These Charts Show Why the Federal Reserve Is Still in a Panic Over the Repo Loan Market

What the New York Fed knows that the majority of Americans do not know, is that five Wall Street investment banks – all of which own federally-insured, taxpayer-backstopped commercial banks – hold insane levels of highly-concentrated, largely unregulated derivatives.

By Pam Martens and Russ Martens of Wall Street on Parade

Over-the-Counter and Centrally Cleared Derivative Contracts at Banks in U.S. as of September 30, 2019 (Source: OCC)
Over-the-Counter and Centrally Cleared Derivative Contracts at Banks in U.S. as of September 30, 2019

After the epic financial crash on Wall Street in 2008 – the worst since the 1929 crash and ensuing Great Depression – two key reforms were put in place in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to prevent another catastrophic meltdown on Wall Street.

The first key reform was that derivatives were to be moved out of the federally-insured, taxpayer backstopped commercial banks, that had been bought up by Wall Street trading houses, into units that could be wound down in a bankruptcy proceeding. It was called the “Push Out” rule. That reform was also meant to prevent the New York Fed from ever again secretly pumping upwards of $29 trillion into Wall Street trading houses and their derivative counterparties in order to bail out a corrupt casino banking system. (And yet here we are again today watching the New York Fed pump hundreds of billions of dollars each week into trading houses on Wall Street without offering any credible explanation to the American people as to why Wall Street is getting another bailout – and while mainstream media pretends this is as normal as apple pie by refusing to cover what’s happening.)

Citigroup was able to get the Push Out rule repealed by having an amendment tacked on to a must-pass spending bill in December 2014.

The other promised reform was that derivatives would no longer be opaque private contracts (over-the-counter) between banks and insurers but would gain pricing transparency and adequate collateral backing by being traded on an exchange or centrally cleared at a clearing house.

But according to the most recent quarterly report from the Office of the Comptroller of the Currency (OCC), for the period ending September 30, 2019, an outrageous 81 percent of Goldman Sachs’ derivatives remain over-the-counter. At JPMorgan Chase and Citibank, 53 percent of their derivatives remain over-the-counter black holes according to the OCC report. (See Graph 15 in the Appendix.)

We don’t know how exactly how bad the situation is at Morgan Stanley because the OCC does not report the breakdown for its holding company, which has $36.2 trillion notional (face amount) in derivatives versus $903 billion in assets. We should note that Morgan Stanley owns two federally-insured banks while having the distinction of previously employing Howie Hubler, a bond trader who lost the bank $9 billion in bad bets during the last financial crisis. Morgan Stanley also has the distinction of receiving more than $2 trillion in secret cumulative loans from the New York Fed during the 2007 to 2010 financial crisis.

What the New York Fed knows that the majority of Americans do not know, is that five Wall Street investment banks – all of which own federally-insured, taxpayer-backstopped commercial banks – hold insane levels of highly-concentrated derivatives. There are more than 5,000 federally-insured, deposit-taking banks in the U.S. The vast majority of them see no reason to hold any derivatives as part of their banking business. But for reasons absolutely no one can explain, five Wall Street banks hold $230 trillion in derivatives, a stunning 85 percent of the $270.7 trillion in derivatives held by the top 25 bank holding companies in the U.S. (See OCC chart below)

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