Well, in theory, in the example you site, "the risk is exactly zero". However, it's not always this way, because there is also gambling, err speculation, err ma

Well, in theory, in the example you site, "the risk is exactly zero". However, it's not always this way, because there is also gambling, err speculation, err market making, err ... Not everything is always perfectly hedged. And when it's not, there are mark to market issues. And, the market isn't always liquid. Levine is in fact writing about a market that "froze up". One of my favorite anecdotes (pg 212) from The Big Short involves Deutsche. It was perhaps embellished a bit for the book. It involved credit default swaps: In early July, Morgan Stanley received its first wake-up call. It came from ... Deutsche Bank ... the CDS (sold to) Deutsche Bank had moved in Deutsche Bank's favor Deutsche: Triple-A-rated subprime CDOs ... were now worth ... 70 cents on the dollar Morgan: Our model says they're worth ninety-five Deutsche: our model say's they're worth seventy Morgan: Well, our model says they are worth ninety-five, repeated the Morgan Stanley person Deutsche: Dude, fuck your model. I'll make you a market. They are seventy---seventy-seven. You have three choices. You can sell them back to me at seventy. You can buy some more at seventy-seven. Or you can give me my fuckimg one point two billion dollars. That's exactly what happens at just the wrong point in time when there is stress in the markets. This isn't something from ancient history, this all happened less than 10 years ago. So, while 72 trillion is indeed a "meaningless" number, quite often the "residual risks" you mention will greatly exceed the equity in the big investment banks. Notably, Deutsche has in the past been considered to be very over-leveraged. The banks smartly foisted off some of their "residual risks" onto muppets and companies like AIG, who stupidly accepted the business. But AIG wasn't liquid enough to pay off. If the Fed hadn't bailed out AIG, who then bailed out their counter-parties, the fallout would have utterly destroyed the world's financial system. As it was, we came pretty close to everything crashing down. IIRC at one point the Fed had to provide liquidity to e.g. Verizon, because the banks weren't willing to. Sheesh.