Credit to @DrBob2 for pointing out:

"Securitization and derivatives are two separate processes (which can be used sequentially). Securitization is, as you/Gemini noted, the bundling of X – which can then be sold more easily than each one individually. And with less risk (more diversification).

Derivatives are financial ‘instruments’ which are tied to the performance of the underlying (their value derives from said performance). The underlying can be stocks, futures, the above bundled mortgages, etc. but they are two different layers if you will."

As a result I looked up the dollar amounts of the securitization market. According to Google Gemini, Tthe total U.S. securitization market is estimated to be approximately $14 trillion. That’s what the Dividend Cafe said.

Then I asked about the derivatives market.

The derivatives market is often discussed in terms of two different values: notional value and gross market value. The notional value is the total face value of the underlying assets, which is a massive number and is often the one quoted in headlines. The gross market value represents the actual cost of replacing the contracts and is a much more realistic measure of the market’s size.

For the U.S. specifically, reports from the Office of the Comptroller of the Currency (OCC) indicate that the notional amount of derivatives held by insured U.S. commercial banks and savings associations was around $206.1 trillion in the first quarter of 2024. This value is dominated by interest rate derivatives. This gigantic number is far greater than the actual amount of the bonds that speculators are betting on.

The OCC’s Quarterly Report on Bank Trading and Derivatives Activities for the third quarter of 2024 reported the “gross positive fair value” of derivatives held by insured U.S. commercial banks and savings associations to be $2.441 trillion. A small number of large U.S. banks hold a vast majority of these derivatives, with the top four banks holding over 87% of the total notional amount.

This shows that the risk is concentrated in a few banks.

JPMorgan Chase Bank, N.A.
Citibank, N.A.
Goldman Sachs Bank USA
Bank of America, N.A.

This concentration is a key point of focus for financial regulators, who monitor the systemic risks associated with such a large amount of trading activity being concentrated in so few institutions.

Sudden unexpected interest rate moves could destabilize these “too big to fail” banks which could put the taxpayer on the hook.

Wendy