House of Sticks: Kneading (or Needing) the Dough

April 3, 2014

Grab your favorite search engine (Google always works for me) and type in “55 trillion”. A Bloomberg article dated 10-18-11, featuring writers Bob Ivy, Hugh Son, and Christine Harper, will appear. A Seeking Alpha article, dated 10-21-11 and written by Avery Goodman, will appear. A San Francisco Business Times, Afternoon Edition, dated 10-21-11 and written by Mark Calvery, will appear. What do these three articles have in common? They will tell you who saddled 55 trillion (notional value) of derivatives onto the backs of us taxpayers and why it was done.

Now……when you have finished seething enough so you can control the keyboard amid your shaky hands, type in “Investment banks becoming commercial banks”. The Wall Street Journal, New York Times, London Guardian and even the Huffington Post and NBC News got into the act on this one. You’ll find out which investment banks became commercial banks in 2008 and why it had to happen.

Without further ado, type in “N.Y. Times Dealbook dated 6-7-12” or “N.Y. Times Dealbook 6-7-12 derivatives”. You will find out who has been sitting on 50 trillion of troublesome derivatives and how they are being dispersed. Becoming a commercial bank seems to have had two distinct advantages. The former investment bank now can access Federal Funds, for short term borrowings, not available to investment banks. The former investment bank also has a new, safe hiding place for its derivatives mess. It can sneak them under FDIC umbrellas within the commercial bank and stop the margin calls and hopefully stop its ratings declines. Remember those stress tests.

I have gone a bit out of my way to prove to you that I couldn’t make up these scenarios in a million years. I also wanted to direct you to credible references for information instead of some individual writing a blog with an ax to grind. How can we tie it all together? Remember that 16 trillion dollar secret bailout? Remember the list of twenty companies, on page 131 of the GAO report, who took the cumulative short term loans? Several of them are the major players we have been discussing, in this column, in spirit if not name. Five of them hold the lion’s share of the private derivatives issued within these borders. Is it any surprise to you now that they are on that list?

We’ll connect a few more dots tomorrow.

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