The
global derivatives bubble is now 20 percent bigger than it was just
before the last great financial crisis struck in 2008. It is a
financial bubble far larger than anything the world has ever seen,
and when it finally bursts it is going to be a complete and utter
nightmare for the financial system of the planet. According
to the
Bank for International Settlements,
the total notional value of derivatives contracts around the world
has ballooned to an astounding 710 trillion dollars
($710,000,000,000,000). Other estimates put the grand total
well over a quadrillion dollars. If that sounds like a lot of
money, that is because it is. For example, U.S. GDP is
projected to be in the neighborhood of around 17 trillion dollars for
2014. So 710 trillion dollars is an amount of money that is
almost incomprehensible. Instead of actually doing something
about the insanely reckless behavior of the big banks, our leaders
have allowed the derivatives bubble and these banks to get larger
than ever. In fact, as
I have written about previously,
the big Wall Street banks are collectively 37 percent larger than
they were just prior to the last recession. “Too big to fail”
is a far more massive problem than it was the last time around, and
at some point this derivatives bubble is going to burst and start
taking those banks down. When that day arrives, we are going to
be facing a crisis that is going to make 2008 look like a Sunday
picnic.
If
you do not know what a derivative is, Mayra Rodríguez
Valladares, a managing principal at MRV Associates, provided a pretty
good definition in her recent article for
the New York Times…
A derivative, put simply, is a contract between
two parties whose value is determined by changes in the value of an
underlying asset. Those assets could be bonds, equities, commodities
or currencies. The majority of contracts are traded over the counter,
where details about pricing, risk measurement and collateral, if any,
are not available to the public.
In other words, a derivative does not have any
intrinsic value. It is essentially a side bet. Most
commonly, derivative contracts have to do with the movement of
interest rates. But there are many, many other kinds of
derivatives as well. People are betting on just about anything
and everything that you can imagine, and Wall Street has been
transformed into the largest casino in the history of the planet.
After
the last financial crisis, our politicians promised us that they
would do something to get derivatives trading under control.
But instead, the size of the derivatives bubble has reached a new
record high. In the
New York Times article I mentioned above,
Goldman Sachs and Citibank were singled out as two players that have
experienced tremendous growth in this area in recent years…
Goldman
Sachs has been increasing its derivatives volumes since the crisis,
and it had a portfolio of about$48
trillion at
the end of 2013. Bloomberg Businessweek recently
reported that
as part of its growth strategy, Goldman plans to sell more
derivatives to clients. Citibank, too, has been increasing its
derivatives portfolio, despite the numerous capital and regulatory
challenges, In fact, its portfolio has risen byover
65 percent since
the crisis — the most of any of the four banks — to $62
trillion.
According
to official
government numbers,
the top 25 banks in the United States now have a grand total of more
than 236 trillion dollars of exposure to derivatives. But there
are four banks that dwarf everyone else. The following are the
latest numbers for those four banks…
JPMorgan
Chase
Total Assets: $1,945,467,000,000 (nearly 2
trillion dollars)
Total
Exposure To Derivatives: $70,088,625,000,000 (more
than 70 trillion dollars)
Citibank
Total Assets: $1,346,747,000,000 (a bit more
than 1.3 trillion dollars)
Total
Exposure To Derivatives: $62,247,698,000,000 (more
than 62 trillion dollars)
Bank
Of America
Total Assets: $1,433,716,000,000 (a bit more
than 1.4 trillion dollars)
Total
Exposure To Derivatives: $38,850,900,000,000 (more
than 38 trillion dollars)
Goldman
Sachs
Total Assets: $105,616,000,000 (just a shade
over 105 billion dollars – yes, you read that correctly)
Total
Exposure To Derivatives: $48,611,684,000,000 (more
than 48 trillion dollars)
If the stock market keeps going up, interest
rates stay fairly stable and the global economy does not experience a
major downturn, this bubble will probably not burst for a while.
But if there is a major shock to the system, we
could easily experience a major derivatives crisis very rapidly and
several of those banks could fail simultaneously.
There are many out there that would welcome the
collapse of the big banks, but that would also be very bad news for
the rest of us.
You see, the truth is that the U.S. economy is
like a very sick patient with an extremely advanced case of cancer.
You can try to kill the cancer (the banks), but in the process you
will inevitably kill the patient as well.
Right
now, the five largest banks account for 42
percent of
all loans in the entire country, and the six largest banks control 67
percent of
all banking assets.
If they go down, we go down too.
That is why the fact that they have been so
reckless is so infuriating.
Just
look at the numbers for Goldman Sachs again. At this point, the
total exposure that Goldman Sachs has to derivatives contracts is
more than460
times greater than
their total assets.
And
this kind of thing is not just happening in the United States.
German banking giant Deutsche Bank has more
than 75 trillion dollars of
exposure to derivatives. That is even more than any single U.S.
bank has.
This
derivatives bubble is a “sword
of Damocles”
that is hanging over the global economy by a thread day after day,
month after month, year after year.
At some point that thread is going to break,
the bubble is going to burst, and then all hell is going to break
loose.
You see, the truth is that virtually none of
the underlying problems that caused the last financial crisis have
been fixed.
Instead, our problems have just gotten even
bigger and the financial bubbles have gotten even larger.
Never before in the history of the United
States have we been faced with the threat of such a great financial
catastrophe.
Sadly, most Americans are totally oblivious to
all of this. They just have faith that our leaders know what
they are doing, and they have been lulled into complacency by the
bubble of false stability that we have been enjoying for the last
couple of years.
Unfortunately for them, this bubble of false
stability is not going to last much longer.
A financial crisis far greater than what we
experienced in 2008 is coming, and it is going to shock the world.
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