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It’s the Derivatives, Stupid!

By On

To borrow phraseology from candidate Bill Clinton and at the risk of again being characterized as Chicken Little, here is some information that may make your teeth itch and your toenails curl. Compare this piece with the rhetoric of our President Obama during his State of the Onion speech regarding our economy, “Anyone claiming that America's economy is in decline is peddling fiction.” This statement makes the Sword of Damocles look like a paring knife. Excerpt: “According to a report from one of the regulators of national banks, the Office of the Comptroller of the Currency, as of September 30, 2015, insured U.S. commercial banks and savings associations had exposure to $192.2 trillion notional (face amount) of derivatives. (Yes, that’s trillion with a “t”.) The report goes on to terrify with the revelation that only four banks hold 90.8 percent of all derivatives: Citigroup, JPMorgan Chase, Goldman Sachs and Bank of America.” Derivatives took down AIG during the last crash. And it gets worse as you read on….here.

And to those who look to the Federal Deposit Insurance Corporation to protect your deposits, guess again. “In 2009, when the FDIC fund went $8.2 billion in the hole, Chairwoman Sheila Bair assured depositors that their money was protected by a hefty credit line with the Treasury. But the FDIC is funded with premiums from its member banks, which had to replenish the fund. The special assessment required to do it was crippling for the smaller banks, and that was just to recover $8.2 billion. What happens when Bank of America or JPMorganChase, which have commingled their massive derivatives casinos with their depositary arms, is propelled into bankruptcy by a major derivatives fiasco? These two banks both have deposits exceeding $1 trillion, and they both have derivatives books with notional values exceeding the GDP of the world. [nearly $200 trillion]” (From Bail-out Is Out, Bail-in Is In: Time for Some Publicly Owned Banks.)

Then the “bail-ins” begin wherein the banks take your money to recapitalize and leave you broke.

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