Commercial banks take 4Q hit trading derivatives

Commercial banks lost $9.2 billion trading derivatives during the fourth quarter as the credit crisis intensified, according to a report released Friday by the Office of the Comptroller of the Currency. Losses mounted as commercial banks had to take additional write-downs on the value of investments they held, offsetting gains from actual trades. The collapse of Lehman Brothers Holdings Inc. and the near-failure of American International Group Inc. in September touched off one of the worst parts of the credit crisis, which carried over into the final three months of the year. Credit markets froze up, further pressuring the value of many types of investments. Derivatives contracts include interest rate and foreign exchange contracts as well as credit default swaps — a product that is essentially a bet against the performance of other types of investments. Credit default swaps have been at the heart of the credit crisis and a main reason for problems at Lehman and AIG. The total value of derivatives at commercial banks jumped 14 percent to $200.4 trillion as financial firms changed their operating status to commercial banks after the collapse of Lehman in an effort to stay in business. Among those changing their status were investment banking giants Goldman Sachs Group Inc. and Morgan Stanley. For the full year, commercial banks recorded their first-ever industrywide loss on derivatives trading, losing $836 million in 2008, compared with revenues of $5.49 billion in 2007, according to the OCC.