5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives | Zero Hedge
The numbers speak for themselves. The banks maintain the fiction that derivatives should be netted out (long and short positions cancelling each other out), and that their actual exposures are much less than their notational exposures. The only flaw here is when a large counterparty goes bust on one side of the trade, the netted exposure becomes the notational exposure. This is what happened with AIG and Lehmann Brothers in 2008. When that happens, watch out below as the whole system quickly unravels. It is not a question of if, but when.
It is truly immoral to jeopardize the future of our society in such a manner and is not in anyone's long term self interest. Put up a shield of "Too big to fail" and thieves and scoundrels will steal everything insight while crowding out those that are conducting banking on the terms of a rational business model.
I don't understand the counter-party risk. As a retail investor, I can't write options I couldn't make good. I guess these large institutions buy each other's options on faith.