If this is the case, then it’s quite reasonable for the banks to make a profit in return for intermediating a deal between willing buyers and sellers of these derivatives. What’s more, it does not necessarily mean the banks are running any material risks – it is likely to be a simple function of supply and demand. There is very limited supply in the banking sector due to high barriers to entry, so they can charge a high price without taking much risk.

Yes, the high notional derivative figure does indicate the potential for major disruption if things go wrong and a few parties are stuck on the wrong side of a multi-trillion liability (or asset!). But it doesn’t necessarily mean the banks are the ones taking that risk. I suspect the banks are relatively risk-averse right now because they can make decent returns without having to take much risk.

Thats actually worse. Derivatives, by their nature, are zero-sum instruments. Thats why they are great for financial alchemist-types: their “quantum foam” nature means to create them, you only need to just get two counterparties in the room and poof, they exist.

But you can’t make NET money on such things, just as quantum-foam doesn’t create energy: For every dollar made, another dollar must be lost.

So if banks made $15 billion on derivitives, that means either

a) Some banks didn’t really make this, but have only made this on paper where it will dissapear: if both counterparties show a profit on a derivitive deal, one must be mistaken and will prove to be mistaken in the end.

b) Anything remaining there must be an equal dollar value of losers out there.