by David St.-Lascaux
12 July 2012; updated 24 August 2012
AS THE LIBOR RATE-FIXING SCANDAL heats up, here are a few quick questions: First, how much has the FDIC promised to cover of JPMorgan Chase’s and Bank of America’s derivative exposure? Second, how much do banks and hedge funds have out in total derivatives positions? Third, what is the total “wealth” of the entire world? And what are the world’s total production and debt?
Of course, if you’re financially savvy, you know that the FDIC agreed in October 2011 to cover the entirety of the two too-big-to-fail banks’ $154 trillion (that’s not a typo: it’s a trill) bets, as reported by Bloomberg. And you may also note that those bets are backed up by an impressive $5 trillion in assets. But wait, you say, that’s leverage of 30/1, and neither of these banks would give my business or me a loan of 30 times my assets, let alone, say, one third of them. And you’d be right. But wait, I’m only warming up: These two banks have bets out of 10x the entire US GDP of $15.3 trillion, which accounts for about 22 percent of the total annual GWP (Gross World Product) of a mere $70 trillion. So these two banks alone have bets out of over 2x the total GWP. How, you may rightly ask, can they do that?
JPMorgan Chase and Bank of America have 10x the U.S. GDP out in derivatives bets, backstopped by – you guessed it – taxpayers.
The answer, of course, is: Magic! Banks and hedge funds, we have learned from the emerging LIBOR manipulations story, have derivatives exposure of $700 trillion (that’s not a typo: it’s trilliontastic), or 10x the entire world’s output, which, we read, “are traded on a daily basis”[!] (bold, italics and exclamation mark mine). Holy guano, Batman! How, you may rightly ask, can they do that, except by multiple and/or multi-year bets on the same tranches, in a fantasy world in which multiple players claim to hold the same, replicated assets and in which participants are making bets none can ever come close to covering should the markets collapse, which, as we know, they have a tendency to periodically do. Money does, however, really disappear, as in the recent, memorable time that actual American citizens saw $7 trillion – over 40 percent of their assets – vaporize (if you invested in the technopreneurial NASDAQ at its peak 12 years ago, you’d still be down 44 percent today [or down 50 percent with Facebook], a dazzling investment return of about minus five percent per year; it’s less than hilarious that the optimistic, euphemistically-named AARP investment return calculator doesn’t permit negative returns). Permit me to bring this into focus: America fell into the greatest depression since the Great Depression when a mere $7 trillion was lost. Picture what $154 trillion in losses by JPMorgan Chase and Bank of America alone would trigger.
It’s important to note that the FDIC is also at the table, playing with Americans’ money, making citizens involuntary gamblers. That’s because the FDIC’s guarantee is, of course, being covered by American taxpayers. Unfortunately for Americans, the Treasury’s current cash balance (note PDF) is a paltry $84 trillion at 10 July 2012 – a little over half of the banks’ positions. Of course, Social Security’s $2 trillion in assets (and ongoing, impressive, profitability) would cover a little over 1 (that’s one) percent of the banks’ positions.
If this is all beginning to sound a lot like funny (or Monopoly) money, it’s because it is. Apparently the math and computer science majors who populate these firms – and the government – have agreed that, as Citibank’s former CEO Charles Prince infamously said, “As long as the music is playing, you’ve got to get up and dance.” Either that or math and computer science education isn’t what it used to be. And don’t get me started about economics and business school ideologues and cheerleader journalists.
With total derivatives bets of $700 trillion out today, our speculative brethren have apparently made bets upon 70 percent of everything «there is».
If you’re still in denial about the gambling, er, financial industry, let’s close out with the following meditation. The financial industry, as previously noted, has bets out of $700 trillion. These are against – wait for it – total global assets of $1 quadrillion. In other words, our speculative brethren have made bets upon 70 percent of everything there is, taking positions of over 12x the $57 trillion total of global publicly traded stock. How, you may rightly ask, can they do that? And, even if you aren’t a risk manager, what exactly are the odds that something might go wrong given this level of exposure?
At least, you say, this isn’t 30/1 leverage, and I’ll concede that. But did 70 percent of the world agree to have its chips put on the table? Does 70 percent of everything qualify as indebted? The answer is no: The Economist states that total global debt stands at just under $40 trillion (the CIA non-concurs, calculating total global external debt at $69 trillion), with America’s debt of just under $9 trillion thus accounting for 13 to 22 percent. [Important Aside: If, rather than loaning U.S. and foreign banks over $16 trillion over the last five years we had simply used the money to liquidate our debt, America would have no debt and an additional $454 billion – 12 percent of the total budget of the U.S. Government (note PDF) – to finance our lives that is now being used to finance our debt.] In other words, the financial industry has made bets of 10 to 17.5x total world debt. How could they possibly cover these bets?
The answer is – whew – reserves. You’ll be impressed to know that, according to JPMorgan Chase’s 2011 10-K,
“Total firmwide credit reserves were $28.3 billion, resulting in a loan loss coverage ratio of 3.35% of total loans, excluding the purchased credit-impaired portfolio.” and
“[Note 27]… In compliance with rules and regulations established by U.S. and non-U.S. regulators, as of December 31, 2011… cash in the amount of $25.4 billion… and securities with a fair value of $23.4 billion… were segregated in special bank accounts for the benefit of securities and futures brokerage customers. In addition, as of December 31, 2011… the Firm had other restricted cash of $4.2 billion… primarily representing cash reserves held at non-U.S. central banks and held for other general purposes.” and
“The Board of Governors of the Federal Reserve System (the “Federal Reserve”) requires depository institutions to maintain cash reserves with a Federal Reserve Bank. The average amount of reserve balances deposited by the Firm’s bank subsidiaries with various Federal Reserve Banks was approximately $4.4 billion… in 2011….”
Which means that JPMorgan Chase has set-asides and reserves of $86 billion (not including litigation [Note 31 begins:] “The Firm has established reserves for several hundred of its currently outstanding legal proceedings.”) – of which $49 billion doesn’t belong to it to begin with, leaving it with a net of $37 billion – to cover its $79 trillion in bets. That’s a ratio – do you really want to know? – of .04 percent.
Of course, if you believe that we can “add trillions of dollars to the global GDP [sic, unless this is a Freudian slip communicating the de facto acknowledgment that global business has singular, supernational power]” by mining asteroids, as technopreneurs Larry Page and Eric Schmidt of Google, Charles Simonyi of Microsoft, and Ross Perot Jr. of the Perot Group, along with Avatar movie director James Cameron believe we can, you can sleep secure in the knowledge that through their for-profit start-up, Planetary Resources (do visit this sucker-born-a-minute, ludicrous website), there’s relief in sight, although those with longer memories may recall the Chicxulub (CHEEK she loob) cratering effect of our last asteroid encounter in the Late Cretaceous as slightly less salubrious, if metaphorically apropos.
Of course, if you believe that we can “add trillions of dollars to the global GDP ” by mining asteroids, you can sleep secure in the knowledge that there’s relief in sight.
To better understand our regulation-resistant, high-rolling financiers and their apparently collusive government enablers, former U.S. Poet Laureate Kay Ryan’s trenchant question in “Nothing Ventured” comes to mind:
Don’t you wonder
how people think
the banks of space
and time don’t matter?
How they’ll drain
the big tanks down to
slime and salamanders
and want thanks?
[As Chris Crocker might say, "Leave Stephen A. Schwarzman and Jamie Dimon Alone!"] Maybe another Ryan poem, “Home to Roost,” is even more pertinent, and prescient:
are the chickens
you let loose
one at a time
and small –
Now they have
to roost – all
the same kind
at the same speed.
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