Musing on Derivatives

I read with interest in the Financial Times today about “Morgan Stanley’s plan to shift a large chunk of its $57 trillion derivatives portfolio into the part of the group backed by customer deposits…” In the same article, a “looming Moody’s cut could cost Morgan Stanley $9.6 billion…”

J.P. Morgan must be restive in his heavenly retreat, or at least turning in his grave.

I would guess that a small hedging error could cost 1% or so – say $500 billion – certainly possible. Imagine a broken counter-party of note and the systemic inability to cash in the “hedges.”

Moody’s downgrade costing $9.6 billion seems a mere bagatelle.

Whence Dodd-Frank, Volcker, or even a return to Glass-Steagall?

Most banks carry their massive derivatives positions in the group backed by customer accounts. Discomforting indeed with $875 trillion estimated as the total derivatives positions carried by these same banks.

The idea that Morgan Stanley’s derivatives position is more than three times the total U.S. debt and that the total derivatives position backed by banks exceeds by multiples the entire world’s sovereign debt is, indeed, worthy of note.


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