Too Big To Fail Is Now Too Big To Save

Zero Hedge tells an interesting tale.

The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from #4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

That $5.3 trillion of exposure represents about 1/3 of US GDP this year. Suppose they are doing that every quarter. That means they are exposed to 4/3 of US GDP every year. Now it is not quite as bad as all that if the expected failure is slow and orderly. Currently the expected net exposure is 10% of the total. That would be roughly $25 trillion. That still is a LOT of money.

I remember when Everett Dirksen, who died in 1969, said:

"A million here, a million there, pretty soon, you're talking real money."

Where will that kind of money come from? And if the crash is fast and disorderly? Hold on to your hats kiddies because we are in for a wild ride.

Cross Posted at Classical Values