Tag Archives: Leverage

Will “Goldman Penis Envy” Crash the Economy Again? by Matt Taibbi and Eric Salzman

There’s more to running a successful investment bank than borrowing a lot of money and putting it to speculative use. From Matt Tiabbi and Eric Salzman at taibbi.substack.com:

Nearly fifteen years ago, on December 10, 2006, the CEO of Senderra, a subprime mortgage lender owned by Goldman, Sachs, sent grim news to its parent company. “Credit quality has risen to become the major crisis in the non-prime industry,” Senderra CEO Brad Bradley wrote, adding that “we are seeing unprecedented defaults and fraud in the market.”

Within four days, senior executives at Goldman decided to “get closer to home” by unloading risky mortgage instruments. They didn’t alert regulators, of course, but did save their own hides, with Goldman CEO Lloyd Blankfein soon after ordering subordinates to sell off the ugly “cats and dogs” in their mortgage portfolio.

Around the same time that Goldman was having its come-to-Jesus moment, the heads of rival Lehman Brothers were going the other way. In one meeting, the bank’s head of fixed income, Mike Gelband, pounded a table, telling the firm’s infamous Vaderqsque CEO Richard “Dick” Fuld and hatchetman-president Joe Gregory there was a $15-18 trillion time bomb of lethal leverage hanging over the markets. Once it blew, it would be the “grandaddy of credit crunches,” and Lehman would be toast.

Fuld and Gregory scoffed. They didn’t understand mortgage deals well and thought Gelband lacked nerve. “Be creative,” they told him, adding, “What are you afraid of?”

“We called it ‘Goldman Penis Envy,’” says Lawrence McDonald, former Lehman trader and author of A Colossal Failure of Common Sense. In telling the Gelband story, he explains that Fuld and Gregory were so desperate to beat out Goldman and become the richest men on Wall Street, they chased every bad deal at the peak of the speculative bubble.

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Stock Market Leverage in La-La Land, Rises to Historic WTF High, by Wolf Richter

Leverage is called leverage because borrowed money levers markets up . . . and down. From Wolf Richter at wolfstreet.com:

Archegos shows how leverage is the great accelerator of stock prices on the way up, and on the way down. One of its bets, ViacomCBS, after skyrocketing, collapsed by 60%.

Vast, unreported, and at the time unknown amounts of leverage blew up Archegos Capital Management, dishing out enormous losses to its investors, the banks that brokered the swaps, and holders of the targeted stocks. The amount of leverage became known only after it blew up as banks started picking through the debris. ViacomCBS [VIAC] was one of the handful of stocks on which Archegos placed huge and highly leveraged bets, thereby pushing the shares into the stratosphere until March 22, after which they collapsed by 60%.

Archegos is an example of how leverage operates: It creates enormous buying pressure and drives up prices as leverage builds, and then when prices decline, the leveraged bets blow up as forced selling sets in. Most of the leverage in the markets is unreported until it blows up. The only type of stock-market leverage that is reported is margin debt – the amount that individuals and institutions borrow against their stock holdings as tracked by FINRA at its member brokerage firms. Margin debt is an indicator for overall leverage, and it has reached the zoo-has-gone-nuts level.

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The $2.3 Quadrillion Global Timebomb, by Egon von Greyerz

It’s a question of when, not if, the timebomb explodes. From Egon von Greyerz at goldswitzerland.com:

Credit Suisse is hours from collapse and the consequences could be a systemic failure of the financial system.

Disappointingly, my dream last night stopped there. So unfortunately I didn’t experience what actually happened.

As I warned in last week’s article on Archegos and Credit Suisse, investment banks have created a timebomb with the $1.5 quadrillion derivatives monster.

A few years ago, the BIS (Bank of International Settlement) in Basel reduced the $1.5 quadrillion to $600 trillion with a pen stroke. But the real gross figure was still $1.5q at the time. According to my sources, the real figure today is probably over $2 quadrillion.

A major part of the outstanding derivatives are OTC (over the counter) and hidden in off balance sheet special purpose vehicles.

LEVERAGED ASSETS JUST GO UP IN SMOKE

The $30 billion in Archegos derivatives that went up in smoke over a weekend is just the tip of the iceberg. The hedge fund Archegos lost everything and the normal uber-leveraged players Goldman Sachs, Morgan Stanley, Credit Suisse, Nomura etc lost at least $30 billion.

These investment banks are making casino bets that they can’t afford to lose. What their boards and top management don’t realise or understand is that the traders, supported by easily manipulated risk managers, are betting the bank on a daily basis.

Most of these ludicrously high bets are in the derivatives market. The management doesn’t understand how they work or what the risks are and the account managers and traders can bet billions on a daily basis with no skin in the game but massive potential upside if nothing goes wrong.

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The ECB’s Financial Suttee, by Alasdair Macleod

European banks are a strong contender in the contest to see which institution or institutions leads the world into a humongous financial crisis. From Alasdair Macleod at goldmoney.com:

he European Commission is failing. Its response to Brexit and the pandemic, where it is now threatening emergency powers in order to secure vaccines is a latest throw of the political dice. Even before this development markets were getting the message with capital flight worsening.

The only thing that holds the Commission together is the magic money tree that is the ECB.

Following the recent change in the Commission’s leadership, the political dysfunction in Brussels is a new challenge for the ECB. It is already juggling with overindebted member states, a global rise in bond yields, a rotten settlement system and commercial banks both over-leveraged and with mounting pandemic-related bad debts.

It really is a horror show in the making.

Introduction

This week, the ECB took the next step towards its inevitable destruction of itself, its system and its currency. This ending, a sort of financial suttee where it joins the failing EU Commission on it funeral pyre, is plainly inevitable, and will increasingly be seen to be so.

On 3 March, Bloomberg reported “European Central Bank policy makers are downplaying concerns over rising bond yields, suggesting they can manage the risk to the euro-area economy with verbal interventions including a pledge to accelerate bond-buying if needed.”

Then last week, the story changed: the ECB vowed that: “Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year”.[i]

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