Six banks “too big to fail”

Six Too Big To Fail Banks In The U.S.
Have 278 TRILLION Dollars Of Exposure To Derivatives

By Michael
Snyder, on April 13th, 2015

The very same people that caused the
last economic crisis have created a 278 TRILLION dollar derivatives time
bomb that could go off at any moment.  When this absolutely colossal
bubble does implode, we are going to be faced with the worst economic crash in
the history of the United States.  During the last financial crisis, our
politicians promised us that they would make sure that “too big to fail” would
never be a problem again.  Instead, as you will see below, those banks
have actually gotten far larger since then.  So now we really can’t
afford for them to fail.  The six banks that I am talking about are JPMorgan
Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells
Fargo.  When you add up all of their exposure to derivatives, it comes to
a grand total of more than 278 trillion dollars.  But when you add up all
of the assets of all six banks combined, it only comes to a grand total of
about 9.8 trillion dollars.  In other words, these “too big to fail” banks
have exposure to derivatives that is more than 28 times greater than their
total assets
.  This is complete and utter insanity, and yet nobody
seems too alarmed about it.  For the moment, those banks are still making
lots of money and funding the campaigns of our most prominent
politicians.  Right now there is no incentive for them to stop their
incredibly reckless gambling so they are just going to keep on doing it.

So precisely what are “derivatives”?  Well, they can be immensely complicated, but I like to
simplify things.  On a very basic level, a “derivative” is not an
investment in anything.  When you buy a stock, you are purchasing an ownership
interest in a company.  When you buy a bond, you are purchasing the debt
of a company. But a derivative is quite different.  In essence, most
derivatives are simply bets about what will or will not happen in the
future.  The big banks have transformed Wall Street into the biggest
casino in the history of the planet, and when things are running smoothly they
usually make a whole lot of money.

But there is a fundamental flaw in the
system, and I described this in a previous
article

The big banks use very sophisticated
algorithms that are supposed to help them be on the winning side of these bets
the vast majority of the time, but these algorithms are not perfect.  The
reason these algorithms are not perfect is because they are based on
assumptions, and those assumptions come from people.  They might be really
smart people, but they are still just people.

Today, the “too big to fail” banks are
being even more reckless than they were just prior to the financial crash of
2008.

As long as they keep winning, everyone
is going to be okay.  But when the time comes that their bets start going
against them, it is going to be a nightmare for all of us.  Our entire
economic system is based on the flow of credit, and those banks are at the very
heart of that system.

In fact, the five largest banks account
for approximately 42 percent of all loans in the United States, and
the six largest banks account for approximately 67 percent of all assets in our financial system.

So that is why they are called “too big
to fail”.  We simply cannot afford for them to go out of business.

As I mentioned above, our politicians
promised that something would be done about this.  But instead, the four
largest banks in the country have gotten nearly 40 percent larger since the last
time around.  The following numbers come from an article in the Los Angeles Times

Just before the financial crisis hit,
Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion.
Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.

And the assets of JPMorgan Chase &
Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8
trillion.

During this same time period, 1,400
smaller banks have completely disappeared from the banking industry.

So our economic system is now more
dependent on the “too big to fail” banks than ever.

To illustrate how reckless the “too big
to fail” banks have become, I want to share with you some brand new numbers
which come directly from the OCC’s most
recent quarterly report (see Table 2)

JPMorgan Chase

Total Assets: $2,573,126,000,000 (about
2.6 trillion dollars)

Total Exposure To Derivatives:
$63,600,246,000,000 (more than 63 trillion dollars)

Citibank

Total Assets: $1,842,530,000,000 (more
than 1.8 trillion dollars)

Total Exposure To Derivatives:
$59,951,603,000,000 (more than 59 trillion dollars)

Goldman Sachs

Total Assets: $856,301,000,000 (less
than a trillion dollars)

Total Exposure To Derivatives:
$57,312,558,000,000 (more than 57 trillion dollars)

Bank Of America

Total Assets: $2,106,796,000,000 (a
little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives:
$54,224,084,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $801,382,000,000 (less
than a trillion dollars)

Total Exposure To Derivatives:
$38,546,879,000,000 (more than 38 trillion dollars)

Wells Fargo

Total Assets: $1,687,155,000,000 (about
1.7 trillion dollars)

Total Exposure To Derivatives: $5,302,422,000,000
(more than 5 trillion dollars)

Compared to the rest of them, Wells
Fargo looks extremely prudent and rational.

But of course that is not true at
all.  Wells Fargo is being very reckless, but the others are being so
reckless that it makes everyone else pale in comparison.

And these banks are not exactly in good
shape for the next financial crisis that is rapidly approaching.  The
following is an excerpt from a recent Business Insider article

The New York Times isn’t so sure about
the results from the Federal Reserve’s latest round of stress tests.

In an editorial
published over the weekend
, The Times cites data from Thomas Hoenig, vice chairman
of the FDIC, who, in contrast to the Federal Reserve, found that capital
ratios at the eight largest banks in the US averaged 4.97% at the end of 2014,
far lower than the 12.9% found by the Fed’s stress test
.

That doesn’t sound good.

So what is up with the discrepancy in
the numbers?  The New York Times explains…

The discrepancy is due mainly to
differing views of the risk posed by the banks’ vast holdings of derivative
contracts
used for hedging and speculation. The Fed, in keeping with
American accounting rules and central bank accords, assumes that gains and
losses on derivatives generally net out. As a result, most derivatives do not show up as assets on banks’ balance sheets, an omission that bolsters
the ratio of capital to assets.

Mr. Hoenig uses stricter
international accounting rules to value the derivatives
. Those rules do not
assume that gains and losses reliably net out. As a result, large derivative holdings are shown as assets on the balance sheet, an addition that reduces the
ratio of capital to assets to the low levels reported in Mr. Hoenig’s analysis.

Derivatives, eh?

Very interesting.

And you know what?

The guys running these big banks can see
what is coming.

Just consider the words that JPMorgan
Chase chairman and CEO Jamie Dimon wrote to his shareholders not too long ago

Some things never change — there will
be another crisis, and its impact will be felt by the financial market.

The trigger to the next crisis will not
be the same as the trigger to the last one – but there will be another
crisis
. Triggering events could be geopolitical (the 1973 Middle East
crisis), a recession where the Fed rapidly increases interest rates (the
1980-1982 recession), a commodities price collapse (oil in the late 1980s), the
commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997),
so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing
bubble), etc. While the past crises had different roots (you could spend a lot
of time arguing the degree to which geopolitical, economic or purely financial
factors caused each crisis), they generally had a strong effect across the
financial markets

In the same letter, Dimon mentioned “derivatives
moved by enormous players and rapid computerized trades
” as part of the
reason why our system is so vulnerable to another crisis.

If this is what he truly believes, why
is his firm being so incredibly reckless?

Perhaps someone should ask him that.

Interestingly, Dimon also discussed the
possibility of a Greek exit
from the eurozone

“We must be prepared for a potential
exit,”  J. P. Morgan Chief Executive Officer Jamie Dimon said. in his
annual letter to shareholders. “We continually stress test our company for
possible repercussions resulting from such an event.”

This is something that I have been
warning about for a long time.

And of course Dimon is not the only
prominent banker warning of big problems ahead.  German banking giant
Deutsche Bank is also sounding the alarm

With a U.S. profit recession expected in
the first half of 2015 and investors unlikely to pay up for stocks, the risk of
a stock market drop of 5% to 10% is rising, Deutsche  Bank says.

That’s the warning Deutsche Bank market
strategist David Bianco zapped out to clients today before the opening bell on
Wall Street.

Bianco expects earnings for the broad
Standard & Poor’s 500-stock index to contract in the first half of 2015 —
the first time that’s happened since 2009 during the financial crisis. And the
combination of soft earnings and his belief that investors won’t pay top
dollar for stocks in a market that is already trading at
above-average valuations is a recipe for a short-term pullback on Wall
Street.

The truth is that we are in the midst of a historic stock market bubble, and we are
witnessing all sorts of patterns in the financial markets which also emerged back in 2008 right before
the financial crash in the fall of that year.

When some of the most prominent bankers
at some of the biggest banks on the entire planet start issuing ominous
warnings, that is a clear sign that time is running out.  The period of
relative stability that we have been enjoying has been fun, and hopefully it
will last just a little while longer.  But at some point it will end, and
then the pain will begin.