Derivative Crisis Looming

An excellent article on the Derivatives market and its implication on global economy:

The word "derivatives" sounds complicated and technical, but understanding them is really not that hard.  A derivative is essentially a fancy way of saying that a bet has been made.  Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before.  Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.
Keep in mind that the GDP of the entire world is only somewhere in the neighbourhood of $65 trillion.  The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction".  For now, the financial powers are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down.  When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.
Most people don't talk much about derivatives because they simply do not understand them.
Perhaps a couple of definitions would be helpful.
The following is how a recent Bloomberg article defined derivatives....

Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

The key word there is "speculation".  Today the folks down on Wall Street are speculating on just about anything that you can imagine.
The following is how Investopedia defines derivatives....

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

A derivative has no underlying value of its own.  A derivative is essentially a side bet.  Usually these side bets are highly leveraged.
At this point, making side bets has totally gotten out of control in the financial world.  Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it.  This system is almost entirely unregulated and it is totally dominated by the big international banks.
Over the past couple of decades, the derivatives market has multiplied in size.  Everything is going to be fine as long as the system stays in balance.  But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.
The amount of money that we are talking about is absolutely staggering. Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective....

If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.
The notional value of the derivative market is roughly $1.4 QUADRILLION.
I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.
$1.4 Quadrillion is roughly:
-40 TIMES THE WORLD’S STOCK MARKET.
-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.
-23 TIMES WORLD GDP.

In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system....

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.
They will almost certainly be at the center of the next financial crisis as well.
For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.

Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.
JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.
It is hard to even conceive of such figures.
Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.
Morgan Stanley also has tremendous exposure to derivatives.
You may have noticed that these are some of the "too big to fail" banks.
The biggest U.S. banks continue to grow and they continue to get even more power.
Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.
These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.
You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the "too big to bail" banks to become bigger than ever.
And they pretty much do whatever they want.
A while back, the New York Times published an article entitled "A Secretive Banking Elite Rules Trading in Derivatives".  That article exposed the steel-fisted control that the "too big to fail" banks exert over the trading of derivatives.  Just consider the following excerpt from the article....

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

So what institutions are represented at these meetings?
Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.
Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.
But that is a faulty assumption.  Just look at AIG back in 2008.  When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone "bust" without gigantic bailouts from the federal government.  If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.
It is inevitable that the same thing is going to happen again.  Except next time it may be on a much grander scale.
When "the house" goes "bust", everybody loses.  The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won't be any government on earth with enough money to put it back together again.
A horrible derivatives crisis is coming.
It is only a matter of time.
Stay alert for any mention of the word "derivatives" or the term "derivatives crisis" in the news.  When the derivatives crisis arrives, things will start falling apart very rapidly.

Bank of America, Societe Generale and Unicredit on the brink

Just back from hiking in the remote Irish forests, from the forest to the jungle of today's events.
No need to add again that we are at a turning point in history and this turn does not look good at all.
If they do not invent something either a Federal Reserve QE3 an ECB Euro QE1 or an ECB Bond shopping spree we are not going to survive this summer. Needless to say that we are facing a situation potentially 10 times more dangerous than the Financial Crisis of 2008 (trying to be conservative), all the tricks have been used and failed. Latest news on the US banks could unleash a new major banking crisis in the US which would spread to the Derivatives market and at that point either we redesign how the new economy works by banning derivatives or we can say goodbye to the world economy.
All eyes are on Bank of America which today only has been hammered losing in one day 20%, this is turning ugly since at this point Federal Reserve and the US Government could intervene and bailout again Bank of America, aside from the political and public rage this will cause we still don't know if there is enough money to bailout Bank of America and should it default we are going to see an hurricane on the derivatives market and stock exchanges all over the world.


Going back to Europe, if the Daily Mail is correct, Societe Generale and Italy's UniCredit are on the verge of collapse.

Fears are growing this weekend that two of Europe’s largest banks may require a bailout, having been hugely damaged by the worsening crisis across the eurozone.

In France, President Nicolas Sarkozy is having to confront the possibility that the country’s second-biggest bank, Societe Generale -commonly known as SocGen - is on the brink of disaster after huge losses over loans made to Greece.

The chilling possibility of the largest bank in Italy, UniCredit Banca, suffering a similar collapse if a bailout is not implemented comes as Silvio Berlusconi already faces an increasingly dangerous national economic situation.

The irony of all this is that we went into this mess to bailout failing banks back in 2008 and here we are now 3 years later with banks failing again together with those sovereign countries who were so stupid to support them.

The rise of Corporatism !

The latest news on corporate merging are seeing on Sunday June 21st Xstrata, an Anglo-Swiss mining giant, proposing a “merger of equals” with Anglo American, a big London-based miner. The combined firm, worth some $70 billion, would become the world’s third-largest mining company.
After FIAT missed merging with Opel we are seeing a restructuring of the corporate world never seen before. Until 2007 such giant mergers would have been prevented from occurring due to anti-trust laws put in place exactly to avoid that a giant corporation can control a entire sector of the economy and potentially pose a systemic threat should it fall.
Anti trust laws are officially still there but it appears that everyone has forgot about them, there are no inquiries, no contrary voices, not even a doubt on the possible consequences of such consolidations.
The paradox of this story though is not Europe but USA.
USA was the inventor of anti-trust laws to prevent the abuses and dangers of the robber barons era when Rockfellers, Astors and company were de facto controlling the economy and consequently the country.
Anti-trust laws have always been at the forefront of the political discussion whenever a big merging was taking place, today is exactly the contrary, US government is not only taking equities in the corporations but dictating merging and acquisitions justified by the current economic crisis.
Chrysler forced to join FIAT, Bank of America forced to buy Merrill Lynch, these diktats unthinkable few years ago are common practice in the new economic scenario.
Of course, governments will tell us that all is for the greater good of the national economy, that is something they had to do, that they had no choice otherwise we would be now fighting for food scraps in the streets. I love when they use the apocalypse card!!
So now we have few key corporations in key sectors, equally leveraged or controlled by the governments, not competing against each other but many times joining forces to regulate the sector and control the flow of cash, and either controlled or having as stock holder the government.
First those companies controlled by the government have an unfair advantage against free companies, regardless of the good intentions and fair speeches, the government cannot afford to lose more money in unsuccessful business so if necessary will do its best to make revenue either tricking competition out or taking it out with a merger. First victim of the lack of competition and merit is the Free Market which is agonizing in USA.
The merging of corporations and state let us not forget is called Fascism. Benito Mussolini believed that fascism should have really been called corporatism, because corporatism is when government and business are intertwined.
Too much power is being concentrated in too few hands, we have been here before and it did not go well.
We created laws and rules to prevent this concentration of power from happening again and it is scary how few months of economic decline can let us all repudiate our principles and ideals.
The road to hell is paved with good intentions and we are definitely walking on it now.