thanks misty ... some interesting excerpts I pulled out (italacized) ... sorry couldn't help the commentary

Second, because the high specialized business of structuring, trading, and managing derivatives transactions requires sophisticated and expertise, derivatives activity is concentrated in those institutions that have the resources needed to be
able to operate this business in a safe and sound manner.

ROFLMAO ... and who might those companies be

in most derivatives transactions, such as swaps (which make up the bulk of bank derivatives contracts), the credit exposure is bilateral. Each party to the contract may (and, if the contract has a long enough tenor, probably will) have a current credit exposure to the other party at various points in time over the contract’s life. Moreover, because the credit exposure is a function of movements in market rates, banks do not know, and can only estimate, how much the value of the derivative contract might be at various points of time in the future.

I guess these companies are so trustworthy that even though they don't know the value you can eliminate the mark to market method of accounting and since no on will buy those derivatives, we rely exclusively on their trustworthiness ...Only in Denmark you say ... pity, or is that there is something rotten in the state of banking?

Interest Rate contracts represent 82% of Notional derivatives in US banks as of Dec 08.

May need interest rates of -1 or 2% ... that is Bernanke will start paying people to take loans to avoid further systemic risk ...my goodness what happens when inflation kicks in thanks to a bloated money supply and interest rates take off????

Borrowed this one from the banks backdoor profit article

But something magic happened in the fixed income trading group for Citi. This is pure gold if you like arcane financial statements packed with fictional earnings. If you dig into the quarterly report, you'll learn than fixed income trading revenues were boosted by a "net $2.5 billion positive CVA on derivative positions, excluding monoclines, mainly due to the widening of Citi's CDS spread.

--That takes some sorting out. A CVA is a "credit value adjustment." As you can learn here, it's the credit risk premium of a derivative contract. Once you sort it out, you learn that Citi "made" $2.5 billion on a derivatives position designed to profit when the companies own credit default swaps spreads widen.

--Or, in plain English, Citi profited because it made a bet that the cost of insuring itself against a default would go up. The credit default swap market is the place where you can bet on the credit worthiness of a firm, or, essentially, the chance that a firm might default on its bonds. Citi appears to have reported a $2.5 billion trading gain in the fourth quarter precisely because the market thought the company stood a good chance of failing (hence the widening CDS spread).

--As far as we can tell, if you use this kind of perverted logic, the closer Citi gets to bankruptcy, the more money it would "make" on its derivatives. That shows you how bogus the quarterly number was. The company reported declining revenues in its core banking and lending activities. But thanks to fixed income and this handy $2.5 billion CVA, the company was able to report $1.5 billion in net income.

What a great scheme, you can make huge money and get superb bonuses by making mioney predicting your failure, so one as one division goes bye bye ... the other makes huge profits and awards large compensation schemes to the geniuses that new the company was going bankrupt with the bets it was taking.

If we could do that we could borrow obscene amounts of money from the bank and then go to the bank and buy double the insurance against failure, as we set back drinking margaritas and defaulted on the loans we would collect our insurance policy give half to the bank and keep the other half. This new found wealth could act as collateral so we could borrow more money from the same bank and take out twice as much insurance from the same bank again .... this time defaulting as we sip on singapore slings, we collect on the insurance .... the bank gets there half so operationally one part of the company is doing well ... some tough times in the insurance business .... but they probably made very good other bets.

Aren't derivatives wonderful!

orgy