illiterate guys need to understand is that a derivatives position has a "worth" of 0, plus minus the current marked to market profit or loss.

So... 75 trillion... what does this figure represent if derivatives have no intrinsic value ? Then, how does a loss of 7% of one year derivative positions look like ?

These figures are all nonsense.

The two main sources of risk are market risk and counterparty risk.

* Market risk depends on asset prices, i.e. what is my profit/loss if the asset prices move by X. Figures called "Value at Risk" represent how much risk is taken, when the market moves are within standard deviation, 2 times standard deviation, 3 times etc. 99% probability is a standard indicator, but financial institutions calculate a lot of other scenarios because of non-linearity.

Today, market risk still isn't well understood by many Bank top executives, especially those without education in financial mathematics.

https://en.wikipedia.org/wiki/Value_at_risk

If one don't understand the above link, one is not qualified to make any statement about market risks.

* Counterparty risk is totally different.

In short, counterparty risk for derivatives is the risk that the other side of the derivatives deal will default.

Figures for counterparty risk are Credit Exposure, Expected Exposure and Potential Future Exposure.

A good article explaining counterparty risk:

http://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp

Risk concentration, as well as risk correlation can cause a "domino effect" among financial institutions, because most financial transactions are made between financial institutions themselves, so, if a large institution has major problems, the crisis is likely to expand to other institutions, as was the case with Lehman.

But contrary to what public opinion believes, Lehman did not default on derivatives. The positions were either unwinded or transferred to other institutions.

The real default shock from Lehman was due to its default on loans and bonds, not directly because it couldn't honor derivatives contracts.

So a figure of "75 trillion of derivative bets", whatever that means, is not worrying in itself, it is more an illustration of what "too big to default" means.

Indeed, I think if DB files for bankruptcy, it will be much too big to be allowed to fail. The bank would still go down and its investors and lenders would take a big hit, but I am very confident the bank would first be put under state administration before being either restructured or liquidated, so that its downfall doesn't cause the rest of the market to follow.

[midas]

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

And how does anyone know the exact size of your “ significantly less “ in a totally unregulated market?

Because of the extreme overextension of the use of derivatives Chase Manhattan bank for example only needed to suffer a loss of less than 7% of its one year derivative positions to wipe out their entire asset base. When looking at all derivative maturities, a loss of only 3% would wipe out all of Chase's assets, and only 2% is needed to wipe out the assets of JPMorgan

First what you financially illiterate guys need to understand is that a derivatives position has a "worth" of 0, plus minus the current marked to market profit or loss.

So... 75 trillion... what does this figure represent if derivatives have no intrinsic value ? Then, how does a loss of 7% of one year derivative positions look like ?

These figures are all nonsense.

The two main sources of risk are market risk and counterparty risk.

* Market risk depends on asset prices, i.e. what is my profit/loss if the asset prices move by X. Figures called "Value at Risk" represent how much risk is taken, when the market moves are within standard deviation, 2 times standard deviation, 3 times etc. 99% probability is a standard indicator, but financial institutions calculate a lot of other scenarios because of non-linearity.

Today, market risk still isn't well understood by many Bank top executives, especially those without education in financial mathematics.

https://en.wikipedia.org/wiki/Value_at_risk

If one don't understand the above link, one is not qualified to make any statement about market risks.

* Counterparty risk is totally different.

In short, counterparty risk for derivatives is the risk that the other side of the derivatives deal will default.

Figures for counterparty risk are Credit Exposure, Expected Exposure and Potential Future Exposure.

A good article explaining counterparty risk:

http://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp

Risk concentration, as well as risk correlation can cause a "domino effect" among financial institutions, because most financial transactions are made between financial institutions themselves, so, if a large institution has major problems, the crisis is likely to expand to other institutions, as was the case with Lehman.

But contrary to what public opinion believes, Lehman did not default on derivatives. The positions were either unwinded or transferred to other institutions.

The real default shock from Lehman was due to its default on loans and bonds, not directly because it couldn't honor derivatives contracts.

So a figure of "75 trillion of derivative bets", whatever that means, is not worrying in itself, it is more an illustration of what "too big to default" means.

Indeed, I think if DB files for bankruptcy, it will be much too big to be allowed to fail. The bank would still go down and its investors and lenders would take a big hit, but I am very confident the bank would first be put under state administration before being either restructured or liquidated, so that its downfall doesn't cause the rest of the market to follow.

manarak why do you feel the need to blind us with science to try to mask the concerns of the author of this article? If you are correct about downplaying any risk then why did the New York Fed slam Deutsche bank and accuse it of “ significant operational risk “ for having such massive exposure to derivatives? Are people at the NY Fed financially illiterate also?

And if it makes you feel better to accuse me of being financially illiterate because I may not understand the mathematical technicalities of these " financial instruments " – which incidentally even Warren Buffett described as as "financial weapons of mass destruction" (and I don’t think you could say he is financially illiterate ) then go ahead and do so if it makes you feel better.

I have no idea why you seem so anxious to deflect concern away from the danger of derivatives? The fact that you seem to consider yourself to have superior knowledge in this field to me suggests you are or were once part of these activities yourself ? I see no other motive for you to so vociferously defend the actions of the banksters in this field who have hardly shown an ability to act in good faith over recent years. And why do they still so vigourously resist transparency with derivatives if there nothing to worry about?

Anyway for me I find the grave concerns expressed by other well-known personalities in the financial world far more credible than what you have written (not only from the author of the article in the original post that you denigrated so unfairly and unjustifiably ) but even including the likes of Naomi Prins who was a managing director at Goldman-Sachs or billionaires Hugo Salinas Price and Eric Sprott or Elliott Management's Paul Singer. The list goes on and on.

Surely you can’t be suggesting that manarak is right and they are all wrong?

Edited June 13, 2015 by midas

[midas]

Jain’s raison d’etre was to build Deutsche Bank into the world’s largest derivatives dealer. On May 26, it was announced that Deutsche Bank had reached a settlement with the SEC for improperly valuing its its risk exposure to its Leveraged Super Senior trades book of business (credit derivatives). This in and of itself was not the cause of the Bank’s reversal on Jain. But I can guarantee that this is just the tip of the iceberg with regard to fraud and risk exposure connected to Deutsche Bank’s derivatives business under Jain’s stewardship. We found out in 2008 that bank CEOs and CFOs not only lie to each other and their employees, they also lie to regulators.

http://investmentresearchdynamics.com/a-derivatives-bomb-exploded-within-the-last-two-weeks/

Edited June 13, 2015 by midas

[midas]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

So who to believe ? you and manarak or Janet Tavakoli ?

Janet Tavakoli is a former Adjunct Professor of Derivatives at the University of Chicago’s Graduate School of Business, as well as author of several related books, including the titles Credit Derivatives & Synthetic Structures and Structured Finance and Collateralized Debt Obligations.

Janet Tavakoli believes due to endemic control fraud derivatives represent a truly potentially frightening financial time bomb. Global financial markets are literally awash in hundreds of trillions of dollars worth of derivatives, perhaps a quadrillion by some estimates. Because they are interconnected with such complexity no one really can understand or forecast how this overall market will behave in reaction to some potential systemic shock.

[Naam]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

a number of journàsslists specialise in supporting gloom&doomers to enhance their salivating and enable them to repeat for the godzillionth time "the end is nigh!"

[Naam]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

i am preaching that since years to resident eggsburts who possess a wealth of "no idea" about derivatives.

[midas]

nice alarmist article, yet "$75 Trillion in derivatives bets" sounds very worrying, but doesn't mean anything and certainly doesn't mean exposure.

I'm not saying DB is in good shape - it probably isn't - but throwing around big numbers isn't good journalism.

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

i am preaching that since years to resident eggsburts who possess a wealth of "no idea" about derivatives.

yeah well and pray tell us what makes you such an eggsburt that you claim you know more than people like Janet Tavakoli ?

[Loptr]

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

So, who is the counter party for the derivatives risk, Daddy Warbucks? As far as the exposure, you might go talk to the tax payers that ultimately bailed out AIG in 2008 to the tune of $85 billion USD...

The two Deutsche Bank co-CEO's resignations this past week was followed closely by a raid on their HQ by authorities to seize documents for a criminal investigation... The stink is about to get worse in Frankfurt...

http://www.nytimes.com/2015/06/08/business/dealbook/co-chief-executives-of-deutsche-bank-resign.html

http://www.wsj.com/articles/german-prosecutors-say-nine-suspects-targeted-in-deutsche-bank-raids-1434010639

No reference in either of those links to derivatives exposure being the main issue.

Nice diversion from the question...

You claim there is no counter party risk in the derivatives market... Please explain the logic supporting your position, if you can...

[Loptr]

So, who is the counter party for the derivatives risk, Daddy Warbucks? As far as the exposure, you might go talk to the tax payers that ultimately bailed out AIG in 2008 to the tune of $85 billion USD...

The only way such a huge figure of $75T can be reached would surely be if principals and counter parties all down the line have their whole exposure including to hedges accounted or should I say (very) multiple accounted.

Any sensible bookmaker hedges to limit his exposure and the hedgee may also hedge and so on. One hope DB limits their remaining exposure to what they can afford, of that I have no clue.

(They....and any counterpartiee can of course hedge ALL their exposure or even overhedge to take a reverse position.)

As the Devil's Advocate here I would also hope that that present day derivatives exposure is much better controlled.

This may be evidenced in the very article cited to criticise DB:

"While Deutsche Bank, Germany’s largest bank, has the biggest investment bank not based in the United States, some analysts say it can no longer compete at the same level in an age when regulators are cracking down on banks’ use of borrowed money to do business. "

You are assuming that the "book keepers" are sensible, which is long stretch... Any sensible money manager hedges their positions to offset potential losses, but the investment banks have far exceeded this sensible investment strategy... For one, any hedging that surpasses the original investment exposure is simply a bet... The real problem is that anyone can create a derivative, for any risk investment, with no original investment and no skin in the game, much like stepping up to the craps table in Las Vegas... This is why there is an estimated 26 trillion euros in derivatives exposure on Greece's 864 billion euro debt... These un-hedged bets DO have counter party risk... Now, apply this logic to the over $1 quadrillion in global derivatives and even the curmudgeons have to admit there is a problem...

Edited June 13, 2015 by Loptr

[NeverSure]

And how does anyone know the exact size of your “ significantly less “ in a totally unregulated market?

Because of the extreme overextension of the use of derivatives Chase Manhattan bank for example only needed to suffer a loss of less than 7% of its one year derivative positions to wipe out their entire asset base. When looking at all derivative maturities, a loss of only 3% would wipe out all of Chase's assets, and only 2% is needed to wipe out the assets of JPMorgan

You'd need to use the right terminology for me to understand you, and I want to understand.

A bank's "assets" are comprised of many things including its own liquid capital, buildings it owns, loans it has made to customers, other investments, furniture and fixtures...

Its liabilities are mostly comprised of depositors' money it holds, accrued interest to be paid on deposits, reserves for losses and the like.

"A bank uses liabilities to buy assets, which earns its income. By using liabilities, such as deposits or borrowings, to finance assets, such as loans to individuals or businesses, or to buy interest earning securities, the owners of the bank can leverage their bank capital to earn much more than would otherwise be possible using only the bank's capital."

Link

Edited June 13, 2015 by NeverSure

[Naam]

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

i am preaching that since years to resident eggsburts who possess a wealth of "no idea" about derivatives.

yeah well and pray tell us what makes you such an eggsburt that you claim you know more than people like Janet Tavakoli ?

first of all i did not claim that i am an expert. but the fact that i am doing quite well since many years inspite of the gloom&doomers' wailing since as many years speaks volumes.

even before i received my first salary i heard the rubbish about "worthless fiat money" and that was more than 40 years ago when Nixon abolished the Dollar/Gold peg. and the same rubbish plus "the sky will fall and the end is near" is repeated nearly every day in this forum by little scared men who think they are financial eggsburts because they read a book or a blog of a disgruntled poor little man or woman.

not to forget that i have and still earn my money with hard mental work, not by writing sensationalist scare books and with a company that advises on structured products (derivatives) like Janet Tavakoli.

by the way, nice marketing strategy. "derivatives are the devil's work, consult Tavakoli Structured Finance, Inc. and pay us for our advice!"

[manarak]

" but doesn't mean anything and certainly doesn't mean exposure."

On what do you base this statement?

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

And how does anyone know the exact size of your “ significantly less “ in a totally unregulated market?

Because of the extreme overextension of the use of derivatives Chase Manhattan bank for example only needed to suffer a loss of less than 7% of its one year derivative positions to wipe out their entire asset base. When looking at all derivative maturities, a loss of only 3% would wipe out all of Chase's assets, and only 2% is needed to wipe out the assets of JPMorgan

First what you financially illiterate guys need to understand is that a derivatives position has a "worth" of 0, plus minus the current marked to market profit or loss.

So... 75 trillion... what does this figure represent if derivatives have no intrinsic value ? Then, how does a loss of 7% of one year derivative positions look like ?

These figures are all nonsense.

The two main sources of risk are market risk and counterparty risk.

* Market risk depends on asset prices, i.e. what is my profit/loss if the asset prices move by X. Figures called "Value at Risk" represent how much risk is taken, when the market moves are within standard deviation, 2 times standard deviation, 3 times etc. 99% probability is a standard indicator, but financial institutions calculate a lot of other scenarios because of non-linearity.

Today, market risk still isn't well understood by many Bank top executives, especially those without education in financial mathematics.

https://en.wikipedia.org/wiki/Value_at_risk

If one don't understand the above link, one is not qualified to make any statement about market risks.

* Counterparty risk is totally different.

In short, counterparty risk for derivatives is the risk that the other side of the derivatives deal will default.

Figures for counterparty risk are Credit Exposure, Expected Exposure and Potential Future Exposure.

A good article explaining counterparty risk:

http://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp

Risk concentration, as well as risk correlation can cause a "domino effect" among financial institutions, because most financial transactions are made between financial institutions themselves, so, if a large institution has major problems, the crisis is likely to expand to other institutions, as was the case with Lehman.

But contrary to what public opinion believes, Lehman did not default on derivatives. The positions were either unwinded or transferred to other institutions.

The real default shock from Lehman was due to its default on loans and bonds, not directly because it couldn't honor derivatives contracts.

So a figure of "75 trillion of derivative bets", whatever that means, is not worrying in itself, it is more an illustration of what "too big to default" means.

Indeed, I think if DB files for bankruptcy, it will be much too big to be allowed to fail. The bank would still go down and its investors and lenders would take a big hit, but I am very confident the bank would first be put under state administration before being either restructured or liquidated, so that its downfall doesn't cause the rest of the market to follow.

manarak why do you feel the need to blind us with science to try to mask the concerns of the author of this article? If you are correct about downplaying any risk then why did the New York Fed slam Deutsche bank and accuse it of “ significant operational risk “ for having such massive exposure to derivatives? Are people at the NY Fed financially illiterate also?

And if it makes you feel better to accuse me of being financially illiterate because I may not understand the mathematical technicalities of these " financial instruments " – which incidentally even Warren Buffett described as as "financial weapons of mass destruction" (and I don’t think you could say he is financially illiterate ) then go ahead and do so if it makes you feel better.

I have no idea why you seem so anxious to deflect concern away from the danger of derivatives? The fact that you seem to consider yourself to have superior knowledge in this field to me suggests you are or were once part of these activities yourself ? I see no other motive for you to so vociferously defend the actions of the banksters in this field who have hardly shown an ability to act in good faith over recent years. And why do they still so vigourously resist transparency with derivatives if there nothing to worry about?

Anyway for me I find the grave concerns expressed by other well-known personalities in the financial world far more credible than what you have written (not only from the author of the article in the original post that you denigrated so unfairly and unjustifiably ) but even including the likes of Naomi Prins who was a managing director at Goldman-Sachs or billionaires Hugo Salinas Price and Eric Sprott or Elliott Management's Paul Singer. The list goes on and on.

Surely you can’t be suggesting that manarak is right and they are all wrong?

I'm not blinding anyone and certainly not saying DB is safe, and I am also not saying there isn't another crisis looming somehwere.

I'm just saying diabolizing derivatives and quoting huge meaningless figures that have only a very remote link to a possible crisis is not the right way to make a point.

How about Tavakoli and I are right ?

She certainly wouldn't say anything I have written is wrong.

You said "Janet Tavakoli believes due to endemic control fraud derivatives represent a truly potentially frightening financial time bomb. "

If this is true (I have no idea since I left banking years ago), then there is indeed a problem.

If you want my opinion, I believe a fundamental problem lies in how re-securitisation of assets is used to increase leverage.

I think that is the root of the problem, there should be regulations limiting re-securitization.

[midas]

Manarak is exactly right. Many of the derivative positions will be offsetting to a lesser or greater degree. The resultant exposure will be significantly less than the total size of the positions.

i am preaching that since years to resident eggsburts who possess a wealth of "no idea" about derivatives.

yeah well and pray tell us what makes you such an eggsburt that you claim you know more than people like Janet Tavakoli ?

first of all i did not claim that i am an expert. but the fact that i am doing quite well since many years inspite of the gloom&doomers' wailing since as many years speaks volumes.

even before i received my first salary i heard the rubbish about "worthless fiat money" and that was more than 40 years ago when Nixon abolished the Dollar/Gold peg. and the same rubbish plus "the sky will fall and the end is near" is repeated nearly every day in this forum by little scared men who think they are financial eggsburts because they read a book or a blog of a disgruntled poor little man or woman.

not to forget that i have and still earn my money with hard mental work, not by writing sensationalist scare books and with a company that advises on structured products (derivatives) like Janet Tavakoli.

by the way, nice marketing strategy. "derivatives are the devil's work, consult Tavakoli Structured Finance, Inc. and pay us for our advice!"

Hey Naam . You claim you have been preaching your interpretation of the limited risk of derivatives since years but the reason no one has taken a blind bit of notice of what you wrote is because it's not preaching it is waffling.

Not one of your counter arguments on this issue " since years " had an ounce of substance or credibility.

No details or reasons why you believe what you believe whatsoever . only your usual inflammatory comments amongst continued off topic garbage about your personal achievements.

And now you introduce another red herring inferring that not too much of what Janet Tavakoli warns about should be believed anyway because she probably has vested interests. Oh brother you get worse as you get older.

If similar warnings were also voiced by Brooksley Born who was Chairperson of the Commodity Futures Trading Commission (CFTC) for what outrageous reasons are you going to say she is not to be believed either?

[midas]

And how does anyone know the exact size of your “ significantly less “ in a totally unregulated market?

Because of the extreme overextension of the use of derivatives Chase Manhattan bank for example only needed to suffer a loss of less than 7% of its one year derivative positions to wipe out their entire asset base. When looking at all derivative maturities, a loss of only 3% would wipe out all of Chase's assets, and only 2% is needed to wipe out the assets of JPMorgan

First what you financially illiterate guys need to understand is that a derivatives position has a "worth" of 0, plus minus the current marked to market profit or loss.

So... 75 trillion... what does this figure represent if derivatives have no intrinsic value ? Then, how does a loss of 7% of one year derivative positions look like ?

These figures are all nonsense.

The two main sources of risk are market risk and counterparty risk.

* Market risk depends on asset prices, i.e. what is my profit/loss if the asset prices move by X. Figures called "Value at Risk" represent how much risk is taken, when the market moves are within standard deviation, 2 times standard deviation, 3 times etc. 99% probability is a standard indicator, but financial institutions calculate a lot of other scenarios because of non-linearity.

Today, market risk still isn't well understood by many Bank top executives, especially those without education in financial mathematics.

https://en.wikipedia.org/wiki/Value_at_risk

If one don't understand the above link, one is not qualified to make any statement about market risks.

* Counterparty risk is totally different.

In short, counterparty risk for derivatives is the risk that the other side of the derivatives deal will default.

Figures for counterparty risk are Credit Exposure, Expected Exposure and Potential Future Exposure.

A good article explaining counterparty risk:

http://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp

Risk concentration, as well as risk correlation can cause a "domino effect" among financial institutions, because most financial transactions are made between financial institutions themselves, so, if a large institution has major problems, the crisis is likely to expand to other institutions, as was the case with Lehman.

But contrary to what public opinion believes, Lehman did not default on derivatives. The positions were either unwinded or transferred to other institutions.

The real default shock from Lehman was due to its default on loans and bonds, not directly because it couldn't honor derivatives contracts.

So a figure of "75 trillion of derivative bets", whatever that means, is not worrying in itself, it is more an illustration of what "too big to default" means.

Indeed, I think if DB files for bankruptcy, it will be much too big to be allowed to fail. The bank would still go down and its investors and lenders would take a big hit, but I am very confident the bank would first be put under state administration before being either restructured or liquidated, so that its downfall doesn't cause the rest of the market to follow.

manarak why do you feel the need to blind us with science to try to mask the concerns of the author of this article? If you are correct about downplaying any risk then why did the New York Fed slam Deutsche bank and accuse it of “ significant operational risk “ for having such massive exposure to derivatives? Are people at the NY Fed financially illiterate also?

And if it makes you feel better to accuse me of being financially illiterate because I may not understand the mathematical technicalities of these " financial instruments " – which incidentally even Warren Buffett described as as "financial weapons of mass destruction" (and I don’t think you could say he is financially illiterate ) then go ahead and do so if it makes you feel better.

I have no idea why you seem so anxious to deflect concern away from the danger of derivatives? The fact that you seem to consider yourself to have superior knowledge in this field to me suggests you are or were once part of these activities yourself ? I see no other motive for you to so vociferously defend the actions of the banksters in this field who have hardly shown an ability to act in good faith over recent years. And why do they still so vigourously resist transparency with derivatives if there nothing to worry about?

Anyway for me I find the grave concerns expressed by other well-known personalities in the financial world far more credible than what you have written (not only from the author of the article in the original post that you denigrated so unfairly and unjustifiably ) but even including the likes of Naomi Prins who was a managing director at Goldman-Sachs or billionaires Hugo Salinas Price and Eric Sprott or Elliott Management's Paul Singer. The list goes on and on.

Surely you can’t be suggesting that manarak is right and they are all wrong?

I'm not blinding anyone and certainly not saying DB is safe, and I am also not saying there isn't another crisis looming somehwere.

I'm just saying diabolizing derivatives and quoting huge meaningless figures that have only a very remote link to a possible crisis is not the right way to make a point.

How about Tavakoli and I are right ?

She certainly wouldn't say anything I have written is wrong.

You said "Janet Tavakoli believes due to endemic control fraud derivatives represent a truly potentially frightening financial time bomb. "

If this is true (I have no idea since I left banking years ago), then there is indeed a problem.

If you want my opinion, I believe a fundamental problem lies in how re-securitisation of assets is used to increase leverage.

I think that is the root of the problem, there should be regulations limiting re-securitization.

"If you want my opinion, I believe a fundamental problem lies in how re-securitisation of assets is used to increase leverage.

I think that is the root of the problem, there should be regulations limiting re-securitization."

But manarak isn't that essentially the whole point regarding being very concerned as at 2015? How can the most brilliant understanding of all the mathematical intricacies behind these instruments mean anything at all if they are all corrupted with criminality behind the scenes?

I mean if Jain’s raison d’etre was caught with his hand in the cookie jar for improperly valuing its risk exposure how can anyone have any trust in any of these activities?

Edited June 14, 2015 by midas

[midas]

So, who is the counter party for the derivatives risk, Daddy Warbucks? As far as the exposure, you might go talk to the tax payers that ultimately bailed out AIG in 2008 to the tune of $85 billion USD...

The only way such a huge figure of $75T can be reached would surely be if principals and counter parties all down the line have their whole exposure including to hedges accounted or should I say (very) multiple accounted.

Any sensible bookmaker hedges to limit his exposure and the hedgee may also hedge and so on. One hope DB limits their remaining exposure to what they can afford, of that I have no clue.

(They....and any counterpartiee can of course hedge ALL their exposure or even overhedge to take a reverse position.)

As the Devil's Advocate here I would also hope that that present day derivatives exposure is much better controlled.

This may be evidenced in the very article cited to criticise DB:

"While Deutsche Bank, Germany’s largest bank, has the biggest investment bank not based in the United States, some analysts say it can no longer compete at the same level in an age when regulators are cracking down on banks’ use of borrowed money to do business. "

" present day derivatives exposure is much better controlled. "

hang on a minute, how did you come up with that one ???? - Deutsche Bank just reached a settlement in a case by the SEC for improperly valuing their risk exposure

Edited June 14, 2015 by midas