If the Fed isn’t seeing the buildup of large imbalances, it’s simply because it isn’t looking or is consciously choosing to stick its head in the sand.
By Pam Martens and Russ Martens of Wall Street on Parade.
Fed Chairman Jerome Powell had a Greenspan moment on Wednesday during his press conference. He made several Goldilocks statements about the banks that are going to come back to haunt him just as former Fed Chairman Alan Greenspan’s Alice in Wonderland remarks to Congress in the leadup to the greatest financial crash since the Great Depression have now made him appear to have been either lying to Congress or dangerously out of touch. It took just a few moments for us to pull up some charts to disprove the statements made by Powell.
Powell stated the following during the Q&A portion of the press conference:
“So, we monitor financial stability risks very carefully all of the time. It’s what we do since the financial crisis, as I’ve mentioned before. Currently, we don’t see large imbalances. This long expansion is notable for the lack of large financial imbalances like the ones we’ve seen certainly before the crisis happened.”
If the Fed and Jerome Powell aren’t seeing large imbalances, it’s simply because they aren’t looking or they are consciously choosing to stick their heads in the sand.
Above is a chart showing what has happened to the share prices of four global banks versus the Standard and Poor’s 500 since January 1, 2007. Despite more than a decade of economic recovery, these banks have lost serious ground in terms of rebuilding common equity – the buffer that would help get them through another downturn or crash. That’s a big imbalance considering that three of the banks in the graph above, Citigroup, Deutsche Bank and Morgan Stanley, are huge players in the high-risk derivatives market in the U.S.
According to the Office of the Comptroller of the Currency (OCC), the federal regulator of national banks in the U.S. that publishes a quarterly report on the derivative holdings of each of the mega banks in the U.S., derivative risks have grown exponentially since the financial crash of 2008. At the very height of the market panic on September 30, 2008, U.S. bank holding companies held $185 trillion in notional (face amount) of derivatives. As of June 30, 2019, that figure stands at $280 trillion – an increase of 51 percent.
And here’s another imbalance: that derivative risk is concentrated among just five mega bank holding companies who are responsible for 86 percent of all derivatives at the more than 5,000 U.S. banks and savings associations. Those five bank holding companies are: JPMorgan Chase, Citigroup, Goldman Sachs, Bank of America and Morgan Stanley. We’d call that a very big imbalance…