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Mix-Ansicht- D for Derivatives (kommt doch nach ABC* gleich das D) - Emerald, 02.11.2005, 07:43
D for Derivatives (kommt doch nach ABC* gleich das D)
-->But the Comptroller of the Currency (OCC) reports that four of the five big banks are taking a risk that exceeds their capital. Moreover, it's a kind of risk that has little or nothing to do with whether they're right or wrong about the markets.
Here's where the risk lies: The banks are risking the possibility that their partners in the bets may be a bad credit risk and could default on the trade.
Take Bank of America, for example. For every one dollar of risk-based capital it has in the kitty, the bank has assumed $1.68 in credit risk associated with its derivatives, according to the OCC.
That's far too much risk, in my view.
Citibank's risk is worse: $3.10 per dollar of capital.
HSBC's is still worse: $4.07.
And the biggest player of all — JP Morgan Chase — now has a whopping $6.25 in credit risk for each dollar of risk capital, based on the OCC report.
In a near perfect, predictable world, all this might be justifiable. But in a world of volatile markets and unpredictable disasters, it's downright crazy.
One decade ago, when Dad and I were tracking interest rates together here in Florida, the biggest banks were risking, on average, about $1.50 per dollar of capital. Now, the average is about double, at $3.17.
And three decades ago, when I first started tracking interest rates in New York, these kinds of bets barely existed.
Plus, remember this: 85% of these bets are bets on the future direction of interest rates. If they're wrong, it multiplies the potential volatility in interest-rate-related markets.
So now can you see why I believe the Federal Reserve is ultimately powerless to control interest rates?
*)
Alan
Banjamin
Crash
Derivatives
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