By Pam Martens and Russ Martens: July 5, 2017
The day before the 4th of July, when most Americans were hustling about preparing for family barbecues, the New York Times finally decided to publish an editorial warning about Wall Street’s potential threat to the nation. Unfortunately, it did so with the kind of timidity we see regularly from cowed or compromised Wall Street banking regulators. The editorial writers noted that: “It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate,” and they called for “heightened vigilance of derivatives in particular” without providing any detailed data.
A more accurate assessment of the situation would have been this: There is only one industry in the United States that has twice in a period of less than 100 years brought about a devastating economic crisis in the country. Wild speculation coupled with poor regulation of mega Wall Street banks brought about the Great Depression in the 1930s, leading to massive job losses, bank failures, poverty and economic misery for tens of millions of innocent Americans. The precise same combination of wild speculation and crony regulators created the Wall Street crash of 2008, throwing millions of Americans into unemployment and foreclosure while creating obscene bailouts and bonuses for bankers, and leaving the U.S. with such a low economic growth rate to this day that many Americans feel they are still living in the Great Recession.
If a foreign country did this kind of damage to the U.S. economy with a military weapon, that country would have been reduced to bombed-out, smoldering ruins by now. But despite research coming directly from our own Federal government illustrating that Wall Street’s threat to the nation is more dangerous than ever, both the Obama and Trump administrations appointed Wall Street’s own former lawyers as regulators and allowed the derivatives bomb to re-arm itself and point directly at the heart of the nation’s economy.
On July 3, the same day that the New York Times editorial ran, the Federal regulator of national banks, the Office of the Comptroller of the Currency (OCC), published its trading and derivatives report covering the first quarter of 2017. The report found that just four mega Wall Street banks “held more than 89 percent of the total banking industry notional amount [face amount] of derivatives.”
Comparing the OCC’s first quarter 2017 data on derivatives to its first quarter of 2008 data (the year of the 2008 epic Wall Street crash) reveals this stunning finding: as of March 31, 2008, Citigroup held $41.3 trillion in notional derivatives. Today, that figure stands at $54.8 trillion. Not to put too fine a point on it, but Citigroup is the institution that received the largest taxpayer bailout in financial history from 2007 to 2010 after blowing itself up with derivatives and toxic subprime debt. The U.S. Treasury infused $45 billion in capital into Citigroup to prevent its total collapse; the government guaranteed over $300 billion of Citigroup’s assets; the Federal Deposit Insurance Corporation (FDIC) guaranteed $5.75 billion of its senior unsecured debt and $26 billion of its commercial paper and interbank deposits; the Federal Reserve secretly funneled $2.5 trillion in almost zero-interest loans to units of Citigroup between 2007 and 2010. And that’s just the details that have been made public thus far.
Now ask yourself this. The entire world GDP was only $75.6 trillion in nominal terms for 2016 according to the World Bank. What is just one U.S. bank holding company, Citigroup, doing with 72 percent of total world GDP in derivatives? Equally important, how could there be adequate counterparties to hedge this risk?
After Wall Street blew itself up with derivatives in 2008, the Obama administration promised that under the Dodd-Frank financial reform legislation, derivatives would be exposed to the light of day by becoming centrally cleared. According to the report just released by the OCC, less than 40 percent of derivatives today are being centrally cleared. The balance remains behind a dark curtain as Over-the-Counter private contracts between one financial institution and another.
Last year, the Office of Financial Research, a unit of the U.S. Treasury, released a detailed report on the threat from derivatives which included this statement:
“Systemic concentration risks are not possible to infer when supervisors examine bilateral exposures that lack granular data such as contract details.”
In other words, much of Wall Street is still a black hole for regulators.
The Obama administration also promised that under Dodd-Frank, derivatives would be pushed out of the FDIC-insured depository bank into an uninsured unit to prevent a repeat of the taxpayer bailout of 2008. But in December 2014, Citigroup effectively repealed that part of Dodd-Frank by using its muscle to have an amendment tacked on to the must-pass spending bill to keep the U.S. government running.
Crony Federal regulators have also sat by while Citigroup has loaded up on Credit Default Swaps, the very instruments that blew up the behemoth insurer AIG in 2008, forcing a taxpayer bailout of $185 billion. According to the latest data from the OCC, Citigroup has $1.979 trillion in credit derivatives with 82 percent of that position not being centrally cleared.
Americans should also be highly alarmed that the Dodd-Frank legislation mandated that the President of the United States appoint a Vice Chairman for Supervision at the Federal Reserve Board of Governors, a position that has never been filled since the legislation’s signing in 2010.
Section 1108 of Dodd-Frank requires: “The Vice Chairman for Supervision shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board, and shall oversee the supervision and regulation of such firms.”
Both the Democrat and Republican party platforms for the 2016 presidential campaign promised to rein in the abuses of Wall Street by restoring the Glass-Steagall Act and its separation of insured banks from the wild speculations of investment banks on Wall Street. Only an uproar from the American people and strident, ongoing editorials from our nation’s newspapers will bring that critical legislation to the fore.