This article was written by Michael Snyder and originally published at his Economic Collapse blog.
Editor’s Comment: The derivatives problem has been on the table for some time, but is only getting worse with each passing year. The Dodd-Frank reforms were nothing more than a public relations exercise to give the appearance that Washington was reigning in the ‘too big to fail/jail’ banks. In reality, these banks are bigger than ever, and have accumulated more power and wealth than at any other time in history.
In the event of the next economic collapse, the derivatives will act as an accelerant to the destruction, multiplying the explosive force by many, many times. If these dangerous instruments are not neutralized or canceled, they could result in absolute horror for large portions of the population.
Financial Armageddon Approaches: U.S. Banks Have 247 Trillion Dollars Of Exposure To Derivatives
by Michael Snyder
Did you know that there are 5 “too big to fail” banks in the United States that each have exposure to derivatives contracts that is in excess of 30 trillion dollars? Overall, the biggest U.S. banks collectively have more than 247 trillion dollars of exposure to derivatives contracts. That is an amount of money that is more than 13 times the size of the U.S. national debt, and it is a ticking time bomb that could set off financial Armageddon at any moment. Globally, the notional value of all outstanding derivatives contracts is a staggering 552.9 trillion dollars according to the Bank for International Settlements. The bankers assure us that these financial instruments are far less risky than they sound, and that they have spread the risk around enough so that there is no way they could bring the entire system down. But that is the thing about risk – you can try to spread it around as many ways as you can, but you can never eliminate it. And when this derivatives bubble finally implodes, there won’t be enough money on the entire planet to fix it.
A lot of readers may be tempted to quit reading right now, because “derivatives” is a term that sounds quite complicated. And yes, the details of these arrangements can be immensely complicated, but the concept is quite simple. Here is a good definition of “derivatives” that comes from Investopedia…
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. 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.
I like to refer to the derivatives marketplace as a form of “legalized gambling”. Those that are engaged in derivatives trading are simply betting that something either will or will not happen in the future. Derivatives played a critical role in the financial crisis of 2008, and I am fully convinced that they will take on a starring role in this new financial crisis.
And I am certainly not the only one that is concerned about the potentially destructive nature of these financial instruments. In a letter that he once wrote to shareholders of Berkshire Hathaway, Warren Buffett referred to derivatives as “financial weapons of mass destruction”…
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Since the last financial crisis, the big banks in this country have become even more reckless. And that is a huge problem, because our economy is even more dependent on them than we were the last time around. At this point, the four largest banks in the U.S. are approximately 40 percent larger than they were back in 2008. The five largest banks account for approximately 42 percent of all loans in this country, and the six largest banks account for approximately 67 percent of all assets in our financial system.
So the problem of “too big to fail” is now bigger than ever.
If those banks go under, we are all in for a world of hurt.
Yesterday, I wrote about how the Federal Reserve has implemented new rules that would limit the ability of the Fed to loan money to these big banks during the next crisis. So if the survival of these big banks is threatened by a derivatives crisis, the money to bail them out would probably have to come from somewhere else.
In such a scenario, could we see European-style “bail-ins” in this country?
Ellen Brown, one of the most fierce critics of our current financial system and the author of Web of Debt, seems to think so…
Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank.
Title II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.
For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back.
As I mentioned yesterday, the FDIC guarantees the safety of deposits in member banks up to a certain amount. But as Brown has pointed out, the FDIC only has somewhere around 70 billion dollars sitting around to cover bank failures.
If hundreds of billions or even trillions of dollars are ultimately needed to bail out the banking system, where is that money going to come from?
It would be difficult to overstate the threat that derivatives pose to our “too big to fail” banks. The following numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is on a level that is difficult to put into words…
Citigroup
Total Assets: $1,808,356,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $53,042,993,000,000 (more than 53 trillion dollars)
JPMorgan Chase
Total Assets: $2,417,121,000,000 (about 2.4 trillion dollars)
Total Exposure To Derivatives: $51,352,846,000,000 (more than 51 trillion dollars)
Goldman Sachs
Total Assets: $880,607,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $51,148,095,000,000 (more than 51 trillion dollars)
Bank Of America
Total Assets: $2,154,342,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $45,243,755,000,000 (more than 45 trillion dollars)
Morgan Stanley
Total Assets: $834,113,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $31,054,323,000,000 (more than 31 trillion dollars)
Wells Fargo
Total Assets: $1,751,265,000,000 (more than 1.7 trillion dollars)
Total Exposure To Derivatives: $6,074,262,000,000 (more than 6 trillion dollars)
As the “real economy” crumbles, major hedge funds continue to drop like flies, and we head into a new recession, there seems to very little alarm among the general population about what is happening.
The mainstream media is assuring us that everything is under control, and they are running front page headlines such as this one during the holiday season: “Kylie Jenner shows off her red-hot, new tattoo“.
But underneath the surface, trouble is brewing.
A new financial crisis has already begun, and it is going to intensify as we head into 2016.
And as this new crisis unfolds, one word that you are going to want to listen for is “derivatives”, because they are going to play a major role in the “financial Armageddon” that is rapidly approaching.
Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years.
Today, Michael is best known for his work as the publisher of The Economic Collapse Blog and The American Dream.
If you want to know what things in America are going to look like in a few years read his new book The Beginning of the End.
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I’ve seen estimates of $1.5 Quadrillion in total derivatives outstanding.
When I saw that number, I tried to wrap my mind around such a mind-boggling number… Took out a micrometer and measured a crisp new $1 bill. $1.5 quadrillion, if printed in new $1 bills, would cover the entire Earth with a layer of paper 1.24″ thick… And that’s assuming NO space between the bills, all perfectly stacked.
Remember this, next time you’re driving in the country… try to imagine how that would look.
Another Michael Snyder article. Whatever, Yaaaaawn.
I agree that Snyder is a buzzkill, but I have always believed these derivatives are going to be what causes the coming dollar collapse. It’s gonna be like dominos falling because many many of them are interconnected and no amount of bail ins or retirement savings confiscation will be enough to cover this bohemith. I believe if folks knew more about this stuff, they would also see why PM’s are being manipulated. Get some metal and get it soon.
“And as this new crisis unfolds, one word that you are going to want to listen for is “derivatives”, because they are going to play a major role in the “financial Armageddon” that is rapidly approaching.”
Maybe. Maybe not. Personally, I am not gonna bet against the FED. I will front run them as usual.
Can you say, “Derivatives Resolution Trust Corporation” ??? 🙂
http://theantimedia.org/grand-jury-clears-cops-who-gunned-down-12-year-old-tamir-rice/
http://theantimedia.org/california-government-forcibly-sterilized-latina-women-without-their-consent/
***CALIFORNIA IMPLIMENTED A EUGENICS PROGRAM FROM 1909-1963***
They say home schooled children come out about 10 years ahead of publik skool kids. But the practice has to be banned because your wife is not a licensed, credentialed professional propaganda artist, you see.
Acid…sometimes you say very interesting things. Sometimes you say crap. This is one of those “crap” times.
Why would you make a stupid comment like that? What don’t you understand?
It don’t matter none Acid. We get whatcha sayin’
Quie: Its all way the same. The any minute, now, just around the corner, but never quite arriving crash. They will not let it happen. Given all the recent changes in markets, it should have happened? The media makes its own news by asking its own questions bit like the 1930s/ dig a whole then fill it.
Financial Armageddon… Martial Law… Suspended Elections in 2016… Obola still in office… Martial Law…
FUBAR.
Recommended movie: Young Ones.
Recommended video games: Alien Isolation, Rise of the Tomb Raider.
Buy these for your kids. It cant screw them up any worse than the schools can.
Recommended movie: Young Ones.
Recommended video games: Alien Isolation, Rise of the Tomb Raider.
Buy these for your kids. It cant screw them up any worse than the schools can.
The President would fly back to Hawaii and play golf.
Maybe Kula can hit a hole in one with Obama then.
I wish he’d come to the Big island.
Pelee needs a sacrifice.
247 Trillion….that’s waaay low according to some folks . I’ve heard figures as high as 1000 trillion.
Who cares if it happens,when it happens and the fall out from it all . To use the phrase from Hank Williams Jr to show my concern…..Country Boy Can Survive .
Once we started the “too-big-to-fail” idiocy, clearly the fix was in and the guv shoved it in our faces. What rational person thought we could get away with printing money with nothing backing it? Add to that, this derivative fiasco and trouble is on its way.
Snyder = same articles over and over. I notice, however, there are several new authors posting on this blog with good articles. Nice to see.
QE1, QE2, QE3 and QE endless taught us all that exposure To derivatives is meaningless.
When everything goes tits up, the Government will issue another round of Quantitative Easing and solve the problem.
As for you and me, INFLATION.
among the general population about what is happening.
The government has made it so that there can not be alarm by the public.
Everybody that participates in a 457 plan can not withdraw their money until they retire or quit their job that the plan is under.
So, everybody keeps contributing blindly hoping that when they retire they will be taken care of.
What a better ponzi scheme that to prohibit people from withdrawing their money.
How does one put this all into perspective?
I use percentages.
Take the top twenty problems that you think might happen. Given that they are equal in value in happening each one is five percent.
Maybe you think only ten problems are worthy to occur.
Now it is ten percent per choice.
You begin to push the envelope with five At twenty
Three is drastic at 33,3 percent.
Two at fifty percent.
Then bet the farm on One or 100 percent.
But really it is only 50 percent because it might and might not happen.
You may try 100 bad situations with one percent but a hundred problems are just more trouble and what do percentages mean anyhow.
DAMN, I JUST DID THE MATH!
12 pounds of sugar makes 5 gallons of wine. At 2.5 gallons per week you’d need 312 pounds of sugar for a year lol. Same amount as mash. Smoking a pack a day will take 18lbs. of tobacco. Shooting trespassers with a .300 win mag is 2.50 per round (match ammo). Enjoying all of the above: Priceless 🙂
I’ve mentioned to a couple of people that 100 to 200 lbs of sugar should be a MINIMUM stockpile for a long-term crisis, and they look at me like I’m crazy. They regard a single five-pound sack of sugar as more than enough to last into the indefinite future.
Most people have no idea whatsoever of the massive amounts of food that it takes to sustain a person for a single year; let alone the additional supplies of sugar, salt, vinegar, etc that are required to preserve your own harvest.
Shortages and rationing persisted in Britain for about ten years after the END of WWII…. let alone during the war. People who do not sit down and do the hard math to determine their real needs over several years will soon be in the same boat as those who failed to prepare at all.
Every single bank in each nation including ours is NOT solvent.
Assets are land, water, tools, education, and family. Money and PM mean nothing.
If PM’s mean nothing, then prices wouldn’t be artificially suppressed and banks wouldn’t be buying them up. Texas wouldn’t want their gold back either.
If I’m hungry, I can’t eat a gold coin. I can kill a pig if I have a gun. You choose your wealth. I choose guns and ammo.
You can’t eat a gun either… you can eat ammo, but it’s not good for you. However you can use them to go out and get food for yourself. A gold coin does the same thing… but quieter.
As the use of credit cards and debit cards is being push to use rather then cash the BIG BANKS get richer and richer. America need to start using more cash for purchases. If all of this happens there will be NO Social Security check, NO WELFARE PROGRAMS. America will have the Greatness Depression like no other. GOD BLESS AMERICA.
Derivatives were always the skeleton key to the control plan. They enable, through infinite hypothecation, to always move the goal posts in the economy, thus nobody (apart from the financial insiders) can ever get ahead or on top of the price and asset inflation.
I went on a secret government course in 2000 where we were trained in this and told this was the thing that kept the system going.
With quantum computing coming online, the plan is to take hypothecation to the next level. Spin the machine ever faster and the ‘muppets’ will never get their heads around it all: “Back to worrying about transsexuals you human offal!!”
Most of the population are too mentally fried to ever get on top of this. I test it out all the time: talk to people on planes and trains, just to see what they know and how they think. They are clueless and mostly consume msm news.
2016 will be a spectacular year where all the plans come together. Hillary (as prophesized in the new Star Wars film) will be the president and preside over the new world.
2016 will be a spectacular year where all the plans come together. Hillary (as prophesized in the new Star Wars film) will be the president and preside over the new world.
Please elaborate…..
If an economy fails, and no one reports it, did I really fail?
Land, gold, silver, beans, and bullets.
Everything else is an illusion.
“The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.”
So, the trillions of derivatives are between the players. Wouldn’t that mean most of it would cancel out if everything crashed?
I don’t have anything in that market other than a few dollars to keep my account open, so I wouldn’t lose more than $25.
Wouldn’t that mean most of it would cancel out if everything crashed?
Answer:
No.
https://www.youtube.com/watch?v=zp21OqnBIBw
Can you say, “good bank, bad bank” ??? “Derivatives Resolution Trust Corporation” ???
The Gangster Banksters are very bright, ingenious, and creative. I am sure they are scheming for that eventually as we mull the possibilities; and modeling the financial ramifications on the latest supercomputers which are magnitudes faster than the last generation of machine.
Accounting is more creative than quantum physics. 🙁
Does anyone find it strange that Doomsday Preppers is no longer being shown on National Geo Channel? This is has been bugging me for the past year, especially since Doomsday Preppers was the highest watched show on NGC. Although I didn’t necessarily agree with all the preppers on this show, it was still interesting. Now you won’t even see a rerun. I wonder what govt. bureaucrat forced NGC to take it off the air and never speak of it again. Strange indeed. Anyone else have an opinion on this?
I don’t find it strange because you’re wrong. There are reruns at various hours of the day and night. I had to stop the DVR from recording them because I had seen them all, and they were filling up the hard drive.
There will be a new episode on Thursday, January 21, 2016 at 9:00 PM. All you have to do is check their website at:
ht tp://channel.nationalgeographic.com/doomsday-preppers/
If they ever stop the series, it will only be because they can’t find any more suckers to blow their OPSEC on national television.
archivist, you’re a bit of a sucker yourself. How’d you like your Obomber destroying Libya, Syria, and Yemen?
The average prepper is quite boring, the people they find for Doomsday Preppers are on ten nutty making it quite a freak show as most reality shows are.
Amazing the nuts they have filmed with firearms who were subsequently arrested because they have a criminal history and can’t posses firearms. How stupid can people be?
Ya ya keep hearing this derivative thingy stuff…prepare the best you can and wake me up when the cruise missiles are flying….in the mean time live, love,laugh enjoy your life…cheers
too big to BAIL is more like it…just a continuation of bush’s “no child left a DIME”.
That sad part is people do not believe this type of collapse can occur.
Its like telling gun owners, gun control can be passed during a period of social unrest just like what occurred in the 1960’s and being told it cant happen again!
Why I vote Democrat:
I vote Democrat because I believe it’s okay if our federal government borrows $85 Billion every single month.
I vote Democrat because I care about the children … but saddling them with trillions of dollars of debt to pay for my bloated leftist government is okay.
I vote Democrat because I believe it’s better to pay billions of dollars to people who hate us rather than drill for our own oil, because it might upset some endangered beetle or gopher.
I vote Democrat because I believe it is okay if liberal activist judges rewrite the Constitution to suit some fringe kooks, who would otherwise never get their agenda past the voters.
I vote Democrat because I believe that corporate America should not be allowed to make profits for themselves or their shareholders. They need to break even and give the rest to the federal government for redistribution.
I vote Democrat because I’m not concerned about millions of babies being aborted, so long as we keep all of the murderers on death row alive.
I vote Democrat because I believe it’s okay if my Nobel Peace Prize winning President uses drones to assassinate people, as long as we don’t use torture.
I vote Democrat because I believe people, who can’t accurately tell us if it will rain on Friday, can predict the polar ice caps will melt away in ten years if I don’t start driving a Chevy Volt.
I vote Democrat because Freedom of Speech is not as important as preventing people from being offended.
I vote Democrat because I believe the oil companies’ profit of 3% on a gallon of gas is obscene, but the federal government taxing that same gallon of gas at 15% isn’t obscene.
I vote Democrat because I believe a moment of silent prayer at the beginning of the school day constitutes government indoctrination and an intrusion on parental authority ….. but sex education, condom distribution and multiculturalism are all values-neutral.
I vote Democrat because I agonize over threats to the natural environment from CO2, acid rain and toxic waste ….. but I am totally oblivious of the threats to our social environment from pornography, promiscuity and family dissolution.
I vote Democrat because I believe lazy, uneducated stoners should have just as big a say in running our country as entrepreneurs who risk everything and work 70 hours per week.
I vote Democrat because I don’t like guns ….. so no one else should be allowed to own one.
I vote Democrat because I see absolutely no correlation between welfare and the rise of illegitimacy.
I vote Democrat because I see absolutely no correlation between judicial leniency and surging crime rates.
I vote Democrat because I believe you don’t need an ID to vote but you do to buy beer.
I vote Democrat because I believe marriage is obsolete, except for homosexuals.
I vote Democrat because I think AIDS is spread by insufficient funding.
I vote Democrat because I think “fairness” is far more important than freedom.
I vote Democrat because I think an “equal outcome” is far more important than equal opportunity.
I vote democrat because I would rather hide in a class room while others fight for my freedom.
I vote democrat because I’m not smart enough to own a gun and I need someone else to protect me.
I vote democrat because I would rather have free stuff than freedom.
And lastly, I vote Democrat because I’m convinced that government programs are the solution to the human condition, NOT freedom.
thank you, test, for a GREAT list that i copied and sent to myself so i can show it to those ” democrats” that don’t even realize why they are who they are…it’s gong to be passed around for a while in MY circle…great post. SERIOUSLY. thank you!
If the financial system collapsed the major banks would be bankrupt in an instant.
You’re a real genius.
he does seem to have a keeen sense of the obvious…
The check book is so overdrawn! The government credit card no longer works.
The derivatives do not matter to the bankers. They know they can not cover their losses. They never intended to. There is no penalty if they are wrong. They are betting money that is not theirs. If they are right, they reap the rewards.