# Dr. Jim Willie-Big Banks in Danger of Imploding



## BillS (May 30, 2011)

He claims that the big banks are taking huge losses in the derivative market because of the sudden Treasury bond interest rate increases in September. He said the Fed is creating $200 billion a month to cover derivative losses for the big banks.


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## Geek999 (Jul 9, 2013)

The derivative losses were in 2008. The Fed is creating money and keeping low interest rates and that is good for banks. The fact that the Fed is going to have to tighten eventually is pretty obvious and the banks will adjust fine as it won't be a urprise when it happens. The derivatives were a big problem for AIG (an insurance company) in 2008, but the idea that large banks are taking big losses in that area now is unlikely. The regulatory environment is not friendly to taking significant risks.


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## BillS (May 30, 2011)

There's still an estimated one quadrillion dollars in derivatives. Most of them are in interest rate derivatives.


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## Geek999 (Jul 9, 2013)

BillS said:


> There's still an estimated one quadrillion dollars in derivatives. Most of them are in interest rate derivatives.


The term derivatives covers a wide range of instruments, including interest rate swaps, which is what I think you are referring to. Typically an interest rate swap is an agreement between financial institutions used to lower the risk of both. For instance, let's say Bank A has a lot of Fixed Rate loans and a lot of floating rate deposits (think of the S&Ls in the 1980s). The best thing would be for that bank to offload the Fixed Rate interest stream for a Floating Rate stream. Meanwhile Bank B has the opposite problem. It has a lot of Floating Rate loans and Fixed Rate deposits. Bank B would be better off locking in Fixed Interest Rates for itself. If these two banks do an interest rate swap, both will have lower risk.

Unfortunately, these two banks will probably never find each other, so they will each go to a large money center bank that will do their respective deals and ultimately the money center banks will do offsetting deals with each other, effectively brokering the transaction, so you wind up with 3 contracts, one between each of the initial banks and their respective money center banks and one between the money center banks.

This makes it seem as though there is triple the amount of activity that is really going on and the activity is actually reducing risk, not increasing it. Furthermore, the amount of regulation has increased significantly since 2008.

There are also interest rate options and interest rate futures which would fall under the description "interest rate derivatives".


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## BillS (May 30, 2011)

http://demonocracy.info/infographics/usa/derivatives/bank_exposure.htm

9 Biggest Banks' Derivative Exposure - $228.72 Trillion

There is no government in the world that has this kind of money. This is roughly 3 times the entire world economy. The unregulated market presents a massive financial risk. The corruption and immorality of the banks makes the situation worse.

If you don't want to bank with these banks, but want to have access to free ATM's anywhere-- most Credit Unions in USA are in the CO-OP ATM network, where all ATM's are free to any COOP CU member and most support depositing checks. The Credit Unions are like banks, but invest all their profits to give members lower rates and better service. They don't have shareholders to worry about or have derivatives to purchase and sell.

Keep an eye out in the news for "derivative crisis", as the crisis is inevitable with current falling value of most real assets. 
Derivative Data Source: ZeroHedge


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## hiwall (Jun 15, 2012)

Many say when they repealed the Glass–Steagall Act they guaranteed banks would collapse at some point in the future.


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## Immolatus (Feb 20, 2011)

Geek- My understanding of the derivatives exposure is things like MBS/CDO's and CDS's that make up most of it. Werent the CDS's on Lehman that AIG was selling/holding that caused AIG to require the bailout, and was the main cause of the whole crisis? That Lehman was holding all of these worthless CDO's/MBS, and AIG was selling the CDS on Lehman, so when they went under AIG was left holding the bag on tons of CDS that they couldnt possibly pay out and exposed the whole system for the entangled mess that it is? Is that not correct? And that all that mess led to the redefining of what a 'default' is, as in with Greece?
Or am I just in way over my head in trying to understand this?

That was a lot of questions...


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## Geek999 (Jul 9, 2013)

Immolatus said:


> Geek- My understanding of the derivatives exposure is things like MBS/CDO's and CDS's that make up most of it. Werent the CDS's on Lehman that AIG was selling/holding that caused AIG to require the bailout, and was the main cause of the whole crisis? That Lehman was holding all of these worthless CDO's/MBS, and AIG was selling the CDS on Lehman, so when they went under AIG was left holding the bag on tons of CDS that they couldnt possibly pay out and exposed the whole system for the entangled mess that it is? Is that not correct? And that all that mess led to the redefining of what a 'default' is, as in with Greece?
> Or am I just in way over my head in trying to understand this?
> 
> That was a lot of questions...


You are accurately describing 2008. A lot of change has happened since. Banks now have more capital and the derivatives market operates differently.

MBS stands for Mortgage Backed Securities and those are within a category known as Pass Through Securities. One would normally consider these securities, not derivatives. Until 2008 the number of defaults on mortgages was low so these were considered very secure. Due to the government requirement to write mortgages for low income individuals, this assumption was wrong. Since then mortgage underwritin has improved, many of the bad loans have been resolved, regulation has tightened, and capital has improved.

Derivatives in general are a means to transfer risk. In my example above, the banks lowered risk on both sides. One can also use derivatives to increase risk, but the new regulatory standards would make it highly unattractive for a bank to do so.

Understand that 2008 is not today.


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## Marcus (May 13, 2012)

Thanks Geek, I was going to write a reply about tranches and the alphabet soup of the various derivatives.

One of the things that hasn't changed since 2008 is that a lot of these financial derivatives are *very* illiquid. Therefore their value under mark-to-market provisions of the law is suspect.


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## RevWC (Mar 28, 2011)

I think we should scrap all this crap...(huh, crap scrapper new derivative?) know one owes anything...and go back too no money..the bankers can all go pound sand..


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## jsriley5 (Sep 22, 2012)

RevWC said:


> I think we should scrap all this crap...(huh, crap scrapper new derivative?) know one owes anything...and go back too no money..the bankers can all go pound sand..


Have to agree although things would shore be insane for a while when folks used to sittin around waiting fo rthe money to come in figure out what to do.

Can anyone even remember the day when deals were often for goods or services to be renderred at a later date? Sealed with a handshake? And THEY WERE HONORED everyone got enough nobody starved. I barely remember the tail end of it and remember lots of stories of my grandparents or from my grandparents of hand shake deals honor and telling the truth, being honorABLE having a good name "you can take to the bank" or being told in school that everything you do follows you around litke a tail so you need to be truthful and honorable? That stuff sure seems to be missing now days.

oh along with being taught proper phone ediquette. Actuallly remember being taught that they sure don't no more. Absolutely pisses me off when someone calls and doest start their speil by telling me who they are on whos behalf they are calling and wait for a response before rolling into to some BS speil. Have actually given the lecture to a few of em at least until they hung up


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## RevWC (Mar 28, 2011)

jsriley5 said:


> Have to agree although things would shore be insane for a while when folks used to sittin around waiting fo rthe money to come in figure out what to do.
> 
> Can anyone even remember the day when deals were often for goods or services to be renderred at a later date? Sealed with a handshake? And THEY WERE HONORED everyone got enough nobody starved. I barely remember the tail end of it and remember lots of stories of my grandparents or from my grandparents of hand shake deals honor and telling the truth, being honorABLE having a good name "you can take to the bank" or being told in school that everything you do follows you around litke a tail so you need to be truthful and honorable? That stuff sure seems to be missing now days.
> 
> oh along with being taught proper phone ediquette. Actuallly remember being taught that they sure don't no more. Absolutely pisses me off when someone calls and doest start their speil by telling me who they are on whos behalf they are calling and wait for a response before rolling into to some BS speil. Have actually given the lecture to a few of em at least until they hung up


or when you said thank you and they said thank you...or your welcome...now they say no problem...


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## Geek999 (Jul 9, 2013)

Marcus said:


> Thanks Geek, I was going to write a reply about tranches and the alphabet soup of the various derivatives.
> 
> One of the things that hasn't changed since 2008 is that a lot of these financial derivatives are *very* illiquid. Therefore their value under mark-to-market provisions of the law is suspect.


Liquidity proved to be a problem in 2008 because no one could easily assess the value when widely held assumptions proved wrong. Liquidity is therefore a legitimate concern at all times around all products. Something could be liquid now and not liquid tomorrow.

However, among the new regulations are liquidity standards and regulatory reporting that are intended to insure that banks are more liquid than they would be without those standards. These standards were not in place in 2008.


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