derivatives article - Barron's

[Steve Grube]

The Sep 28th Barron's has an article by
Kathryn M.Welling, sitting in for Alan Ableson.
It's a great article about the degree to which
all the various forms of derivatives handled
by all the various institutions is not well known
at all.  It points out that the biggest financial
names in banking and brokerage are much
more vulnerable than either:  they're willing
to admit or than than know!   (I think one
point was that derivatives when used as
insurance are probably under priced for a
real debacle in the mkts and consequently
those providing them are vulnerable)

Here is part of the middle portion of the
article, wherein an estimate is made of
global banking equity lost so far.

=========article follows=======

Nonetheless, some reasonable back-of-the-envelope
estimates can be made.

With world GDP at about $30 trillion, Andrew reckons
-- based on the relationship between GDP and money
supply in the G-7 industrialized nations -- that $30 trillion
is also a workable estimate of the amount of money
sloshing around the globe. From there, using a rough
average of 5% Tier One capital, he arrives at a ballpark
figure of $1.5 trillion of total equity capital in the global
banking system.

Which certainly sounds like a comfortable cushion.
Or is it?

Says Andrew, "If current estimates are right and
banks have lost $200 billion or so in the combination
of recent events in Asia and Russia -- and Fitch has
put a $100 billion number on Russia alone -- then
the global banking system has probably suffered a
contraction of its equity on the order of almost 14%.
Which means we must either expect the banks to
come to market for more capital -- or see a sharp
contraction in their lending activities."

Neither, obviously, is an ideal background for world
markets in present circumstances. What's worse,
Andrew reckons, is that the $200 billion or so
of hits the banking establishment has thus far
owned up to could be just the beginning. Especially
if "America's financial-asset bubble" pops. The reason:
The financial system's immense leverage to derivatives.

 Precisely how immense, Andrew ruefully admits,
is unknowable. Consistent reporting standards
simply don't exist.
========end of article fragment==========

("Andrew" is Andrew Smithers of Smithers & Co.

 of London; consultants to the fund industry)