Derivatives: The Unregulated Global Casino for Banks

[Maguspk]

http://i.minus.com/iQpJIH7eml0sZ.png
Infographic (20 MB -- Allow load) @ http://demonocracy.info/infographics..._exposure.html

Text from Infographic

Spoiler: show

SHORT STORY: Pick something of value, make bets on the future value of "something", add contract & you have a derivative.
Banks make massive profits on derivatives, and when the bubble bursts chances are the tax payer will end up with the bill.

LONG STORY: A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. Ex- A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative.
Most large banks try to prevent smaller investors from gaining access to the derivative market on the basis of there being too much risk. Deriv. market has blown a galactic bubble, just like the real estate bubble or stock market bubble (that's going on right now). Since there is literally no economist in the world that knows exactly how the derivative money flows or how the system works, while derivatives are traded in microseconds by computers, we really don't know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times, that will be catastrophic for the world financial system since the 9 largest banks shown below hold a total of $228.72 trillion in Derivatives - Approximately 3 times the entire world economy. No government in world has money for this bailout. Lets take a look at what banks have the biggest Derivative Exposures and what scandals they've been lately involved in.

Bank of New York Mellon

BNY has a derivative exposure of $1.375 Trillion dollars.
Considered a too big to fail (TBTF) bank. It is currently facing (among others) lawsuits fraud and contract breach suits by a Los Angeles pension fund and New York pension funds, where BNY Mellon allegedly overcharged the funds on many millions of dollars and concealed it.

State Street Financial

State Street has a derivative exposure of $1.390 Trillion dollars.
Too big to fail (TBTF) bank. It has been charged by California Attorney General (among other) lawsuits for massive fraud on California's CalPERS and CalSTRS pension funds - similar to BNY (above).
Bank of New York Mellon - Derivative Exposure
Morgan Stanley

Morgan Stanley has a derivative exposure of $1.722 Trilion dollars.
Its a too big to fail (TBTF) bank. It recently settled a lawsuit for over-paying its employees while accepting the
tax payer funded bailout. Vice Chairman of Morgan Stanley had a license plate that said "2BG2FAIL" on his Porsche Cayenne Turbo. All this while $250 million of bailout money ended up in the hands of Waterfall TALF Opportunity, run by the Morgan Stanley's owners' wives-- Marry a banker for a $250M tax-payer cash injection.
The bank also got a SECRET $2.041 Trillion bailout from the Federal Reserve during the crisis, beyond the tax payer bailout.

Wells Fargo

Wells Fargo has a derivative exposure of $3.332 Trillion dollars.
Its a too big to fail (TBTF) bank. WF has been charged for its role in allegedly pursuing illegal foreclosures and deceptive loan servicing. Wells Fargo was just slapped with a $85 million fine by Federal Reserve for putting good credit borrowers into bad-credit rating (high rate) loans.
In March 2019, Wachovia (owned by Wells Fargo) paid $110 million fine for allowing transactions connected to drug smuggling and a $50 million fine for failing to monitor cash used to ship 22 tons of cocaine. It also failed to monitor $378.4 billion (that's $378400 millions dollars) worth of transactions to Mexican "casas de cambio" (think WesternUnion, anonymous cash transfer) usually linked to drug cartels. Beyond that, WF lets its' VIP employees live in foreclosed mansions. WF knows how to cash your legit check, then claim "fraud" and close your account. WF also re-orders your transactions to create more overdraft fees. Wells Fargo's Wachovia also got a SECRET $159 billion bailout from the Federal Reserve.

Wells Fargo paid NO taxes in 2008-2010 and had a tax rate of NEGATIVE 1.4% while making
$49 billion in profit during the same time.

HSBC

HSBC has a derivative exposure of $4.321 Trilion dollars.
HSBC is a Hong Kong based bank and its original name is
The Hongkong and Shanghai Banking Corporation Limited.

You will find HSBC working a lot with JP Morgan Chase.
Both HSBC and JP Morgan Chase have strong interest in gold & precious metals. HSBC and JP Morgan Chase are often involved together in financial scandals.
Lately HSBC has been sued for allegedly funneling more than $8.9 billion to the largest ponzi-scheme in history - Bernie Maddof's investment business.
HSBC (along w/ JP Morgan Chase) has been sued for alleged conspiracy suppressing the price of silver and gold, partially through precious metal DERIVATIVES and making billions of dollars on it. State of Hawaii is suing HSBC (and other banks) for deceptive credit card lending practices.
DZ Bank in Germany is suing HSBC (and JP Morgan) for deceptive (lying) practices when selling home-loan-backed securities.
HSBC is also under investigation for laundering billions of dollars.

Goldman Sachs

Goldman Sachs has a derivative exposure of $44.192 Trillion dollars.
The $1 Trillion pillars towers are double-stacked @ 930 feet (248 m).
The White House is standing next to the Statue of Liberty.

Goldman Sachs has advantage over other banks because it has awesome
connections in US Government. A lot of former Goldman employees hold high-level
US Government positions (chart).

Mitt Romney's top donor is Goldman Sachs, and one of Obama's best donors.
Ex-CEO of Goldman Sachs, Hank Paulson became the Secretary of Treasury under Bush and
during the 2008 financial crisis authored the TARP bill demanding $700 billion bail-out.
In UK, Goldman Sachs escaped £10 million bill on a failed tax avoidance scheme with help of good connections.
The bank is the largest player in the food commodities market, earned $955m from food speculation in 2009" - That's your $$$.
Goldman Sachs employees are arming themselves with guns in case there is a populist uprising against the bank.
Goldman Sachs calls their investors "muppets". and use clients to make money for themselves, disregarding the clients.
The bank was fined $22 million for sharing valuable nonpublic information with top clients (Think insider trading with best clients).
Goldman Sachs was part-owner America's leading website for prostitution ads until the ownership stake was exposed.
Goldman Sachs helped Greece conceal its debt with secret loans, while simultaneously taking advantage of Greece.
Goldman Sachs got a $814 billion SECRET bailout from the Federal Reserve during the 2008 crisis.
Goldman Sachs got $10 billion of the 2008 TARP bailout, and in the same year paid $10.9 billion in employee compensation and "benefits", while paying a tax rate of 1%. That means an average of $327,000 to each Goldman Sach's employee.

Bank of America

Bank of America has a derivative exposure of $50.135 Trillion dollars.

BofA is sticking the tax-payers with a MASSIVE bill, by moving derivatives to
accounts insured by the federal government @ total of $53.7 trillion as of 06/2011.
During 2011-12 BofA has been in need of cash, so Warren Buffett gave BofA $5 billion.
Same year BofA sold its stake in China Construction Bank to raise $1.8 billion in cash.


Bank of America paid $22 million to settle charges of improperly foreclosing on active-duty troops
BofA recruited 3 cyber attack firms to attack WikiLeaks. but the Anonymous hacker group hacked the security firms first.
BofA was sued for $31 billion in home-loan losses in 2011, the bank is involved in many lawsuits, too many to document.
BofA also received a SECRET $1.344 trillion dollar bailout from the Federal Reserve.

Citibank

Citibank has a derivative exposure of $52.102 Trillion dollars.
The $1 Trillion dollar towers are double-stacked @ 930 feet (248 m).

Citibank customers have been arrested for trying to close their accounts, while in in Indonesia a man was interrogated to death in Citibank's special "questioning room". In 2011 Citibank paid a fine of $285 million for selling home-loan backed bonds to investors, while betting they would lose value (think derivatives/insurance). The man in charge of the unit at Citibank became Obama's Chief of Staff. 2 weeks before getting hired by Obama he got $900,000 from Citibank for great performance. This was after Citigroup took out $45 billion in bailout money.
Citibank knowingly passed over bad loans to the Federal Housing Administration to insure.

Citigroup also received a SECRET $2.513 trillion dollar bailout from the Federal Reserve.

JP Morgan Chase

JP Morgan Chase has a derivative exposure of $70.151 Trillion dollars.
$70 Trillion is roughly the size of the entire world's economy.
The $1 Trillion dollar towers are double-stacked @ 930 feet (248 m).


JP Morgan is rumored to hold 50->80% of the copper market, and manipulated the market by massive purchases. JP Morgan is also guilty of manipulating the silver market to make billions. In 2010 JP Morgan had 3 perfect trading quarters and only lost money on 8 days. Lawsuits on home foreclosures have been filed against JP Morgan. Aluminum price is manipulated by JP Morgan through large physical ownership of material and creating bottlenecks during transport. JP Morgan was among the banks involved in the seizure of $620 million in assets for alleged fraud linked to derivatives. JP Morgan got $25 billion taxpayer in bailout money. It has no intention of using the money to lend to customers, but instead will use it to drive out competition. The bank is also the largest owner of BP - the oil spill company. During the oil spill the bank said that the oil spill is good for the economy.
JP Morgan Chase also received a SECRET $391 billion dollar bailout from the Federal Reserve.

9 Biggest Banks' Derivative Exposure - $228.72 Trillion

Note the little man standing in front of white house. The little worm next to lastfootball field is a truck with $2 billion dollars.
There is no government in the world that has this kind of money. This is roughly 3 times the entire world economy. The unregulated market presents a massive financial risk. The corruption and immorality of the banks makes the situation worse.

If you don't want to banks with these banks, but want to have access to free ATM's anywhere-- most Credit Unions in USA are in the CO-OP ATM network, where all ATM's are free to any COOP CU member and most support depositing checks. The Credit Unions are like banks, but invest all their profits to give members lower rates and better service. They don't have shareholders to worry about or have derivatives to purchase and sell.

Keep an eye out in the news for "derivative crisis", as the crisis is inevitable with current falling value of most real assets.
Derivative Data Source: ZeroHedge

http://demonocracy.info/infographics..._exposure.html

[Pirian]

Just so we're clear, derivatives such as the futures market are a necessary part of the business world to hedge against inflation/an unknown future. The problem here is the unregulated nature in which these mega-banks have been allowed to expose themselves to these derivative markets, and since the repeal of Glass-Steagal, this exposure has been on the tax-payers dime. And that is the problem.

[Pirian]

I don't mean to double post, but it's also worth noting that the comparison of the derivatives market to an unregulated global casino for the banks is a little off. It's more like, the banks ARE the casino, and their odds of winning are a lot higher than a Vegas casino due to the leverage that they hold. But, despite the odds being in the houses favor, they do sometimes lose, and this is what we saw with the housing bubble

[Drex]

It's also probably important to point out that the notional amount (referred to as exposure in the image and text) of derivatives contracts is more or less meaningless in terms of risk, especially when discussing the possibility of systemic collapse. What actually matters is the gross market value, which is "only" around $10trillion total (about $5trillion for the big banks listed in the image). That still sounds scary, but for reference, the stock and bond markets are around $40trillion and $50trillion respectively, and for all the "regulation" they get, credit ratings are still pretty much useless and earnings reports are still closer to beauty pageants than real representations of financial standing.

[archibaldcrane]

We're in a stock market bubble right now? Interesting.

[Pirian]

We're in a stock market bubble right now? Interesting.

Hmm, we're in a stock market bubble in that it is artificially high due to it being where many people have dumped their retirement, and they're going to need to cash out at some point. The most obvious sector bubble right now is gold, and it'll probably be the most clear sign that the economy has completely recovered, and that investors feel safe again, once that bubble pops.

[archibaldcrane]

Many people had their retirement money dumped into the stock market 3 years ago when the dow was over 40% lower. Was it a bubble then too?

[Pirian]

Many people had their retirement money dumped into the stock market 3 years ago when the dow was over 40% lower. Was it a bubble then too?

Yeah, and that had partly to do with the magnitude of the decline. People saw their retirement going down and those that didn't know better and had the power to sell did so, and this partly added to the decline.

[archibaldcrane]

My point is, we still have huge unemployment numbers and minimal growth. There is loads of untapped potential for growth in this economy - this isn't "bubble" material.

[Pirian]

"Bubble material"? We're talking about two different things here. I'm talking about an artificially high level in the stock market due to retirement holdings that are not always going to be there, and you're talking about the natural rate of growth in the stock market.

We have huge unemployment (relative to what it was) because of the recession, and most of that will return, but this also exacerbated the shift of unskilled labor to cheaper markets. It should also be noted that there is currently an unmet demand for skilled manufacturing labor in this country. Our labor markets are demanding more high skilled labor, and this can be seen in the around 90% wage differences between those with a simple high school diploma and those with at least a bachelors degree. In the 60's this difference was around 50%, and while we have also increased the amount of people graduating from college, the increase in demand for college graduates has exceeded the increase in supply, and this has lead to the huge wage gap.

My point is, our unemployment may never get back down to what it once was unless we increase the level of skilled labor in the labor market. This means that while there are loads of untapped potential for growth in this economy, it is likely to stay untapped for a while.

[RKenshin]

My point is, we still have huge unemployment numbers and minimal growth. There is loads of untapped potential for growth in this economy - this isn't "bubble" material.

If anything though, wouldn't that further indicate that the current surge is a bubble?

The stock market has more than doubled since the low points in 2008/2009, yet our GDP has only increased a few % overall, we still haven't recovered anywhere close to all the jobs lost, unemployment is high, etc. It surged way faster than any other economic indicators have, most of which are still in limbo at near-recession levels.

[Niiro]

The horrible spelling and grammar in that image kind of put a damper on its message.

But maybe I'm just picky.

[Jeryhn]

I'm interested in knowing if there are any source documents or articles for fact-checking some of the charges laid out in that infographic, particularly for those of Citi (the guy interrogated to death) and GS (laundry list).

[Pirian]

I'm interested in knowing if there are any source documents or articles for fact-checking some of the charges laid out in that infographic, particularly for those of Citi (the guy interrogated to death) and GS (laundry list).

Yeah...the only source they cite is zerohedge, which looks to be a conspiracy-type website for derivatives/all things finance, so now I question even the size of the money stacks in that photo

[Moridam]

ZH is fairly suspect as a source. Lots of speculation going on there, often pretty hysterical from what I can remember.

With that said though, I'm pretty sure they lowballed BofA's total derivatives exposure by about $20T. I definitely remember reading back in the fall that they'd been shuffling a bunch of them from Merrill into their depository businesses, which I assume was for the purpose of forcing the FDIC to cover those exposures. The figure quoted in the reporting at that time was around $75T for the holding company, which afaik would include all of the various retail and securities entities.

[Zetanio]

LOL at the entire article. Pirian brought up a good point regarding the huge exposures banks have to the current derivative markets but that article is based on the wrong numbers and uses gross outstanding instead of netting the exposure which lowers the number by a large factor.

Source: I work in the CDS and derivative markets.

I agree that there should be more regulation drafted for derivative markets but they play a VERY important role in the market by allowing companies to offset their primary risk by using derivative as a hedge. This makes them MORE stable.

Also, using ZH as a source? Those guys think the sky is falling every 5 minutes.

[Ferion]

The stock market has more than doubled since the low points in 2008/2009, yet our GDP has only increased a few % overall, we still haven't recovered anywhere close to all the jobs lost, unemployment is high, etc. It surged way faster than any other economic indicators have, most of which are still in limbo at near-recession levels.

While I do agree that stock prices seem to be a little higher overall than they probably should be based on other statistics, the only reason they seemed to have increased so much is because corporations started posting larger profits and beating forecasts at the end of the 2011 fourth quarter. I think even last year there was a large surge in stock prices in the first quarter and then things kind of leveled off and declined a little, which will probably be the case again this year unless the recovery is truly starting to pick up momentum. Also, the unemployment rate is probably the slowest lagging indicator we have so it's always going to be one of the last things to start recovering while the stock market is considered a leading indicator. So while I do agree that stock prices are probably a little over inflated it's probably not something that's a bubble that'll pop and really hurt economic recovery.