Posted on 09/28/2014 7:00:07 PM PDT by SeekAndFind
When is the U.S. banking system going to crash? I can sum it up in three words. Watch the derivatives. It used to be only four, but now there are five "too big to fail" banks in the United States that each have more than 40 trillion dollars in exposure to derivatives. Today, the U.S. national debt is sitting at a grand total of about 17.7 trillion dollars, so when we are talking about 40 trillion dollars we are talking about an amount of money that is almost unimaginable. And unlike stocks and bonds, these derivatives do not represent "investments" in anything. They can be incredibly complex, but essentially they are just paper wagers about what will happen in the future. The truth is that derivatives trading is not too different from betting on baseball or football games. Trading in derivatives is basically just a form of legalized gambling, and the "too big to fail" banks have transformed Wall Street into the largest casino in the history of the planet. When this derivatives bubble bursts (and as surely as I am writing this it will), the pain that it will cause the global economy will be greater than words can describe.
If derivatives trading is so risky, then why do our big banks do it?
The answer to that question comes down to just one thing.
Greed.
The "too big to fail" banks run up enormous profits from their derivatives trading. According to the New York Times, U.S. banks "have nearly $280 trillion of derivatives on their books" even though the financial crisis of 2008 demonstrated how dangerous they could be...
American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them.
(Excerpt) Read more at theeconomiccollapseblog.com ...
That’s insane!
I am well versed on financial matters, and have invested successfully for 35 years. Why don't you enlighten us rather than insult other Freepers? I have concerns that capitalization only covers a tiny fraction of liabilities too. In some circles they call that a Ponzi scheme.
Revalue gold to what? Why would anyone care?
Whether we blame Greenspan (as the media does) or Rubin as donaldo rightly points out, the derivative and credit default swaps certainly played a point in 2008 in reduced liquidity in financial institutions being able to weather the storm of events.
The total market in these vehicles of shedding or spreading risk I once read was six times the GDP of all the countries in the world — six times the global GDP.
While they are collateralized they are all marginally collateralized, and the whole market for these vehicles seems to be lending itself to domino actions rather than firewall actions.
impimp makes the point that regulation is hardly the conservative standard, but Greenspan’s approach was more libertarian no-regulation rather than modest as called for Brookley Born when she started sounding an alarm in ‘97.
There is a mix that is the right mix to sizing and regulation for something that is claimed to be “insurance” without the regulation you have for insurance and also insurance with no insurable interest.
There is such a thing as smoke detection prior to a real fire. Do we have smoke detection for this market — I think not.
In support of my comments at 84, I find a useful analysis and overview is given in Born’s testimony before congress in ‘98 when some regulation was even beginning to be considered. Boom, congress was forced by Rubin and Greenspan was forced to knock it down with legislation and Born was forced out.
See this testimony at the time of the proposed prohibition of regulation consideration.
http://www.cftc.gov/opa/speeches/opaborn-33.htm
Its a great over-view.
Its not just the banks. It is everybody. You buy stock or bonds in a company. You're buying someone's word.
I marketed oil and gas for a large independent producer for many years (a few years ago). We had a derivative trader who hedged our production. He was the only guy in the company that could understand if he was upside down or not? And you're right... that a true derivative trader is always convinced he's just one trade away from "square".
But most often derivatives are traded to hedge or insure a position. At least, that's my take on it.
Yep.
> “Brooksley is funny. She makes up good stories.”
Prove it.
You don’t want me to insult my fellow Freepers? Why not insult them? They are talking about stripping away my family’s income like a bunch of brownshirts. I don’t owe them an explanation about why derivatives are a massive benefit to the US economy any more than they owe me a justification for their professions.
http://jonathanturley.org/2011/11/06/bank-of-america-the-great-derivatives-transfer/
Sir, with respect to this statement of yours...”Can you name any bank that got in trouble by making these derivative bets?” The answer is yes. That Bank would be Bank of America (see link above; it is an article by Jonathan Turley which is plain enough) although there are several other big American Banks that are well known world wide to be “in EQUAL jeopardy” to B of A. B of A right now is operating on stock that is rated “junk status”. That speaks for itself and to the thrust of your arguments.
Regarding your statement about Mortgage Loans, I find very little disagreement. My “little” country bank has never made a bad mortgage loan. This simple fact speaks to the corruption between government and the “big” banks and the whole “too big to fail” mentality that is one root cause of all this.
Regarding your question about “show your math”, LOL, it’s not a “math” problem I am speaking of. It IS about the honest application of GAAP.........which has been completely blown away by these derivative schemes. Indeed, “honesty” in any form being practiced by anybody (as far as I know) is gone from the whole subject of banking and derivatives.
On your question of “What did they steal?”.........I could write a book and many have been written on the subject; but speaking of just my own first hand experience with banks in Texas in the eighties, and Austin in particular, I can tell you that only one bank that I know of survived. Hundreds of millions of taxpayer money was lost (some think stolen).
And, your right, most of the underlying causes back in those days were bad or just plain “crooked” mortgage loans. I personally witnessed a 1.5 million loan liquidated at just one of hundreds of auctions for $41,000.00. Arguably, the difference was in this case, as in many cases, stolen!
I don’t believe ANY S & L (in the Austin area) survived and several (not enough) of those guys went to jail. There is no such thing as an S & L to my knowledge anymore. It is not in dispute that the most fundamental reason they failed, on a bumper sticker is dishonest bankers making dishonest loans or honest bankers making dumb stupid loans, and one or two of them went to jail.
Along with them, most believe there should have been some regulators and government officials going to jail too. But, I don’t think any ever did. We see that today in our government. There simply is no accountability. When sound banking practices are observed by honest bankers, and the regulators do their job, and banks are not allowed to get too big, evidence shows we simply don’t have these problems. And of course there is the politicians involvement in all this but I will save my breath on them.
Now, Austin banks and S&L’s in the eighties were playing tiddly winks compared to these derivative folks today. But, the principal is the same, tens of millions went into bankers and select clients pockets BY DESIGN and INTENT and DISREGARD for well known SOUND banking practices. One banker was flying to work in a helicopter! He and several other of his banker colleagues in the area went to prison (for stealing funds). At least One of Austin’s leading citizens went to prison too. But, I won’t name him out of respect for his surviving family.
It’s the “Intent” that makes what these derivative guys are doing criminal and what I am mad about. These bastards know they are doing wrong while they are doing it and they use their ill gotten gains as financial clout to buy politicians and get them to force regulators to do their bidding so that when and IF (not much risk) the prosecutors come knocking they (the bankers) have some cover. B of A is now trying to slide an amount of their derivatives, equal to Federal Coverage, in Merrill Lynch’s back door so the government will cover their ass! More theft! Read the Turley article. A young aggressive prosecutor could make a big name for himself by putting some of these top bankers in prison.
I will save you some trouble and simply note that I’m sure from the tone of your comments that you disagree with a lot or all or most of what I say. That is your right.
Thanks for your comments.
I appreciate your response. Below is a definition I like of derivatives.
To your points, they are excellent and show in some part why derivatives, in their current form, should be outlawed. Lots of bankers and traders and employees of that industry will hate anybody for saying that. It’s kinda like saying beef should be outlawed. LOL, “cattlemen” will hate you!
I think I can offer up just one, of hundreds, if not thousands, of examples of a derivative that somewhat illustrate my point. Airlines try to buy jet fuel in huge amounts to cut costs. Clearly that’s a sound business practice and makes sense for their execs to do, so far. But, then along comes an institution and says to the Airline execs, “well, if you will pay us a bunch of money, we will insure you against any price increase out into some agreeable point in the future”. Airline guys say “heck yeah”.
The deal is still ok, sound and logical. But, then, the wall street banker, or Chicago or LA or London bankers (I use that term very loosely; it used to be respected), seeing some BIG BUCKS to insure that business transaction, and using their ill gotten gains to buy politicians, says “wait, we will do the deal if we can sucker the feds into insuring our risk for US. That’s where the rub is. The taxpayer’s money and depositors money should not be used for these “Crap table” games.
The airline should just buy it’s fuel and make the best deal it can WITHOUT risking the taxpayers money. The scale upon which these 3 pc suit thieves have raped these banks balance sheets (hundreds of trillions!!!) just boggles the mind. 700 trillion is what I read in one article last night. The article said that is more money that has been generated in the history of mankind for everything.
Now, yes the airlines cost of doing business will not be reduced if they can’t make sweetheart fuel buys. And, yes the price per seat will go up. But, I would rather pay a few bucks extra for my seat than see my whole world collapse down around me because of corrupt bankers, politicans, lobbyists and regulators. And, this is what some very smart guys are talking about every day these days.
The question is “Is it too late?”...........some say yes! I don’t know.
.......Derivatives are types of investments where the investor does not own the underlying asset, but he or she makes a bet on the direction of the price movement of the underlying asset via an agreement with another party. There are many different types of derivative instruments, including options, swaps, futures and forward contracts. Derivatives have numerous uses as well as various risks associated with them, but are generally considered an alternative way to participate in the market........
Thanks for the link. I expected it to show that Bank of America lost money on derivatives or in some other way prove your claim that they got in trouble because of derivatives. It did neither.
B of A right now is operating on stock that is rated “junk status”.
Junk stock? What the hell is that?
Regarding your question about “show your math”, LOL, it’s not a “math” problem I am speaking of. It IS about the honest application of GAAP...
Honest GAAP accounting shows they have a negative net worth of $70 trillion? I think it is a math problem.
On your question of “What did they steal?”.........I could write a book and many have been written on the subject;
You were talking about JPM, I don't need a book.
It’s the “Intent” that makes what these derivative guys are doing criminal and what I am mad about. These bastards know they are doing wrong
What are they doing wrong? Be specific.
they use their ill gotten gains
Profits from derivatives are somehow ill gotten?
B of A is now trying to slide an amount of their derivatives, equal to Federal Coverage, in Merrill Lynch’s back door so the government will cover their ass! More theft!
I don't see any theft. Did the regulators even let them move them? If they move them and they're profitable, do you feel that is theft?
I will save you some trouble and simply note that I’m sure from the tone of your comments that you disagree with a lot or all or most of what I say.
Only the stuff you get wrong.
They hedge their fuel with exchange traded futures contracts.
No taxpayer funds involved.
I knew a guy who was the vice president in marketing at a small natural gas producer. He traded futures contracts to protect his company's natural long position. He was apparently pretty good at it. At some point he began to trade futures contracts in his personal name with no equity position to back the trade. He picked a bad market cycle to start that practice. Lost house, wife, family, job.... etc etc.
We hear about banks that have trillions of dollars in derivatives on their books. My assumption would be that those are not all one sided. Most derivative traders trade both sides at some level. Who knows?
If you're a derivative trader for an oil and gas company part of your job is spreading your risk across various companies. Any company can go bankrupt. I guess... except those that are backed by tax dollars :) And those can go bankrupt too. Obammy bought GM out of trouble, but bond investors got paid pennies on the dollar.
All of this is why during my retirement I continue to move funds out of the financial market. I buy rental property. I own it outright. I generate monthly retirement income, and I'm in control of the deal. I pick the customer to do business with. I pick the terms. And I own hard assets. Not a CEO's promise.
Enjoyed the exchange. Take it easy!
Todd wrote, quite rudely I might add,
“Warren (Buffet) does know more than you. I can hear him laughing at you now.”
I am glad I can be a source of amusement to the old gentlemen. Really.
I bought 3 Berkshire shares in the mid 80’s for a little less than $3,000 total. Warren has returned an average on those puppies of around 24% until the Bush/Obama crash of 2007. Now he is squeaking out around 17%....still WTF better than any other investment I ever made including income producing real estate and farm land. Those returns are managed VC fund territory without the periodic suicide inducing reports…and it is liquid and saleable.
He can laugh his wrinkled old ass off at me as long as he keeps giving me results like that. Ho-Ho-Ho. I like that kind of liberal.
The old man, being right in 2002 about 2007, is again worried about derivatives.
In a recent Forbes interview…“What terribly worries him is that he simply doesn’t understand the massive derivatives position on the balance sheet of J.P. Morgan Chase .” Like many other financial experts Buffett can’t really figure out the financial health of JPM’s derivatives. It is impossible for anyone to divine the extent that JPM is profiting or losing money or the risks entailed in the identity of counterparties, the quality of the collateral used, and the amount of leverage employed.”
He continues….” Buffett flatly tells Forbes he refuses to write any long term derivatives contracts with anyone, recalling the trouble the nation of Kuwait faced many years ago when it could not collect on its derivatives contracts. Nor will he take positions in short term commercial paper for even a few weeks, as he wants to avoid getting stuck in a crisis where he won’t be able to collect the expected receivables from a counter-party. Buffett is adamantly risk averse to being dependent on substantial amounts of monetary receivables from any counter-party, apparently including J.P. Morgan.”
Then quiet old Charlie Munger chips in….” “Wall Street is addicted to derivatives trading like the masses are addicted to sports betting…..Both are counterproductive, but lucrative for their practitioners. You are talking about gambling…..The banks are just gambling parlors with huge odds in favor of the people running them.”
Now on the conservative side…..David Stockman (who has never made me any money yet, but I have just started to follow him) opines, “…..a terrifying $500 trillion derivative bomb threatens the entire world….. the great ticking time bomb is interest rate swaps....Who knows what’s lurking underneath the surface there?” http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/2/13_Stockman_-_$500_Trillion_Derivative_Bomb_Threatens_The_World.html
Stockman has lots more of like kind on his site at http://davidstockmanscontracorner.com/tag/derivatives-dealers/
You should really read quality analysis more, Todd. It is pretty dog gone amusing, too.
But like so sagely agreed, what the heck do I know, or Buffet, or Munger, or Stockman and none of us, I am sure, feel really strongly about it.
I enjoy quality analysis.
Of course Stockman has been a whiner ever since Reagan fired him way back when.
The prophet from Omaha said this 6 years before the last melt down....and he is still not trading this trash.
But he is trading derivatives.
Some people may be unfamiliar with the trade I’m talking about, but may be aware that Warren Buffett called derivatives financial weapons of mass destruction in the Berkshire Hathaway 2002 annual report. Part of the commentary around this thought had to do with Long Term Capital Management and the focus was more on over the counter derivatives. However, by 2004 Berkshire Hathaway began initiating a pretty interesting over the counter equity index derivative trade. They sold puts on major market indexes.
Thank you for the highly responsive post!
I have sympathy with the guy who lost his wife and everything else. Been there done that decades ago! Now, I am retired and owe nobody anything and no contingent liability wife or romance.
I’ve been dealing in tens of millions of loans for decades and I know how these bankers, brokers, lawyers and politicians think. Indeed, I once had a mayor of a major city as a partner in a deal. So, when I say these blankety blanks need to go SPREAD the risk of these derivatives over the “players” that are involved assets and not the “taxpayers” assets. I, at least, know where I am coming from!
Enjoyed commiserating with you. Stay in touch!
Sir, I suppose that it is possible that “No taxpayers funds (are) involved” in my illustration of how airlines legitimately use derivatives. And, there may be some “derivatives” that are structured to where the taxpayer is completely out of the loop. To that I say HooRay! and that is a good thing and your right. On the airlines, you’ve sparked my curiosity and I will do some more research on whether or not the “taxpayer” has been kept completely out of that loop. With all due and sincere respect to your comment, I doubt it.
But, the facts are that B of A is trying as we both type to slide trillions of these damn derivatives into or on to it’s subsidiary Merrill Lynch so that UP TO the amount of the Fed’s guarantee they will be covered BY THE TAXPAYER. Please go to the link on Jonathan Turley’s article I posted about that.
So, you and I have “no beef”........LOL, as Long Islander Bill Oreilly would say. If there is a derivative that the taxpayers are not on the hook for that indeed is a good thing. Now, unfortunately, the several hundred trillion that are remain, hanging over our head.
Sir, with respect to this statement of yours...”Can you name any bank that got in trouble by making these derivative bets?” The answer is yes. That Bank would be Bank of America (see link above; it is an article by Jonathan Turley which is plain enough)
Thanks for the link. I expected it to show that Bank of America lost money on derivatives or in some other way prove your claim that they got in trouble because of derivatives. It did neither.
I’m comfortable with believing that almost any knowledgeable, experienced person of intellect, except perhaps yourself, would read that article and other articles available on the subject and conclude as most have that “derivatives” were and are the cause of B of A being a worthless company. Beyond this statement, I can’t help you.
On this derivative subject, you seem to be arguing that sun will not come up tomorrow.
B of A right now is operating on stock that is rated “junk status”.
Junk stock? What the hell is that? Generally speaking, junk stock is stock that has no value. Please Google it and then I respectfully suggest you reread the article by Turley.
Regarding your question about “show your math”, LOL, it’s not a “math” problem I am speaking of. It IS about the honest application of GAAP...
Honest GAAP accounting shows they have a negative net worth of $70 trillion? I think it is a math problem. Well, unless their auditors are perpetually drunk, their balance sheet is a wreck as evidenced by the value of the company. Can’t help you any more than that.
On your question of “What did they steal?”.........I could write a book and many have been written on the subject;
You were talking about JPM, I don’t need a book. OK.
It’s the “Intent” that makes what these derivative guys are doing criminal and what I am mad about. These bastards know they are doing wrong
What are they doing wrong? Be specific. They are using depositors and the taxpayers to cover their RISK so they can book “profits” in the billions and LOSSES be damned! I feel that the players involved should cover their own risk. I guess, as one taxpayer presumably, you don’t mind.
they use their ill gotten gains
Profits from derivatives are somehow ill gotten? LOL, your talking about alleged profits, I am talking about REAL losses, in the hundreds of Trillions, with T! But, again, using the taxpayers and depositors money to cover the RISK is to some, ill gotten gains and standing alone, your argument on “profits” is meaningless in this discussion because we are talking about LOSSES in the hundreds of TRILLIONS.................. NOT ISOLATED PROFITS. In a worse case scenario, you, your kids, mine and everyone loses everything. There is not this much money in the entire world. If you and I were at the movies, and I went to the bathroom and saw a fire, and yelled out “FIRE!!!”........ would you continue to keep sitting there eating your popcorn?
B of A is now trying to slide an amount of their derivatives LOSSES, equal to Federal Coverage, in Merrill Lynch’s back door so the government will cover their ass! More theft! Why don’t they leave them in their portfolio and they pay the losses from their profit that you defend instead of like thieves slinking in the alleys lay them off on the taxpayer.
I don’t see any theft. Did the regulators even let them move them? If they move them and they’re profitable, do you feel that is theft? Sorry again that you apparently scanned my post and did not read Jonathan Turley’s article. You need to reread both.
I will save you some trouble and simply note that I’m sure from the tone of your comments that you disagree with a lot or all or most of what I say.
I will not comment on whose wrong and who’s right here. I assume you are being sincere in your expressed beliefs, as I am. That should be enough.
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