Banks Could Still Blow Up The World The worlds biggest banks still cant fully account for all the risks theyre taking when they trade derivatives, according to a report last week by a group of 10 of the worlds financial watchodgs, including the Federal Reserve. Derivatives, in case you dont know, are essentially side-bets that banks and hedge funds and other investors make with each other on the prices of things trading in other markets. These other things include everything from corn prices to subprime mortgages. Sometimes derivatives are helpful ways to buy insurance against wild price swings (see corn futures, for example). Sometimes theyre dangerous ways to feed Wall Streets addiction to obscene bonuses (see subprime mortgage-backed securities, for example). Sometimes theyre both! Though banks these days arent trading too many subprime mortgage-backed securities -- the derivatives that blew up the world last time -- theyre still trading plenty of other such stuff, including the credit-default swaps that recently cost JPMorgan Chase $6 billion in the London Whale debacle. Even years after the crisis, JPMorgan didnt see that one coming. And JPMorgan is probably not alone, according to this new regulatory report. Heck, banks cant even always identify whos on the other side of their trades -- which, as you can imagine, is somewhat vital information. Five years after the financial crisis, firms progress toward consistent, timely and accurate reporting of top counterparty exposures fails to meet supervisory expectations as well as industry self-identified best practices, the regulators wrote. huffingtonpost/2014/01/21/banks-derivatives_n_4638942.html?ref=topbar
Posted on: Wed, 22 Jan 2014 03:59:08 +0000
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