What the downgrade [of the Big 5 derivatives-holding banks] means for these banks is that they will have to post additional collateral against trades, including derivative trades held on their books. Estimates of the amounts of additional collateral are measured in the billions of dollars. The downgrades also raise their borrowing costs, and should force other financial institutions to review their credit lines to the five bank holding companies. That could result in cutbacks in credit availability.


The five banking behemoths are so large in the global derivatives market that they would appear to be the market. According to the OCC, their outstanding holdings constitute some 95% of the US market total of approximately $302 trillion. Over the past decade the amount of outstanding derivatives has exploded. Since the end of 2002 the outstandings of the bank holding companies have grown from $58.2 trillion to $302 trillion an increase of 419%.

... if the Fed and the US Treasury were trying to find a buyer for [Morgan Stanley] in 2008 and yet it was allowed to continue even as its credit situation deteriorated, how could MS grow its derivative business since then?

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