Mega-Bank Equity Derivatives in the US Surge to $4+ Trillion, from $737 Billion in 2008

Equity Derivative Contracts by Maturity at Federally Insured Banks

“The four banks with the most derivative activity hold 88.4 percent of all bank derivatives.” In other words, four banks out of 4,989 U.S. banks are putting the entire system at risk.

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

During Federal Reserve Chairman Jerome Powell’s press conference this past Wednesday, he took a question from Brian Cheung of Yahoo Finance. The question was: “It seems like to people on the outside who might not follow finance daily, they’re paying attention to things like GameStop, now Dogecoin. And it seems like there’s interesting reach for yield in this market to some extent — also Archegos. So, does the Fed see a relationship between low rates and easy policy to those things, and is there a financial stability concern from the Fed’s perspective at this time?”

As part of Powell’s long, meandering answer, he said this: “Leverage in the financial system is not a problem.” Within a second or so, Powell repeated himself: “Leverage in the financial system is not an issue.” (Read the full transcript here.)

Either Powell has not read any of the quarterly reports coming out of the Office of the Comptroller of the Currency (OCC), a Federal regulator of national banks, or he’s willfully misleading the American people.

According to the OCC’s most recent “Quarterly Report on Bank Trading and Derivatives Activities,” for the quarter ending December 31, 2020, equity (stock) derivative contracts at federally-insured banks and savings associations have exploded from $737 billion (notional or face amount) since the Wall Street banks last blew themselves up in 2008 to $4.197 trillion notional as of December 31, 2020. That’s a staggering increase of 469 percent in just 12 years.

Equally troubling, the OCC specifically notes that these equity derivative contracts are being held in the federally-insured banks – not at their investment banking units. That means the U.S. taxpayer will be on the hook if these derivatives blow up, as the banks’ previous reckless subprime derivative gambles did in 2008.

But here’s the really dangerous and outrageous part of this. The OCC notes on page 10 of this report that “The four banks with the most derivative activity hold 88.4 percent of all bank derivatives.” In other words, four banks out of 4,989 U.S. banks are putting the entire system at risk.

Graph 10 of the same report provides the answer to just which four banks the OCC is talking about: JPMorgan Chase, Bank of America, Citigroup’s Citibank, and Goldman Sachs.

Yes, it’s true that Goldman Sachs is allowed to own a federally-insured bank called Goldman Sachs Bank USA. That’s where it has chosen to hold $42.2 trillion notional in various derivative contracts, including equity derivative contracts according to the OCC.

While Goldman Sachs Bank USA is rather small in terms of deposits, holding just $220.7 billion in deposits as of June 30, 2020 according to the FDIC, the other three banks, JPMorgan Chase, Bank of America, and Citigroup’s Citibank, rank in the top four of the largest federally-insured banks in the United States in terms of deposits, holding a combined $4.8 trillion. (The other large bank by deposits is Wells Fargo. Its exposure to derivatives is exponentially less, however, than the three other banks.)

As the chart above indicates, while the Fed, the regulator of bank holding companies, has been assuring the American people that these banks are “a source of strength,” and that leverage “is not a problem” in the banking system, the casino has been providing massive leverage to all sorts of questionable, highly leveraged hedge funds…

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