Tag Archives: derivatives

Goldman Sachs’ Rich Man’s Bank Backstopped by You and Me, by Pam Martens and Russ Martens

Posted on October 26, 2015 | 3 comments

One simple but very powerful fact has not changed at all since the last financial crisis: the government is on the hook for the banking industry’s liabilities. Note the staggering derivatives exposures in the following graph. Bankers say that these are gross, not net exposures. In other words, banks often match the sale of a derivative with the purchase of the same derivative, giving them a net exposure of zero until…until a counterparty goes bust, like AIG or Lehman Brothers did during that last crises. From Pam Martens and Russ Martens at wallstreetonparade.com:

OCC List of Banks by Assets Versus Notional Amounts of Derivatives, June 30, 2015

Just when you thought Wall Street’s heist of the U.S. financial system couldn’t get any crazier, along comes a regulator’s report on FDIC-insured banks exposure to derivatives. According to the Office of the Comptroller of the Currency (OCC), one of the regulators of national banks, as of June 30 of this year, Goldman Sachs Bank USA had $78 billion in deposits, and – wait for it – $45.7 trillion in notional amount of derivatives. (Notional means face amount of derivatives.) According to the OCC report, Goldman Sachs Bank USA’s notional derivatives are an eye-popping 563 percent of its risk-based capital. You and every other little guy in America are backstopping this bank because it’s, amazingly, FDIC insured.

Compared to its Wall Street peers, Goldman Sachs Bank USA is a midget. JPMorgan Chase Bank NA has just shy of $2 trillion in assets; Citibank NA (part of Citigroup) has $1.3 trillion; Bank of America NA $1.6 trillion. That compares with Goldman Sachs Bank USA, which just became an FDIC insured bank at the height of the financial crisis on November 28, 2008, which has a puny $122.68 billion in assets. But it wants to play with the big boys anyway when it comes to derivatives, as the chart above shows.

Based on the data, it looks like the average taxpayer is backstopping a ton of risk at this FDIC insured bank and getting very little in return. According to financial data from the FFIEC for the second quarter, the bank had $25.1 billion in trading assets and according to the company’s web site, it’s those high net worth clients of its Private Bank that it’s working with “to manage their cash flow needs, finance private asset purchases, and facilitate strategic investments.”

To continue reading: Goldman Sachs Rich Man’s Bank Backstopped by You and Me

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There Are No Markets, Only [IMF] Manipulation, by Mark Nestmann

Posted on September 10, 2015 | Leave a comment

Check out the figures on the notational value of derivatives at the end of this post. From Mark Nestmann, on a guest post at theburningplatform.com:

I can’t help but be reminded of the truism of this week’s article title, watching Chinese stock prices drop, day after day. In response, Chinese securities regulators have banned most short selling. They’ve pressured mutual funds to buy stocks and run advertisements that extol the virtues of buying stocks.

The Chinese central bank has even parceled out cash to brokers to make it easier for investors to buy on margin. As central banks do, it’s creating the cash out of thin air. The central bank also announced a surprise devaluation of the yuan, China’s currency.

So far, the intervention hasn’t worked. Chinese stocks continue to plummet. The latest interventions urge companies to buy back their shares and boost dividends. Perhaps the central bank will create more money to pay for it all.

That might stop the plunge. But then again, it might not.

China is hardly alone in overtly manipulating its markets. This blatant effort to manipulate stock prices is only the most recent desperate gamble by global governments to prop up markets. They’ll do just about anything to prevent a repeat of the 2007-2008 recession.

Their playbook comes from the International Monetary Fund (IMF), which advises governments to engage in “financial repression” to buoy up global markets.

The IMF’s recipe to avoid what former Fed Chairman Ben Bernanke calls “chaotic unwinding” includes bail-ins, higher inflation, negative interest rates, and capital controls. The IMF even proposes a “one-off capital levy” – outright confiscation of private savings – at a rate of 10% or higher.

But as world markets have demonstrated over the last few weeks, it doesn’t always work.

The cause of this chaotic unwinding is excessive debt combined with leveraged bets financed by more debt.

The world economy is floating on a gargantuan mountain of debt; collateralized, re-collateralized, hypothecated, and semi-hypothecated. Total world indebtedness now stands close to $200 trillion. That amounts to 286% of the global GDP of $70 trillion.

What’s more, according to the Bank for International Settlements, the total notional value of derivatives (i.e., bets on the value of something else, like a stock, bond, interest rate, etc.) traded over the counter was $630 trillion for the last six months of 2014. There’s another $600 trillion or so of exchange-traded derivatives, structured notes, and custom-designed derivatives. They include options, futures, and credit default swaps, along with securities backed by assets (many of dubious value, such as high-risk mortgages).

That amounts to about $1.2 quadrillion, or 1,868% of global GDP.

To continue reading: There Are No Markets, Only [IMF] Manipulation

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A Derivatives Bomb Exploded Within The Last Two Weeks, by Investment Research Dynamics

Posted on June 24, 2015 | 1 comment

SLL recently published a guest post, “Is Deutsche Bank The Next Lehman?” (6/13/15). Along the same line is this post from Investment Research Dynamics, which raises the suspicion of a recent derivatives “accident” at Deutsche Bank. There is no smoking gun, just speculation, but Deutsche Banks huge derivatives book, recent developments at the bank detailed in the prior article, the turmoil in debt markets, and the Greek situation, lends some credence to the speculation. If Deutsche Bank is in trouble, most of us won’t know it until well after financial markets have reacted. From Investment Research Dynamics:

I’ve never seen so many sophisticated Wall Street’ers this scared in my entire career. – This comment comes from a very well-connected Wall Street/DC insider and is in reference to how illiquid the bond markets have become.

Something deep and dark has transpired behind the Orwellian “curtain” used by the elitists to hide the inner workings of the financial markets, especially with regard to big bank balance sheets and OTC derivatives. What’s happening right now reminds of the movie “Jurassic Park.” You can hear and feel the monster coming but you can’t see it yet and you don’t know it will pop up in your face or how big it is.

It was the sudden firing of Deutche Bank’s co-CEOs this past weekend – The Brown Stuff Is About To Hit The Fan – that prompted me to spend more time analyzing a sequence of events which indicate to me some sort of derivatives position, possibly at Deutsche Bank, has exploded. In addition, the stock and bond markets have been emitting some curious signals which reflect that fact that something happened in the global economic and financial system.

Let’s look at some charts first (click on any chart to enlarge). The first graph below shows a 1-yr plot Dow Jones Transportation Average vs. the S&P 500:

As you can see, the DJ Transports and the S&P 500 were tightly correlated until the end of April 2015. The Transports hit an all-time high on October 25, 2014, which is about when the Fed formally ended its QE program. The DJT began to underperform the S&P 500 at the end of April. Since then it began to diverge quite negatively from the S&P 500. The DJ Transports are largely made up of trucking, railroad and delivery services stocks. This sector of the market reflects the heart-beat of economic activity, especially as it relates to consumer spending in the United States. The Transports are down 9.4% from its all-time high. I wrote about the collapsing U.S. economy a week ago: LINK The behavior of the Dow Jones Transports is the market’s confirmation that the U.S. economy is contracting.

A collapsing global economic system will exert an unanticipated and extreme amount of stress on highly leveraged financial systems. This stress is “magnified” by the enormous amount of derivatives which are connected to the disastrous amount of global debt.

An even more curious chart is the relationship between the yield on the 10yr Treasury bond and the DJ Transports:

As you can see, the yield on the 10yr Treasury bond has been trending higher since the beginning of February while the DJ Transports has been trending lower. Notice a problem? In a “clean” market – i.e. a market free from Central Bank and Government interventions, interest rates and the DJ Transports should be positively correlated. If the economy is contracting, as reflected by the direction in the DJ Transports, the yield on the 10yr Treasury should be declining – not rising. You can see that when the DJ Transports ran up to an all-time high, the 10yr yield spiked up, reflecting the markets perception that the U.S. economy might be strengthening.

It does not make sense that the 10-yr Treasury yield is moving higher – quite rapidly – while the DJ Transports are tanking – quite rapidly. In the first week of June, the yield on the 10yr Treasury bond spiked up from 2.09 to 2.40, a 14.8% move. This is a big move for yields in just 5 trading days, especially in the context of a rapidly weakening economy. Worst case, 10yr yields should have remained flat.

I believe the illogical movement in 10yr Treasury yields reflects the fact the Fed is losing control of its tight grip on the bond market and longer term interest rates. Note that German bunds have also experienced a similar spike up in interest rates and volatilty. In the context of my view that there was a derivatives accident somewhere in the global banking system in the last two weeks, it could well have been an OTC interest rate swap bomb that detonated.

To continue reading: A Derivatives Bomb Exploded Within The Last Two Weeks

http://investmentresearchdynamics.com/a-derivatives-bomb-exploded-within-the-last-two-weeks/

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Is The Brown Stuff About To Hit The Fan? by Dave Kranzler

Posted on January 6, 2015 | 1 comment

Dave Kranzler, on his blog Investment Research Dynamics, points out an interesting parallel:

Set aside for a moment the fact that the S&P 500 just closed down 4 days in a row – something which never happened in 2014. Zerhohedge had an interesting post today in which it wondered if Citibank was the next AIG (LINK) after it discovered that Citi is now the largest single holder of derivatives in the U.S., with $70.3 trillion in notional exposure holdings.

Not pointed out by Zerohedge was an interesting relationship between Citi and Goldman Sachs. Recall, that Goldman Sachs was AIG’s biggest counter-party. And the fact of the matter is that Goldman would have blown up along with AIG had the Government and the Fed – with close to a trillion dollars in taxpayer money – not bailed out AIG and the big banks. Let’s wipe the lipstick off that pig and call it what it was: An AIG/Goldman Sachs de facto collapse.

Recall that Henry Paulson was Treasury Secretary when Goldman de facto collapsed. Paulson was the former CEO of Goldman and had been appointed Treasury Secretary in July 2006. As it turns out, Goldman had been impaled on AIG’s nuclear mortgage -derived credit default swaps, to which GS was the main counter-party. I have always suspected that Paulson was inserted into the Treasury post because “they” knew that eventually the big banks – led by Goldman – were going to hit the derivatives wall and a Wall Street bank representative inside the Treasury would be needed to fix the problem.

Fast-forward to today. Who is the Treasury Secretary? Jack Lew. Jack Lew worked at Citibank up until late 2010, when he was moved into Government “service” as Director of the OMB. After that he was appointed Obama’s Chief of Staff. In 2013 Obama appointed him to be Treasury Secretary. Lew is clearly a political beast but I find it interesting that a former Citi employee is now Treasury Secretary at a time when Citi is now the largest derivatives owner in the U.S. and the 2nd largest in the world (Deutsche Bank is #1).

And, Zerohedge points out, Citibank was the primary force behind the recent legislation passed by Congress – legislation that was buried into the controversial budget Bill – which allows banks to move their derivatives into their FDIC insured subsidiary. This legislation, by the way, is a de facto bailout-in-advance for the Too Big To Fail Banks. Remember, Obama promised no more bank bailouts. Once again he lied.

At any rate, it may of course be just a mere coincidence that Paulson was appointed to Treasury Secretary about 2 years before Goldman blew up on derivatives and Lew was appointed Treasury Secretary, well, about 2 years before Citi might blow up on derivatives. I mean, why else would Citi aggressively push for FDIC coverage of its derivatives exposure if it were not worried about fomenting risks? By the way, Citi has now moved all of its derivatives into its FDIC-covered subsidiary and it’s the only bank to have done so.

Mere coincidence? Maybe. But when blood money is at stake, nothing happens by coincidence.

http://investmentresearchdynamics.com/is-the-brown-stuff-about-to-hit-the-fan/

Citigroup’s equity is a little over $212 billion, or about 1/330 of its notational derivative exposure. Not to worry, though, because much of that exposure is netted out against offsetting positions. It would only become a problem if one or more of the bank’s counterparties were unable to meet their commitments, and that hasn’t happened since…2008. Well, maybe worry just a little bit, because should that happen, a .3 percent move against Citibank’s derivatives would wipe out its equity, and you know who would be on the hook.

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