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Authored by Michael Snyder via The Economic Collapse blog, The recklessness of the “too big to fail” banks almost doomed them the last time around, but apparently they still haven’t learned from their past mistakes. Today, the top 25 U.S. banks have 222 trillion dollars of exposure to derivatives. In other words, the exposure that these banks have to derivatives contracts is approximately equivalent to the gross domestic product of the United States times twelve. As long as stock prices continue to rise and the U.S. economy stays fairly stable, these extremely risky financial weapons of mass destruction will probably not take down our entire financial system. But someday another major crisis will inevitably happen, and when that day arrives the devastation that these financial instruments will cause will be absolutely unprecedented. During the great financial crisis of 2008, derivatives played a starring role, and U.S. taxpayers were forced to step in and bail out companies such as AIG that were on the verge of collapse because the risks that they took were just too great. But now it is happening again, and nobody is really talking very much about it. In a desperate search for higher profits, all of the “too big to fail” banks are gambling like crazy, and at some point a lot of these bets are going to go really bad. The following numbers regarding exposure to derivatives contracts come directly from the OCC’s most recent quarterly report (see Table 2), and as you can see the level of recklessness that we are currently witnessing is more than just a little bit alarming… Citigroup Total Assets: $1,792,077,000,000 (slightly less than 1.8 trillion dollars) Total Exposure To Derivatives: $47,092,584,000,000 (more than 47 trillion dollars) JPMorgan Chase Total Assets: $2,490,972,000,000 (just under 2.5 trillion dollars) Total Exposure To Derivatives: $46,992,293,000,000 (nearly 47 trillion dollars) Goldman Sachs Total Assets: $860,185,000,000 (less than a trillion dollars) Total Exposure To Derivatives: $41,227,878,000,000 (more than 41 trillion dollars) Bank Of America Total Assets: $2,189,266,000,000 (a little bit more than 2.1 trillion dollars) Total Exposure To Derivatives: $33,132,582,000,000 (more than 33 trillion dollars) Morgan Stanley Total Assets: $814,949,000,000 (less than a trillion dollars) Total Exposure To Derivatives: $28,569,553,000,000 (more than 28 trillion dollars) Wells Fargo Total Assets: $1,930,115,000,000 (more than 1.9 trillion dollars) Total Exposure To Derivatives: $7,098,952,000,000 (more than 7 trillion dollars) Collectively, the top 25 banks have a total of 222 trillion dollars of exposure to derivatives. If you are new to all of this, you might be wondering what a “derivative” actually is. When you buy a stock you are purchasing an ownership interest in a company, and when you buy a bond you are purchasing the debt of a company. But when you buy a derivative, you are not actually getting anything tangible. Instead, you are simply making a side bet about whether something will or will not happen in the future. These side bets can be extraordinarily complex, but at their core they are basically just wagers. The following is a pretty good definition of derivatives that comes from Investopedia… A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Those that trade derivatives are essentially engaged in a form of legalized gambling, and some of the brightest names in the financial world have been warning about the potentially destructive nature of these financial instruments for a very long time. In a letter that he wrote to shareholders of Berkshire Hathaway in 2003, Warren Buffett actually referred to derivatives as “financial weapons of mass destruction” The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. Warren Buffett was right on the money when he made that statement, and of course the derivatives bubble is far larger today than it was back then. In fact, the total notional value of derivatives contracts globally is in excess of 500 trillion dollars. This is a disaster that is just waiting to happen, and investors such as Buffett are quietly positioning themselves to take advantage of the giant crash that is inevitably coming. According to financial expert Jim Rickards, Buffett’s Berkshire Hathaway Inc. is hoarding 86 billion dollars in cash because he is likely anticipating a major stock market downturn… Far from a bullish sign, Buffett’s cash hoard could mean he’s preparing for a market crash. When the crash comes, Buffett can walk through the wreckage with his checkbook open and buy great companies for a fraction of their current value. That’s the real Buffett style, but you won’t hear that from your broker or wealth manager. If Buffett has a huge cash allocation, shouldn’t you? He knows what’s coming. Now you do too. Warren Buffett didn’t become one of the wealthiest men in the entire world by being stupid. He knows that stocks are ridiculously overvalued at this point, and he is poised to make his move after the pendulum swings in the other direction. And he might not have too long to wait. In recent weeks I have been writing about many of the signs that the U.S. economy is slowing down substantially, and today we received even more bad news… Despite high levels of economic confidence expressed by business owners and consumers, one key indicator shows that it has not translated into much action yet. Loan issuance declined in the first quarter from the previous three-month period, the first time that has happened in four years, according to an SNL Financial analysis of bank earnings reports filed for the period. The total of recorded loans and leases fell to $9.297 trillion from $9.305 trillion in the fourth quarter of 2016. This is precisely what we would expect to see if a new economic downturn was beginning. Our economy is very highly dependent on the flow of credit, and when that flow begins to diminish that is a very bad sign. For the moment, financial markets continue to remain completely disconnected from the hard economic data, but as we saw in 2008 the markets can plunge very rapidly once they start catching up with the real economy. Warren Buffett is clearly getting prepared for the crisis that is ahead. Are you?
Guest posted a topic in TopicsThere will be no more taxpayer bailouts for the Big Wall Street banks. That much has been established by the lobbied to death Dodd-Frank banking reform (yeah, right) bill. However, instead of taking money from the government (taxpayers), the principal has been established that the next source of money for profligate banks will be your deposit accounts. Yeah, that’s right, the money to stabilize the banking sector during the next crisis will come out of your savings and checking accounts. To add insult to injury – since the banks pay you zero percent on your savings account in the first place – the banks have the right to confiscate your funds if they crash the economy again as they did in 2008. Remember the Great Recession? It’s coming again to a bank near you. How can they do this, you ask? Simple. When you deposit money in a checking or savings account, that money no longer belongs to you. Technically and legally, it becomes the property of the bank, and the bank just issues you what amounts to an IOU. As far as the bank is concerned, it’s an unsecured debt. The way Dodd-Frank has managed to screw things around, derivatives (bets banks have made in the Wall Street casino) have priority over your checking and savings accounts when it comes to paying off their debts. And don’t think that the FDIC (Federal Deposit Insurance Corporation) will save your money. The assets of the FDIC are minuscule (in the billions) compared to the valuation of outstanding derivatives (in the trillions). Your deposits are protected only up to the $250,000 insurance limit, and also only to the extent that the FDIC has the money to cover deposit claims or can come up with it. Ellen Brown asks, “What happens when Bank of America or JPMorganChase, which have commingled their massive derivatives casinos with their depositary arms, is propelled into bankruptcy by a major derivatives fiasco? These two banks both have deposits exceeding $1 trillion, and they both have derivatives books with notional values exceeding the GDP of the world.” The answer is a Cypress style bail-in. You might recall that money was taken out of depositor’s accounts during the last banking crisis in Cypress. These depositors were mainly Russian oligarchs so what the heck. Now this principle has been extended to depositors in the big Wall Street banks and actually to depositors all over the world. Now is a good time to take your money out of banks such as Bank of America, JPMorgan Chase and Citibank and deposit it in smaller banks or credit unions. Otherwise, $1 trillion of depositors’ funds could go bye-bye, and that’s not small change. Ellen Brown elucidates: According to an International Monetary Fund paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”: ail-in . . . is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution. The language is a bit obscure, but here are some points to note: What was formerly called a “bankruptcy” is now a “resolution proceeding.” The bank’s insolvency is “resolved” by the neat trick of turning its liabilities into capital. Insolvent TBTF banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual. “Unsecured debt” includes deposits, the largest class of unsecured debt of any bank. The insolvent bank is to be made solvent by turning our money into their equity – bank stock that could become worthless on the market or be tied up for years in resolution proceedings. The power is statutory. Cyprus-style confiscations are to become the law. Rather than having their assets sold off and closing their doors, as happens to lesser bankrupt businesses in a capitalist economy, “zombie” banks are to be kept alive and open for business at all costs – and the costs are again to be borne by us. So as far as you, the depositor, are concerned, your money in checking and savings accounts is the bank’s “unsecured debt.” You will have to stand in line behind trillions of dollars of derivative payouts before your checking and savings accounts will be made whole. Both the Bankruptcy Reform Act of 2005 and the Dodd Frank Act provide special protections for derivative counterparties, giving them the legal right to demand collateral to cover losses in the event of insolvency. They get first dibs, even before the secured deposits of state and local governments. Your chances of recovering your money are about as great as the chances of a snowball in hell. Since most poor and middle class people have a major portion of their assets in checking and savings accounts while rich people have the major portion in real estate, stocks and bonds, who do you think will be most affected by bail-ins? You guessed it: the poor and middle class will be hit the hardest. And don’t think your money will be safe in a bank’s safe deposit box. The banks have the right to go into your safe deposit box and take your money out of it. Pension funds, which were the biggest suckers for Wall Street during the last banking crisis, will also be drained by Wall Street during the next one. Their funds will be subject to confiscation as bail-ins as well since many of the bonds they purchase are subject to being converted to bail-inable deposits if the banks really need the money which they no doubt will sooner or later when the derivatives bubble goes bust. So taxpayers you can sleep soundly as taxpayer bail-outs have been taken off the table in the next banking crisis. Whew, that’s a relief. But if your savings get taken over by the bank, ouch, that’ll hurt even more than a widely distributed taxpayer bail-out which might add a couple of dollars to your income tax. Be careful of what you wish for. It could be even worse than what you already had. There is a better way. Let the zombie banks go bankrupt instead of confiscating depositor funds. A better way is to create public banks and transfer funds from Wall Street. Then the gambling casino with all the attendant risks for bail-outs and bail-ins comes to an abrupt halt. Profits go to the local community or to the state in the case ofNorth Dakota, the nations’s first and oldest public bank.. On a personal note, a representative of my bank, Union Bank, called me a few weeks ago to inform me that I was only allowed five debits per month out of my savings account and that I had used up my five debits for December. So I would have to wait until January before I was allowed to take any more money out of my savings account. I was furious. “It’s my money isn’t it, and besides you call it a savings account. It gets zero interest.” He kept repeating that I was only allowed five debits per month and said it was a Federal law. Well, this means nothing because it’s well known that all Federal banking regulations are written by lobbyists for the banking industry in the interests of the banking industry. I asked him what was the rationale for this regulation. He said, “The government doesn’t want you to spend your money too fast.” Hmmm. Since when does Big Brother have an interest in making sure I don’t spend my money? I don’t think so. It probably has more to do with keeping your money in the bank so that the bank can meet its currency reserve requirements or possibly slow down the exodus of money from worthless savings accounts which pay no interest or even perhaps to confiscate your money for bail-ins during the next banking crisis at which time there will be undoubtedly a run on the banks 1930s style. Whoops, if you’ve already had your five debits, you won’t be able to get your hands on your money before it’s “bailed-in.” Source: http://sandiegofreepress.org/2015/01/the-bail-in-how-you-and-your-money-will-be-parted-during-the-next-banking-crisis/