Posted on 04/02/2009 11:34:05 AM PDT by lewisglad
The "dirty little secret" that Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks that are the source of the toxic poison causing such dislocation in the world financial system. The heart of the present problem, and the reason ordinary loan losses are not the problem as in prior bank crises, is a variety of exotic financial derivatives, most especially credit default swaps.
What Geithner does not want the public to understand, his "dirty little secret", is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global "off-balance sheet" or OTC derivatives issuance.
Today, five US banks, according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The top three are, in declining order of importance: JPMorgan Chase, which holds a staggering $88 trillion in derivatives; Bank of America with $38 trillion, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs, with a mere $30 trillion in derivatives; number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain's HSBC Bank USA, has $3.7 trillion.
The government bailout of AIG, at more than $180 billion so far, has primarily gone to pay off AIG's credit default swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase and Bank of America, the banks who believe they are "too big to fail".
(Excerpt) Read more at atimes.com ...
That's why you need large, liquid, free markets .... and lots of smart honest cops to corral the smartasses who are always trying to corner/gull/fleece the market.
It's called "ordoliberalism", a 19th-century term from the addition of the name of the German journal Ordo ("Order") to the classical term "liberal" (which nowadays would equate to a "paleoconservative" of the Friedrich Hayek/Frank Meyer/Murray Rothbard mold).
Today, five US banks, according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The top three are, in declining order of importance:
---JPMorgan Chase, which holds a staggering $88 trillion in derivatives
---Bank of America with $38 trillion
---Citibank with $32 trillion.
---Goldman Sachs, with a mere $30 trillion in derivatives\
---Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion.
----Britain's HSBC Bank USA, has $3.7 trillion.
Thanks for the post. This backs up my gut feeling that the ‘good’ regulations meant to control rapacious greed were removed and bad regulations were added as a reward for making loans and mortgages (CRA)that had no prayer of ever being repaid. Also that these bad loans were limited to a few very large global institutions while many smaller local banks are still in good shape.
Under GHW Bush it was on a much smaller scale and tolerable
It all got out of hand starting with Bill Clinton's second term then onto 43 GW Bush who adopted the libertarian (marketarian) dream of zero regulation of Wall Street. Hands off
Look at Chris Cox. He never lifted a finger
Credit default swaps were a 100% free unregulated market and still are. The AIG bailouts are actually money transfers to Wall Street firms that made unlawful CDS bets with AIG. They had a racket going with AIG
AIG: Before CDS, There Was Reinsurance
http://www.ritholtz.com/blog/2009/04/aig-before-cds-there-was-reinsurance/#more-22986
One of the first things we learned about the insurance world is that the concept of “shifting risk” for a variety of business and regulatory reasons has been ongoing in the insurance world for decades. Finite insurance and other scams have been at least visible to the investment community for years and have been documented in the media, but what is less understood is that firms like AIG took the risk shifting shell game to a whole new level long before the firm’s entry into the CDS market.In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.
As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.
The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are “valid legal contracts” is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.
Does Reinsurance + Side Letters = CDS?
One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer. This may sound pretty routine and plain vanilla, but what most people don’t know is that often times when insurers would write reinsurance contracts with one another, they would enter into “side letters” whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract.
Let’s say that an insurer needs to enhance its capital surplus by $100 million in order to meet regulatory capital requirements. They can enter into what appears to be a completely legitimate form of reinsurance contract, an agreement that appears to transfer the liability to the reinsurer. By doing so, the “ceding company” - an insurance company that transfers a risk to a reinsurance company - gets to drop that $100 million in liability and its regulatory surplus increases by $100 million.
The reinsurer assuming the risk does actually put up the $100 million in liability, but with the knowledge that they will never have to actually pay out on the contract. This is good for the reinsurer because they are paid a fee for this transaction, but it is bad for the ceding company, the insurer with the capital shortfall, because the transaction is actually a sham, a fraud meant to deceive regulators, counterparties and investors into thinking that the insurer has adequate capital. Typically the fee is 6% per year or what is called a “loan fee” in the insurance industry.
When it operates in this fashion, the whole reinsurance industry could be described as a “surplus rental” proposition, whereby an insurer literally loans another insurer capital in the form of risk cover, but with a secret understanding in the form of a side letter that the loan will be reversed without any recourse to the seller of protection. You give me $6 million in cash today, and I will give you a promise that we both know I will never honor.
Does this sound familiar? What our contacts in the insurance industry describe is almost a precise description of the CDS market, albeit one that evolved in the reinsurance industry literally decades ago and has been the cause of numerous insurance insolvencies and losses to insured parties. Or to put it another way, maybe the inspiration for the CDS market - at least within AIG and other insurers — evolved from the reinsurance market over the past two decades.
As best as we can tell, the questionable practice of using side letters to mask the economic and business reality of reinsurance transactions started in the mid-1980s and continued until the middle of the current decade. This timeline just happens to track the creation and evolution of the OTC derivatives markets. In particular, the move by AIG into the CDS market coincides with the increased awareness of and attention to the use of side letters by insurance regulators and members of the state and federal law enforcement community.
Top five dirty banks are——>>
The top five are, in declining order of importance:
-—JPMorgan Chase, which holds a staggering $88 trillion in derivatives
-—Bank of America with $38 trillion
-—Citibank with $32 trillion.
-—Goldman Sachs, with a mere $30 trillion in derivatives\
-—Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion.
——Britain’s HSBC Bank USA, has $3.7 trillion.
VERY SIMILAR to how most of our mortgage crisis is in five states.
California
Florida
Nevada
Arizona
Michigan
“These appear to be new lower numbers, than I have seen elsewhere.”
You’ll appreciate this report; FWIW...the third quarter total was 170 trillion....the fourth quarter is 200 trillion!!!(page 22)
http://www.occ.gov/ftp/release/2009-34a.pdf
http://www.occ.gov/ftp/release/2008-152a.pdf
The state securities regulators warned against this madness but Federal preemption shut them up. They were right and the world has gone mad. This was 8 years in the making and all of the nightmare worries have happened. Geithner was an agent of this madness and needs to be in jail. He is the fox guarding the hen house...
Pause. Let these words soak in. Then, buy farmland or oil reserves on Monday morning... THEY CREATED TRILLIONS OF DOLLARS OUT OF THIN AIR!!!!!!!!!!!!!!!!!!!
Just freaking wow.
The author of this better watch his back.
Both sides are dirty because both sides are stupid. We have exceptionally brilliant people pushing deregulation at the national level. The GOP took it hook, line and sinker because it had the word "deregulation" in it. The Democrats were the smart guys lining up to make millions in the deregulated environment. When the thing collapsed, the Dem friendly media did its job in blaming the clueless GOP who, when not wandering in the intellectual wilderness, was still promoting deregulation.
The lessons of the 1920s was forgotten in 2000 when the laws were changed. THIS IS WHY ALL INCUMBENTS NEED TO BE THROWN OUT OF OFFICE IN 2010...
I can just imagine the DemonRATs forming their puckered lips just before the elections: Poooooofffff!
Yes Wall Street is overwhelmingly Democrat and Goldman Sachs is notoriously Democrat
George Bush's open borders policies means more Democrat voters
George Bush's zero regulation policies meant Wall Street/bankster Democrats got rich off of billions in bonuses
Joe Cassano contributed to Chris Dodd and urged his AIG brethren to do the same
Cassano is a crook and was most responsible for the massive writing of credit default swaps by AIG
He took home 300 million and is one of the most culpable
TALF is more of the same rip off by the same people. Keep you eye on it
TALF is Guithner’s baby and Geithner is a Larry Summers protege
WIKI_
He was Under Secretary of the Treasury for International Affairs (1998–2001) under Treasury Secretaries Robert Rubin and Lawrence Summers.[5] Summers was his mentor,[10][11] but other sources call him a Rubin protégé
I think Rubin is the king pin. If there were balls hanging on ANY Federal prosecutor these days, they’d be looking at a RICO action against these gangsters. Ain’t going to happen! We got screwed. They got rich, We will spend the rest of their lives paying the bill and (not all countries) hasn’t threatened Switzerland about its secrecy laws... Read between the lines...
TALF is more opium for the severely addicted. Keep the consumers all doped up with debt while they stabilize the situation long enough to get away...
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