The Derivatives Bomb (Banker Gambling) Getting Ready to Explode

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“Risk Is Going Up Exponentially… It’s Unmeasurable” –Egon Von Greyerz/Zero Hedge
“There is only 0.5% of all world financial assets held in physical gold. So, this is a very small group, but it is still a lot of money. Of course, the majority doesn’t believe this because if they did, all the other markets would collapse. The particular people that are concerned about risk that we deal with, and they are not concerned in a minor way… look at all the asset classes, whether you take the stock markets, bond markets or property markets, they are all in the most massive bubbles fueled by exponential growth in credit. Global credit has tripled since 1999 to today. Global debt went from $80 trillion to $240 trillion. When debt triples, it doesn’t mean that risk triples. Risk goes up exponentially. Then you add to that all the off-balance sheet items and unfunded liabilities. The derivatives are at least $1.5 quadrillion. I think stock markets and bond markets will go down by at least 75%, and I would say it could be up to 95% or more. A lot of companies will disappear….With this risk, people have to take insurance. This business is not a business, it is a passion, and I have a passion to help the few people that see the risks. . . . I think your best wealth preservation will be gold.'”

Pope warns of ‘a ticking time bomb’ whose explosion would devastate market

Published: May 17, 2018 3:35 p.m. ET

MarketWatch photo illustration/Getty Images, iStockphoto
The Holy Father is worried about the market.




Derivatives are ‘a ticking time bomb ready sooner or later to explode, poisoning the health of the markets.’

That’s just a snippet from the warning Pope Francis, long a vocal critic of unchecked global capitalism, sounded on Thursday via a statement released by the Vatican.

“The market of CDS, in the wake of the economic crisis of 2007, was imposing enough to represent almost the equivalent of the GDP of the entire world,” the document explained. “The spread of such a kind of contract without proper limits has encouraged the growth of a finance of chance, and of gambling on the failure of others, which is unacceptable from the ethical point of view.”

The proliferation of unregulated derivatives — complex products that derive their value from an underlying asset or group of assets — is to blame for nearly blowing up the global financial system a decade ago.

The pope apparently believes the powers-that-be haven’t learned their lesson.

The financial crisis “might have provided the occasion to develop a new economy, more attentive to ethical principles, and a new regulation of financial activities that would neutralise predatory and speculative tendencies,” the statement said, adding that instead Wall Street has returned to “the heights of myopic egoism.”

The Vatican urged increased regulation of financial products and also called for universities to better educate the next generation of business leaders “as a fundamental and not merely supplementary element of their curricula of studies.”

Of course, the Vatican isn’t above reproach when it comes financial scheming. Earlier this year, prosecutors indicted a former president of the Vatican bank and his lawyer for embezzlement and money laundering. The charges were the latest in a long line of efforts aimed at cleaning up a scandal-ridden institution.

In 2010, Pope Benedict XVI in 2010 set up a financial watchdog to ensure the bank complied with more rigorous international standards on financial crimes, triggering a series of reforms that has continued under Pope Francis.

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Derivatives – The $600 Trillion Time Bomb Set to Explode (It’s Now 1.4 QUADRILLION-LaRouchePac)

Regulators have let this problem spiral out of control


pocket_watch_in_hand_185Do you want to know the real reason banks aren’t lending and the PIIGS have control of the barnyard in Europe?

It’s because risk in the $600 trillion derivatives market isn’t evening out. To the contrary, it’s growing increasingly concentrated among a select few banks, especially here in the United States.

In 2009, five banks held 80% of derivatives in America. Now, just fourbanks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.

The four banks in question are JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS).

Derivatives played a crucial role in bringing down the global economy, so you would think that the world’s top policymakers would have reined these things in by now — but they haven’t.

Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.

Think I’m exaggerating?

The notional value of the world’s derivatives is actually estimated at over $600 trillion. Notional value, of course, is the total value of a leveraged position’s assets. This distinction is necessary because, when you’re talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30 or, in extreme cases, 100 times greater than investments that could only be funded in cash instruments.

The world’s gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.

Compounding the problem is the fact that nobody even knows if the $600 trillion figure is accurate, because specialized derivatives vehicles like the credit default swaps that are now roiling Europe remain largely unregulated and unaccounted for.


To be fair, the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.

Imagine the fallout from a $600 trillion explosion if several banks went down at once. It would eclipse the collapse of Lehman Brothers in no uncertain terms.

A governmental default would panic already-anxious investors, causing a run on several major European banks in an effort to recover their deposits. That would, in turn, cause several banks to literally run out of money and declare bankruptcy.

Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible.

And that’s why banks are hoarding cash instead of lending it.

The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents, so they’re doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny.

What really scares me though, is that the banks think this is an acceptable risk because the odds of a default are allegedly smaller than 1 in 10,000.

But haven’t we heard that before?

Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back.

According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy — the countries most at risk of default. But they’ve lent $275.8 billion to French and German banks, and undoubtedly bet trillions on the same debt.

Key Takeaways

There are three key takeaways here:

  • There is not enough capital on hand to cover the possible losses associated with the default of a single counterparty — JPMorgan Chase & Co., BNP Paribas SA(PINK:BNPQY) or the National Bank of Greece (NYSE:NBG) for example — let alone multiple failures.
  • That means banks with large derivatives exposure have to risk even more money to generate the incremental returns needed to cover the bets they’ve already made.
  • The fact that Wall Street believes it has the risks under control practically guarantees that it doesn’t.

It seems to me the world’s central bankers and politicians should be less concerned with stimulating “demand” and more concerned with fixing derivatives before this $600 trillion time bomb goes off.

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