We fondly believe that a computer can model the behavior of markets, people, chemical reactions, etc. In most cases, we are correct. A computer can take an enormous amount of variables and predict the outcome with amazing accuracy.
Unfortunately, life is more complicated than any computer model. One of the first computer models was designed to predict the price of oil. It worked really well until the Shah of Iran abdicated. The model was useless to predict what then happened to the oil prices. Some of us still remember the lines at the gas stations.
I believe that the banks are losing large amounts on derivatives because they are using computer models to recommend the buys and sells. These computer models were designed using data from the time before the 2008 monetary crises.
I have already pointed out that banks and policy makers did not realize that people were using the equity from their homes to get loans. They were then using that loan money to buy boats, TVs, etc. Because the equity was being used for purchases, the economy grew as if wages had increased.
Now all that equity money is gone. Wages haven't increased for decades. The entire economy is different.
And the people at the banks are using computer models derived from an economy that no longer exists. Since only the very best economists and computer programmers can hope to maybe understand the computer models that are derivatives, bankers are making HUGE bets using a betting system that no longer works.
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