Four Biggest Banks in America have Huge Leverage
3 OCTOBER 2011 80 COMMENTS
I keep hammering away at the fact the Fed doled out $16 trillion in the wake of the credit crisis of 2008. This is an enormous sum that is greater than the all goods and services produced in the U.S. in a single year. Domestic banks and companies got the money, right along with foreign banks and companies. In effect, the Federal Reserve bailed out the world financial system. Now, we are right back to square one facing another financial meltdown with European banks and sovereign debt. If the Fed spent $16 trillion, why in the heck is this problem not fixed and why isn’t the world economy taking off like a rocket?” The simple answer is it wasn’t enough money.
The Bank of International Settlements pegs the total world over-the-counter (OTC) derivative exposure at around $600 trillion, but many experts say the real figure is more than twice that amount. No matter which figure you use, it is a gargantuan sum. OTC derivatives are an unregulated dark pool of money with no public market. These are basically debt bets between two entities on things such as credit risk, currencies, interest rates and commodities. According to the latest report from the Comptroller of the Currency, just four U.S. banks have an eye popping $235 trillion of OTC derivative leverage. (Click here for the complete Comptroller of the Currency report.) As a nation, U.S. banks have a total OTC derivative exposure of $250 trillion. So, the fact that just four U.S. banks have this much leverage and risk is astounding! The banks are listed below in order of size and approximate OTC exposure:
1.) JP MORGAN CHASE BANK NA OH
$78.1 trillion OTC derivatives
2.) CITIBANK NATIONAL ASSN
$56.1 trillion OTC derivatives
3.) BANK OF AMERICA NA NC
$53.15 trillion OTC derivatives
4.) GOLDMAN SACHS BANK USA NY
$47.7 trillion OTC derivatives
Considering that the total assets of these four banks are a little more than $5 trillion, I see a frightening amount of risk with a total derivative exposure of $235 trillion! This is nearly 50 to 1 leverage. On top of that, assets such as real estate or mortgage-backed securities can be held on the books at whatever value the banks think they can sell them for in the future. I call this government sanctioned accounting fraud, or mark to fantasy accounting. Who knows what the true value of the banks “assets” really are.
I am sure the banks would say that the net exposure is really not near that great because the banks have hedged their bets. The banks will probably say, by and large, these debt bets will cancel out or back up one another. It is known in the banking world as “bilateral netting.” A recent article in Zerohedge.com explained the enormous risk by saying, “The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.”(Click here to read the complete Zerohedge.com story.)
The global economy is still in trouble. Everyone is focusing on Europe because the sovereign debt crisis there is likely to cause the European Union to break apart and kill the Euro. The Head of UniCredit global securities, Attila Szalay-Berzeviczy said recently, “The euro is beyond rescue . . . . “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits . . . . A Greek default will trigger an immediate “magnitude 10” earthquake across Europe.” (Click here for more on that story.) If the EU goes under, do not expect all the highly leveraged U.S. banks to walk away unscathed. They will need another bailout to stay afloat.
You must remember the U.S. still is at the epicenter of the ongoing credit crisis. At the moment, America looks like it is in better shape than Europe, but that will not last. According to the latest report from John Williams of Shadowstats.com, “The root source of current global systemic instabilities largely has been the financially-dominant United States, and it is against the U.S. dollar that the global markets ultimately should turn, massively. The Fed and the U.S. Treasury likely will do whatever has to be done to prevent a euro-area crisis from triggering a systemic collapse in the United States. Accordingly, it is not from a euro-related crisis, but rather from within the U.S. financial system and financial-authority actions that an eventual U.S. systemic failure likely will be triggered, seen initially in a rapidly accelerating pace of domestic inflation—ultimately hyperinflation.”
Sure, the dollar may gain in value for a while in absence of the Euro as a competing currency, but, ultimately, the dollar too will crash, right along with a few very big banks.
Greg
Gov. Walker may have desired to pay teachers twice the present salary and benefits, but even if he had, the money was not there. Sorry, we’re tapped out–not there–don’t have it–can’t do it–wish we could. Now, back to your article, it is the same story, really. The math tells the story and shows us the general direction of our future. This does not end well. Most of us will end up holding the bag to one degree or another. But, I believe worse than the personal and sovereign financial bust is the opportunity for our collectivist opponents, or other varietiy of tyrant, to seize control. In Chile when Allende, an avowed Communist, held the reins of power, my Chilean friends stated that “the disorder was in EVERYTHING.” It is easy to disrupt a system but hard to establish civil order. After the North Vietnamese won the war the statement was made by them that making war was easy, but to establish peace is very hard.
Greg, we rely upon you to keep serving up the straight story. It is full-strength and unadulterated. It is tough to swallow sometimes but with the facts before us we can make wise decisions. Thanks for your good work.
Greg
I made a prediction in one of my older posts that the euro collapse will come in mid November, and all hell will come right after…even in our economy. Many of our young people have started to wake up from the dreamland their professors taught them. Reality hits hard. To believe riots won’t happen here is foolish. They’re presently called demonstrations; later come the riots. Corruption in our government has made this bursting of the bubble possible (thanks to Barney Frank, Chris Dodd, Schumer, et al).
The banking crooks make up phony paper that they put a price on and sell to greedy and stupid investors. Some of these are derivatives, hedge funds, CDS’s, CDO’s, etc. If they could make titles to acreage on the moon they would sell them too. Only when we return to the intent of the stock market, which is ownership of businesses by purchase of shares in them without use of credit, will the market be stable. Sales of stock options, preferred stock, mortgages, etc. would also be disallowed. I guess I’m just too old.
In 08, the reported derivative volume was 1.8 Quadrillion,
the BIS acted quickley to (revise that number) down to a much more
managable $600 trillion. The BIS continues to play a shell game with
ALL central bank currencies on a daily basis.
When gold began it’s noticable climb back in 2003, there were a multitude of tools available to reel it back in; interst rate adjustments, Gold dumping – (which was actually just a transfer of bullion from one Rothschild central bank to another,) commodity
manipulations ( to draw investmnent capital away from one sector and
into another), and of course , currency devaluation, which since 2010
can be seen as an “ALL RED vs ALL GREEN” volley ball game, being
used to milk the last remianing life out the paper currency system.
Edward Bernaise and friends retroactivley cursed our country and world
into a vicious cycle of manufacturing and destruction, based upon a
an inevitably self destructive consumer sociey ( CONSUME defined
in the dictionary as “to destroy”).
I belive that these crafty freemasons planned this as early as 1873
when they crippled the US and world economies by demonitizing silver,
and repeated the formula
100 “freemason” years later in 1973 with
the Arab oil embargo, and the now dieing “petro dollar”.
running in and out of this burning building (the stock market),
before it’s collapses on top of us
and ALL paper assets return to their true intrinsic value – ZERO -?
And when we arrive there, how many of the 3% slice od prepared Americans can we expect to locate and barter with?
The new American refuge will become a nasty force to deal with,
there is no fall back possition to sustain “civilization” when the
dollar GOD dies.
Not exactly, Some of these OTC contracts will perform just fine in a meltdown but some will not. This means contracts will not be “bilateral netted” or hedged for default risk. How many are sour? Who really knows because this is a dark pool with not regulation or public market. If just 10% defaults in the next meltdown then that will be $60 trillion in losses.
Greg
You are correct. “One one of these banks failing could cause a world depression.” That is the scary thing and there are many failure possibilities.
Greg
Your link for Click here for the complete Comptroller of the Currency report isn’t a link–only text.
I fixed it. Sorry, but it works now.
Greg
Greg
Amen brother!
Greg Hunter
Who knows the exact path this crash will take but at the very least inflation is a lock. Thank you for weighing in.
Greg
Greg
the 3 banks goes down goldman goes up, when goldman goes up
enough the usa banks start into bankruptcy, thereby goldman and
their sponsers become the de facto worldwide banking system,
all prior creditors, depositors, go bellyup, ho ho ho
Greg
so that debt can not be paid off, thus usa-economy continually
is in quasi-bankruptcy as is the world economy, more or less a freefall of a hyperinflation-depression, which might hit bottom around yr 2030, if not then then soon afterwards, until then
- count your fingers and toes when dealing with government(s) or business and or anyone other than your inner self, i.e. they will promise the end of the freefall but they know they can not stop it
- it must fizzle out of its own accord