zinger of a news story:
Plc had no idea how big Lehman Brothers Holdings Inc.’s futures-and-options
trading business was when it considered taking over the defunct bank’s derivatives trades at exchanges in 2008, a
Barclays executive said.
books were in such a mess that I don’t think they knew where they were,” Elizabeth James, a director of Barclays’s
futures business, testified today in U.S. Bankruptcy Court in Manhattan. James
worked on Barclays’s purchase of Lehman’s brokerage during the 2008 financial
for months that the central issue surrounding the Financial Crisis
(derivatives) was not only misunderstood but completely ignored by the
mainstream financial media. Here we are, nearly two years after Lehman Brothers
went bust, and they’re telling us that Lehman had “no idea” what its options
and futures exposure was.
this into perspective.
value of the derivatives market at the time that Lehman went bust was somewhere
between $600 trillion and $1 Quadrillion (1,000 trillions). It was a market of
inter-linked paper contracts entangling virtually every financial institution
(including some non-financials), country (Greece, Italy used derivatives to get
into the European union), and county (Birmingham Alabama is one example) in the
world. As a market it was at least 20
times larger than the world stock market and somewhere north of 10 time World
words, this was the giant white elephant in the living room.
Lehman brothers, one of Wall Streets’ finest, most respected financial
institutions which had been in business for over 150 years announcing that it
had “no idea” “if it had sold $2 billion
more options than it had bought, or whether it owned $4 billion more than it
world of trillion dollar bailouts, $2-4 billion doesn’t sound like much, so
let’s give some perspective here… in its golden days, Lehman Brother’s market
cap was roughly $47 billion. So you’re talking about bets equal to an amount
between five and 10% of its market cap. Not exactly chump change.
had no idea where it was or how much it really owed.
we’re only addressing Lehman’s options and futures derivatives, we’re
completely ignoring its mortgage backed securities, collateralized debt
obligations (CDOs), and other Level 3 assets. Options and futures are literally
the “tip of the iceberg,” the most visible portion of the behemoth that was
Lehman’s off balance sheet derivative issues. After all, these are regulated securities unlike most derivatives.
Now, if the
above statement doesn’t send shivers down your spine, have a look at the
notional value of derivatives exposure at the top five financial institutions
in the US (mind you, this chart is denominated in TRILLIONS).
had “no idea” what it owned even when it came to options and futures (regulated
derivatives), what are the odds that these other firms, whose derivative
exposure is tens if not hundreds of times larger than that of Lehman’s, might
similarly be “in the dark’ regarding their risk?
who on earth might be on the opposite end of these deals? Other US counties
like Birmingham Alabama (which JP Morgan transformed into 3rd world
country status)? Other countries like Italy or Greece (who used Goldman’s financial
engineering to get into the European Union)? My next-door neighbor’s house? Tim
Geithner’s long-lost tax returns? WHO KNOWS?
The point is
that the very same issues that nearly took the financial world under in 2008
still exist today. In fact, this time around the systemic risk is even more severe.
that the Credit Default Swap (CDS) market which nearly took the financial
system down in 2008 was roughly $50-60 trillion in size. In contrast, the
interest rate based derivative market is
in the ballpark of $500+ trillion.
commercial banks alone have $182 TRILLION in notional value of interest rate
based derivatives outstanding right now. To
put that ridiculous number in perspective it’s 13 times US GDP and roughly
three times WORLD GDP.
Ben Bernanke has promised to maintain Zero Interest Rate Policy (ZIRP) for as
long as possible. Now you know why. But even this guarantees nothing because at
some point the bond vigilantes that visited Greece, Hungary, and Ireland will set
their sights on the US. When that happens, inevitably interest rates will rise
and the financial system will once again begin to implode only on a scale TEN
TIMES that of 2008.
I realize this
may sound ridiculous now, but all warnings of doom sounded ridiculous in 2008
right up until the world imploded (I was warning as far back as April 2008 that
a full-scale Crash was coming). Again, remember Lehman Brothers had “no idea” what
its options and future positions were… again, these were for regulated derivatives… do you think this ignorance was somehow a
special or unique?
Or do you
think Lehman’s admission is just a
taste of what’s to come?
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