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Pam and Russ Martens: The next bomb to go off in the banking crisis will be derivatives
By Pam and Russ Martens
Wall Street on Parade
Thursday, March 16, 2023
U.S. Treasury Secretary Janet Yellen finds herself in a very dubious position.
Under the Dodd-Frank financial reform legislation of 2010, the U.S. treasury secretary was given increased powers to oversee financial stability in the U.S. banking system. This increase in power came in response to the 2008 financial crisis -- the worst financial collapse since the Great Depression. The legislation made the treasury secretary the chair of the newly created Financial Stability Oversight Council (F-SOC), whose meetings include the heads of all of the federal agencies that supervise banks and trading on Wall Street.
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The legislation also required the Treasury secretary's authorization before the Federal Reserve could create any more of those $29 trillion emergency bailout programs for the mega banks, which had tethered themselves to casino trading on Wall Street since the repeal of the Glass-Steagall Act in 1999.
Yesterday, after the Swiss banking behemoth Credit Suisse had traded at an all-time low of less than two bucks; blown out its credit default swaps to unprecedented levels; and tanked the Dow Jones Industrial Average by more than 700 points intraday, Bloomberg News ran this headline at 12:54 p.m.: "U.S. Treasury Reviewing U.S. Banks' Exposure to Credit Suisse."
By "exposure" the Treasury really means how many billions of dollars of underwater derivatives U.S. banks are on the hook for as a counterparty to Credit Suisse.
The Treasury also has to worry about U.S. banks' exposure to Credit Suisse's other major counterparties that U.S. banks do business with, even if the banks are not direct counterparties to Credit Suisse itself.
If the U.S. Treasury Secretary and her staff at F-SOC were just yesterday getting around to finding out which U.S. banks have counterparty exposure to Credit Suisse's derivatives, we are all in very big trouble. The serious problems at Credit Suisse have been making headlines for two years. ...
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