Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Derivatives Crisis Of Banks…Worldwide

Companies / Credit Crisis 2016 May 03, 2016 - 06:12 PM GMT

By: I_M_Vronsky

Companies

Derivatives are weapons of mass destruction” – Warren Buffett

The WHAT AND WHY Of Derivatives

"Megabanks trade risk via derivatives contracts to another firm while keeping the underlying asset on their books. This way they can bypass capital requirements and take on more debt. This, in turn, allows them to make more trades, but it also means that if a sudden downturn surfaces in the markets, the firm which borrowed way beyond their means may quickly go bankrupt. Lehman Brothers experienced this after they’d borrowed 30 times more money than they had in reserve. In that case, a relatively small loss of a mere 3% meant that Lehman no longer had reserves (i.e. capital), and they therefore collapsed…i.e. totally wiped out. The leverage that derivatives allow is incomprehensible. They are betting 30 TIMES MORE MONEY THAN THEY HAVE. This is financially insane." (Source:  http://www.huffingtonpost.ca/nick-fillmore/banks-derivatives_b_4408856.html )


Who was Lehman Brothers…and what happened to them?

Lehman Brothers had humble origins, tracing its roots back to a small general store that was founded by German immigrant Henry Lehman in Montgomery, Alabama in 1844. In 1850, Henry Lehman and his brothers, Emanuel, and Mayer, founded Lehman Brothers.

While the firm prospered over the following decades as the US economy grew into an international powerhouse, Lehman had to contend with plenty of challenges over the years. Lehman survived them all – the railroad bankruptcies of the 1800s, the Great Depression of the 1930s, two world wars, a capital shortage when it was spun off by American Express Co. (AXP) in 1994, and the Long Term Capital Management collapse and Russian debt default of 1998. However, despite its ability to survive past disasters, the collapse of the U.S. housing market ultimately brought Lehman Brothers to its knees, as its headlong rush into the subprime mortgage market proved to be a disastrous step.

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest US investment bank at the time of its collapse with 25,000 employees worldwide.

The world’s largest financial institutions trade derivatives. Derivatives are instruments that derive their value from fluctuations in the price of an underlying asset such as a stock or a commodity. Financial institutions, asset managers, corporations, and governments use derivatives to manage volatility in assets that their respective enterprises are exposed to. At the time of its bankruptcy, Lehman Brothers had an estimated $35 trillion notional derivatives portfolio.

From 2004-2007 Lehman Brothers and Deutsche Bank (DB) were indeed riding high on the global financial hog.  They were literally gorging themselves via Derivative Exposure…ad nauseam.  Then the proverbial poop hit the fan as both Lehman Brothers and Deutsche Bank were hemorrhaging on insane ingestion of many Trillions of Dollars in DERIVATIVES. Subsequently, Lehman Brothers went belly up…with its stock price going into freefall from $25/share in 2007 to a mere 10 cents/share by early 2009.  Moreover, Lehman Brothers shares are today only 12 cents a share.  Likewise, Deutsche Bank’s catastrophic derivative exposure has hammered down its stock price from $135 in 2007 to only $17/share today…ergo a heart-stopping price loss of -87%. Furthermore, DB’s stock price appears to be hell bent for leather to follow Lehman Brothers’ lethal path to Wall Street’s graveyard…due primarily to its oppressive Derivative’s Exposure.  See Chart below:

Interesting Historical Note:  When Lehman Brothers failed, it had $35 Trillion in Derivative Exposure. Now compare this with today’s Deutsche Bank Derivative Exposure of a cardiac-arrest $75 Trillion in DERIVATIVES…and you will understand WHY DB share value is relentlessly and methodically falling in recent years. In fact, today May 3rd, Deutsche Bank stock has already been hammered down more than 6% in today’ early hours of New York trading.

Indeed:  “Derivatives are weapons of mass destruction” – Warren Buffett

What is the global magnitude of these financial weapons of mass destruction?

Global Derivatives: $1.5 Quadrillion Time Bomb

That’s $1,500,000,000,000,000…equivalent to nearly $200,000 per every man, woman and child on this earth !!

(Source:  http://www.globalresearch.ca/global-derivatives-1-5-quadrillion-time-bomb/5464666  )

The legendary Lehman Brothers financial dynasty is dead and buried in Wall Street’s cemetery. However, Germany’s giant financial power houseDeutsche Bank is today vying helter-skelter to duplicate the infamous legacy of the tragic Lehman Brothers saga.

Is It Time To Panic About Deutsche Bank?

"At $72.8 Trillion, The Bank With The Biggest Derivative Exposure In The World" was not JPMorgan as some had expected, but Germany's banking behemoth, Deutsche bank.

Financial Armageddon Approaches: US Banks Have 247 Trillion Dollars Of Exposure To Derivatives

The following US bank numbers reveal a self-destructing recklessness that is on a level that is near criminal negligence.

Citigroup: Total Assets more than 1.8 trillion dollars

Total Derivatives more than 53 trillion dollars

JPMorgan Chase: Total Assets about 2.4 trillion dollars)

Total Derivatives more than 51 trillion dollars)

Goldman Sachs: Total Assets less than a trillion dollars

Total Derivatives more than 51 trillion dollars

Bank Of America:  Total Assets a little bit more than 2.1 trillion dollars

Total Derivatives more than 45 trillion dollars

Morgan Stanley: Total Assets less than a trillion dollars

Total Derivatives more than 31 trillion dollars

Wells Fargo:  Total Assets more than 1.7 trillion dollars

Total Derivatives more than 6 trillion dollars

Today six major US banks are betting 24 TIMES MORE MONEY THAN THEY HAVE (i.e. $237 Trillion in Total Derivatives vs only $10 Trillion in Total Assets).  Even more insanely lethal is the Derivative exposure of Deutsche Bank, which has $75 Trillion vis-à-vis Total Assets of a mere $1.6 Trillion.  Sadly DB is betting nearly 47 TIMES MORE MONEY THAN THEY HAVE (astoundingly, it’s the biggest Derivatives Exposure in the world). Clearly, it’s insanely suicidal. (Source: http://www.zerohedge.com/news/2016-02-03/it-time-panic-about-deutsche-bank)

This is financially crazy for the following reason. In a hypothetical case where a relatively small Derivatives Investment Loss of a mere 4% would mean that six major US banks might be totally wiped out. The leverage that derivatives permit is incomprehensible…ludicrously suicidal! It’s even worse for Deutsche Bank, where a Derivative Investment Loss of less than 3% would crash DB into immediate bankruptcy…a la Lehman Brothers.

To be sure, this is Financial Armageddon to the Nth degree.

The dire warning words of Warren Buffett are gospel:  “Derivatives are weapons of mass destruction”

By I. M. Vronsky
Editor & Partner - Gold-Eagle
www.gold-eagle.com

Founder of GOLD-EAGLE in January 1997. Vronsky has over 40 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a Financial Analyst with White Weld.  He believes gold and silver will soon be recognized as legal tender in all 50 US states (Utah and Arizona having already passed laws to that effect). Vronsky speaks three languages with indifference:   English, Spanish and Brazilian Portuguese.  His education includes university degrees in Engineering, Liberal Arts and an MBA in International Business Administration – qualifying as Phi Beta Kappa for high scholastic achievement in all three.

© 2015 Copyright I. M. Vronsky - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules