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96% of Credit Derivative Risk Held by 5 Banks

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Washington’s Blog
Tuesday, July 28, 2009

Fitch’s has found that JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country’s derivatives risk, and 96% of the exposure to credit derivatives:

About 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies reviewed by Fitch were held by five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley.

Those five banks also account for more than 96% of the companies’ exposure to credit derivatives.

As Newsweek wrote in April:

Major Wall Street players are digging in against fundamental changes…At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen…

Geithner’s new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be “too big to fail” (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges…The old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show.

Newsweek was right. The same giants – JP Morgan, B of A, and Citigroup – are dominating the CDS market.

When I last looked at this issue, JP Morgan, B of A, and Citigroup were still the top 3 holders of derivatives in general, as well as credit derivatives.

But Goldman and Morgan weren’t even on the list (granted, Wachovia has since gone bust and been purchased by a bigger bank, Wells Fargo. But Wells isn’t in the top 5).

Given that Goldman bought $20 billion of credit default swaps from AIG in 2005 alone, and that Goldman received $13 billion and Morgan $1 billion from the AIG bailout, why weren’t Goldman and Morgan on the earlier list?

It might simply be that Fitch’s new list is not limited to any certain type of company, but includes all derivatives holders. Or it might be because Goldman and Morgan became “bank holding companies” since the list was published, and their new status made them subject to inclusion in Fitch’s new list. Or it may be because Goldman and Morgan hid the data.

This article was posted: Tuesday, July 28, 2009 at 4:27 am

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