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What Today's Mathematical Culture
Knows About Derivatives

Nov. 6, 2014 (EIRNS)—At one of a seemingly endless recent run of "Have We Ended Too-Big-To-Fail?" conferences, at George Washington University Nov. 5, economist John Parsons of the MIT Sloan School of Management gave an entertaining look at one tiny corner of the derivatives bubble. He showed that when it comes to knowing anything about banks' derivatives exposure, the Dodd-Frank emperor has just one piece of clothing, and it is getting rather soiled.

Parsons began by recalling the scene in "Too Big To Fail," the movie, in which a bank trader tells Ben Bernanke and Hank Paulson that he's discovered that AIG doesn't know what its huge total credit default swap exposure is, and has no capital backing for it. They wave the trader off, and he says ominously, "They're not on top of it."

Dodd-Frank required, as of Jan. 1, 2013, "trade reporting" of derivatives by banks and exchanges, and required the Commodity Futures Trading Commission (CFTC) to report totals every month, starting in November 2013. Since Parsons' field is "commodities", he said, he investigated commodity derivatives, a very small, and apparently manageable and knowable slice of the global derivatives bubble.

Holding up cue cards, Parsons showed that the CFTC's reported total in its first report, for November 2013, was "$1.7 trillion." And for individual commodities: "Not available" in all cases. "It says that this is only an estimate," he added.

He checked again in December - cue card - "$1.7 trillion," exactly. And in January 2014 - "$1.7 trillion." February - the "estimate" was "$1.7 trillion." "And this month [November 2014] I checked again", said Parsons, holding up a cue card - "$1.7 trillion." And for derivatives on individual commodities? Still "Not available."

Parsons suggested that the media should demand that the CFTC explain how the commodity derivatives market has maintained such eerie stability for a full year!

The London Whale episode showed clearly, Parsons added, that the management of the largest banks also, still, do not know their own banks' derivatives exposures except, possibly, with a lag of at least six months—by which time it will have completely changed.

And the Bank for International Settlements says the size of the global derivatives bubble is ...