US Bank Derivative Exposure

Chris Whalen at the Institutional Risk Analyst asks an interesting question: How Much Capital Does a Bank Need?

The short answer: Alot.

The longer answer depends upon the bank’s derivative exposure. Chris includes this handy chart to help you figure out just what that cap need might be:

Economic Capital is as calculated by IRA.  All figures in $000 :

Sources: FDIC/IRA Bank Monitor; Q1 2008 data shown in “bank only” rollup.   

WTF? $90 Trillion dollars derivative exposure for JPMorgan ? No wonder the Fed "rescue" of Bear Stearns  was via JPM — it was their own derivative exposure that was at risk.


Memo to the President-Elect; How Much Capital Does a Bank Need?
Chris Whalen,
Institutional Risk Analyst, August
21, 2008

Download bankcds_capital.pdf

What's been said:

Discussions found on the web:
  1. JS commented on Aug 21


  2. Jeff M. commented on Aug 21

    @WTF? $90 Trillion dollars derivative exposure for JPMorgan ? No wonder the Fed “rescue” of Bear Stearns was via JPM — it was their own derivative exposure that was at risk.

    Good point, Barry! I think you nailed it. It was in JPM’s own best interests to step in with a big assist from the Fed and probably taxpayers……

  3. James Sivco commented on Aug 21

    Just caught the Bitter:Sweet concert here in Houston, TX.

    Great band. thanks for turning us on to them.

    great concert. the girls thought it was a “cute” show.

    new album is good too.

  4. sanjosie commented on Aug 21

    Yikes – at 14 bp change in the derivatives book wipes out JP Morgan’s Tier 1 capital. Their goose is cooked! Unless the Fed keeps them on their protected endangered species list. Hah!

    Add $90 trillion to the US Deficit when that comes about. Oh, Dennis Neale, you’ll argue it’s notional, so the true hit will be less than ten percent of that, geez only $9 trillion.

    Utterly mind boggling. The US deficit is 9.5 trillion now – not counting the GSE’s, Social Security…

  5. mappo commented on Aug 21

    The US DEBT is $9 trillion. The DEFICIT is ~$400 billion

  6. Noah commented on Aug 21

    JP Morgan written alot of the BSC credit default swap contracts. If we think back to that weekend, the Friday before and the week after, look at what happened.

    JPM buys Bear for ultimately $10/share, and saves tens of billions of losses they probably would have occurred if Bear failed. Fed helps organize.

    Those holding CDS protection on BSC on Friday, were heavily IN THE MONEY. On Monday, their CDS contracts were worthless. So, they have to unwind other positions that were working: sell commodities, cover shorts, etc..

    The week after BSC deal, here is what the indices did:

    GOLD: -8%
    OIL: -6.3%
    NAT GAS: -8.2%
    CRB INDEX: -7%
    XLF: +10%
    FRE: +50%
    FNM: +50%
    USD: +1.5%

    data courtesy of

    The point is that a failing Bear would bring systemic issues to all financials, with the writers of the CDS contracts first in line to take huge losses. Here in comes JPM.

  7. Jeff M. commented on Aug 21

    OK, someone please educate me here. How is it that Dick Bove can predict (basically start a rumor) that LEH is going to be bought and that’s perfectly legal, while short-sellers make similar “predictions” the other way and that’s criminal? Someone please educate me.

  8. km4 commented on Aug 21

    1) We are all subprime now
    2) We are all derivatives now
    3) We all are subjected to the massive ponzi financial scheme that’s needs to perpetuate to keep the increasingly fake and bullshit US economy going.

  9. JimmyY commented on Aug 21

    Yeah, this ‘rally’ in the S&P500 makes a lot of sense. TSLF shows stress with bid-to-cover at 1.79, Crude @ $121, Reuters now reporting that precious metals dealers cannot get replenished from the US mint for Eagles & Buffalos due to high demand, Initial claims trends are very apparent (down), leading indicators down…. do folks really believe that this will be a generic 12 – 16 month recession? WTF?! AM I missing something? What say ye BR?

  10. leftback commented on Aug 21

    Exactly. The BSC rescue was not a rescue of BSC.

    So, to extend this line of thinking, who has exposure to Lehman, WaMu, Regions, or any other entity deemed “small enough to fail”? Given that FRE and FNM are too big to fail, the question becomes: what are the systemic consequences when a bank is allowed to fail without a take-over, take-under etc.?

    LEH is probably going to be forced to sell assets and might survive in some form. Hard to see how WaMu can keep going. So who are the counter-parties?

  11. CFA PM commented on Aug 21

    For JPM, this all about how it’s calculated. JPM is basically the clearinghouse for a lot of derivatives, so they only have “exposure” if one counterparty fails. Their risk, then, is not so much pricing as system stability.

    Re: their BSC CDS “exposure”, again, they were pretty much just the middleman. Somebody was long on one side and short on the other, both used JPM as a writer but odds are JPM would not have been the one to pay up unless the short counterparty went under.

  12. CFA PM commented on Aug 21

    Let me go one further with an illustration. Suppose JPM’s financials showed it had $20bn CDS exposure to GM. That, more likely than not, is going to be $10bn each way with 2 different counterparties. So their net exposure is $0 unless the counterparty that ends up owing $10bn can’t pay up.

  13. Movie Guy commented on Aug 21

    Where do we go from here?

    Which of the heavies may not survive?

  14. Rob Dawg commented on Aug 21

    WTF? $90 Trillion dollars derivative exposure for JPMorgan ?

    The chart says:

    JPM $91,592,580 and notes $(000s)

    That’s Billions not trillions.


    BR: RD, thats tier 1 — look at the 3rd column: (widen your browser window)

    JPM $90,408,468,778 (All figures in $000):

    Dems’ trillions, baby!

  15. Mika commented on Aug 21

    Ummmm…isnt the Worlds stock market capitalization about 47 tillion? JPM has almost double the exposure of the worlds market cap? how does that even work?!?! am i missing something?

  16. GLOOMY commented on Aug 21

    Here is my interpretation of this data. BUY GOLD!! BUY GOLD!!! BUY GOLD!!!

  17. crgordon commented on Aug 21

    @ Rob Dawg

    Move a column to the right – you showed the Tier 1 assets – derivatives are really trillions

  18. BG commented on Aug 21

    Look, I think the entire Financial System in the US is FUCKED! Get it?

    The thing that amazes me is that apparently no one ANYWHERE did anything wrong???

    Now, that my friend is the greatest WTF of all times!

  19. pescayolas commented on Aug 21

    finally, i have been trying to get a couple of other blogs that i follow to post this info, if you get a chance check out this latest release by the OCC specifically page 25 it lists the top 25 banks in the US and their CDO exposure.
    There is a saying that goes “no matter what deal you are doing on wall street, you are doing a deal with JPM”

  20. gloomy commented on Aug 21

    I challenge you to construct a list of money center and regional banks that are NOT at high risk of failure. I can’t think of any.

  21. MikeBC commented on Aug 21

    Can someone kindly explain the significance of the “spread vs. RBC” column, in light of the apparent fact that JPM is running a matched book of trades and (i’m inferring) no single move in rates will actually cause exposure or losses in the derivatives book, assuming counterparties do not default??

  22. Caroline Binham and Joyce Moullakis commented on Aug 21

    Large Number’ of Banks Mis-Marked Assets, U.K. Regulator Says

    Incorrect securities pricing found at Credit Suisse Group AG, Morgan Stanley and Lehman Brothers Holdings Inc. is more widespread and will be investigated, the U.K.’s financial regulator said today.

    The Financial Services Authority said it will begin the probe next year after finding that securities valuations at a “large number” of London banks were “materially flawed or inadequate,” the agency said. The problems may worsen if banks fire compliance and risk officers, the FSA said.

    “We recommend that you consider carefully any headcount reduction exercises that will affect valuation-control functions at this sensitive time,” FSA Chief Executive Officer Hector Sants wrote in a letter to CEOs last week and made public today.

    Incorrect pricing on London trading desks has contributed to $2.8 billion of writedowns. The FSA letter comes a week after the U.K. operations of Credit Suisse, Switzerland’s second- largest bank, was fined 5.6 million pounds ($10.6 million) for failing to properly oversee pricing of asset-backed securities.

    Spokeswoman Teresa La Thangue declined to say how many mis- marking incidents the FSA has uncovered or name companies targeted. “The fact that we’ve sent a `Dear CEO’ letter isn’t unprecedented, but it’s rare,” La Thangue said. “It means that it’s an issue we’re taking very seriously.”

    The FSA will be visiting firms and “wielding a big stick,” said Patrick Buckingham, a regulatory lawyer at Herbert Smith and a former Lehman Brothers in-house lawyer. “The FSA has been chomping at the bit to bring an enforcement case based on a lack of systems and controls.”

    `Negative Adjustments’

    Credit Suisse joined at least three of its competitors in identifying incorrect pricing this year. The Zurich-based bank had to write down holdings by $2.65 billion when it discovered the mis-pricings.

    Morgan Stanley suspended a credit trader and disclosed $120 million of “negative adjustment” in June relating to erroneous valuations of his positions. The New York-based firm said it was cooperating with authorities in London and conducting an internal review. The internal review is continuing, London-based spokesman Wesley McDade said today, declining to comment further.

    Merrill Lynch & Co., the third- largest U.S. securities firm, said in May it was probing a trading desks in London and suspended a trader after discovering he may have overstated the value of some of the bank’s equity derivatives.


    The trader, who Merrill declined to identify, traded derivatives based on individual stocks for the firm’s own account, according to a person with direct knowledge of the matter. Merrill initially determined that he may have overstated the value of some holdings by less than 10 million pounds in April, when his marks were detected, the person said.

    In March, Lehman Brothers, the fourth-largest U.S. securities firm, suspended two London-based equity traders after internal controls identified “issues” on share valuations. The sums involved were “not material,” an official for the company said at the time.

    The regulator hasn’t yet investigated the banks. The fine levied on Credit Suisse was based the bank’s own review.

    The marking incidents reflect common traits, including poor oversight of traders and a lack of seniority for product-control staff, the FSA’s letter said.

  23. mathias commented on Aug 21

    i am skeptical too. must be billions.

    The “All figures in $000″ is a ” All figures = $000″ written post-it, by an economist, and then translated ( traduttore traditore) to that by a summer job’s son of him.

    no chance ?

  24. vp commented on Aug 21

    The nominal amount is not a good indicator of risk. First, it is likely that some of those derivatives positions are hedging other derivative positions, resulting in a reduced net exposure. Second, nominal is not a very good measure of risk.

  25. NotanEstimator commented on Aug 21

    Pardon my weak eyes; but, to me, this says Billions???

  26. constantnormal commented on Aug 21

    OK, definition time — exactly and specifically what ARE “OBS derivatives”? I looked at the source link, and did not see an acronym dictionary for OBS.

    I assume that this is a “worst-case” exposure value, possibly obtained by summing the absolute values of derivatives written and purchased, which would tend to generate a ridiculously large sum, and ignore hedged positions.

    Please educate me on this. I did some order-of-magnitude number checking, and came up with the net asset value of the United States (households and corporations, via wikipedia) as being in the $90 trillion ballpark. These are BIG numbers.

    In any event, there is no danger that the taxpayer is going to be on the hook for this derivative exposure. When companies (or people) go bankrupt, the difference between what they owe and what they have goes up in smoke. FDIC coverage is extremely limited, so it’s not going to put a major hurt on Uncle Sam.

    The banks’ creditors and customers, and whomever is on the other side of these derivatives trades, is another matter.

  27. constantnormal commented on Aug 21

    note to all those in confusion over billions vs trillions:

    The note at the bottom says to add three zeros to all the above numbers. The tier 1 numbers make sense when you do that. When you add three zeros to the derivatives column, you get TRILLIONS.

    Yes, that’s some BIG NUMBERS. While it could be that someone mixed the wrong scale of numbers into the derivatives column, the spread column (the rightmost column that indicates the number of basis points that the derivatives need to change by to wipe out the tier 1 column) tends to make everything internally consistent, if not entirely rational.

  28. zazupuppy commented on Aug 21

    The trillions are correct – in (000) means to add 2 zeros to numbers shown. What is even worse is that the credit default swaps, which are the largest portion of derivatives, AND ARE UNREGULATED by any SRO (don’t have to match buyers and sellers at time of trade, so trades can literally never settle), are leveraged at an estimated 10-30 times. It is much worse than the counterparty issue. Bear Stearns had over $10 Trillion in credit default swaps alone when JPM stepped in. It is no coincidence.

  29. Steve Barry commented on Aug 21

    Great post and agree 100%…just a bit puzzled at Barry’s tag line which indicates some surprise at JPM’s derivative book (unless he is feigning surprise for satirical purposes)…because this was all known way back. Barry posted on it back in March…I commented as well that the real bailout was for JPM:

    The real bailout was for JP Morgan, not Bear. They get to keep the lid on their garbage for awhile longer and get to pick up assets at what appears to be a rock-bottom price.

    Posted by: Steve Barry | Mar 30, 2008 8:42:47 AM

  30. Darkness commented on Aug 21

    I went hunting for some historical docs on when this all started and found this interesting 2002 article from Zeal entitled JPM derivatives monster.

    Money quote: “Amazingly, the total derivatives positions held in terms of notional amounts by US banks literally exploded in the six months between the Q1 and Q3 reports. The US banks ramped up their derivatives positions by an absolute 16.8% in a mere six months, or $7,362b (yes, that is seven thousand BILLION, or over seven TRILLION dollars).”

  31. zazupuppy commented on Aug 21

    Well, nothing is as it seems. Bof A bailed out Countrywide just in time before the government had to bail them out and a month later, B of A was suddenly a new member of the Dow Jones Industrial. A reward? JPM is in big trouble with derivatives because most of these type of securities are handled by the Private and Investment Bank divisionsof these institutions, where trading regulations are not under the SEC, NASD, etc. If you will notice, JPM, Citigroup and BofA, all of whom have huge private and investment banking divisions, have the highest derivative exposure. Again, no coincidence. We will never know the extent of the crises for years. Also, my last post should have said that in (000) means to add 3 zeros to the number shown (I had a typo and said 2). So we are talking in trillions and the numbers are high because of obscene leveraging. The deleveraging will take a long time and be painful for all of us.

  32. tfd commented on Aug 21

    dude…’alot’ is a lot….Two Words!

  33. Dan commented on Aug 21

    I’m betting it’s a slide error

  34. Jtil commented on Aug 21

    Nggg. Never *alot.*
    Alot is what illiterate people write. You’re not illiterate.
    A lot of people make this mistake. Don’t be one of them.

    Your friendly-daily-reader-who-is-also-an-editor.


    BR: * Sigh * . . another picture straightener . . .

  35. blue bellied Yankee commented on Aug 22

    Buffett has talked about all these trillions in derivatives many times over the years, and he calls derivatives:


    As usual Buffet knows what he is talking about and has direct experience in how worthless these things are. Years ago Buffet bought GenRe (a reinsurance company) and he got a small book of derivatives (a few hundred million) with the purchase. He found that he couldn’t even sell the things and eventually he took a bath to the tune of the several hundred million. He said no one really understood them and if he couldn’t sell the derivatives when things were calm, imagine what it would be like when the markets are riled. Once again we are finding out Buffet was right and way ahead of his time again.

    References for the above information recently can be found in Berkshire Hathaway’s annual reports.

  36. Don commented on Aug 22

    Basis Point – BPS
    A unit that is equal to 1/100th of 1%, and is used in denoting the change in a financial instrument. The basis point is commonly used for calculating changes in yield of a fixed-income security, interest rates and equity indexes.

    The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.

    So, a bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points or interest rates that have increased by 1% are said to have increased by 100 basis points.

  37. Don commented on Aug 22

    OBS = Off balance sheet

  38. dallas commented on Aug 22

    thanks, pescayolas, for the link…that table is very informative, particularly the “bilaterally netted” exposure calculations. since USB (not UBS) is my biggest single holding, I watch it like a hawk and this was additional reassurance

  39. mickslam commented on Aug 22

    Others have noted that a 14bp move wipes out capital for JP. What happens if a 56bp move happens. It isn’t that big of a move…

  40. MikeBC commented on Aug 22

    dallas I am questioning whether it is actually true that “a 14bp move” wipes out JPM’s capital–I think their derivative book is largely matched and that therefore moves in rates may change the roster of counterparties to whom JPM is exposed but not its aggregate net dollar exposure. But no one has answered my question posted above about whether that is true and, if so, what is the significance of the 14bp figure in the chart.

  41. pescayolas commented on Aug 22

    this thread is so indicative of the market, we all probably consider ourselves to be somewhat astute on market place matters and several of us can’t even tell if those are billions or trillions (i had to physically write the numbers down and then compare it to the fact i know UBOC is a 50billion dollar company) also mickslam questions what a 14bps point will do and none of us astute market followers can’t answer it. I can’t answer it, I can say it wont be good. But, then i look at recent CMBX spreads and think everything should be grinding to a halt even faster than it is – and poof SKF is down 4%, LEH is up 10% and Hank says all is good.

  42. Nick Gogerty commented on Aug 22

    The term Tera dollar ($100 trillion) was first used to describe the notional exposure of JPmorgan during the Bear takeover. They have shrank things a bit, but the netting risk of CDS still loom very largely. Even internal netting of some of the notional amounts still leaves huge exposure to a large EOD or multiple small EOD’s which could overwhelm either the ability to find securities or cash to settle.

  43. 666 commented on Sep 19

    MY New World Order is coming
    This will give me world control.
    Then, you can have all the bankers
    They will not be needed
    Now I will own the world
    paid with nothing.
    all followed the beast
    It will come 2012 14 dec
    You can not stop it.

  44. Isi commented on Sep 20

    JPM derivatives number seems incredibly high because, it has been said, they are not covering only for themselves, but act as the main agent leveraging for US Treasury. Can anyone corroborate this?

  45. schallb commented on Sep 22

    A Ponzi is a Ponzi is a Ponzi. Next is world class action against the elite that own the privately owned federal reserve

  46. David commented on Sep 27

    Tips to get loans, personal and business loans

    Well, at least there are people out there trying to solve this problem. There is a need for more non-profit agencies helping people re-gain their financial footing. the foreclosure alternative blog

  47. ochomehunter commented on Sep 28

    I can see the consolidation happening, the game of cat and mouse @ CDS started with demise of BSC. What we are seeing today is power shift from little banks to major four banks C, BAC, WFC, and JPM in USA. This make me now believe in the painful movie “The Money Masters – How International Bankers Gained Control of America”

    Link “

  48. Jim T commented on Sep 30

    Below is an email I sent to Bloomberg to try and get someone to investigate JPM and the Tresury’s back door payments of $138 Billion Dollars. I still have no answers after contacting (WSJ, Bloomberg, CNBC, NY Post, Nancy Pelosi, etc.. except as reported below)

    I wrote to you a couple of days ago asking you to look into an $87 Billion Dollar payment from the Treasury Department to J.P. Morgan Chase that was made on behalf of Lehman Brothers because I thought it should be big news and brought out to the publics attention that the Treasury tried to shoot this payment for Lehman under the radar. If we can’t TRUST HENRY WITH $87 BILLION why on earth would we give him $700 BILLION?

    I contacted this group (Money and Markets) with the same request I made of you. And the confirmed a payment of “$87 billion in repayments to JP Morgan Chase for providing financing to underpin trades with bankrupt investment bank Lehman Brothers, etc.,”

    If you read down their story (Below) they add the $87 Billion Dollar payment into the ongoing cost of the bail outs. They must have found the same information the reporter that wrote the original story found on that payment being made.

    Why isn’t a secret $87 Billion Dollar payment Big News? What else are these guys doing and or hiding? Why is J.P. Morgan Chase involved? Don’t they hold 50% of the World CDS contracts and exposure? Weren’t they forced to buy Bear Stearns to keep Bear’s CDS exposure out of the Bankruptcy Court’s scrutiny? (And therefore out of the public’s scrutiny) And now they make $138 Billion in advances to bankrupt Lehman to settle CDS contracts, get the Treasury to pay them back $87 Billion on the QT and What about the balance of $51 Billion? Did they eat that loss or will Lehman pay them back?

    Why is it Soooooooooooo important to J.P. Morgan Chase and the Treasury to keep the derivatives & CDS story out of the press? Is J.P. Morgan Chase insolvent and WAY TOO BIG to fail or bail out? How many TRILLION would that one cost? Is the $700 Billion Bail Out just a side show to distract the market and public from the real problem?



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