The Birth Of Barter: How One Greek Town Dropped The Euro And Moved On
Greece
was the first country to defect from the non-default game theory
regime of the European Union (a move which ultimately will be in its
great benefit, as it is forced, very shortly, to default higher and
higher into the 177% of GDP secured debt,
until finally even the Troika's DIP loan is impaired). It has also
become the first country to demonstrate that people can, contrary to
apocalyptic claims otherwise by the global banker consortium which
realizes oh too well it will be its death if
people stop playing by the broken rules, exist under a barter regime.
The video below shows how the Greek town of Volos develops its own
bartering system without the aid of the euro. Yes - it can be done,
especially since one is forced to produce in order to consume, and
borrowing infinitely from the future becomes impossible.Keynes For Muppets: Elmo Explains The National Debt
Muppets have received a lot of bad press since Greg Smith realized that he is not, in fact, a one-percenter. Fortunately Elmo’s back to reclaim his rightful place in the financial world: Making the seemingly incomprehensible comprehensible while politely pointing out what should be obvious to everyone not in diapers. That’s not so easy when the economic views espoused by everyone from central bankers to TV talking heads can only be accurately described as infantile.
Dear Daily Readers...
Sorry for the slow updates...
A family member had a major operation last night...Patient doing well...
Spanish non performing loans up to 8.16%/Italian non performing loans 6.3%/England keeps QE on hold/gold and silver raid with silver holding its own/
Good
evening Ladies and Gentlemen:
Gold closed down today down $11.50 to $1438.80. Silver also retreated
by 18 cents to $31.48.
The bankers probably had advanced warning that the OI to be reported on
silver rose yesterday instead of falling. This continues to unnerve
these bozos. Today we mark time as tomorrow is the big Spanish 10 yr
bond auction. A failure can be very damaging to the
Stay In The Trade
*Men who can both be right and sit tight are uncommon. I found it one
of
the hardest things to learn. But it is only after a stock operator has
firmly grasped this that he can make big money. *- Jesse Livermore
I don't have time produce some of my own work, so I wanted to highlight
Eric King's interview with Rick Rule at King World News:
*You know, Eric, for investors who are frustrated, past is probably
prologue. They need to have a sense of what happened in the 1970s
market.If you go back to that bull market, you will remember there were
numerous
occasions, probably 25 or 30... more »
U.S. bows to Wall Street on derivatives
You'd have to have been living living under a rock over the past five years
to be surprised by this decision. To quote Gun N Rose, Welcome to The
Jungle where influence turns black and white into 10,000 shades of grey.
Headline: U.S. bows to Wall Street on derivatives The CFTC and SEC
originally proposed that a derivatives trader would be subject to the rule
if the firm’s annual...
[[ This is a content summary only. Visit my website for full links, other
content, and more! ]]
Bart Chilton of the CFTC Discusses Position Limits - Economists Remain Craven, Compromised, Blind
Jeremy Grantham Explains How To "Survive Betting Against Bull Market Irrationality"
"You apparently can survive betting against bull market irrationality if you meet three conditions. First, you must allow a generous Ben Graham-like “margin of safety” and wait for a real outlier before you make a big bet. Second, you must try to stay reasonably diversified. Third, you must never use leverage."...It
is the classic failing of value managers (and poker players for that
matter) to get impatient and bet too hard too soon. In addition, GMO was
not always optimally diversified. We are generally more cautious (or,
if you prefer, “more experienced”) now than in 1998 with respect to,
for example, both patience and diversification, and at least we in
asset allocation always stayed away from leverage. The U.S. growth and
technology bubble of 2000 was by far the biggest market outlier event
in U.S. market history; we had previously survived the 65 P/E market in
Japan, which was perhaps the greatest outlier in all important equity
markets anywhere and at any time. These were the most stringent tests
for managers, and we were 2 to 3 years early in our calls in both cases.
Yet we survived, although not without some battle scars, with the
great help that we did, in the end, win these bets and by a lot.
Hypothetically, resisting the temptation to invest too soon in 1931 may
have been a tougher test of survival in bucking the market. Luckily we,
and all value managers, were not around to be tempted by that one.India Launches Nuclear Missile Test As South Korea Preps Cruise Missiles For Retaliation
Within
the last few minutes, Bloomberg has popped up a few rather disturbing
headlines - that for all intent and purpose have been totally ignored
by the trading public at large (we assume WWIII is priced in). So Asia
in general is in major sabre-rattling mode tonight with the following
comment: South Korea’s military will firmly and thoroughly punish North
Korea for any reckless provocation, Yonhap cited Shin as saying. We
choose 'not to play'.- India Test Fires Long-Range Missile Agni-V, CNN-IBN Says
- *INDIA MISSILE TEST FLIGHT `IMMACULATE,' DEFENSE MINISTRY SAYS
- S.Korea Deploys Missiles in Case of N.Korea Provocation: Yonhap
- *N.KOREA'S KIM JONG UN CALLS FOR STRENGTHENED MILITARY, NHK SAYS
How Far To The Wall?
Decades of manipulation by the Federal Reserve (through its creation
of paper money) and by Congress (through its taxing and spending) have
pushed the US economy into a circumstance that can't be sustained but
from which there is no graceful exit. With few exceptions, all of the
noble souls who chose a career in "public service" and who've advanced
to be voting members of Congress are committed to chronic deficits,
though they deny it. For political purposes, deficits work. The people
whose wishes come true through the spending side of the deficit are
happy and vote to reelect. The people on the borrowing side of the
deficit aren't complaining, since they willingly buy the Treasury bonds
and Treasury bills that fund the deficit. And taxpayers generally
tolerate deficits as a lesser evil than a tax hike. So stay up as late
as you like on election night to see who wins, but the deficits aren't
going to stop anytime soon. The debt mountain will keep growing. The
part of it the government acknowledges is now approaching $16 trillion,
which is more than the country's gross domestic product for a year.
Obviously, the debt can't keep growing faster than the economy forever,
but the people in charge do seem determined to find out just how far
they can push things.
Brazil Central Bank Cuts Benchmark Rate From 9.75% To 9.00%
The global reliquification continues:
- BRAZIL CENTRAL BANK DECREASES BENCHMARK LENDING RATE TO 9.00%
- BRAZIL CEN BANK SAYS RATE CUT PART OF CONTINUED ADJUSTMENT
First India, now Brazil (even if the move was largely expected). When are Russia and China joining the fray?
Retail Investors Ignore "Generational" Opportunity To Buy Stocks One More Week
The week ended April 11th is when equities finally rolled over. Which
is why those curious how retail fund flows did in the past week will
not be very surprised: if individual investors avoided stocks like
Bernie Madoff Asset Management on the way up, there is no reason why
they should change their mind on the way down. Sure enough, in the past
week, $1.5 billion was withdrawn from domestic equities. Instead,
cash, solely with the aim of capital preservation enter taxable bond
funds, as it has for the past 3 years now. With the latest redemption,
total 2012 flows to date are over $25 billion, or more than double the
comparable amount in 2011. It appears that retail has seen right
through the once in a lifetime opportunity, and is withdrawing money
from stocks at the fastest pace ever, irrelevant of what the myth
formerly known as the "market" actually does.
US Postal Service Bailout Imminent?
It
has long been known that the United States Postal Service, in its
current money-losing format, is unsustainable. The media has reported in
the past that in order for this bloated government anachronism to be
remotely competitive in the age of email and FedEx, it would need to cut
hundreds of thousands of its workers. Even the USPS,
via its largest union, the National Association of Letter Carriers,
has admitted that the organization will need to undergo "tough
sacrifices" although as the WSJ noted, "It didn't specify what
concessions it would seek from members." And this is where it gets fun:
because "just the tip", or even just talking about the tip, apparently
is more than labor unions in this country can stomach. Enter Ron
Bloom, Lazard, and the very same crew that ended up getting a taxpayer funded bailout for GM.
From the WSJ: "The Postal Service's proposal to close thousands of
post offices and cut back on the number of days that mail is delivered "won't work" and
would accelerate the agency's decline, according to the six-page
report by Ron Bloom, President Barack Obama's former auto czar, and
investment bank Lazard Ltd., LAZ who were hired by the union in October." That's right: after all the huffing and puffing about "sacrifice" and austerity, the labor union took one long look at the only option... and asked what other option is there.Is This The Canary Of Australia's Collapsing Housing Coalmine?
When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.Quote Of The Day
The following sentence captures, better than anything, the sheer sociopathology, and the epic unprecedented delusions of a failing central planning bureaucrat:- Angela Merkel is not happy that financial markets have not made any contribution to resolving the financial crisis -RTRS
Bob Janjuah Dismisses Central Bank Independence Amid Monetary Anarchy
We discussed Bob Janjuah's must-read perspective of
the market just over a week ago and his appearance on Bloomberg TV
this morning reiterates that strongly held view that we are in midst of
central bank anarchy and the rules of the game
continue to change. While earnestly admitting his miss in Q1, on the
back of under-estimation of just how incredibly un-independent central
banks are (and will be proved to be in an election year), the bearded
bear goes on to confirm his view of short term 10% correction in the S&P 500, a mid-year recovery on Bernanke's bowing to Obama's pressure, and ultimately back to S&P 500 in the 800pt range (and Dow/Gold to hit 1).
Dismissing the don't-fight-the-Fed argument with analogies from 2007's
'you have to dance while the music is playing' and the tick-tick-boom
carry trades that so many funds and investors follow now, he reminds
the interviewer and the audience of how quickly all the trickle of
carry gains are lost and then some when the music stops. Must watch to
comprehend how smart money is comprehending the ultimate game theory of
today's central bank largesse and the clear non-self-sustaining
recoveries in global economies.Saudi Arabia Pumps Record 9.8 Million Barrels/Day In March
According to the latest OPEC data, Saudi Arabia, which in its own view, is some endless pool of easily retrievable crude, yet which Phibro's Andy Hall, as well as leaked confidential docs, claim is nothing but one big lie, pumped a record 9.834 million barrels per day, an increase of just 24K barrels from February's total (based on secondary market data, not direct communication). While we salute Saudi's peak production, which has never crossed over the 10 MMBPD level, we wonder, just how and where will Saudi get the 25% extra spare crude capacity needed to fully replace Iran's embargoed oil, which however continues to flow. Or it does at least according to Iran - oil production rose in February and March, if just redirected: India and certainly China (which is currently adding to its strategic reserves as pointed out here some time ago) are delighted to buy excess Iran production. Based on secondary market sources, Iran production has declined from 3.46MM BPD to 3.35MM BPD: hardly much of an "embargo" impact.
SF Fed: This Time It Really Is Different
It appears that after months of abuse for their water-is-wet economic insights, the San Francisco Fed
may have stumbled on to the cold harsh reality that this
post-great-recession world finds itself in. The crux of the matter, that
will come as no surprise to any of our readers, is credit and "its central role to understanding the business cycle".
Oscar Jorda then concludes, in a refreshingly honest and shocking
manner that "Any forecast that assumes the recovery from the Great
Recession will resemble previous post-World War II recoveries runs the
risk of overstating future economic growth, lending activity, interest rates, investment, and inflation."
His analysis, which Minsky-ites (and Reinhart and Rogoff) will
appreciate - and perhaps our neo-classical brethren will embrace - is
that the Great Recession upended the paradigm that modern
macro-economic models omitted banks and finance and this time it really
is different in that the 'achilles heel' of economic modeling - credit
- cannot be considered a secondary effect. His analysis points to
considerably slower GDP growth and lower inflation expectations as he
compares the current 'recovery' to post-WWII recoveries across 14
advanced economies - a sad picture is painted as he notes "Today
employment is about 10% and investment 30% below where they were on
average at similar points after other postwar recessions."The Complete And Annotated "Hollande Victory" Matrix
Back in early February, long before anyone was too worried that French socialist candidate Hollande may win the French presidential election (after all the market was soaring on the fumes of a still ramping LTRO 1+2 effect, so why worry), UBS George Magnus penned a must read analysis of the macro implications what a Sarkozy loss would mean for Europe in "As Falls Sarkozy, So Falls Europe: The Full Story Behind The Upcoming French Election" which with 4 days to go until the first round of the French presidential election, is certainly worth a refresh (especially for Frau Merkel who will be roundly humiliated after backing the losing horse). And yes, it is only 4 days as UBS is kind enough to remind us. UBS also reminds us that, as strategist Stephane Deo believes Hollande has a 75% chance of winning, the french equity market is at substantial risk, as a Hollande victory is not priced in, even as noted earlier, it is starting to seep into the credit market where French CDS jumped over 200 bps for the first time in 4 months. To wit: "The bond market may force the government’s hand if they don’t start walking the walk on debt reduction. Plus, while we don’t think that France is as troubled as Spain, it’s not priced for election disruption." But that is the big picture. Below we present a summary matrix which breaks down the various Hollande proposals that may propel him to become the next French president (and think that if it wasn't for a certain hotel maid, DSK would be days away from the French presidency), as well as their implications on various micro items.
April 17, 2012, at 10:47 pm
by Jim Sinclair in the category SeekingAlpha.com |
Print This Post | 
Email This Post
by Jim Sinclair in the category SeekingAlpha.com |
Print This Post | Email This Post
Dear CIGAs,
This article was called to my attention by the legendary CIGA Green Hornet. It is simply too good, too correct and too educational not to be published. For those with the attention span larger than gold fish, this must be read and understood. Today’s JSMineset is big but there is a great deal to say. You might consider printing it out, and taking it in smaller doses.
Click here to view the original article on Seeking Alpha…
Details Of The $291 Trillion In Derivatives To Which American Taxpayers Are Exposed April 17, 2012 |
The entire US GDP is less than $15 trillion each year. The gross notional amount of derivatives issued in the USA is more than $291 trillion. Does that sound like a lot? Apologists for derivatives dealers don’t like it when we talk about derivatives in terms of the notional totals. Large numbers, like these, discussed publicly, frighten too many people. According to the apologists, gross "notional" is misleading, because it does not include "hedges," offsets and the limits on interest rate risk.
In fact, the total amount of derivatives cannot be accurately presented in any other form but gross notional obligations. The risk to society cannot be judged in any other way. That’s why the FDIC, US Comptroller of the Currency and the Bank for International Settlement (BIS) all use gross notional.
Final net obligations can only be determined when and if derivatives are triggered. The net can be significantly lower, but neither we, nor the banks themselves actually know exactly what that is. It depends upon the balance sheets of every counter-party, and the extent to which interest rates will change in the future. Not even the banks have full information about either topic..
There is another number called the "net current credit exposure" (NCCE) that some erroneously claim represents the risk imposed by derivatives. According to the Office of the Comptroller of the Currency (OCC), the NCCE for American bank derivatives amounts to about $370 billion. That’s a huge amount of money, but it’s not $291 trillion.
Unfortunately, NCCE provides no information about ultimate exposure to loss. It merely measures the net cost of unwinding the contracts, before the occurrence of any trigger event. NCCE is the current market value of the contracts, and nothing more.
There are also a number of "value at risk" calculations that the banks provide. These are not standardized, and are based upon vastly different models and assumptions, from bank to bank. Unfortunately, a very high level of inconsistency and lack of any standards for measurement causes such models to be highly unreliable. For example, during the 2008 credit crisis, similar proprietary models used to determine subprime credit risk failed, in the infinitely smaller subprime mortgage market.
In reality, it is impossible to know the true risk of $291 trillion in New York issued derivatives (ignoring the additional $417 trillion issued out of London). A sudden very large increase in interest rates, alone, could trigger trillions of dollars in payments. One could argue that the Federal Reserve could force interest rates down at any time, but that is not entirely true.
If the US dollar came under heavy selling pressure, for an extended period of time, as has happened to the British pound, Chinese yuan, Japanese yen, German mark, Austrian shilling, Argentine peso, and a host of other currencies in the course of history, the Fed would be able to defend the dollar only at the risk of inducing widespread systemic failure.
That is why interest rates cannot rise for many years, regardless of whether that destroys its status as the world’s reserve currency, and/or creates extreme levels of inflation or hyperinflation. It is also one more reason for the government to lie about the true inflation rate, to avoid pressure to raise interest rates (see shadowstats.com.)
All the too-big-to-fail (TBTF) banks, with the exception of Morgan Stanley (which uses its SIPC-insured division) are using FDIC-insured depository divisions to house derivatives. That provides them with lower collateral requirements because FDIC depositary units usually have higher credit ratings than investment banks and/or bank holding companies. It also means that, ultimately, the American people will pay for losses.
While no one can determine the exact exposure, it is safe to say is that the risk is astronomical, and imposes a grave risk upon American taxpayers. It is not surprising that FDIC staff is not thrilled with US bank derivative exposures. In fact, Sheila Bair, who until recently ran the FDIC, is as disgusted with the Federal Reserve slush fund and the banking cartel as you and I. A few days ago, she penned a satirical article heavily critical of Fed policy and published it in the Washington Post.
The FDIC staff doesn’t like the fact that the Federal Reserve keeps allowing banks to put their derivatives inside insured depositary institutions. This is mostly for the same reason the banks want to put them there. Insolvency laws provides priority to derivatives counter-parties over the FDIC. If and when a bank is liquidated, the FDIC will be on the hook to repay depositors, but the failing bank will be stripped of all assets.
The US government’s full faith and credit guaranty means massive amounts of new US Treasuries will need to be sold, massive numbers of new counterfeit dollars will need to be printed under color of law, and significant tax hikes will need to be levied to pay the bill.
FDIC opposition, however, has had little to no effect on keeping derivatives out of insured units. The Federal Reserve, and not the FDIC, has the authority to approve the practice and it keeps doing so. The FDIC staff can complain privately, and issue regulations forcing disclosures, but little more. But, because of the disclosure requirements, more detailed information than ever is now available concerning derivatives.
In fact, FDIC has made far more information about derivatives public, over the last 3 years, than the Fed and OCC ever disclosed over decades. The numbers reveal a frightening concentration of risk. Five large "TBTF" US banks hold 96% of derivatives issued in the United States.
But the Bank for International Settlements in Switzerland reports that about $707.6 trillion worth of derivative obligations have been issued worldwide as of the end of 2011. That leaves about $417 trillion worth of derivatives that are not accounted for, in the FDIC records.
The surplus derivatives have been written mostly in London. Part of the exposure is held on the balance sheets of foreign, mostly European banks, including Deutsche Bank, PNB Paribas, Credit Suisse, UBS et. al. But, a large number of seemingly foreign derivatives is also hidden inside bank divisions, owned by American institutions, who do business in London. Such derivatives are not reported to the Fed, the OCC or the FDIC. Lenient British banking laws insure that these opaque obligations are not subject to public scrutiny.
Ultimately, if London-issued derivatives eventually cause massive losses to a UK bank division, the US based bank that owns it would end up being closed or bailed out. Ultimately, just like the derivatives issued in New York, the American taxpayer and dollar-denominated saver will pay the bill. Unfortunately, in spite of this, details about London-issued derivatives are not publicly disclosed or I cannot find them. If such data exists, a British lawyer or someone knowledgeable enough about UK regulations and bureaucracy would be needed to ferret it out.
Even in the absence of London data, however, investors should find this incomplete article enlightening. It is useful to obtain a general picture of the risk of investing in shares of the five big derivatives dealers. Here’s how the dollar amounts break down, as of December 31, 2011 in thousands of dollars.
JPMorgan Chase (JPM)
Bank of America (BAC)
It should be pointed out that BAC has recently moved a nominal value of about $22 trillion worth of derivatives from Merrill Lynch, into its FDIC insured division. This does not appear to be showing up, yet, in these numbers. The total for BAC’s FDIC insured division is now closer to $72 trillion.
Citigroup (C)
Goldman Sachs (GS)
Morgan Stanley (MS)
According to the US Comptroller of the Currency, the Morgan Stanley holding company has about $52 trillion worth of derivatives obligations, but only $1.7 trillion show up in the detailed FDIC statistics. It is not worth listing that small fraction as it would give an incomplete and misleading picture. Unlike other banks, MS is storing most of its derivatives in its SIPC insured investment bank, rather than its FDIC insured commercial banking division.
The reason it is doing that are unclear. Unlike the FDIC, which opposed the addition of $22 trillion in Merrill Lynch obligations to FDIC insured Bank of America’s balance sheet, diligent search indicates that the SIPC does not bother keeping track of derivatives. If we did have details on the MS derivatives, the company would rank number 3, slightly above Citigroup.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours
Link to full article…
This article was called to my attention by the legendary CIGA Green Hornet. It is simply too good, too correct and too educational not to be published. For those with the attention span larger than gold fish, this must be read and understood. Today’s JSMineset is big but there is a great deal to say. You might consider printing it out, and taking it in smaller doses.
Click here to view the original article on Seeking Alpha…
Details Of The $291 Trillion In Derivatives To Which American Taxpayers Are Exposed April 17, 2012 |
The entire US GDP is less than $15 trillion each year. The gross notional amount of derivatives issued in the USA is more than $291 trillion. Does that sound like a lot? Apologists for derivatives dealers don’t like it when we talk about derivatives in terms of the notional totals. Large numbers, like these, discussed publicly, frighten too many people. According to the apologists, gross "notional" is misleading, because it does not include "hedges," offsets and the limits on interest rate risk.
In fact, the total amount of derivatives cannot be accurately presented in any other form but gross notional obligations. The risk to society cannot be judged in any other way. That’s why the FDIC, US Comptroller of the Currency and the Bank for International Settlement (BIS) all use gross notional.
Final net obligations can only be determined when and if derivatives are triggered. The net can be significantly lower, but neither we, nor the banks themselves actually know exactly what that is. It depends upon the balance sheets of every counter-party, and the extent to which interest rates will change in the future. Not even the banks have full information about either topic..
There is another number called the "net current credit exposure" (NCCE) that some erroneously claim represents the risk imposed by derivatives. According to the Office of the Comptroller of the Currency (OCC), the NCCE for American bank derivatives amounts to about $370 billion. That’s a huge amount of money, but it’s not $291 trillion.
Unfortunately, NCCE provides no information about ultimate exposure to loss. It merely measures the net cost of unwinding the contracts, before the occurrence of any trigger event. NCCE is the current market value of the contracts, and nothing more.
There are also a number of "value at risk" calculations that the banks provide. These are not standardized, and are based upon vastly different models and assumptions, from bank to bank. Unfortunately, a very high level of inconsistency and lack of any standards for measurement causes such models to be highly unreliable. For example, during the 2008 credit crisis, similar proprietary models used to determine subprime credit risk failed, in the infinitely smaller subprime mortgage market.
In reality, it is impossible to know the true risk of $291 trillion in New York issued derivatives (ignoring the additional $417 trillion issued out of London). A sudden very large increase in interest rates, alone, could trigger trillions of dollars in payments. One could argue that the Federal Reserve could force interest rates down at any time, but that is not entirely true.
If the US dollar came under heavy selling pressure, for an extended period of time, as has happened to the British pound, Chinese yuan, Japanese yen, German mark, Austrian shilling, Argentine peso, and a host of other currencies in the course of history, the Fed would be able to defend the dollar only at the risk of inducing widespread systemic failure.
That is why interest rates cannot rise for many years, regardless of whether that destroys its status as the world’s reserve currency, and/or creates extreme levels of inflation or hyperinflation. It is also one more reason for the government to lie about the true inflation rate, to avoid pressure to raise interest rates (see shadowstats.com.)
All the too-big-to-fail (TBTF) banks, with the exception of Morgan Stanley (which uses its SIPC-insured division) are using FDIC-insured depository divisions to house derivatives. That provides them with lower collateral requirements because FDIC depositary units usually have higher credit ratings than investment banks and/or bank holding companies. It also means that, ultimately, the American people will pay for losses.
While no one can determine the exact exposure, it is safe to say is that the risk is astronomical, and imposes a grave risk upon American taxpayers. It is not surprising that FDIC staff is not thrilled with US bank derivative exposures. In fact, Sheila Bair, who until recently ran the FDIC, is as disgusted with the Federal Reserve slush fund and the banking cartel as you and I. A few days ago, she penned a satirical article heavily critical of Fed policy and published it in the Washington Post.
The FDIC staff doesn’t like the fact that the Federal Reserve keeps allowing banks to put their derivatives inside insured depositary institutions. This is mostly for the same reason the banks want to put them there. Insolvency laws provides priority to derivatives counter-parties over the FDIC. If and when a bank is liquidated, the FDIC will be on the hook to repay depositors, but the failing bank will be stripped of all assets.
The US government’s full faith and credit guaranty means massive amounts of new US Treasuries will need to be sold, massive numbers of new counterfeit dollars will need to be printed under color of law, and significant tax hikes will need to be levied to pay the bill.
FDIC opposition, however, has had little to no effect on keeping derivatives out of insured units. The Federal Reserve, and not the FDIC, has the authority to approve the practice and it keeps doing so. The FDIC staff can complain privately, and issue regulations forcing disclosures, but little more. But, because of the disclosure requirements, more detailed information than ever is now available concerning derivatives.
In fact, FDIC has made far more information about derivatives public, over the last 3 years, than the Fed and OCC ever disclosed over decades. The numbers reveal a frightening concentration of risk. Five large "TBTF" US banks hold 96% of derivatives issued in the United States.
But the Bank for International Settlements in Switzerland reports that about $707.6 trillion worth of derivative obligations have been issued worldwide as of the end of 2011. That leaves about $417 trillion worth of derivatives that are not accounted for, in the FDIC records.
The surplus derivatives have been written mostly in London. Part of the exposure is held on the balance sheets of foreign, mostly European banks, including Deutsche Bank, PNB Paribas, Credit Suisse, UBS et. al. But, a large number of seemingly foreign derivatives is also hidden inside bank divisions, owned by American institutions, who do business in London. Such derivatives are not reported to the Fed, the OCC or the FDIC. Lenient British banking laws insure that these opaque obligations are not subject to public scrutiny.
Ultimately, if London-issued derivatives eventually cause massive losses to a UK bank division, the US based bank that owns it would end up being closed or bailed out. Ultimately, just like the derivatives issued in New York, the American taxpayer and dollar-denominated saver will pay the bill. Unfortunately, in spite of this, details about London-issued derivatives are not publicly disclosed or I cannot find them. If such data exists, a British lawyer or someone knowledgeable enough about UK regulations and bureaucracy would be needed to ferret it out.
Even in the absence of London data, however, investors should find this incomplete article enlightening. It is useful to obtain a general picture of the risk of investing in shares of the five big derivatives dealers. Here’s how the dollar amounts break down, as of December 31, 2011 in thousands of dollars.
JPMorgan Chase (JPM)
|
Description |
Amount |
|
|
Total Derivatives |
70,268,515,451 |
|
|
Notional amount of credit derivatives: |
5,775,740,000 |
|
|
Bank is guarantor |
2,920,886,000 |
|
|
Bank is beneficiary |
2,854,854,000 |
|
|
Interest rate contracts |
53,708,319,000 |
|
|
Notional value of interest rate swaps |
38,805,453,000 |
|
|
Futures and forward contracts |
7,033,041,000 |
|
|
Written option contracts |
3,841,178,000 |
|
|
Purchased option contracts |
4,028,647,000 |
|
|
Foreign exchange rate contracts |
8,799,397,451 |
|
|
Notional value of exchange swaps |
2,934,191,451 |
|
|
Commitments to purchase foreign currencies & U.S. Dollar exchange |
4,521,035,000 |
|
|
Spot foreign exchange rate contracts |
116,741,000 |
|
|
Written option contracts |
674,276,000 |
|
|
Purchased option contracts |
669,895,000 |
|
|
Contracts on other commodities and equities |
1,985,059,000 |
|
|
Notional value of swaps |
453,521,000 |
|
|
Futures and forward contracts |
137,101,000 |
|
|
Written option contracts |
746,259,000 |
|
|
Purchased option contracts |
648,178,000 |
It should be pointed out that BAC has recently moved a nominal value of about $22 trillion worth of derivatives from Merrill Lynch, into its FDIC insured division. This does not appear to be showing up, yet, in these numbers. The total for BAC’s FDIC insured division is now closer to $72 trillion.
|
Derivatives |
50,407,550,785 |
|
Notional amount of credit derivatives: |
4,720,320,266 |
|
Bank is guarantor |
2,342,544,257 |
|
Bank is beneficiary |
2,377,776,009 |
|
Interest rate contracts |
40,832,704,946 |
|
Notional value of interest rate swaps |
29,707,570,138 |
|
Futures and forward contracts |
8,203,345,962 |
|
Written option contracts |
1,430,677,395 |
|
Purchased option contracts |
1,491,111,451 |
|
Foreign exchange rate contracts |
4,676,887,004 |
|
Notional value of exchange swaps |
1,425,870,031 |
|
Commitments to purchase foreign currencies & U.S. Dollar exchange |
2,839,430,866 |
|
Spot foreign exchange rate contracts |
254,990,960 |
|
Written option contracts |
204,427,019 |
|
Purchased option contracts |
207,159,088 |
|
Contracts on other commodities and equities |
177,638,569 |
|
Notional value of swaps |
76,992,166 |
|
Futures and forward contracts |
343,077 |
|
Written option contracts |
44,438,807 |
|
Purchased option contracts |
55,864,519 |
|
Derivatives |
52,620,696,000 |
|
Notional amount of credit derivatives: |
2,975,096,000 |
|
Bank is guarantor |
1,439,748,000 |
|
Bank is beneficiary |
1,535,348,000 |
|
Interest rate contracts |
42,568,376,000 |
|
Notional value of interest rate swaps |
31,525,209,000 |
|
Futures and forward contracts |
3,279,189,000 |
|
Written option contracts |
3,842,701,000 |
|
Purchased option contracts |
3,921,277,000 |
|
Foreign exchange rate contracts |
6,488,019,000 |
|
Notional value of exchange swaps |
1,349,909,000 |
|
Commitments to purchase foreign currencies & U.S. Dollar exchange |
3,910,599,000 |
|
Spot foreign exchange rate contracts |
518,436,000 |
|
Written option contracts |
601,793,000 |
|
Purchased option contracts |
625,718,000 |
|
Contracts on other commodities and equities |
589,205,000 |
|
Notional value of swaps |
116,124,000 |
|
Futures and forward contracts |
36,180,000 |
|
Written option contracts |
215,205,000 |
|
Purchased option contracts |
221,696,000 |
|
Derivatives |
44,195,386,000 |
|
Notional amount of credit derivatives: |
499,741,000 |
|
Bank is guarantor |
203,723,000 |
|
Bank is beneficiary |
296,018,000 |
|
Interest rate contracts |
41,737,737,000 |
|
Notional value of interest rate swaps |
29,901,018,000 |
|
Futures and forward contracts |
4,361,219,000 |
|
Written option contracts |
3,553,371,000 |
|
Purchased option contracts |
3,922,129,000 |
|
Foreign exchange rate contracts |
1,945,805,000 |
|
Notional value of exchange swaps |
1,623,260,000 |
|
Commitments to purchase foreign currencies & U.S. Dollar exchange |
134,300,000 |
|
Spot foreign exchange rate contracts |
2,912,000 |
|
Written option contracts |
89,612,000 |
|
Purchased option contracts |
98,633,000 |
|
Contracts on other commodities and equities |
12,103,000 |
|
Notional value of swaps |
11,885,000 |
|
Futures and forward contracts |
0 |
|
Written option contracts |
111,000 |
|
Purchased option contracts |
107,000 |
According to the US Comptroller of the Currency, the Morgan Stanley holding company has about $52 trillion worth of derivatives obligations, but only $1.7 trillion show up in the detailed FDIC statistics. It is not worth listing that small fraction as it would give an incomplete and misleading picture. Unlike other banks, MS is storing most of its derivatives in its SIPC insured investment bank, rather than its FDIC insured commercial banking division.
The reason it is doing that are unclear. Unlike the FDIC, which opposed the addition of $22 trillion in Merrill Lynch obligations to FDIC insured Bank of America’s balance sheet, diligent search indicates that the SIPC does not bother keeping track of derivatives. If we did have details on the MS derivatives, the company would rank number 3, slightly above Citigroup.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours
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