Britain's attempt to leave the EU could cause a storm in financial marketsby Jay Elwes / September 20, 2018 / Leave a comment
In a letter to shareholders in 2002, the great money man Warren Buffett issued a warning. There was one financial asset traded on world markets that was making him worried. “Derivatives,” he wrote, “are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
When Buffett wrote those words, the total value of all derivatives in existence was $142 trillion. Things didn’t stop there: by the dawn of the crash in 2008, the figure stood at $458 trillion. Suddenly Collateralised Debt Obligations, and their close friend the Credit Default Swap, both forms of derivative, became almost everyday phrases, as they became the nitro and glycerin that helped blast the global financial system to pieces.
Ten years on from the crisis, they are more popular than ever. According to the Bank for International Settlements, the notional value of all outstanding derivatives currently stands at $542.4 trillion, higher than the pre-crisis peak. To give some sense of what that number actually means: if a million pounds is a cube of fifties about three feet high, then—from the same 3 square foot foundation—a billion pounds would make a tower of notes 3,000 feet high. A trillion, on the other hand, would reach an altitude of about 570 miles, stretching out past the orbit of the International Space Station.
There are a dizzying volume of derivatives out there—and it looks like they are about to become a problem again. The trigger last time was the stretched “sub-prime” borrowers who could no longer afford the repayments on their condominiums in Florida or the suburbs of the Midwest. This time the problem is set to be the mix of high politics and low farce that is Brexit.
In his recent testimony before a Commons committee Mark Carney, the Bank of England’s Governor, issued a warning. The UK has said that it will pass laws allowing EU firms to work on derivatives trades with our companies post-Brexit, but the EU has made no corresponding offer. If Brussels and London can’t get a deal in place, British firms would not be able to work on derivatives in the EU. Carney warned we would then see “a financial stability risk developing fairly quickly.” The value of…