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Pam and Russ Martens: Fed telegraphs disaster for mega-banks: rapid rate hikes hitting trillions in derivatives
By Pam and Russ Martens
Wall Street on Parade
Monday, April 25, 2022
The Federal Reserve is the central bank of the United States. It sets monetary policy, including control of the benchmark short-term interest rate known as the Federal Funds rate, or in Wall Street jargon, the "Fed Funds" rate.
This is a key rate because it signals the rate at which overnight loans are made between financial institutions and the direction of interest rates in general.
... Dispatch continues below ...
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Wednesday, April 20, 2022
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Unfortunately, over time, the Fed has also been granted a supervisory role by Congress over Wall Street's megabanks alongside its ability to bail them out when its crony brand of supervision fails. There was an epic failure in the Fed's supervision of the Wall Street megabanks in the leadup to the 2008 financial crash and the September 2019 repo blowup. In both cases, the Fed made trillions of dollars in cumulative loans at below-market interest rates to the trading units of these megabanks to resuscitate them and cover up its own failure to properly supervise the banks.
The convulsions the stock market experienced last Thursday and Friday, which investors will continue to witness in the days ahead, are inextricably tied to the failure of Congress to strip the Fed of a supervisory role over these global megabanks.
There is no better snapshot of the Fed's failure as a banking supervisor than this one fact that is called out every quarter in the Office of the Comptroller of the Currency’s Report on Bank Trading and Derivative Activities. Table 14 of this report (see Page 19) shows that the 25 largest bank holding companies in the U.S. are sitting on $234 trillion notional (face amount) in derivatives but just five bank holding companies are responsible for $200.18 trillion of that exposure or 86% of the total. Those mega-bank holding companies are: JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, and Bank of America.
The table also clearly shows that the most dangerous form of these derivatives -- the same credit derivatives that blew up Wall Street in 2008 -- are also concentrated at those same five bank holding companies. ...
... For the remainder of the analysis:
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