Tag Archives: Systemic risk

Archegos & Credit Suisse – Tip of the Iceberg, by Egon von Greyerz

The old saying is that there’s never just one cockroach, and in a highly leveraged and interconnected global financial system, there’s never just one blowup. From Egon von Greyerz at goldswitzerland.com:

Bill Hwang, the founder of the hedge fund Archegos that just lost $30 billion, probably didn’t realise when he named his company that it was predestined for big things.

Archegos is a Greek word which means leader or one who leads so that others may follow.


This, until a few days ago, unknown hedge fund is a trailblazer for what will happen to the $1.5+ quadrillion derivatives market. I have warned about the derivatives bubble for years. Archegos has just lit the fuse and soon this whole market will explode.

I know that technically Archegos was a Family Office for favourable regulatory reasons. But for all intents and purposes I consider it a hedge fund.

Warren Buffett called derivatives financial weapons of mass destruction and he is absolutely right.

Greedy bankers have now built derivatives to a self-destructive nuclear weapon. Archegos shows the world that an unknown smaller hedge fund can get credit lines of $30 billion or more that quickly leads to contagion and uncontrollable losses.

And when the hedge fund’s bets go wrong, not only do the investors lose all their money, also the banks which have recklessly financed Archegos’ massively leveraged speculation will lose around $10 billion of their shareholders’ funds.

It obviously will not affect the bankers’ bonuses which will only be reduced when the bank  has gone bust. Remember the Lehman crisis in 2008. Without a massive rescue package by central banks, Morgan Stanley, Goldman Sachs, JP Morgan etc would have gone under. And still the bonuses that year in these banks were the same as the previous year.

Absolutely scandalous and the very worst side of capitalism. But as Gordon Gekko said in the film Wall Street – Greed is Good! Well when it all finishes, it might not be as good as they think.

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Revolutionary Times and Systemic Collapse – “The System Cannot Handle It”, by Alastair Crooke

After system overload comes chaos, the betting favorite at SLL for a long time. From Alastair Crooke at strategic-culture.org:

Some have queried how it could be that President Putin would co-operate with President Trump to have OPEC+ push oil prices higher – when those higher prices precisely would only help sustain U.S. oil production. In effect, President Putin was being asked to underwrite a subsidy to the U.S. economy – at the expense of Russia’s own oil and gas sales – since U.S. shale production simply is not economic at these prices. In other words, Russia seemed to be shooting itself in the foot.

Well, the calculus for Moscow on whether to cut production (to help Trump) was never simple. There were geo-political and domestic economic considerations – as well as the industry ones – to weigh. But, perhaps one issue trumped all others?

Since 2007, President Putin has been pointing to one overarching threat to global trade: And that problem was simply, the U.S. dollar.

And now, that dollar is in crisis. We are referring, here, not so much to America’s domestic financial crisis (although the monetisation of U.S. debt is connected to threat to the global system), but rather, how the international trading system is poised to blow apart, with grave consequences for everyone.

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The Threat of Contagion, by Jim Rickards

Systemic financial risk is higher now than it was in 2008. From Jim Rickards at thedailyreckoning.com:

Each crisis is bigger than the one before. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.

This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008.

Today, systemic risk is more dangerous than ever. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.

To understand the risk of contagion, you can think of the marlin in Hemingway’s Old Man and the Sea. The marlin started out as a prize catch lashed to the side of the fisherman Santiago’s boat.

But, once there was blood in the water, every shark within miles descended on the marlin and devoured it. By the time Santiago got to shore, there was nothing left of the marlin but the bill, the tail and some bones.

An even greater danger for markets is when these two kinds of contagion converge. This happens when market losses spillover into broader markets, then those losses give rise to systematic trading against a particular instrument or hedge fund.

When the targeted instrument or fund is driven under, credit losses spread to a wider group of fund counterparts who then fall under suspicion themselves. Soon a market-wide liquidity panic emerges in which, “everybody wants his money back.”

This is exactly what happened during the Russia-Long Term Capital Management (LTCM) crisis in 1998. The month of August 1998 was a liquidity crisis involving broad classes of instruments. But, the month of September was systematically aimed at LTCM.

I was right in the middle of that crash. It was an international monetary crisis that started in Thailand in June of 1997, spread to Indonesia and Korea, and then finally Russia by August of ’98. It was exactly like dominoes falling.

LTCM wasn’t a country, although it was a hedge fund big as a country in terms of its financial footings.

I was the general counsel of that firm. I negotiated that bailout.  The importance of that role is that I had a front-row seat.

To continue reading: The Threat of Contagion

Bankers’ Nirvana by Robert Gore

Bankers are no longer heartlessly stingy stewards of their banks’ capital and depositors’ funds, deniers of loans to all but those who do not need them, they are the fountainheads of democratic credit—loans for all! Banking has become a public-private partnership, although determining if banks are an arm of the government or vice versa requires time, effort, and a strong stomach. The question may prove as irrelevant as the distinction between coxswain and crew in a shell headed over a waterfall.

How many people know that when they deposit their money in a bank, they become its unsecured creditors and it uses their deposits to fund its loans and investments? Speculating with or investing other people’s money, offering some recompense for the usage but keeping most of the profits, has been an alluring business model for centuries. It is at the heart of banking. When done correctly, the depositor earns a return, individuals and enterprises receive loans that they repay, and the bank makes money.

It is not without risks. The wise banker navigates the Straits of Prudence between excessive greed and caution. He must keep money on hand for depositor withdrawals, but that money earns no return, so most of the bank’s funds must be “working,” earning a return on lending, speculation, or investment. Too aggressive, and the costs and losses from bad loans, speculations, and investments outweigh the returns from good ones. Not aggressive enough, and returns are inadequate to pay depositors interest, cover costs, and leave a satisfactory profit for the owners. The bankers’ Holy Grail is risk minimization and compensation maximization: public sector security and private sector pay. After a hundred-year quest, they have found it.

The Federal Reserve, established in 1913, was to meet the varying liquidity demands of what was still primarily an agricultural economy, and also act as an emergency lender of last resort during financial panics, lending against money-good but temporarily illiquid bank collateral to forestall bank runs, the old-time bankers’ worst nightmare. A nod was made to the gold standard; the legislation required 40 percent of the central bank’s assets to be backed by gold. However, this was clearly the fiat-money camel’s nose under the monetary tent. Step by step the link between dollars and gold was severed, from President Roosevelt outlawing the private ownership of gold in 1932 to President Nixon suspending the last vestige of convertibility, for foreign governments, in 1971. “Good as gold” morphed into “good as promises by always trustworthy politicians and bureaucrats not to debase dollars too much.” Dollars today are nothing more than pieces of paper or electronic accounting entries, buying about 2 percent of what they bought a century ago.

Knowing the Fed had their backs, like Ebenezer Scrooge on Christmas morning, bankers turned less heartless and stingy. The Fed is ostensibly independent, but is headquartered in Washington. Politicians like seeing money in their constituents’ pockets; bankers like invitations to Georgetown parties. The year 1913 kicked off a century-long democratization of credit. Bankers became great guys and (later) gals, and the banking system became the economy’s consumption-priming, job-creating silent partner. Regulatory capture is an iron-clad law in Washington, and that insidious process had begun even before the Federal Reserve Act was passed—bankers led by JP Morgan’s crew drafted the legislation.

Nobody had heard of “too big to fail” during the Great Depression, when many banks were too small to succeed. Scores of them, geographically confined by branch banking and interstate banking restrictions, went under because they were dependent on one region or industry for their survival. (Canada had nationwide banks and few failures.)

Doing something, no matter how conceptually flawed or counterproductive, was the New Dealers’ default option, and deposit insurance was one of many “somethings.” President Roosevelt was against deposit insurance, which put the government on the hook for a substantial portion of the banking system’s liabilities. He eventually signed the legislation (the Glass-Steagall Act of 1933), mollified by the law’s regulatory regime, which was sold as the way to keep bankers on the straight-and-narrow. The New Dealers’ creation—the Federal Deposit Insurance Corporation—now insures member bank accounts up to $250,000.

Banks have loans, investments, and speculations outstanding that are some multiple of their capital. A decline in value in their assets greater than the reciprocal of that multiple wipes out their capital. (If a bank’s assets are ten times its capital, a realized 10 percent drop in value eliminates that capital.) In the globally interconnected financial system, the failure of one bank impairs the assets of others, setting off a chain reaction. Asset prices collapse, economic activity implodes, and governments are on the hook for a major portion of banks’ deposit liabilities. “Systemic risk” has been the monster under the bed mega-bankers invoke to make their behemoths failure proof.

Too big to fail has been the final step to bankers’ nirvana. Heads they win, reaping the rewards of lending, investing, and speculating. If that comes a cropper, tails the government, and taxpayers, lose. Two consequences flow from bankers’ nirvana: the rate of expansion of credit is greater than the growth rate of the economy—claims on the economy increase as it becomes more indebted—and this debt imbalance leads to financial crises.

Regulation is a useless fig leaf. Bankers have every incentive to game the regulations. Even if they did not, you can’t regulate away bad ideas. Bankers’ nirvana is the culmination of bad ideas: central banking, deposit insurance, and too big to fail. World debt is substantially higher than it was in 2008; the too big to fail banks are substantially bigger. The inevitable tidal wave of the next crisis will wash away both banks and the governments with whom they are joined at the hip.