Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24
Bitcoin Trend Forecast, Crypto's Exit Strategy - 31st May 24
Zimbabwe Officials Already Looking to Inflate New Gold-Backed Currency - 31st May 24
India Silver Imports Have Already Topped 2023 Total - 31st May 24
Gold Has Done Its Job – Isn’t That Enough? - 31st May 24
Gold Stocks Catching Up - 31st May 24
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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.


© 2005-2022 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