Sunday, September 27, 2009

Financial media gets the hype award for reports on "derivatives revenue"

Financial media is at it again hyping up derivatives revenue at banks. CNBC: "Banks Made $5.2 Billion From Derivatives in 2nd Quarter". WSJ: "Banks Made $5.2 Billion in Derivatives Trading". (Interestingly enough, this time Bloomberg didn't carry the story.) Yes these "banksters" are back doing their derivatives thing again. Great headline grabber. Of course they all picked it up the Associated Press article (here is a copy reprinted in the WSJ):
AP: U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter, as the level of risk eased in the global market for the complex financial instruments, according to a government report released Friday.

The financial media of course doesn't have much understanding of how trading desks report revenues (shown here in the OCC report).

source: OCC report below

A "rates desk" (or division) for example may be trading everything that involves interest rates. It's a combination of cash instruments (bonds), OTC derivatives (swaps, caps, floors, swaptions), secured loans (repo contracts), and financial futures (eurodollar futures, etc.) These instruments constitute books and portfolios, both market making and proprietary. Separating the P&L by instrument for reporting purposes does not work because many of these individual positions act as offsets for one another. Nor does the OCC ask for that information - it reports results by broad business lines, not by instrument type. Here is what the OCC actually said (see attached report below):

U.S. commercial banks reported revenues of $5.2 billion trading cash and derivative instruments in the second quarter of 2009

Again, "cash instruments" means stocks, bonds, loans, physical assets, etc. Trading "contracts" does not necessarily mean derivatives either - it includes repo, spot FX, etc. Derivatives are simply an integral part of market making and prop activities.

But obviously truth doesn't always grab headlines, and financial media doesn't always do it's homework. For their misleading reporting as a means to grab headlines, the mass media and in particular the Associated Press gets the Sober Look Hype Award:

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