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Posts Tagged ‘too big to fail’

There’s No Way In Hell We’re Making It To Nov 2012

Posted by Admin on September 30, 2011

http://beforeitsnews.com/story/1152/460/There_s_No_Way_In_Hell_We_re_Making_It_To_Nov_2012.html

Tue Sep 27 2011 19:41

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Adding to last night’s BBC spot of Mr. Rastani’s truth-telling, we have yet another experienced market trader telling the full-monty of truth:

Here is a piece from ZeroHedge.com that hopefully will make you all understand, once and for all, that this ain’t the 1930′s, and that there is absolutely no way in hell that this Republic is going to make it to November 2012.

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

Summary: The five largest banks in the U.S. (JP Morgan Chase, Citibank, Bank of America, Goldman Sachs and HSBC) are carrying $238 TRILLION dollars in derivative exposure. JP Morgan alone is carrying $78 TRILLION in derivative exposure BY ITSELF.

Okay, what the hell is derivative exposure? What this is referring to are over-the-counter non-exchange traded forward delivery (or “futures”) contracts of various kinds. I am a futures broker, but I only execute futures contracts on the futures exchanges, namely the Chicago Mercantile Exchange and the New York Mercantile Exchange. About ten years ago a new “novelty” emerged in the futures business – the so-called “over-the-counter” contracts. There was a kid in the office I worked in who got wind of this and had all kinds of stars in his eyes about making a killing off of these “OTC” contracts because the brokers’ commissions were not a flat fee but a percent of the contract value. Here’s the problem with OTC contracts: there is no exchange standing between the buyer and seller as a guarantor.

In my business, when a customer executes a trade on a futures or options contract, it makes no difference who the other guy is on the other side of the trade, be it executed electronically or in the pit. None of us have to worry for a second about the counterparty on our executions because the EXCHANGE ITSELF stands between ALL transactions as the ultimate guarantor. The exchange then enforces the financial requirement rules with the Clearing Houses, the Clearing Houses enforce the financial requirement rules with the brokers, and the brokers enforce the financial requirement rules with the customers. That is the chain of financial responsibility. So, even if a customer bugs out and fails to financially perform on a contract, the contract WILL BE MADE GOOD by extracting the money from the broker, then the Clearing House and finally the Exchange.  This massive enforcement buffering is what gives the system integrity.

OTC contracts have no exchange. They are a flipping free-for-all. If someone bugs out on a contract, the poop hits the fan. The counterparty has their pants around their ankles and the broker is caught in the middle. That’s why when that kid in my office years ago got all starry-eyed, I thought to myself, “I wouldn’t do that OTC crap if you put a gun to my head – no matter what the commissions were. It would be Russian Roulette. Eventually someone would default and it would financially destroy the broker instantly, and perhaps the counterparty as well.”

Let’s take my business – cattle futures. One contract is 40,000 pounds of live cattle. The spot contract settled at $119.725 per hundred pounds today. So, 40,000 pounds X $1.19725 (shift the decimal) = $47,890 total value of the contract. Since this is an exchange traded instrument, the customer doesn’t really don’t have to worry about default and can go ahead and book that $47,890 today, and it will be offset at a later time, and the net of the entry and exit will be the P&L. The contract isn’t going to default, so the derivative exposure is limited.

Okay. These banks are carrying these OTC futures contracts with NO exchange to guarantee anything. And they are carrying these contracts largely WITH EACH OTHER. So JP Morgan might be the long and Goldman Sachs, or some insolvent bank in Europe is the short on the other side. If these banks default, which is now a mathematical certainty because they are not only insolvent, but insolvent multiple times over and there isn’t enough money in the world to bail them out, there is going to be a cascading default on all of these OTC contracts.

Now look at the value and exposure of these OTC derivatives again: the top 5 banks in the US alone have exposure of $238 TRILLION dollars.

The total GDP of the United States is $14.5 Trillion.

The total GDP of China is $6 Trillion.

The total land mass on earth is 36.8 billion acres. If every acre of land on earth was “sold” for $6467 per acre, that would total $238 Trillion.

JP Morgan BY ITSELF has derivative exposure equal to over FIVE TIMES the value of the entire US GDP.

And no, there will not be a 1:1 offsetting in a collapse, because the collapse will be asymmetrical, and the bankrupt party will first pursue FULL payment on its “longs” (think of these as accounts receivables) while its “shorts” (accounts payable) will only pay out 20 cents on the dollar OR LESS. In other words, these entities will tear each other apart in a mad dogfight and this dogfight will take the entire world down with it.

TWO HUNDRED AND THIRTY-EIGHT TRILLION DOLLARS.

AND THAT IS JUST FIVE BANKS.

AND THE MASSIVELY CORRUPT AND INCOMPETENT SECURITIES REGULATORS, BOTH GOVERNMENTAL AND PRIVATE, SAT BY AND WATCHED THIS HAPPEN. That is what happens when you let a group of criminals run a bureaucracy of affirmative action hires to “audit” the financial industry. Scroll down and read my post titled “There Must Be A Reckoning.”

It’s over. There is no coming back from this. The only thing that can happen is a total and complete collapse of EVERYTHING we now know, and humanity starts from scratch. And if you think that this collapse is going to play out without one hell of a big hot war, you are sadly, sadly mistaken.

Ann Barnhardt – Barnhardt Capital Management, Inc.

I’m going to add to what Ann has explained so well:

By the end of 2007, all the Too-Big-to-Fail (TBTF) banks were writing these things hand-over-fist because they already knew they were in doo-doo.  All this did was put massive leverage into the system…..debt, leveraged upon debt, with no asset value behind much of it.   And here is where it gets truly ugly for my conservative friends who refuse to look at Wall Street as the criminals they are: THEY DID THIS KNOWING FULL WELL THE MAJORITY OF THE DERIVATIVES THEY WERE CREATING WERE FRAUDULENT AND BACKED BY NOTHING.   How do I know this?  A myriad of lawsuits filed all over the country with a literal shitton of depositions on discovery.  These are not lawsuits filed by merely disgruntled foreclosure victims; these are lawsuits filed by large insurance companies like Allstate and MetLife, and even The Federal Housing Finance Agency (FHFH) because they all realized far too late that they’d been sold worthless crap.  This is not to mention how adamantly the TBTFs have lobbied against any whiff of the idea of forcing these things onto an exchange where they would be made transparent.  That’s pretty much a tipoff that they’re hiding something very bad.  If the used car salesman won’t let you look under the hood, you can be pretty sure there’s something there you won’t like much.

The idea Wall Street had here with creating these fraudulent pieces of toxic waste was that if even a fraction of these ‘paid out’ for them, they could ‘save themselves.’  Unfortunately this doesn’t work when Wall Street runs out of suckers; you know, pension plans, insurance companies, retail investors and other places they could sell these things to without anyone understanding what they were buying.  Most importantly, when they ran out of suckers they could put into home loans they couldn’t afford, this was the beginning of the end and the whole scheme began to unravel.

Even better, our government not only looked the other way when they were made aware of what was going on, they began to aid and abet the criminal activity….because the TBTFs convinced the government that ‘economic meltdown could be avoided’ if they were just given time for the ‘asset values to come back.’  THIS whole game was facilitated by none-other than Hank Paulson.  You know, ‘Mr-I-Have-A-Bazooka.’

Our entire global economy is a giant Ponzi Scheme.  Makes Social Security look like a rounding error.  This also gives one a better perspective on the stock market movements.  (Yeah, 400 point Dow Jones Industrial ranges in a day is a ‘stable market’.)  What the market is now is merely the TBTF banks chasing government cheese.  Where is the next bailout coming from?  Wherever they THINK it is (and since they push for it, they have a good idea), they front run it and pile in, using HFT to try to position better than the next TBTF.  Who is going to get the next ‘exemption from the law’?  Wherever they think THAT is coming next, again, they go ‘all-in’ – thus providing the massive swings in the market with both bonds (treasuries and corporate debt) and stocks.   Any idea that there is ANYTHING left of a ‘free-market’ is a LIE.  Wake up and smell the Ponzi conservatives, and stop defending the criminals with your cries of ‘it’s anti-capitalist to protest against Wall Street.’  It’s not about your neighbor getting a free house, it’s about massive, global, legalized financial rape.

Wall Street a/k/a the Too-Big-To-Fails are chasing corruption.  They’re chasing legalized theft sanctioned by our government and you can watch it in real-time every day….just pull up a stock chart.  Any stock chart.

Have a nice day.

Perhaps now you will start screaming STOP THE LOOTING & START PROSECUTING!

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Financial Macrophilia and Shrinking the Banks

Posted by Admin on December 7, 2010

The big bank problem won’t go away anytime soon. There is a simple reason: financial institutions as huge and diversified as our modern universal banks are a persistently lurking threat to financial stability because if any one of them goes down we will have a major systemic problem and, as sure as night follows day, the need for another bailout. And, given their complexity, the risk of such catastrophic failure is likely to be greater than with smaller, less permutatively connected and more easily liquidated financial institutions.

America ducked this problem with the Dodd-Frank Act, though not before a valiant effort by some Senators to address the issue. Europe took some strong action to address it when the European Commission insisted that ING be broken apart and the British government insisted on some downsizing for Lloyds Bank. This week the issue returned.

First, it was reported that British banks threatened to move their headquarters to other countries if faced with the demand that they be broken into smaller units. Then one of the chief issuers of this threat lost his job. Today the British Independent Commission on Banking suggested in a lengthy issues paper that the government should use its ownership stake (read bailout investment) in the Royal Bank of Scotland, Lloyds and other banks to “restructure” them (read break them up). The chairman of the Commission, Sir John Vickers, is quoted in the Financial Times to have said of threats by bankers to pack up toys and leave:

[O]n the idea put about that banking operations would leave the UK if resulting reforms were uncongenial to banks, I sometimes wonder if those who say this realise how sharp a conflict they are suggesting between the interests of the banks and the public interest.

Modular structures, as championed by one of the leading thinkers on the subject, Andy Haldane of the Bank of England (see his “Regulation or prohibition: the $100 billion question”, are the way to go in reducing our global financial system to greater stability. Now the Commission is taking this idea very seriously.

What will we do in the United States? Is macrophilia too overwhelming an obsession or will we have the courage to look at the situation objectively as well, before the collapse of one of the behemoths leads to another round of claims that “we could not have seen it coming”?

The Financial Crisis Inquiry Commission still has time to deal with the issue in its report, expected in November. It has so far shown itself to be a little more willing to address the issue directly than the Congress or Treasury Department so we might still see some November fireworks.

COMMENTS SECTION

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Isn’t it interesting this has been the biggest factor to increasing our recent deficit, but not a word from the Tea Party on the Bailouts, other than to say they are against the TARP, which as horrid as it was, was probably the only option to save us from the abyss???

I mean, for example, have we heard the old hag running for Senator in Nevada say a single word about capital reserve requirements for banks?? And Christine O’Donnell??? Are you kidding me??? If you talked to her about capital reserve requirements O’Donnell would probably tell you she thought that banks should have the freedom to put big letters or small letters on their logo.

We’ll never know what would have happened if Paulson hadn’t pushed for the $700billion, and as angry as it still makes me to this day, I don’t think we would’ve wanted to risk that coin flip.

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Lawrence,
Good of you to highlight what the UK is investigating, although, I’m afraid as with Senator Dodds initial radical overhaul plans, the UK Commissions findings will amount to little – the City is indeed that strong in the governing party.

That said, an a most salient point for us to bare in mind is this little known fact: The UK’s casino banks/ too-big-to-fail exist solely due to the fact of the UK and USA bank bailouts, had these not occurred, all would have become insolvent and failed – this applies to HSBC, Barclays and RBS, HSBC being a special case in that it is listed in both Hong Kong and London.

Now, at the moment, all casino banks/TBTFs are the beneficiaries of near zero interest rates in the UK, USA and Euro Zone, all engage in borrowing funds from their respective central banks and purchasing sovereign debt issued by their national governments, thus earning a risk free 2-3%.

Now, just suppose Barclays Bank was to de-list and move to the Cayman Isles to avoid any form of regulation and enjoy low taxation of earnings/profits. For starters, its balance sheet could not rely on a 2-3% risk free return, the implied notion that the government would step in if it went pear shaped would be gone, hence, its use of wholesale market funds would increase, costs of CDSs for its counterparties would increase, and basically, in a September 2008 style crisis the bank would implode.

The reality is this, would the UK now actually welcome Citigroup to list on the LSE, and vice-versa, which nation would like to gamble on having to bailout a TBTF for the pleasure of earning a few pennies a year in corporate.

Shout as they may, without the implied backdrop of the state behind them, most TBTFs could not conduct business as they have, there shareholders would not stand for it – I mean, imagine bondholders and shareholders losing all their capital, be it in shares, corporate bonds or business deposits.

As with the IIF paper in May suggesting Basel III was a calamity and its imposition lead to a global depression, its really all posturing and hyperbole.

My own view is simple, call their bluff and see what the market does next, given the costs all tax payers have been forced to incur, the resultant loss of earnings due to a recession caused by the TBTFs, the loss of jobs and all other hidden subsidies they receive, it would be cheaper in the long run for sovereign states to actually ask their TBTF’s to move elsewhere, the cost savings alone would pay for those who lost their jobs to enjoy lavish lifestyles if distributed solely between them.

Utter nonsense, and crass nonsense at that.

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Hi Chris,

I very much do get your drift and you make an excellent point about the risk premium Barclays and others would have to pay. It is all mostly bluster and bloviating, with Josef Ackermann losing all credibility this week in a related context by now complaining about a “race to the top”! It is as if these people are so intoxicated by power and ego that they can’t even think straight. Yet we continue to drift, like deer in the headlights, toward identified disaster while doing nothing about it.

Thanks for your thoughtful post. I now appreciate entirely why the threat to move is such baloney.

Lawrence

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Troubled Asset Relief Program – TARP Definition

What Does Troubled Asset Relief Program – TARP Mean?
A government program created for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets. The fund was created by a bill that was made law on October 3, 2008 with the passage of H.R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury will be given $250 billion immediately, and the President must certify additional funds as they are needed. The additional funds will be distributed as $100 billion, and then as the final $350 billion is given, Congress has the right to not approve the additional amounts.

Investopedia explains Troubled Asset Relief Program – TARP
Global credit markets came to a near stand still in September 2008, as several major financial institutions, such as Lehman Brothers, Fannie Mae, Freddie Mac and American International Group, went under. In a few surprising moves, heavyweights Goldman Sachs and Morgan Stanley even changed their charter to become commercial banks, in an attempt to stabilize their capital situation. The bailout will attempt to increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS, and through that, reducing the potential losses that could be felt by the institutions who currently own them.

In October of 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $250 billion to be used to buy equity stakes in nine major U.S. banks, and many smaller banks. This program demands that companies involved lose some tax benefits, and in many cases incur limits on executive compensation.

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