Systemic Risk Is Everywhere

JP Morgan Derivatives Exposure: Systemic Risk Is EverywhereBy 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.

Comments
  1. niphtrique

    I was here yesterday writing about my frustration about having a solution and not getting attention. You can go to the countryside and buy guns to defend yourself. If the hungry masses leave the cities they will also get their hands on guns. You probably will be overrun so this is not a solution.

    There is a solution that can work fast and a disaster can be averted. First of all you have to see the underlying cause of the systemic risk, big government and centralising forces, which is interest on money or usury. It is a powerful centralising force, for the following reasons:

    Concentration of wealth

    First, interest causes wealth to concentrate as the poor pay interest to the rich. Interest can therefore be seen as a tax on poverty to the benefit of the rich. The following example demonstrates this and also that interest on money is unsustainable and leads to crisis:

    If someone brought a 1/10 oz gold coin to the bank in the year 1 AD, and the money remained there until the year 2000 AD, collecting a yearly interest of 4%, the amount of gold in the account would have been 3.6 * 10^31 kilogrammes of gold weighing 6,000,000 times the complete mass of the Earth.

    If interest is charged on a limited scale or over a short timeframe then those problems do not surface. Interest is an insidious process. Over time it is unescapable that it reduces large numbers of people to a state of servitude to the money lenders. This is a long term development that transcends the life span of a human. Interest is the main reason why a number of civilisations have failed and why Western civilisation is about to fail. Therefore all interest is usury and the current financial system is a usury financial system.

    Usury economic cycle

    Second, the usury economic system favours large scale operations. The mechanic behind the usury economic system favouring large scale operations is:
    - If businesses make use of debt on which interest is paid, they need larger scale operations to achieve the same income level for the business owners because a part of the business income is going to the usurers. In good times businesses can borrow money to expand their operations. There is a reward for taking risk in the form of interest so there is a tendency to over invest.
    - When a recession sets in many businesses fail because demand falters and there is no credit available. If a larger scale operation fails then it is often not liquidated but taken over at a lower price which makes it more cost effective for the new owners than smaller operations that are more conservatively financed.
    - When the economy recovers a smaller number of larger scale businesses have survived. They start to increase their capacity again and become even larger than they were before.

    This cycle is repeated again and again so with usury large scale operations have the advantage. The usury economic cycle caused the division of labour to go further than it otherwise would have done. The effect of the usury economic cycle favouring large scale operations is amplified by the free flow of capital and free trade as this created a competition of everybody against everybody on a world wide scale. As a consequence dependencies have escalated and people have become less self sufficient. In this way “the system” has been created. Before the middle of the twentieth century most people lived in villages that were largely self dependent. Henceforth more and more people live in cities and societies have become more complex than they would have been without usury. The story of the Tower of Babel reflects on the dangers of this development.

    The Tower of Babel

    Division of labour empowers humans to create great works at the risk of people becoming too specialised. People working on the same project or working in the same organisation often do not understand each other. In many cases nobody oversees the complete picture. This undermines the effectiveness of the organisation as a whole. Many organisations rely on advisors and specialists, such as lawyers, IT specialists and market analysts, while managers often do not understand the work they do and the advice they give. Humans have a limit to what they are capable of managing but common sense does not always prevail, especially when complex solutions are chosen where simple solutions suffice.

    The biblical story of the Tower of Babel warns us for the division of labour gone too far. After becoming specialised, people are very dependent on each other, while they do not understand each other any more. In this way a society disintegrates and therefore the story of the Tower of Babel is reflecting the situation we live in today. After the collapse of the city civilisation, the people became scattered from there over the surrounding countryside (Gen. 11:8). An important theme in The Bible is Eden versus Babylon or rural living versus city life. The story on the Tower of Babel is part of this theme.

    The building of the Tower of Babel may also reflect the effect of usury and credit in the financial system. Usury is the principle cause of the division of labour and the concentration of people in cities. Credit amplifies the booms and busts spurred by usury. Most sky scrapers have been built in the years just before financial crises. Historically, skyscraper construction has been characterised by bursts of sporadic, but intense activity that coincide with easy credit, rising land prices and excessive optimism.

    Big government

    Many people want to protect themselves against the consequences of usury, such as economic cycles, unemployment, pollution and exploitation. For this reason they wanted the government to intervene. This is the real cause of big government in a democratic society.

    Solutions

    There are solutions for this problem and I have worked on them but I am tired of spamming other websites. It often antagonises people and that is not helpful. I am only interested in making it work. It will work as soon as it is tried. An example may demonstrate that.

    On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl introduced a complementary currency. Wörgl was in trouble and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job and 200 families were penniless. The mayor Michael Unterguggenberger had a long list of projects he wanted to accomplish, but there was hardly any money to carry them out. These projects included paving roads, streetlights, extending water distribution across the whole town, and planting trees along the streets.

    Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as scrip money. The Wörgl currency required a monthly stamp to be stuck on all the circulating notes for them to remain valid, amounting 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.

    Because nobody wanted to pay the holding tax, everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings but this offer was rarely taken up. Of all the business in town, only the railway station and the post office refused to accept the local money. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump and a bridge.

    The key to its success was the fast circulation of the scrip money within the local economy, 14 times higher than the Schilling. This in turn increased trade, creating extra employment. At the time of the project, unemployment in Wörgl dropped while it rose in the rest of Austria. Six neighbouring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the ‘miracle of Wörgl’. In January 1933, the project was replicated in the neighbouring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea. At this point the central bank panicked and decided to assert its monopoly rights by banning complementary currencies.

    If the experiment had not been banned, everybody would be using scrip money today. The example shows that scrip money can end the grip of banks, large corporations and centralised governments over the destiny of ordinary people. This money combined with a ban on charging interest creates a more efficient financial system and can help to solve many problems the world is facing today. It can work without a large organisation. One small but committed community like Wörgl can be enough to change the world completely and forever.

    Start proposal

    I have a start proposal that can get things going posted on Occupywallst.org:
    http://occupywallst.org/forum/natural-money-bomb-the-way-to-finish-off-the-usury/

    [If you do not like a link to another website you may remove it. The alternative is posting the start proposal here, but it contains even more links so it is even more likely considered to be spam.]

    • Frank

      You don’t really understand. Evil is running things. Understand now?
      Jesus will set it all straight later. Good luck.

      • Craig

        No it is you that does not understand.. Jesus is Zues. In spanish Hey Zues is Jesus, Jesus was the son of god, Zues was the son of god. (Saturn the planet is that god) Chronos.. This is the oldest story back to the Phoenicians in 13,000bc … Saturn is the all seeing eye, the Black son. X mas is on Dec 25 like cuz of the Winter Solstice X marks the spot.. IT is not D”evil” red legged demon, hahaha no it is Greed and selfishness.. God is only an Egregore. Gold is wealth, Fiat always fails. Good day.

  2. j.bradbury

    Below is an excellent article about derivatives. The author uses pictures to show the danger that is out there.

    http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

    This loss by JP Morgan is not even a drop in the bucket.

    • Greg

      Thank you J.
      Greg

  3. Tom

    In light of the continuing crisis in the financial markets and the pumping out of paper dollars, why are gold and silver taking it on the chin recently?

    • Greg

      Tom,
      I am no Jim Sinclair but my theory is two fold. Folks are needing cash for margin because the stock market is off and the price is being manipulated downward because the Fed anticipates a giant money drop to fend off insolvency. That is just my personal theory and I have nothing to back it up. Longer term gold and silver will move dramatically upward in price. Only a fool would sell now unless you needed some cash. Thank you for your question. I hope I gave you an answer that makes sense.
      Greg

      • Tom

        Thanks Greg. It seemed like gold and silver were in a tight range for quite some time and now it’s falling fast. Your analysis makes sense. I have believed that metal prices were being held down by manipulation but was a little surprised by the recent drop. Long term though I can’t see how they cannot go up, along with other hard assets.

  4. Sean

    The goal is to collapse the existing world economies, bring them into parity with the rest of the world, and then rebuild an interdependent global system from the ashes, using already harmonized policy (G8, G20 etc) and existing (or new) global finance organizations including the IMF and WTO. The banks control.and oversee federal policy and are working hand in hand with the White House (for more than 50 years) to put the pieces in place to make this happening.

    We’re near the goal line so the formerly secretive and less obvious activities are now much more overt and obvious as the final big pieces are moved into place to effect the collapse and the planned crisis. George HW Bush once said that if the American people what the government was really doing, they would march on Washington overnight to stop them. This is what he was referring to.

  5. Silver Dollar Coin Value

    ….. “You shall not crucify mankind upon a cross of gold” -
    William Jennings Bryan, July 9, 1896.

  6. art barnes

    Greg, “bank or bucks” for old Ben and his beloved FED? I’m betting on the FED’s & its buddies the banks, odds are at least 3 to 1 he side with the elite with main street be damned. After all, who started the FED in the first place, the banking elite. Who said gold wasn’t money, old Ben. Your article is all too real as the future of the “land of the dollar bill”. When this all hits, the FED prints again and again, and the world leaves the dollar, main street will look like you just got off from a third world train station.

    Lastly, systemic risk is everywhere as you said, but when you just lost your job or your hours were cut, no raise in 4 years, seems to me that’s a systemic risk of your family. Out here on the Western Front systemic risk is everywhere with many families having already melted down.

    • Greg

      Thank you Art and Sling,
      Greg

  7. slingshot

    “Abandon all hope ye who enter here”.

    These words should be inscribed over every entrance to a bank for we enter the “Gates of Hell” and the Devil awaits our monetary transactions. The world is full of lost souls due to banker fraud.

  8. Todd

    Does one hear this sort of thing on CNN? Who knows, I don’t even look. Very well-written and -researched, Mr. Hunter. And of course the points are well-taken!

    • Greg

      Thank you Todd,
      Well this was the kind of stuff I was doing up until July of 2008 on CNN, but they didn’t want it. Oh well I love having my own site and my say. Thank you for your support!!!
      Greg

  9. Dennis

    Greg:
    With the USD continuing to climb supposedly because of the ‘flight to safety’ status, there must be lots of big money that disagrees with your statement: “It looks like the dollar will be sacrificed on an altar of insolvency.” Apparently it’s still the best of a bad lot.
    Or perhaps many believe nothing will happen along those stated lines until far in the future. One thing is sure: The debt of all nations will never be paid back totally. Apparently many believe it can be rolled over forever. Hell, with gold the only real money being trashed again, majorities the world over still believe in fiat digits!
    It is what it is.

    • Greg

      Good point Dennis,
      I don’t see how anyone could be long the U.S. other than a very short term horizon but I am not a market timer or trader. Thank you for weighing in.
      Greg

  10. Neo1

    Greg,
    The banks are just repeating history. The bigger question is, how do we survive and profit from this train wreck? How Venice Rigged the First, And Worst, Global Financial Collapse 1345 http://www.google.com/search?sclient=psy-ab&hl=en&site=&source=hp&q=How+Venice+Rigged+the+First%2C+And+Worst%2CGlobal+Financial+Collapse&btnK=Google+Search or
    http://www.schillerinstitute.org/fid_91-96/954_Gallagher_Venice_rig.html

    • Greg

      Neo1,
      I would worry less about profit and more about insuring my wealth, but that’s just me. Thank you for your comment and link!
      Greg

  11. RUSS SMITH

    Hi!, Patrons Of USAWatchdog Et Al:

    Could someone please explain the practicality of derivatives and what was the original plan to satisfy their demands that would cancel them out off the banks ledgers freeing the banks from these huge, overwhelming risks now plaguing the economic stability of our entire planet? Are derivatives proven banking mechanisms or were they merely created as an expedient experiment from the get go?

    RUSS SMITH, CALIFORNIA

  12. Richard

    Greg:

    Always read your articles as they are insightful, accurate and meaningful for anyone who wants the real story about systemic risks, obfuscation and fraud by our government and the too-big-to-fail. The full faith and credit of the US is ultimately the people, but unfortunately, as you stated, this group also recieves the socialized private debt, which is also ruining the US. We are now a government of laws selectively enforced on everyone except where the real criminals are, at the top. I don’t feel any safer because we caught the lowly bank robber at the local B of A or the Quickie Mart as we let hundreds of billions be stolen every day by the real crooks in America, ie; our government, the Fed, Wall Street, the Big/Pig Banks, and look-the-other-way co-conspirator regulators.

    Strong work! Keep it coming!

  13. Agent P

    That would be FASB rule #157…

    • Greg

      Agent P,
      Thank you for the detail. I can use all the help I can get.
      Greg

  14. Davis

    And Now We Return To Our Grecian Saga.

    While the French voters decided to swap a closet socialist for a hypocritical hard core socialist, not a whole lot of mention was given on this side of the pond on what an absolute disaster the Greek elections were that were held the same day. The results produced such a fractured Parliament that no coalition government can be formed and there will have to be another round of elections. Meanwhile it was announced yesterday that Greece would indeed be making a €345 billion payment on previous bonds that they thought they were going to skate out of with the last refinancing and 70% haircut deal. The pressure applied to force Greece to make these payments must have been tremendous, as had they not done so there would have been no way to prevent the triggering of the related CDS. Where exactly Greece came up with all that money has yet to be revealed. Small wonder that bank runs started in earnest yesterday, with Greek citizens withdrawing upwards of €900 million in a single day

    For right now the Troika of the EC, ECB and the IMF are perfectly happy for there to be no seated government in Athens, It allows them to keep looting Greece’s physical assets at rock bottom prices. But what happens when a government is seated? After a year or so of ignoring the possibility, the reality is beginning to sink in even with the American press that Greece my default on its debt. As of yet little or nothing can be found in so-called mainstream sources about what the options are or the real implications.

    Does Greece seek a “organized” default, leaving the Euro and returning to the Drachma, coupled with some sort of a new debt reorganization, thus attempting to avoid a “credit event,” i.e. pump even more money into an already failed system?

    Do they simply unilaterally leave the Euro, default and hope that after a couple of years of pain and chaos that growth will return and Europe will return to doing business with them in the financial markets?

    Do they go the Icelandic route, default on the debt, and throw the crooked bankers and politicians that got them into the mess in jail?

    There can be no doubt that right now the Troika would prefer some sort of orderly withdrawal and re-accommodation on the Greek debt. But even this is fraught with uncertainty as there would be nothing to prevent Portugal, Ireland, Spain and Italy then standing up and demanding the same accommodations. Problem is that there’s not enough cash in any of the various facilities set up by the EC and the ECB to do it, not even close. And after this weeks local elections in Germany where Chancellor Merkel’s CDU party got stomped, it’s pretty clear that the German electorate is not going to put up with their savings being used to bailout the profligacy of the PIIGS any more. End Game in this scenario? CDS get triggered, European and some U.S banks collapse, then the European Central Banks and the US Federal Reserve have no choice but to print up the losses. Commodity prices begin to soar, then retail prices, and then bank runs that will make Greece’s €900 million run look like a child’s game.

    Second scenario, Greece simply walks away, tells the Troika to pound sand and they will revert to the Drachma and deal with the pain for a couple of year before growth can begin again. End Game for this scenario? Same as above, only worse, as the failure of the CDS could trigger the collapse of a large portion of the rest of the $1 Quadrillion of worthless derivatives.

    Third scenario, same as above plus they throw he crooked bankers and politicians in jail. This would perhaps be the most interesting, as the EC would have little choice but put even more crushing economic sanctions in place and perhaps even threaten military action. This of course is the banking elites ultimate answer to any financial crises of their own making, war. But it also would expose the dirty little realty that their concern all along has not been to rescue Greece but to protect the banks. Question would then be where would the EC get the authority never mind the troops to pull this off? The UK? Not likely, its military is but a shadow of it former self. France? The French don’t want to work never mind go to war. Germany? The last thing they would do is put themselves in the position of being seen as starting a third European war. As the only remaining highly productive economy in Europe they would ditch the Euro themselves, take their losses, and wish the rest of Europe good luck. They have already begun setting up their own capital reserves for just such an event.

    In short the end game for the Euro experiment draws neigh. The bankers and politicians my have a few more accounting tricks and delaying tactics up their sleeves but even that well is beginning to run dry. Anybody who tells you that the US or the rest of the can escape this disaster with “minimal” damage is either lying through their teeth or has not the first idea o what they are talking about.

  15. BigTom

    “Systemic Risk Is Everywhere”…..So is ‘Systemic Corruption’. I would be willing to bet a good lot of those mining shares out there are half again rolled over on naked short volumn —http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-20120515 — and those doing it to America are given a wink and a nod by the SEC and CFTC…

    I had to laugh at Eric Gordon’s (a professor in the law and business schools at the University of Michigan) quote… ‘The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI.’

    Greg – thanks for exposing good points…..

    • Greg

      Big Tom,
      I wonder why someone in the White House Press Corp. doesn’t ask why no FBI investigation into MF Global while pushing forward on Chase? What do I know. Thank you for the comment.
      Greg

  16. Robert

    Too big to fail does not pass the smell test and never did. These banks deserve to be broken up far more than Standard Oil ever did, as the latter never exposed the American people to unlimited and unknowable liability. No new legislation is needed- apply the Sherman Antitrust Law. And then demand that Congress re-instate Glass Steagal- “The Volker Rule” and Dodd-Frank (referred to by insiders as “Too big to read”) simply add unneeded layers of law which choke enterprise .

    • Greg

      Robert,
      You are spot on man!!! I’ll say it again, “One of the best regulatory tools is bankruptcy.” Thank you.
      Greg

  17. Richard

    Greg,

    Your final paragraph sums up the mess we’re in rather poignantly. Unfortunately, until the Jamie Dimons of the world receive their comeuppance, we’re all doomed to a dark and foreboding financial future.

    • Greg

      Thank you Richard. I am afraid you are correct.
      Greg

  18. Marcel

    …and on top of this global economic shaking we have the perfect storm of major war on the horizon as the US and NATO play ‘war games’ next to Iran and Syria even after the loud and clear warnings from Russia’s RasPutin and China.

    WW III will be the perfect distraction away from the economic collapse now under way.

  19. Steve

    Erik Gordon has to be kidding. He stated the FBI looks for evidence of crimes and wants to put people in jail. Who has the FBI brought to justice since the 2008 meltdown? How does a publically known tax cheat like Geithner get away with intentionally not paying his taxes and then gets appointed over Treasury which includes the very agency he cheated? Where is the FBI in the MF Global disaster? This is sad commentary by an out-of-touch academic.

  20. pdog

    Dear Greg:

    The Yuan will replace the dollar as the world’s reserve currency, the process is underway. The eventual dollar devaluation that you describe is augmented by political process and the end of Britton Woods. see below

    https://mninews.deutsche-boerse.com/content/us-geithner-china-agrees-reforms-will-lead-yuan-rise

    • Greg

      pdog,
      Agreed, However, the U.S. is a super power not just in the military but gold. The U.S. is the 4th biggest producer of gold in the world. The U.S. may be forced to back it’s currency (at least particially) with gold. I do not have any timing on this, but if the dollar is debased enough and folks (around the world) stop taking it in trade then the government my have to go back to gold and maybe silver to back the buck. Thank you for the comment and the link.
      Greg

  21. nm

    Greg:

    I’m trying to understand derivatives and why they even exist and/or how they are different from regular options.

    They give you the option (not obligation) to buy say oil at a set price 6 months from now (& you hope that the price of oil is up in 6 months because? what? you’ll benefit from the spread?

    So, if there’s no obligation to buy, why is there an obligation to pay?

    E.g. saying that JP Morgan has $70 Trillion dollars worth of derivatives means what exactly? If JP Morgans derivative bets don’t work out who will they have to pay (& why do they have to pay? it’s just a bet with no obligation to buy)

    • Greg

      nm,
      Derivatives are in simple terms debt bets. The loser has an obligation to pay if the bet goes against them. The problem is the obligation to pay may far exceed the ability of someone to pay. That’s what happend to AIG. It could not pay off the bad bets on mortgage-backed securities and the taxpayer had to step in and save them along with Goldman Sachs to boot. I hope that sums up what you were asking.
      Greg

    • MasterLuke

      Options are Derivatives. Anyways, quick story, In my Risk Management course when my professor discussed derivatives/options and investing she specified, “To hedge everything”. Part of the explanation was, “If the hedge works then you profit [such and such percentage]“. If the hedge doesn’t work you get bank bailouts. The defense is you where hedged. There was no losing and at that point I saw the parasitic nature of the industry. She even laughed along with the whole class.

  22. Ambrose

    Greg,

    Here is a link to a YouTube video “TBTF Sheriff Bill Black on the MF Global Cover-up: ‘All those that doeth Evil’”: http://youtu.be/fyVOJPDYp34

    Last March Lauren Lyster interviewed William Black in “Capital Account” (a Russia Today program). Although the interview was focused on MF Global Cover-up, many of its contents also apply to JP Morgan Chase troubles. I agree with Black that the current regulations were not enforced because the Feds had replaced the “real” regulators with new regulators who don’t believe in regulations. How can we expect the “financial cops” to keep the law and order in the banking system if they don’t believe rules and regulations?

    Many people believe that the banks are sitting on a ticking time bomb. When the bomb explodes, a lot of our money and assets will be vaporized along with the banks. The loss at JP Morgan Chase is just an early warning to a much bigger disaster. It drives me crazy when I see those anti-regulation nuts still against tougher regulations.

    Ambrose

    • Greg

      Ambrose
      Thank you for the comment and the link! This is very good content!
      Greg

  23. Jay Berkey

    HYPERINFLATION OR DEFAULT?
    On numerous occasions I have read where respected economists and pundits have stated unequivocally that there are only two ways our government can clear its debts. One way is to debase our money supply and with enough inflated dollars pay off what we owe. The other way to clear our debts is to default.
    It seems that we have chosen the inflation route to resolve our debts. And maybe eventually we could inflate our money supply with enough almost worthless dollars that we could pay off our creditors. The problem with this approach is first of all “it is not working.” Furthermore as we continue to inflate away our dollar making it worth less it will finally become worthless. We will inevitably experience hyperinflation and that would not only crash our dollar but our whole economy.
    On the other hand – What if we were to choose to default? There is no doubt that this would throw the world economy into absolute chaos. But then hyperinflation would do exactly the same thing. I understand that clearing our government of its debt by simply not honoring our obligations seems morally wrong. Otherwise, inflating our dollar to make it worth less in order to pay our debts is just as wrong morally. If we did default, on the positive side we would not continue to be indentured debt slaves. The debt, mostly owed to China was taken to satisfy our greed to buy their cheap goods and live the good life. China loaned us the money knowing full well that we could never pay them back. They made those loans so they could continue selling us the goods they were making cheaper than we could produce them. So those loans that China made were to satisfy their own greed to steal away our manufacturing jobs and build their own industrial revolution at our expense. The Chinese have not honored our patent rights nor have they hesitated to steal intellectual property. They have not been morally righteous in their dealing with us and two wrongs do not make a right. But should we quietly sit and permit them to make us and our future generations indentured servants to their wanton growth at our expense.
    It is not hard to see that a default of such gigantic amounts of dollars would cause enormous turmoil in world markets. However beyond being clear of debts we could never pay, we would also have an opportunity to rectify some of the wrongs that got us into this untenable position. We are a strong country of willing workers who would love the chance to rebuild our manufacturing base. We have a large economy and we could exist just for our domestic needs without borrowing from other countries. It is obvious that we might wind up the pariah to the rest of the world as deadbeats on our debt so it would make no sense to depend on borrowing from other nations. Things would be tough but the opportunities that would lie before us would engender that good old “American Spirit”. We are a nation of innovators and I truly believe that necessity is the mother of invention. And financially we would not be totally bankrupt because our country holds more gold than any other country in the world.
    We need an intellectual and knowledgeable debate/discussion on whether we should continue to oblivion through debasing our money or should we bite the bullet and just let our foreign creditors know that we choose not to pay.

  24. David

    Greg,

    I don’t understand how the derivative totals can be so large. I believe the GDP of the US is 15 trillion annually. How can these banks accumulate such tremendously large exposures? What exactly is a derivative and who buys them?

    Thanks,
    David

    • Greg

      David,
      Derivatives are very complicated, but in simple terms they are debt bets.
      Greg

      • Colt Larsen

        Thanks for the information, Greg. I am trying to understand the whole story before I put another money into banks or another investment. I am starting to get worried, more especially if this continues.

        • Greg

          Colt,
          You should worry right here and now. this is a very bad sign and it will not be reversed until it blow up. If you are going to make a move to protect your assets do it now.
          Greg

  25. nm

    Hi Greg:

    Thanks for your answer. If it’s just a bet that’s been made, wouldn’t it have been easier for AIG (& for the taxpayers) to just say…listen, sorry…but we don’t have the money to pay you. Afterall, it was just a bet. It’s not like products were given to AIG, which they used (like a car or laptop, etc, etc)…it was just a bet where nothing was exchanged. No product was made and no product was used.

    These financial products have no utility (or do they?)

    • Greg

      NM,
      Derivatives on a future exchange do have an important roll. But I am talking about a public market with guarantees regulation, transparency and price discovery (bid/ask). What JP Morgan was doing was just the opposite.
      Greg

  26. rolf

    bring back the OTTOMAN EMPIRE

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