[dickjocke]

Totally talking out of my butt here, I have no finance knowledge. But just as a matter of general game theory stuff I understand that sometimes you have to push all your chips in on a position, but that doesn't seem sustainable? Like how often is it reasonable for a big bank to have a position in a single security that could bankrupt them?

[btilly]

For some companies, every single night!

Money chases the sun. At the end of trading in New York you make a swap with a company in Japan that at the end of trading in Japan does the same with London then back to New York. Any money not swapped doesn't make money overnight.

This is called the overnight repo market. But if you don't get your money back in the morning, you've got a problem.

[7373737373]

Is it possible to quantify how much "active" vs "passive" money/capital there is?

[btilly]

I doubt that it is possible to properly quantify how much capital there is, let alone to classify it.

http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivati... is nearly 20 years old, but Warren Buffet's criticism of how we account for the value of derivatives is as true today as it was then.

[alexpotato]

Great question! Realized I was mixing different company sizes in the original post.

This would most likely be hitting smaller to medium sizes firms (e.g. Hedge Funds) that are holding a larger position in a security. The small/med firms don't "self clear" so they tend to depend on a larger firm to do that for them.

I should also point out: I used the example of one big position but it could also be a bunch of medium sized positions and then the PB says "Hmmm, we don't agree with 1 or more of those positions so we are stopping trading with you on all of them."

[seanhunter]

It's never reasonable although it doesn't stop people from doing it. History has shown us the folly of this (eg read "When Genius Failed" for a great history of the LTCM collapse). Due to multiple failures, large banks are to a greater or lesser extent prevented from doing this, but smaller financial players do get themselves into trouble.

[lowdose]

The London whale, Long Term Capital Management, etc etc.