When, for whatever reason, the Federal Reserve allowed banks to hold trillions of dollars in derivatives trades "off the books," they created the monster that took our financial system down.
Banks still hold trillions of dollars in derivatives off the books and the Fed is doing nothing about it. All the Fed wants to do is to demand that banks trade derivatives though a clearinghouse. That's a first step, but it doesn't remove the bag of losses that banks are still holding.
It is estimated that the derivatives market is a $195 trillion market, according to the Wall Street Journal (subscription required). What this means is that banks and financial are holding $195 trillion of derivatives. I don't think anyone can comprehend what the number 195 trillion means. We know that JPMorgan Chase is holding about $80 trillion dollars worth of derivatives. I don't think anyone can comprehend the $80 trillion being held by just one bank, nor do we know what the implications of such a number is on the condition of our economy. The depth of the market is so deep that no one really knows what condition it's in. We do know that some of our big banks are still holding substantial losses in derivatives.
Some holding big liabilities include Goldman Sachs Group (NYSE GS) with $91 billion, JPMorgan Chase & Co. (NYSE JPM) with $86 billion, and Citigroup Inc. (NYSE C) with $81 billion.
Again, and I've mentioned this many times, until the Fed requires banks to put all of their trades on the books, we will never have complete trust in our banking system. We cannot know the true value of a bank's stock price because there is just too much "hidden information" to make a rational judgment.
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Reader Comments (Page 1 of 1)
8-16-2009 @ 4:09PM
william lindblad said...
While this is not a fix for the present mess, the repeal of Glass-Stegal would prevent a repeat. This act is at the core since it allowed banks to be both bank and investment house. It is quite obvious that even with tight regulation, this approach is a disaster in making. Since we are now in that disaster, it is not hard to comprehend. The danger in keeping the banking/investment premise in place is that which relates to something attributed to Plato, and that is a very long time ago. The Greek sage is said to have said that the mind is like a ball of wax - when impressions are new they are very clear, but they fade in time. When a crisis is in the forefront, regulation works. When it is over, it gets lax - and things happen again.
Therefore, the only way to avoid a repeat of the current chaos it to put a total roadblock in it's path. Commercial banks, thrifts and S&L's have no business being part of Wall St. Sure, if this had been the case there would have been no housing boom and no skyrocketing prices and the economy would have just muddled along and jobs and wages would have muddled along also, but most people would still be working and paying off notes. The big difference is that people would have been unable to get deeply into debt because they would not have been able to borrow the money. It is a better system debt has to be related to one's ability to re-pay. Housing, the physical root cause, could have been obtained by the fresh starters and low income through HUD. You just would have to live in something in line with your income.
Too bad this free money routine got out of hand as we will all be paying for these consequences - for years to come.