Shadow Banking: Goldman’s derivative exposure 25K% of assets in ‘08, 33K% in ‘09

http://www.levy.org/pubs/wp_587.pdf

by dsplittgerber • 16 years ago

16 18 16 years ago

levy.org

shrikant• 16 years ago

Uh, it's 25 and 32 THOUSAND % each!

dsplittgerber• 16 years ago

Had to shorten the title and missed inserting the K back in. My bad, sorry.

grandalf5• 16 years ago

the derivative exposure could be risk-reducing, fwiw.

eru4• 16 years ago

It could. Though the netting out only works when your counter-parties turn up to play their part.

grandalf5• 16 years ago

True... However it seems to me that singling out a specific type of transaction (such as derivatives) because it faces this kind of risk (the risk of the instrument * the risk of the counter-party) is a bit silly.

Much of what we finance is based on a mental model the future that might not be true. Consider a mortgage. If your house burns down then you still owe the payment.

So the financial industry invented "fire insurance" for the counter-party risk of derivatives, called CDOs. But they too are blamed for the crisis.

The fact is, any set of financial products/buyers/sellers will converge upon a non-worst-case view of the future, and the price of risk will adjust accordingly. Any line you draw in the sand (such as for capital adequacy requirements) is simply an estimate about how risky the future is... and notably it's still a gamble that the future will occur at or above some point in a probability distribution.

T_S_5• 16 years ago

OK. This statistic refers to notional value. Adding up notional values makes as much sense as adding apples, oranges, yen and dollars. Actually it makes less sense than that. You cannot understand a bank's book without access to the individual line items.

If you have the line items, you have everything. Without that you have to rely on high level financial statements and the opinions of bank examiners or other regulators. And as Lehman, Madoff, Enron and other cases show, it means you have nothing.

It is time for banks, who operate a public trust, to offer continuous (lagged) line item disclosure to enable crowdsourcing of risk analysis. The markets are running on the informational equivalent of fumes. No wonder they sputter.

I call this Real Transparency. It is no more intrusive than the fact that I can find out how much you paid for your house and how much you borrowed to buy it. Information like this is necessary for the functioning of a proper market and price system. These are worth preserving more than the privileges of banks.

Real Transparency is the kind of regulatory reform that would make a difference. Not the kind which gives power hungry regulators more information to ignore.

eru4• 16 years ago

> It is time for banks, who operate a public trust, to offer continuous (lagged) line item disclosure to enable crowdsourcing of risk analysis.

I read (probably in the Economist) that a regime like this is already in operation in New Zealand or Australia (if memory serves me right).

T_S_5• 16 years ago

I believe that you are referring to monetary policy in NZ. This is not the same thing. Essentially I am suggesting that banks have about the same amount of financial privacy that you and I do. They do a lot more transactions, so there is much more for them to tell.

mos1• 16 years ago

Summing notional values is not an intelligent or accurate way to determine a firm's derivative exposure.

Please don't use the terms interchangeably.

mattmaroon• 16 years ago

People (not economists) always blame the crisis on bad lending. That's like saying the guy who had full-blown AIDS died of pneumonia. It's true in a literal sense, but it's not meaningful in that you're blaming the symptom rather than the disease.

Shadow Banking: Goldman’s derivative exposure 25K% of assets in ‘08, 33K% in ‘09

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