[A-List] "Deficit attention disorder" (Change You Can Suspend Disbelief In -Club Orlov)

[Todd Boyle]

At 03:52 PM 4/22/2009, Leigh Meyers quoted Publius III :

>Meanwhile, a different branch of the US Treasury -- the Office of the
>Comptroller of the Currency -- catalogs $170 trillion in derivative
>exposure among five large US banks. A commonly accepted estimate of
>the failure rate of these derivative instruments is 20%. If the
>government is to continue to bail out the country's major financial
>institutions, the American public should expect this exposure to yield
>least $34 trillion in new obligations.

The $170 trillion figure is the notional value, not the exposure.

The most recent figure is $200 Trillion as of Dec 31 2008.   The OCC
report is at http://www.occ.treas.gov/ftp/release/2009-34a.pdf

The "notional value" is almost totally unconnected with the exposure
of the losing bettor, or asset value of the winning bettor, in the contract.
Example: Supposing I have a call option (one of the most common
derivatives in the world) on the NYSE on shares of IBM at $100 /share.
Its notional value is $100 --- the value of the underlying asset.
Suppose the price is $103 today.   My call has a market value of $3.
And the loser has an unrealized liability of $3.

Everybody --please --read at least the highlights of the report.  When
we speak or write in public view, making such wildly incorrect statements
as if the derivatives positions of banks will cost the U.S. taxpayer
$34 Trillion, our credibility goes right out the window, and along with it,
any hope of influencing U.S. economic policy,

Now, go out and find right-wing talk show hosts making this mistake.
Play hard and win.

Todd
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