Derivatives at Bank Holding Companies, March 31, 2016 (OCC Report)
By Pam Martens and Russ Martens: July 14, 2016
According to the Federal Deposit Insurance Corporation (FDIC), as of March 31, 2016,
there were 6,122 FDIC insured financial institutions in the United States. Of those 6,122 commercial banks and savings associations, 4,701 did not hold
any derivatives. To put that another way, 77 percent of all U.S. banks found zero reason to engage in high-risk derivative trading.
Citigroup, however, the bank that spectacularly blew itself up with
toxic derivatives and subprime debt in 2008, became a 99-cent stock
during the crisis, and received the largest taxpayer bailout in U.S.
financial history despite being insolvent at the time, today holds more
derivatives than 4,701 other banks
combined which are backstopped by the taxpayer.
The total notional amount of derivatives sitting at Citigroup’s bank holding company is $55.6
trillion
according to the March 31, 2016 report from the Office of the
Comptroller of the Currency (OCC), one of the regulators of national
banks. (See chart above.) Out of Citigroup’s total notional (face
amount) exposure of $55.6 trillion in derivatives, $52 trillion of that
is sitting at its insured depository institution, Citibank, which is
still decidedly too-big-to-fail and would require a taxpayer bailout
again in a collapse.
If you add in four other mega Wall Street banks (JPMorgan Chase,
Goldman Sachs, Bank of America and Morgan Stanley) to Citigroup’s haul
in derivatives, there is a staggering $231.4
trillion in derivatives or
93 percent of all derivatives in the entire FDIC banking universe of 6,122 banks and savings associations.
Didn’t the Obama administration tell the public that allowing these
Frankenbanks to continue to gamble in derivatives while putting the U.S.
economy and taxpayers at risk was going to end under his Dodd-Frank
financial reform legislation passed in 2010? How could there have been
meaningful reform of Wall Street if Citigroup and these other four banks
are still holding a loaded gun to the taxpayers’ head?
Under the “Push-Out Rule” (Section 716 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act), insured banks were not going to be
allowed to hold these derivatives when the rule was fully implemented in
July 2015. The mega banks would have to “push-out” the derivatives to
their uninsured affiliates so that the taxpayer wasn’t on the hook for
future losses or bank implosions. But in December 2014, Citigroup was
able to slip language into the must-pass spending bill that effectively
repealed this critical Dodd-Frank provision and President Obama signed
the bill into law.
According to
OCC data,
prior to Citigroup’s massive bailout in 2008, it held $41.3 trillion in
notional derivatives as of March 31, 2008. Instead of regulators
forcing the unruly bank to pare back its exposures, its tally today of
$55.6 trillion shows it has been allowed to grow its derivative risks by
35 percent.
According to the General Accountability Office, this is how much
Citigroup needed to remain afloat the last time it blew itself up: On
October 28, 2008, Citigroup received $25 billion in Troubled Asset
Relief Program (TARP) funds. Less than a month later, it was teetering
again and received another $20 billion. But its capital moorings were so
shaky that it simultaneously needed another $306 billion in government
asset guarantees. And all of this disclosed money spigot came on top of
the Federal Reserve secretly funneling to Citigroup over $2 trillion in
cumulative loans over more than two years at interest rates frequently
below 1 percent.
The official report on the financial crisis of 2008 from the
Financial Crisis Inquiry Commission explained the interconnected nature
of the derivatives crisis as follows:
“Large derivatives positions, and the
resulting counterparty credit and operational risks, were concentrated
in a very few firms. Among U.S. bank holding companies, the following
institutions held enormous OTC derivatives positions as of June 30,
2008: $94.5 trillion in notional amount for JP Morgan, $37.7 trillion
for Bank of America, $35.8 trillion for Citigroup, $4.1trillion for
Wachovia, and $3.9 trillion for HSBC. Goldman Sachs and Morgan Stanley,
which began to report their holdings only after they became bank holding
companies in 2008, held $45.9 and $37 trillion, respectively, in
notional amount of OTC derivatives in the first quarter of 2009. In
2008, the current and potential exposure to derivatives at the top five
U.S. bank holding companies was on average three times greater than the
capital they had on hand to meet regulatory requirements. The risk was
even higher at the investment banks. Goldman Sachs, just after it
changed its charter, had derivatives exposure more than 10 times
capital. These concentrations of positions in the hands of the largest
bank holding companies and investment banks posed risks for the
financial system because of their interconnections with other financial
institutions.”
The counterparties to this mass gluttony in derivatives by the mega
Wall Street banks included the two government sponsored enterprises,
Fannie Mae and Freddie Mac, and the large insurer, AIG.
In May of this year
we reported
that the U.S. government is still quietly paying out billions of
dollars to Wall Street banks for derivatives held by Fannie Mae and
Freddie Mac, companies the government was forced to place into
conservatorship because of their massive losses during the 2008 crisis.
In April of this year
we reported the following about AIG’s derivative losses during the crisis:
“AIG received a taxpayer backstop of $185
billion and had to be taken over by the Federal government. But the
bailout of AIG was in reality a backdoor bailout of the biggest Wall
Street banks and their foreign big bank kin who had used AIG as a
counterparty on their casino-like derivative bets and for securities
loans that AIG could not make good on.
“It was eventually revealed that major
Wall Street banks, foreign banks and hedge funds received more than half
of AIG’s bailout money ($93.2 billion). Public pressure eventually
forced AIG to
release a chart of
these payments, but the chart showed just a narrow window of
disbursements from September to December 2008. How vast the full total
of payments were to the big banks is yet to see the light of day.”
The banking crisis and economic collapse in 2008 was the largest
financial disaster in the United States since the Great Depression. To
understand that the Obama administration and the U.S. Congress have not
only failed to rein in the risks of a recurrence but have actually
allowed the risks to dramatically grow, is an indictment of our entire
political system and a siren call for the political revolution that
Senator Bernie Sanders has now surrendered to the Clinton Wing of the
Democratic Party — otherwise known as the Wall Street Banksters.
Related Article:
Interconnected Banks Pose Greatest Threat to U.S. Financial System
Reuters
Reuters
