• 16 hours The Cannabis Culling Has Wall Street Disappointed
  • 22 hours Vigilante Offers $100,000 Bounty To Hack Banks
  • 2 days The Dairy Industry Is Dying
  • 2 days The Most Impressive Electric Vehicle Of The Year
  • 3 days Gold Miners Are Having A Stellar Second Half
  • 4 days How 3D Printing Is Turning Each And Every Industry On Its Head
  • 4 days Is The $3.5 Trillion Healthcare Industry About To Get Much More Transparent?
  • 5 days Gamblers Are Betting Big On Trump’s Impeachment
  • 5 days Even Banks Can't Answer Aramco's Trillion Dollar Question
  • 6 days Will Bezos Buy The Seattle Seahawks?
  • 6 days 6 Tech Trends Transforming The Travel Industry
  • 7 days Ousted Uber CEO Cashes Out $500 Million In Stock
  • 7 days Trump Prepares For Another Key Tariff Decision
  • 7 days The Free Money Bubble Is About To Burst
  • 8 days The Crushing Reality Of Poverty In America
  • 8 days Should You Buy Into The World’s Largest IPO?
  • 8 days The Infinite Possibilities Of Cosmic Energy
  • 9 days Analysts Link Walking To Economic Growth
  • 10 days Will Japan Turn Its Back On The Aramco IPO?
  • 11 days Global Debt Soars To $188 Trillion
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Ian Campbell

Ian Campbell

Through his www.BusinessTransitionSimplified.com website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world…

Contact Author

  1. Home
  2. Markets
  3. Other

Bank Derivative Exposure and Warren Buffett

Falling Dominos

In this article Warren Buffett is quoted as saying "there can be enormous gaps in things that you thought were fully protected by collateral, or netting arrangements and that sort of thing. So I regard very large derivatives positions as dangerous".

The article goes on to say JP Morgan Chase, Citigroup and Bank of America (presumably as reflected in their latest publicly released information) hold $50.7 trillion, $48.0 trillion and $42.2 trillion respectively. I take these figures to be gross numbers that are partially offset by other derivatives. Even so, they are huge numbers considering the current world nominal (inflation included) GDP is about $80 trillion.

Estimates for total outstanding derivatives vary widely. Latest Global OTC Derivatives contracts numbers suggest that in mid-2015 such contracts totaled about $550 trillion, and then had a market value of about $15 trillion. It seems likely no one really knows for sure.

That said, there can be little doubt total outstanding derivatives contracts is a multiple of world GDP. Moreover, based on the foregoing numbers the market value of outstanding derivatives is less than 3% of the total derivatives amount. Whether or not a correct calculation, this seems to imply that a very small drop in the value of total outstanding derivatives would wipe out their market value.

This article suggests "it's reasonable to assume that even the most sophisticated banks don't have a complete grasp of their derivatives portfolios". The reasons cited for this statement are (1) derivatives can be complicated (no kidding!), and (2) it's impossible to predict what will happen to the assets or events they're tied to (surely not in all cases!).

I have long believed, and continue to believe, the derivatives overhang - as I think about it - to be very worrisome. More than once I have likened that derivatives overhang to a gymnasium full of dominos where if one domino falls many other dominos may sequentially fall over.

The Hathaway Berkshire investment portfolio includes large positions in a few selected banks. The fact that Warren Buffett has elected to speak out about derivatives in the context of bank risk is interesting, and ought to be taken into account.

Finally, if you have not read my post titled "Trillion: Can You Put Trillion in Context" you ought to do consider doing that. It is hard to think sensibly about economic, business and financial markets news without knowing just how big a trillion is. You can find that post at here.

 


Read "Why Warren Buffett Wouldn't Invest in 90% of Big Banks" at Fox Business - Why Warren Buffett Wouldn't Invest in 90% of Big Banks.

 

Back to homepage

Leave a comment

Leave a comment