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Friday October 30, 2009
DrStockPick.com Article
Too big to fail, is still heavy in the derivative market, and primed for a gigantic collapse.
Congress needs a chimney sweep to clean the soot from the smoke they�ve been blowing.
Our do nothing congress; well we can�t really say do nothing, they did bail out the banks, and they have raised more money for themselves this session from Insurance, health care and bank lobbyists than in any other one year period, and the year isn�t even over.
Now they are spreading the word, the gospel of Obama, it�s time to deal with the too big to fail. Hummm!
Now let me understand this concept, the position of those in government is that these institutions like JP Morgan, are too big to fail, yet JP Morgan was allowed to take over Washington Mutual, and many others with the assent of the FDIC and by the government ignoring our very good anti monopoly laws.
Like for example: JP Morgan absorbed such institutions as; Chemical Banking Corporation, Chase Manhattan Bank, Bank One Corporation, Bear Stearns, and Collegiate Funding Services. But this is just the tip of the iceberg. Add Chemical Bank, Manufacturers Trust Company, Manufacturers Hanover, Hanover Bank, Bank of the Manhattan Company, Chase National Bank of the City of New York, Guaranty Trust Company of New York, City National Bank & Trust Company, Farmers Saving & Trust Company, Banc One Corp., Bank One, First Chicago (First National Bank of Chicago, First Chicago Corp.,) First Chicago NBD, NBD Bancorp. First Chicago NBD, (First Chicago Formerly National Bank of Detroit), Bear Stearns, Washington Mutual, Providian, Great Western Bank, Bank United of Texas. We allowed JP Morgan to make a large mound out of a small ant hill, and now those in government feel JP Morgan and the other �like minded� institutions are too big to fail, are they really?
JP Morgan along with the (4) other major Banks have a potential 87 Trillion dollar Derivatives exposure, this OTC derivative exposure includes fixed income derivatives, of this 87 Trillion dollars, 16.1 trillion is for outstanding credit derivatives, 99% are Credit Default Swaps (CDS).
How much does this congress and Obama believe we will cover in order to keep the Banks afloat? In fact, how much do they believe we can afford?
Actually it would be much better for the economy and the taxpayers to allow too big to fail to fail, then break them up into smaller units, where there would again be more competition and better results for the consumers.
According to Bloomberg March 3, 2009, JP Morgan Chase & Co. managed to generate $5 billion in profit during the worst year in Wall Street history by trading over-the-counter fixed-income derivatives.
JP Morgan, the largest U.S. bank by market value, reported $5.6 billion of total net income in 2008.
With AIG posting $60 billion in losses in the last quarter of 08, there had to be someone on the other side of those trades who would claim a commensurate gain. As of Q3 of 2008, according to the Office of the Controller of the Currency (OCC), there are only 5 major CDS brokers amongst the US banks who hold 87% of the outstanding notional credit exposure. JPMorgan is one of those five. Thus when the government provided $60 billion capital to AIG in order to meet collateral requirements for its counterparty positions, (CDS�S) one can infer that the ultimate recipient was JPMorgan, and other major CDS dealers, e. g. Bank of America, Goldman Sachs, Wells Fargo and Citigroup.
The government provided AIG with funds not just to keep AIG afloat but to support all of AIG�s counterparties from the systemic risk of not getting paid. God forbid that should happen, that would mean that the banks would have no incentive to foreclose on American homeowners, and would have been forced to renegotiate mortgage loans. However instead, this pass through from AIG to its counterparties, Citigroup, Wells Fargo, Bank of America, JP Morgan and Goldman Sachs has allowed the foreclosure epidemic to continue and in fact accelerate. But in providing this liquidity, the government allowed JPMorgan and the other major bank to profit from bailout money originating at another firm and while they held onto the TARP money they received from the government.
JP Morgan received 25 Billion in TARP money while Citigroup received 50 Billion, Bank of America 25 Billion, Wells Fargo 25 Billion and Goldman Sachs 10 Billion. This sum paid directly to these institutions by the government is more than tripled when we consider the pass through money they received from AIG.
Who is kidding who? The bailout was a windfall for the banking industry and put in place to allow the foreclosures to continue, it was not about us, it was about them, the banks and their payments to this administration. They call it lobbying, we call it what it is legalized bribery!
The systemic risk of the �Shadow Banking System� has been balanced by the US taxpayer. But what is not being communicated is the extent of the counterparties saved by the continued bailout of AIG and the other major lenders. Meanwhile these Wall Street firms continue business in the very same instruments that could at any moment cause their collapse. That is if the government withdrew its support for the losing counterparties. In other words it�s still business as usual on Wall Street in these same derivatives (CDS) that brought the system down.
What this underscores is how dysfunctional the entire banking system is!
New York University professor Nouriel Roubini has stated �Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling �huge� bubbles that may spark another financial crisis�. Roubini continued, �We have the mother of all carry trades,� Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset write-downs and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. �Everybody�s playing the same game and this game is becoming dangerous.�
The dollar has dropped 12 percent in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben S. Bernanke, cut interest rates to near zero in an effort to lift the U.S. economy out of its worst recession since the 1930s. Roubini said the dollar will eventually �bottom out� as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and �rush to the exit,� he said.
�The risk is that we are planting the seeds of the next financial crisis,� said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. �This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.�
Roubini has hit the nail right on the head, In the most profound financial change in recent Middle East history, Gulf Arabs are planning, along with China, Russia, Japan and France to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Add this to the mix
According to the Office of the Comptroller of the Currency, the amount of notional derivatives contracts of U.S. Commercial banks �grew� at a CAGR of 20.5% to $203 trillion by 2Q-09 from $87.9 trillion in 2004 with interest rate contracts and foreign exchange contracts comprising a substantial 84.5% and 7.5% of total notional value of derivatives, respectively. Interest rate contracts have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09 while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion between 4Q-04 to 2Q-09.
In terms of absolute dollar exposure, JP Morgan has the largest exposure towards both Interest rate and Forex contracts with notional value of interest rate contracts at $64.6 trillion and Forex contracts at $6.2 trillion exposing itself to volatile changes in both interest rates and currency movements
Goldman Sachs, however, according to the Government Stress Test of 4/20/09, with interest rate contracts to total assets at 318.x and Forex contracts to total assets at 11.2 x has the largest relative exposure. Goldman is trading at an extreme premium from a risk adjusted book value perspective.
As a result of a surge in interest rate and Forex contracts, dependency on revenues from these products has increased substantially and has in turn been a source of considerable volatility to total revenues. As of 2Q-09 combined trading revenues (cash and off balance sheet exposure) from Interest rate and Forex for JP Morgan stood at $2.4 trillion, or 9.5% of the total revenues while the same for GS and Bank of America stood at $196 million and $433 million, respectively.
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