us banks in big trouble?, page-24

Nice post Free Will,

People get a bit carried away when they see the huge notional outstanding in derivatives and assume that banks are running stupidly large exposures.

In reality the net market risk exposures are quite small (and covered by regulatory capital) and the credit exposures are either collateralised or novated to a central clearer. The relatively low levels of risk are well demonstrated in the unwinding of Lehman Brother's derivative portfolio in September-October 2008.

http://www.lchclearnet.com/swaps/swapclear_for_clearing_members/managing_the_lehman_brothers_default.asp

LCH make it sound as though they did a really good job in difficult circumstances, which is partly true. In reality they found another bank who for a fee, stepped in and took over all Lehmans positions. LCH ended up giving money back to Lehman's administrators.