U.S. Financial System Rests on 5 Mega Banks; and They Tanked Yesterday

The bank holding companies of these same five banks as of March 31, 2019 are sitting on unthinkable levels of derivatives.

By Pam Martens and Russ Martens of Wall Street on Parade.

By the closing bell of yesterday’s broad stock market selloff, the Dow Jones Industrial Average, which had been down over 900 points in the afternoon, closed with a loss of 767 points or 2.90 percent. The Standard and Poor’s 500 Index closed even deeper in the red with a loss of 2.98 percent.

But those losses looked mild compared to what happened to four of the biggest banks on Wall Street yesterday. Bank of America, parent of the giant retail brokerage chain, Merrill Lynch, closed with a loss of 4.42 percent. Morgan Stanley, which had been pummeled in the big bank selloff in December, lost 3.87 percent while Goldman Sachs was not far behind with a loss of 3.67 percent. The bank with the most foreign exposure and a monster bailout in 2008, Citigroup, which in a fair and efficient market would have led the bank declines, lost 3.59 percent. (JPMorgan Chase, whose CEO, Jamie Dimon, has attempted to brainwash the market with the mantra that the bank has a “fortress balance sheet,” came in exactly in line with the S&P 500, losing 2.98 percent.)

Equally noteworthy, two of the insurance companies that the Office of Financial Research (OFR) says are interconnected through derivatives to Wall Street’s mega banks, also sustained large losses yesterday. Lincoln National lost 3.75 percent while Ameriprise Financial lost 3.58 percent.

The Office of Financial Research was created under the Dodd Frank financial reform legislation of 2010 to address the reckless conduct of Wall Street in the leadup to the 2008 financial crash, the largest economic upheaval since the Great Depression. Its purpose is to “shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose, and provide policymakers with financial analysis, information, and evaluation of policy tools to mitigate them.” (Apparently, the Trump administration would rather keep those corners in darkness because it has been gutting the budget of the OFR and sacking its staff.)

The 2017 Financial Stability Report from the OFR carried this warning to the markets:

“…some of the largest insurance companies have extensive financial connections to U.S. G-SIBs [Global Systemically Important Banks] through derivatives. For some insurers, evaluating these connections using public filings is difficult. Insurance holding companies report their total derivatives contracts in consolidated Generally Accepted Accounting Principles (GAAP) filings. Insurers are required to report more extensive details on the derivatives contracts of their insurance company subsidiaries in statutory filings, including data on individual counterparties and derivative contract type. But derivatives can also be held in other affiliates not subject to these statutory disclosures, resulting in substantially less information about some affiliates’ derivatives than required in insurers’ statutory filings.”

The simple translation of the above paragraph is that a replay of the implosion of a giant insurance company as a result of being Wall Street’s patsy for derivative exposures, as happened to AIG in 2008, is still possible. AIG received a $185 billion bailout, half of which went out the back door to pay off its derivative debts and securities lending agreements to Wall Street mega banks and their foreign counterparts.

What happens to these Wall Street mega banks is critical to the financial health of the U.S. economy. That’s because Congress has failed to break up these banks into manageable pieces. They now control the vast majority of dangerous derivatives while at the same time holding the vast majority of Federally-insured/taxpayer-backstopped deposits, which represent the life savings of average Americans

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