And I'm not kidding. Below is a breakdown from Citi of the change in major investment banks' business volumes for the most recent quarter, versus Q107. Take a look at it and think about it for a few moments:-
Now, traditionally, investment banks have always done some equity and debt trading. However, their main reason for existence is deal-making. Notice how every form of deal-making, from M&A's, securitizations, IPO's and debt-arranging has completely collapsed.
In fact, the main "growth" areas are in derivatives trading. Remember what Warren Buffett famously called, "Weapons of Financial Mass Destruction"?
When there is lots of "primary" business going on (new deals), you can expect high volumes of derivatives issuance, because, for example, a company issuing a big bond issue might want to hedge their interest rate risk.
However, when there are absolutely no new deals happening, but derivatives trading volumes are going through the roof...well, that's just the equivalent of gambling at the casino.
That's why I think this is so scary. Total derivatives outstanding are in the order of $US500trillion. Estimates of the "at risk" amounts are anywhere between $US5trillion to $US50trillion, depending on who you believe.
The thing is, because most non-investment banking players have summarily withdrawn from the derivatives markets, after being burned by the credit crunch, most of this derivatives trading is between the investment banks themselves.
As anyone who's played poker knows, if you don't all agree to call it quits at midnight, at some point there will be a whole raft of losers and only one winner.
Bear Sterns has already been cleaned out, yet these cowboys keep on upping the ante. There will be many more losers, before this is all said and done, because they're not engaging in business anymore - they're just plain gamblers.
