Derivatives. Not much being said lately on them but a lot has been said on bank failures of as late. I do not understand why not, they are directly related. In math a derivative of a function is, in the most simple terms, “the rate of change of the function's output relative to its input value”. Easy enough, but in financial terms a derivative is “a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark”. Again, that sounds simple enough, but there is far more to it than the textbook mentions. Yes, far more to it. Ostensibly, they are used to “hedge a position, speculate on the directional movement of an underlying asset, or give leverage to holdings…. It's important to remember that when companies hedge, they're not speculating on the price of the commodity. Instead, the hedge is merely a way for each party to manage risk.” As a matter of fact, the frantic meetings of financial masters on both sides of the Atlantic seem to be trying to keep the entire financial system from blowing out. The collapse of Credit Suisse along with the collapse of Silicon Valley Bank and First Republic Bank would blow out the entire derivatives financial bubble. And what a bubble that is, as the rate of change is most assuredly NOT relative to its input value.
(Article by Alan Barton republished from AllNewsPipeLine.com)
Wikipedia says the game of Craps is “a dice game in which players bet on the outcomes of the roll of a pair of dice. Players can wager money against each other (playing "street craps") or against a bank ("casino craps").” As I read through the rules and gaming strategies on that game, I see no difference between playing derivatives markets and shooting craps. Well, perhaps the amounts of money as I suppose hundreds or even thousands are a bit less than trillions and quadrillions of dollars. A number of recent articles have said that the total wealth of the world as a whole is around something a bit less than 500 trillion dollars. That is half a quadrillion dollars rounding up a bit. The estimated debt in derivative markets ranges from estimates of around 3 quadrillion to 4 plus quadrillion dollars. In other words, a failed large bet on the derivatives market has the chanced of destroying the entire worlds economy. And that is just what the recent spate of bank failures is doing. Please note that they are not regular banks, but investment banks; banks used to invest dollars (both real and imagined) into speculative hedges on mythical outcomes of the crap shoot called derivative markets.
Most of those banks scheduled or expected to fail (or are failing) are Investment Banks as opposed to ‘normal’ or Commercial Banks. What is the difference? Investopedia puts it in these terms; “Retail banks primarily focus on banking services for individuals” while “investment bank arranges capital raising for and provides advisory services to institutional clients that invest in capital markets and companies that seek capital.” The Glass-Steagall Act of 1933 separated Wall Street from Main Street as a direct consequence of the 1929 bank and stock market crash that nearly wiped out this nation and those failures were felt all over the world for many years. The primary purpose of World War Two was to push industrialization increases crawl out of that massive depression and FDR had a major hand in all of it. Glass-Steagell created a “firewall” between commercial banks and investment banks and also created the FDIC, the Federal Deposit Insurance Corporation which began as $2,500 maximum and because of the Frank-Dodd Act was raised to $250,000 in 2010. But the dragging down of commercial banks is inevitable and those smaller banks are starting to fail at increasingly large rates as the money fails to keep them solvent. It is seemingly not a matter of cascading failures like in falling dominoes as much as it may be more like a thermo-nuclear chain reaction.
One of the major points as stated in the act was to “provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.” Fed chair Allen Greenspan thought that if banks were permitted to go into investment strategies with their customers then the greater possible profits could be made from the increase in return for their customers, or their depositors. Add in the fact that most of the information used in deciding on the status of investing in derivatives is base on rumor and hunches or fabricated narratives to bilk someone, and the very idea of posting any hard earned cash in one is tantamount to a guaranteed failure. I therefore have no pity for those who lost so much in the SVB failure and see the FDIC bailout as pandering to those who elect the “woke” monkeys that cause the business failures to begin with. In 1999 Bill Clinton signed the Financial Services Modernization Act, commonly known as Gramm-Leach-Bliley, which effectively (and the Frank-Dodd Act) neutralized Glass-Steagall by repealing key components of the act. This bit of maneuvering then led to the effective elimination of Glass-Steagall and led to the “Great Recession” of 2007-2008. It is also the entry for the looming Great Depression that we are now running into at full speed. The safety margins that G-S Act gave us are null and void, and we are witnessing firsthand the insane stupidity of those wealth madness driven actions.
Eleven years ago James Rickards said that the idea of derivatives is very dangerous and gave a selection of myths that they hold. Myth 1 is that “Derivatives break up risk into parts and allow the pieces to be put into strong hands best able to absorb losses.” The next Myth is that “Derivatives allow markets to get valuable price information about the underlying security or index on which the derivative is based.” The third myth is that “Bank management has derivatives risks under control using mathematical models that capture the complex interaction of factors embedded in derivatives trades.” He then concluded his article with this great line; “The next time some derivatives proponent says that derivatives reduce risk, increase transparency, and are well hedged, stop them in their tracks and ask if they believe in tooth fairies, Easter bunnies and leprechauns. Actually, it's safer betting on the leprechauns than in the soundness of modern derivatives finance. Since markets seem not to have learned from past disasters, one should expect worse to come.” Along with Warren Buffett referring to derivatives as "time bombs" and financial "weapons of mass destruction" we must then wonder why they are even permitted at all, let alone inside of “normal” commercial banks.
I think an article by Dennis Small captures the extent of the problems we face when he said “The imminent collapse of Credit Suisse, one of Switzerland’s most venerable banking institutions, founded 167 years ago in 1856, is causing at least as much panic across the entire trans-Atlantic financial sector as the March 10 bankruptcy of Silicon Valley Bank, and the imminent blowout of First Republic Bank, both of California. That’s because the collapse of Credit Suisse threatens to blow out the entire trans-Atlantic financial derivatives bubble.” He covers this with noting the top four American banks with the highest derivative exposure and gave the numbers as;
“JPMorgan Chase, with $54.3 trillion in derivatives, against $3.3 trillion in assets—a 16:1 ratio.
Goldman Sachs, with $51.0 trillion in derivatives, against $0.5 trillion in assets—a 99:1 ratio.
Citibank, with $46.0 trillion in derivatives, against $1.7 trillion in assets—a 27:1 ratio.
And Bank of America, with $21.6 trillion in derivatives, against $2.4 trillion in assets—a 9:1 ratio.
The top four U.S. banks hold a combined $173 trillion in derivatives exposure (89% of the total of all American banks), which stands in a 22:1 ratio to their combined assets of $7.9 trillion. (By contrast, China’s four largest banks have combined assets of $19 trillion, but their derivatives are estimated to be only some $7 trillion—a ratio of less than 0.4:1.)”
That looks to me as if Goldman Sachs is already a dead player, but now we have Biden and the Fed saying they can bail them out, when the law is that they CANNOT do so for Investment banks?
War has been launched against those who would get off of this sinking ship such as Russia and China along with the global majority to create a new economic system based on actual physical economic development as it should have been all along. As this financial crisis continues to echo back and forth across the Atlantic we see that the City of London, Wall Street and the City of the District of Columbia are engaged in shenanigans that dwarf the previous ones that caused World War Two. In other words, we can see that the Rothschild’s are behind what we are witnessing. Those war lords - umm, excuse me, I meant to say world financial wizards have determined to bail themselves out with hundreds of billions using fiat cash as only they can develop. The Feds will borrow monies from the Federal government (remembering that the Federal Bank is NOT part of the Federal Government at all) and we, the American Taxpayer, then must pay back which is impossible when the final tally is counted. Our work, our sweat, our toil drained to cover for the incompetence of investors in Investment banks and derivatives made in speculative and dangerous crap plays.
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