Beware the Current Bull Market in Derivatives

Beware the Current Bull Market in Derivatives
"There’s one statistic, however, that should give investors pause: the growth in the total dollar value of derivative contracts at the top too-big-to-fail banks in the United States."
September 30, 2009
Matthew Goldstein

The Dow is near 10,000 again. The business press is full of stories about the resurgence in mergers, IPOs and even so-called blank check companies.

There’s one statistic, however, that should give investors pause: the growth in the total dollar value of derivative contracts at the top too-big-to-fail banks in the United States.

In the second quarter of this year, the notional value of derivatives contracts at JPMorgan Chase (JPM), Goldman Sachs (GS), Bank of America (BAC) and Citigroup (C) increased by $1.92 trillion, to $191 trillion. Shockingly, Citi is responsible for most of that gain from the end of the first quarter.

Overall, the total dollar value of outstanding derivatives transactions at the top 25 U.S. commercial banks was $203 trillion, according to the Office of the Comptroller of the Currency, meaning that the nation’s four biggest banks account for 94 percent of the industry’s total exposure to derivatives.

Now the concentration of derivatives at a handful of banks isn’t new. It’s even to be expected, bank regulators say.

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http://seekingalpha.com/article/164077-beware-the-current-bull-market-in-derivatives