By Greg Hunter’s USAWatchdog.com
The $2 billion loss of JP Morgan in derivatives trading is signaling, once again, the enormous risks big banks take with taxpayer backing. All U.S. banks are covered by the FDIC, and if a loss is big enough, it could threaten the financial system just as it did in 2008. JP Morgan has $70 trillion in total derivative exposure. The entire world has a little more than $700 trillion in derivative exposure, and one bank has 10% of all the derivative exposure on the planet! If JP Morgan gets into trouble, it alone could cause systemic failure. Today, the FBI announced an investigation into the surprise $2 billion (or more) trading loss that happened last week at the bank. Reuters reported, “The probe was seen in some quarters as necessary, given the ongoing debate in Washington about bank regulation and reform, and one expert said it raised the level of concern around what happened. ‘The FBI looks for evidence of crimes and goes after people who it alleges are criminals. They want to send people to jail. The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI,’ said Erik Gordon, a professor in the law and business schools at the University of Michigan.” (Click here for the complete Reuters story.)
The Obama Administration has to be very worried about JP Morgan which has the biggest derivative exposure ($70.1 trillion) of American banks. The next 4 big U.S. banks after JP Morgan, also, have huge derivative exposure. Citibank has $52.1 trillion in total derivatives, Bank of America has $50.1 trillion, Goldman Sachs has 44.2 trillion and HSBC USA has $4.3 trillion in total derivatives. Combined, the five biggest commercial banks have $220.9 trillion in total derivative contracts. Weigh that against the combined assets of those same top five banks of just $4.8 trillion, and you get an eye popping 46 to 1 leverage! What could go wrong? (Click here for the OCC 4th quarter report.) Please remember, in 2009, the Financial Accounting Standards Board (FASB) changed how banks value assets such as real estate and mortgage-backed securities to whatever the institution thinks they’ll fetch in the future. These “assets” are not valued at what they would sell for today. I call this “government sanctioned accounting fraud.”
The other big banks are probably making some of the same bets in risky derivative as JP Morgan. The FBI opening up an investigation now is like closing the barn doors after all the livestock has run off. There have been zero criminal prosecutions of financial elites in the wake of the 2008 meltdown. (1,000 were successfully prosecuted after the S&L crisis in the 1990’s.) That is no accident. I think it’s because of Wall Street’s political connections, but also because the government has been worried about pushing too far for fear of crashing an already fragile financial system. Now, the FBI is going to start prosecuting Wall Street. Really? Why doesn’t the FBI investigate the Halloween bankruptcy of MF Global and the $1.6 billion in missing segregated client funds?
Details are sketchy, but it has been reported that JP Morgan lost at least $2 billion in the European debt market with derivatives. The austerity in the EU is simply the banks wanting the people to cut back on everything so they get paid back. Elections in France and Greece recently have turned that pipe dream into a nightmare for the bankers. People are voting for less austerity for themselves and for more pain for the banks. Over the weekend in Spain, more than 100,000 marched in protest over harsh austerity. This quote from the New York Times sums up the mood of the crowd: “I’m here to defend the rights that we’re losing and for the young people who have it so tough,’ 57-year-old middle school teacher Roberto Alonso said. ‘They’re better educated than ever. But they don’t have work. They don’t have anything. They’re behind and they’ll stay that way.” (Click here for the complete NYT story.)
The European banking sector has been plagued with downgrades in nearly every major country in the European Union. The situation looks like it’s getting worse–not better. Just yesterday, 26 Italian banks got chopped. That is an ominous sign as Italy is the granddaddy of the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain). It is the 4th largest economy in the EU. Yesterday, Greek depositors withdrew nearly $1 billion (700 million euros) from local banks. Will there be bank runs coming in other countries?
On top of it all, there appears to be little growth as, at least, 8 countries are in recession in Europe. Trouble for banks in Europe and the U.S. will eventually lead to another massive bailout to save the Western financial system. Much of the bailouts will, of course, come from the Federal Reserve. Just three weeks ago, Ben Bernanke strongly hinted at more money printing which the Fed Chief calls “tools.” He said, “Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support.” It is not the economy Bernanke is worried about, it is the extremely leveraged banking system.
The monster downside to all the bailouts to prop up the system is the devaluing of the U.S. dollar and the destruction of the credit worthiness of America. There is another downside to the policy of privatizing the profits and socializing the losses, and that is the loss of confidence of the U.S. dollar as the world’s reserve currency. It will come down to the Fed choosing between the banks or the buck. It looks like the dollar will be sacrificed on an altar of insolvency. It is clear, systemic risk is everywhere.