Three Wall Street Mega Banks Hold $157.3 Trillion in Derivatives – That’s $56.7 Trillion More than the Entire World’s GDP Last Year

At recent Congressional hearings on federal bank regulators’ newly proposed rules to force the largest banks in the U.S. to hold more capital against their riskiest trading positions (so that taxpayers aren’t on the hook for more bailouts), the banks and their sycophants holding Senate and House seats made it sound like it’s the American farmers who will be hurt because the derivatives they use to hedge against crop failures or price swings in their crops will become more expensive…

We knew this was a completely bogus argument because the latest data from the U.S. Department of Agriculture indicates that “agriculture, food, and related industries contributed roughly $1.264 trillion to U.S. gross domestic product (GDP) in 2021….”

In other words, U.S. farmers need to hedge less than $2 trillion while just three mega banks on Wall Street were holding $157.3 trillion in derivatives as of September 30 of this year – which is $56.74 trillion more than the GDP of the entire world last year. (See chart above.)

If the bulk of these derivatives aren’t being used by farmers and business owners to hedge against losses, what are they being used for? According to the Office of the Comptroller of the Currency (OCC), the federal regulator of national banks, the trillions of dollars in derivatives at the mega banks on Wall Street are being used for trading – likely for the benefit of the banks themselves or their billionaire speculator clients, such as hedge funds and family offices.

According to the OCC, as of September 30, JPMorgan Chase (which lost $6.2 billion from its federally-insured bank in wild derivative trades in 2012) is still allowed to sit on $54.4 trillion in derivatives. Citigroup’s Citibank, which blew itself up in 2008 from derivatives and off-balance-sheet vehicles and received the largest bailout in global banking history, is sitting on more derivatives today than at the time of its crash in 2008. OCC data shows Citibank with $35.6 trillion in derivatives on September 30, 2008 (see Table 1 in the Appendix here) versus a staggering $51.3 trillion as of September 30, 2023. Goldman Sachs, whose federally-insured bank has just $538 billion in assets, has $51.6 trillion in derivatives. (In what alternative universe from hell would Goldman Sachs be allowed to own a federally-insured bank?)

Then there is the matter of concentrated risk. According to the FDIC, as of September 30, there were 4,614 federally-insured banks and savings associations in the U.S. – the vast majority of which found no need to involve the bank in derivatives at all. But, for some inexplicable reason, three banks with highly dubious histories have been allowed to establish insane levels of concentrated risk in derivatives. The $157.3 trillion in derivatives held by JPMorgan Chase Bank, Citibank and Goldman Sachs Bank USA represent 77 percent of all derivatives held by all 4,614 federally-insured financial institutions in the U.S. (See chart below.)

Derivatives Held for Trading at Commercial Banks

The chart at the top of this page shows how this derivative problem has grown since the repeal of the Glass-Steagall Act in 1999. The repeal removed the ban of casino trading houses on Wall Street merging with federally-insured banks. Today, every giant federally-insured bank on Wall Street owns a trading house. In 1996, prior to the repeal of Glass-Steagall, derivatives at U.S. banks represented just 63 percent of world GDP. At the end of last year, derivatives at U.S. banks represented 189.92 percent of world GDP.

To prevent a replay of the banks blowing themselves up as they did in 2008 while their federal regulators were napping, federal banking regulators in July proposed to impose higher capital rules on just 37 banks – those significantly engaged in derivatives and other high-risk trading strategies.

The backlash has been fierce, with the mega banks even running television ads painting a bogus and distorted picture of what the capital increases would do.

Another critical question is who is on the other side of these derivative trades with the mega banks and may blow up if they took the wrong side of the trade?

According to federal researchers, there are both mega bank counterparties as well as “non-bank financial counterparties” – which could be insurance companies, brokerage firms, asset managers or hedge funds. There are also “non-financial corporate counterparties” – which could be just about any domestic or foreign corporation. To put it another way, the American people have no idea if they own common stock in a publicly-traded company that could blow up any day from reckless dealings in derivatives with global banks.

This is not some far-fetched fantasy. Wall Street has a history of blowing up things with derivatives. Merrill Lynch blew up Orange County, California with derivatives. Some of the biggest trading houses on Wall Street blew up the giant insurer, AIG, with derivatives in 2008, forcing the U.S. government to take over AIG with a massive bailout.

According to documents released by the Financial Crisis Inquiry Commission (FCIC), at the time of Lehman Brothers’ bankruptcy on September 15, 2008, it had more than 900,000 derivative contracts outstanding and had used the largest banks on Wall Street as its counterparties to many of these trades. The FCIC data shows that Lehman had more than 53,000 derivative contracts with JPMorgan Chase; more than 40,000 with Morgan Stanley; over 24,000 with Citigroup’s Citibank; over 23,000 with Bank of America; and almost 19,000 with Goldman Sachs.

According to the Financial Crisis Inquiry Commission (FCIC), derivatives played an outsized role in the spread of financial panic in 2008. The FCIC wrote in its final report:

“the existence of millions of derivatives contracts of all types between systemically important financial institutions—unseen and unknown in this unregulated market—added to uncertainty and escalated panic….”

clarke931,

The issue of financial derivatives and their impact on the economy is complex and raises legitimate concerns. The recent proposals from federal bank regulators to impose stricter rules on large U.S. banks to hold more capital against their riskiest trading positions seem to be a response to the systemic risks associated with these complex financial instruments. It is undeniable that the three major banks - JPMorgan Chase, Citibank, and Goldman Sachs - hold a significant share of the derivatives market, representing 77% of all derivatives held by federally insured financial institutions in the United States. This raises legitimate concerns about risk concentration and the potential for repeating past mistakes, as seen in 2008. The arguments put forth during recent Congressional hearings, suggesting that American farmers would be most affected by these stricter rules, appear to be an attempt to divert attention from the real issue. Data from the Department of Agriculture shows that the agricultural sector contributes significantly to the U.S. GDP, well below the total amount of derivatives held by major banks. Ultimately, it is crucial to balance financial stability with the need to prevent systemic risks. Regulatory proposals aim to avoid a repeat of past mistakes, where derivatives played a major role in the 2008 financial crisis. However, it is also important to carefully examine the potential consequences on the real economy, ensuring that rules are fair and well-balanced. What are your thoughts? What alternative solutions could be considered to regulate financial derivatives while supporting the real economy?

cedarmesa,
@cedarmesa@lemmy.world avatar

These banks are going to bring about WWIII

PeroBasta,

I believe the dots and commas between numbers are used randomly and cause confusion.

fiat_lux,

Currency and numeric formatting works differently by location, it looks consistent and correct for US formatting.

Personally, I think it's high time for a new global standard on this that abandons the dots and commas altogether, using new symbols so nobody can complain that it's unfair that only some people have to change. But that's... very unlikely to ever happen, for no good reason.

baldingpudenda,

Huh, I thought a space instead of a coma or period was the standard. Ex: 1 000 000

Xer0,

Never in my life have I seen that format.

fiat_lux,

TIL Digit grouping style variances are even more fucked than I anticipated. International Bureau of Weights and Measures along with International Union of Pure and Applied Chemistry uses spaces, but different countries use commas or dots and some use spaces and comma OR dot?

Fuck this, we should redo the whole numeric system. Burn it all down and start from scratch.

metaStatic,

you can be assured that no matter what we choose America will legislate that whatever they're using now is defined in law by the new standard while people are free to ignore it, just like metric.

No_Eponym,
@No_Eponym@lemmy.ca avatar

Burn it all down

Big banks: We’re working on it!

  • All
  • Subscribed
  • Moderated
  • Favorites
  • random
  • [email protected]
  • Food
  • uselessserver093
  • aaaaaaacccccccce
  • test
  • CafeMeta
  • testmag
  • MUD
  • RhythmGameZone
  • RSS
  • dabs
  • TheResearchGuardian
  • oklahoma
  • SuperSentai
  • KamenRider
  • feritale
  • All magazines