BACK TO THE FUTURE: Derivatives Could Blow Up Wall Street Again Warn Megabanks – By Pam Martens

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“…If the average American knew that the very same banks that blew up the U.S. economy just a decade ago were warning in their own 10K legal filings that the same thing could happen again at any moment, there would be mobs with pitchforks in the street”

Derivatives Could Blow Up Wall Street Again, Warn Megabanks – By Pam Martens

The most recent 10Ks (annual reports) filed by the largest Wall Street banks covering their financial condition as of December 31, 2018, provide the strongest argument thus far for Congress to enact legislation to separate the Federally insured, deposit-taking commercial banks from the trading casinos on Wall Street. In other words, Congress needs to restore the Glass-Steagall Act, which kept the U.S. financial system safe for 66 years until its repeal in 1999.

If the average American knew that the very same banks that blew up the U.S. economy just a decade ago were warning in their own 10K legal filings that the same thing could happen again at any moment, there would be mobs with pitchforks in the street.

If the average American knew that the very same banks that blew up the U.S. economy, devastated the housing market, crashed the stock market, threw millions of Americans out of work just a decade ago were warning in their own 10K legal filings with the Securities and Exchange Commission that the same thing could happen again at any moment, there would be mobs with pitchforks in the street. But because corporate media does not put this critical information on the front pages of newspapers, the public remains in the dark and Congress dawdles.

According to JPMorgan’s 10K, it has sold credit derivative protection on $177 billion of “sub-investment grade” i.e., junk credits. When you sell credit protection, you are on the hook to pay the buyer if that entity goes belly up. When you are selling credit protection on sub-investment grade entities, it is far more likely that they could go belly up. JPMorgan Chase will likely argue that they have also purchased boatloads of credit derivatives, which might be on the same entities, but there is no way for anyone to accurately predict if this mega bank has aligned these risks correctly. Even the bank admits that, writing in its 10K the following:

“JPMorgan Chase could incur significant losses arising from concentrations of credit and market risk. JPMorgan Chase is exposed to greater credit and market risk to the extent that groupings of its clients or counterparties:

“Engage in similar or related business, or in businesses in related industries;
“do business in the same geographic region, or;
“have business profiles, models or strategies that could cause their ability to meet their obligations to be similarly affected by changes in economic conditions.

“For example, a significant deterioration in the credit quality of one of JPMorgan Chase’s borrowers or counterparties could lead to concerns about the creditworthiness of other borrowers or counterparties in similar, related or dependent industries. This type of interrelationship could exacerbate JPMorgan Chase’s credit, liquidity and market risk exposure and potentially cause it to incur losses, including fair value losses in its market-making businesses…

“JPMorgan Chase regularly monitors various segments of its credit and market risk exposures to assess the potential risks of concentration or contagion, but its efforts to diversify or hedge its exposures against those risks may not be successful.”

We know very well that JPMorgan Chase “may not be successful” in managing its derivative risks because as recently as 2012 it lost at least $6.2 billion of its bank depositors’ money gambling in derivatives in London. That episode was known as the London Whale incident and triggered a 9-month investigation by the U.S. Senate’s Permanent Subcommittee on Investigations.

According to documents released by that Subcommittee, as of the close of business on January 16, 2012, JPMorgan’s Chief Investment Office held $458 billion notional (face amount) in domestic and foreign credit default swap indices. Of that amount, $115 billion was in an index of corporations with junk bond ratings, which the bank was not allowed to own. To get around that, according to the Office of the Comptroller of the Currency, JPMorgan “transferred the market risk of these positions into a subsidiary of an Edge Act corporation, which took most of the losses.” An Edge Act corporation refers to the ability of a bank to obtain a special charter from the Federal Reserve. By establishing an Edge Act corporation, U.S. banks are able to engage in investments not available under standard banking laws.

Now fast forward to today where JPMorgan Chase has no qualms about telling one of its Federal regulators, the SEC, that it has sold protection on $177 billion of “sub-investment grade” credit derivatives.

According to the Office of the Comptroller of the Currency, JPMorgan Chase had $48.2 trillion (yes, trillion with a “t”) in notional (face amount) of derivatives as of December 31, 2018. Of that amount, 58 percent remained in over-the-counter (OTC) contracts rather than centrally cleared. Regulators have very little insight into these OTC contracts. For all we know, the Wall Street mega banks could have enormous amounts of risk concentrated with one derivatives counterparty – the very thing that brought down the giant insurance company AIG in 2008 – forcing a taxpayer bailout of the insurance company to the tune of $185 billion.

Citigroup has also produced alarm bells in its most recent 10K filing with the SEC. This is the same bank that received the largest taxpayer bailout in global banking history in 2008. It also received over $2 trillion cumulatively in secret revolving loans from the Federal Reserve from the end of 2007 to at least July 2010 because of its shaky condition.

According to the OCC, as of December 31, 2018 Citigroup had $47 trillion notional amount of derivative exposure. This is how Citigroup explains its risk from a major counterparty getting into trouble:

“Citi also routinely executes a high volume of securities, trading, derivative and foreign exchange transactions with non-U.S. sovereigns and with counterparties in the financial services industry, including banks, insurance companies, investment banks, governments, central banks and other financial institutions. A rapid deterioration of a large counterparty or within a sector or country where Citi has large exposures or unexpected market dislocations could cause Citi to incur significant losses…The fair value of financial instruments incorporates the effects of Citi’s own credit risk and the market view of counterparty credit risk, the quantification of which is also complex and judgmental.”

In other words, a bank that blew itself up a decade ago in epic fashion still has no scientific or reliable method of assessing counterparty risk – it simply remains “judgmental.”

Another reason that Citigroup blew up in a short period of time was that its regulators allowed it to have enormous amounts of off-balance sheet exposure. In Citi’s most recent 10K it reports that it has $568.7 billion in “certain off-balance sheet exposures.”

Another Wall Street mega bank is the Bank of America….

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Derivatives Could Blow Up Wall Street Again, Warn Megabanks




One thought on “BACK TO THE FUTURE: Derivatives Could Blow Up Wall Street Again Warn Megabanks – By Pam Martens

  1. Federal Reserve Improperly Secretly Gave Away $60,000 Billion in AIG Bailout

    The Federal Reserve and US Treasury both reported that the AIG bailout required $182 billion and resulted in a profit of $20 billion for US taxpayers.

    In fact, the AIG bailout resulted in a loss of $59,980 billion rather than a profit of $20 billion. Furthermore, the massive losses were intentionally withheld from disclosure to the US taxpayer by the Federal Reserve Board of New York.

    Extraordinary assertions require extraordinary proof so I start with the evidence.

    Magnitude of Undisclosed AIG Losses

    The massive undisclosed losses are detailed in AIG Bailout Oversight Hearing, Panel 1, Oct. 8, 2008. Eric Dinalo directly participated in the AIG bailout negotiations as NY State Insurance Superintendent and estimated the undisclosed AIG bailout (credit default swaps) at $60 trillion. Six other participants stated similar amounts: Maloney (57), Yarmuth (62), Turner (63), Braley (63), Welch (62), Sarbanes (62). The troubling nature of the “naked” credit default swaps is also set forth (“gambling”, no collateral, no ownership of underlying asset, no return value, no cap relative to asset).
    Federal Reserve Intentionally Failed to Disclose $60 Trillion in Losses
    The $60,000 billion in losses was intentionally withheld from disclosure by the Federal Reserve Board of New York and the “extraordinary” withholding is detailed in US House of Representatives, Committee on Oversight and Government Reform, Public Disclosure as a Last Resort: How the Federal Reserve Fought to Cover Up the Details of the AIG Counterparties Bailout from the American People, Special Report, US House, January 25, 2010. When the SEC sought full disclosure the FRBNY responded that this “requirement is giving us some pause, since we haven’t otherwise disclosed this information to Congress.” The “FRBNY clearly hoped to prevent Congress from fully understanding the payments to AIG’s counterparties” (pg 13).
    The Committee concluded that the “fact that a quasi-government agency, unaccountable to the American people, likely wasted billions of taxpayer dollars and went to great lengths to prevent Congress and the American people from learning about these actions demonstrates the threat that the Federal Reserve poses to basic principles of American democracy.”
    Further facts are found in the AIG shareholder suits vs. US in which shareholders asserted unfair bailout treatment. These cases concluded last year at the US Supreme Court. In those cases, plaintiff asserted that, at FRBNY’s insistence, the actual SEC filings did not include Schedule A which would set forth the undisclosed losses. The SEC noted the omission and told AIG that it must include the schedule for public disclosure or request confidential treatment. In response, AIG in consultation with FRBNY, filed a confidential treatment request with SEC to conceal the $60 trillion from disclosure which the SEC granted.
    The request for confidential treatment was clearly improper since the information was not confidential at that time. The losses are disclosed before the SEC filings in the Oversight Hearing mentioned above and, thus, did not deserve confidential treatment.
    Audit of Federal Reserve Reveals Trillion in Losses
    The massive losses are confirmed in the (virtually unreported) first-ever audit of the Federal Reserve. The audit suggests 16,000 billion had already been doled out. GAO, Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance, GAO-11-696. Table 8 (page 131), 2011.
    In assessing the GAO audit, the Levy Institute estimated the amount to be $29 trillion (Levy Institute, Working Paper No. 698, December 2011, $29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient). Numerous foreign and US banks received trillions.
    Despite the evidence that $60,000 billion was secretly funneled through AIG, the Federal Reserve of NY and US Treasury claimed a profit from the AIG bailout of $20 billion.
    Federal Reserve Claims Profit
    Press Release (
    August 23, 2012
    “Today’s announcement on ML III follows the successful wind-down of Maiden Lane II LLC (ML II) in February 2012, which resulted in a net gain of approximately $2.8 billion for the taxpayer. It also follows the January 2011 termination of the New York Fed’s extension of credit to AIG, which produced approximately $8.2 billion in interest and fees. When taken together, the total net profit to taxpayers from the New York Fed’s assistance to AIG and AIG-related facilities was $17.7 billion.”
    The media widely reported this alleged a “profit” and the US Treasury issued a similar press release.
    Treasury Sells Final Shares of AIG Common Stock, Positive Return on Overall AIG Commitment Reaches $22.7 Billion
    WASHINGTON – Today, the U.S. Department of the Treasury announced that it has agreed to sell all of its remaining 234,169,156 shares of American International Group, Inc. (AIG) common stock at $32.50 per share in an underwritten public offering. The aggregate proceeds to Treasury from the common stock offering are expected to total approximately $7.6 billion.
    Giving effect to today’s offering, the overall positive return on the Federal Reserve and Treasury’s combined $182 billion commitment to stabilize AIG during the financial crisis is now $22.7 billion. To date, giving effect to the offering, Treasury has realized a positive return of $5.0 billion and the Federal Reserve has realized a positive return of $17.7 billion.
    Federal Reserve and US Treasury …. Mr. Geithner meet Mr. Geithner
    The Federal Reserve Board of New York (FRBNY) and US Treasury both ignored their duty to inform the US taxpayer of the massive “secret” AIG bailout and served the interest of the central bankers instead. The president of the FRBNY was Tim Geithner when the terms of the AIG bailout were “negotiated” in November, 2008. Later that same month (Nov. 24, 2008), Obama appointed Tim Geithner as US Treasury Secretary.
    “Little Timmy” wrote a book detailing his heroic efforts in saving the economy …seriously?
    The AIG bailout supposedly produced a profit of $18 billion but likely resulted in a loss of $59,980 billion instead.
    “A nation can survive its fools and even the ambitious. But it cannot survive treason from within. An enemy at the gates is less formidable, for he is known and carries his banner openly. But the traitor moves amongst those within the gate freely, his sly whispers rustling through all alleys, heard in the very halls of government itself. For the traitor appears not a traitor; he speaks in accents familiar to his victims, and he wears their face and their arguments, he appeals to the baseness that lies deep in the hearts of all men. He rots the soul of a nation, he works secretly and unknown in the night to undermine the pillars of the city, he infects the body politic so that it can no longer resist. A murderer is less to fear.” Cisero
    $60,000,000,000,000 is a staggering number … $200,000/person in the US, 3X entire national debt, 2X entire NYSE, 2 trillion for all student loans and credit card debt in US, “only” 4 trillion is the Federal budget for 2019
    Who got money? Citigroup: $2.5 trillion, Morgan Stanley: $2.04 trillion, Merrill Lynch: $1.949 trillion, Bank of America: $1.344 trillion, Barclays PLC (United Kingdom): $868 billion, Bear Sterns: $853 billion, Goldman Sachs: $814 billion, Royal Bank of Scotland (UK): $541 billion, JP Morgan Chase: $391 billion, Deutsche Bank (Germany): $354 billion, UBS (Switzerland): $287 billion, Credit Suisse (Switzerland): $262 billion, Lehman Brothers: $183 billion, Bank of Scotland (United Kingdom): $181 billion, BNP Paribas (France): $175 billion … with each of these possibly doubled considering the $60 trillion is twice the amount spent at the time of the audit

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