The Single Most Important Fact of the Financial System Which the Mainstream Media Ignores Every Day

Phoenix Capital Research's picture


Modern financial theory dictates that sovereign bonds are the most “risk free” assets in the financial system (equity, municipal bond, corporate bonds, and the like are all below sovereign bonds in terms of risk profile). The reason for this is because it is far more likely for a company to go belly up than a country.


Because of this, the entire Western financial system has sovereign bonds (US Treasuries, German Bunds, Japanese sovereign bonds, etc) as the senior most asset pledged as collateral for hundreds of trillions of Dollars worth of trades.


The “hundreds” of trillions of Dollars of trades stems from a 2004 SEC ruling in which the SEC ruled that broker-dealers with capital bases above $5 billion (think Goldman, JP Morgan, etc) could increase their leverage above previously required levels while also abandoning market to market valuation methods (a methodology through which a security was priced at the value that a market participant would pay for it).


So, after the 2004 ruling, large broker dealers were permitted to increase their leverage levels dramatically. And because they could value their trades at whatever price their in-house models chose (what are the odds that these models were conservative?), the broker-dealers and large Wall Street banks are now sitting on over $700 trillion worth of derivatives trades.


Now, every large bank/ broker dealer knows that the other banks/dealers are overstating the value of their securities. As a result, these derivatives trades, like all financial instruments, require collateral to be pledged to insure that if the trades blow up, the other party has access to some asset to compensate it for the loss.


As a result, the ultimate backstop for the $700+ trillion derivatives market today is sovereign bonds.


When you realize this, the entire picture for the Central Banks’ actions over the last five years becomes clear: every move has been about accomplishing one of two things:


  1. Giving the over-leveraged banks access to cash for immediate funding needs (QE 1, QE 2, LTRO 1, LTRO 2, etc)
  2. Giving the banks a chance to swap out low grade collateral (Mortgage Backed Securities and other crap debts) for cash that they could use to purchase higher grade collateral (QE 1’s MBS component, Operation Twist 2 which lets bank their long-term Treasuries and buy short-term Treasuries, QE 3, etc).


By way of example, let’s first consider Greece.


Lost amidst the hub-bub about austerity measures and Debt to GDP ratio for Greece is the real issue that concerns the EU banks and the EU regulators: what happens to the trades that are backstopped by Greece sovereign bonds?




  1. Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut.
  2. Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy.


Regarding #1, the ECB had just permitted EU nations to dump over €1 trillion worth of sovereign bonds onto its balance sheet in exchange for immediate financing needs via its LTRO 1 and LTRO 2 schemes dated December 2011 and February 2012.


So, when the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB.


So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not having to put up new collateral on their trade portfolios.


Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy.


Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand.


Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.


Now, Greece was always the small player in this mess. It’s entire sovereign bond market is a mere €300 billion.


Spain and Italy, by comparison, have €1.78 trillion and €1.87 trillion in external debt respectively.


I do not have an exact figure for how much of the derivatives market uses Spanish and Italian sovereign bonds as collateral, but I can create an estimate using the US bank data I have available.


In the US, we know that the top four banks have over $222 trillion in derivatives exposure with just $7 trillion in total assets. So the leverage here is roughly 31 to 1.


Using this as a ballpark estimate for derivatives leverage, it is very possible that Spain and Italy’s sovereign bonds are pledged as collateral for well over $100 trillion worth of derivatives trades ($1.78 trillion X 31 + $1.87 trillion X 31).


This is why Spain is dragging its feet about asking for a bailout: the mess of trying to sort out the collateral issues for €1.78 trillion in collateral that is backstopping what is likely tens of TRILLIONS of Euros’ worth of trades is capable of causing systemic failure.


On that note, if you’ve yet to prepare for Europe’s BIG collapse…we’ve recently published a report showing investors how to prepare for this. It’s called What Europe’s Collapse Means For You and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.


This report is 100% FREE. You can pick up a copy today at:


Best Regards,


Graham Summers


PS. We also offer a FREE Special Report detailing the threat of inflation as well as two investments that will explode higher as it seeps throughout the financial system. You can pick up a copy of this report at:





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Nassim's picture

"Marked to Market" not "Market to Market"

BraveSirRobin's picture

$700 trillion? What's the problem? The Ben Bernank can type $700,000,000,000,000 into a computer in about 4 seconds. There's probably a crack team practicing typing zeros as I write, just in case he's out of the office when needed.

BanjoDoug's picture

"...... the Mainstream Media Ignores ......." - It's not that they are ignoring this or any other financial issue.   They just don't understand the fundamental concepts or the ramifications.    There is a reason they were mostly all journalism majors or communications majors, or lawyers who never had real jobs above a law clerk.    They are stupid.    But also the edomite MSM owners would never cross their fellow edomite banksters.   It's probably just that simple.

Bicycle Repairman's picture

Sure they're ignoring it.  Ron Paul wanted to lay out the important issues and they ignored him.

Stuck on Zero's picture

Question.  Is the Fed somehow sneaking in purchases of state and municipal bonds?  Illinois, California etc?


chubbar's picture

Good question zero. All of these states were on the brink of BK 2 years ago and nothing has happened since. Pretty clear that the FED is in the state and muni bond market as well. How do they hide it though? My own thoughts are they are timing the collapse and don't want any triggers until everything is so far out of whack that it'll collapse like Building 7, free fall with no sign of support to be found. Then they'll trot out the "big fix" after folks have gone without food for a few days or weeks.

petolo's picture

Congratulations Graham. Finally you have put those little gray cells  to use. Substitute every malediction with bank / bankster and follow each vulgarity with same . 

The Reich's picture

"In the US, we know that the top four banks have over $222 trillion in derivatives exposure with just $7 trillion in total assets. So the leverage here is roughly 31 to 1."


31 to 1 was the leverage of Lehman Bros, too.

Radical Marijuana's picture

I understand that 30 to 1 is the current average of the 25 biggest banks in the USA. However, the champion, of course, is Goldman Sachs which has achieved the astonishing leverage ratio of over 400 to 1, headed to 500 to 1, because the people running that outfit, more than any other, actually run the government too.

When you are gambling with money made out of nothing, the tendency is to go big, or go home. ... Meanwhile, since fiat money is actually backed by murder, (which is what the sovereign actually means in the sovereign bonds) this deferred debt control is all based on deferred death control.  This overall debt insanity can never be repaid by manhours. Nor could it even be repaid by seizing assets like land acquisitions. It could theoretically be repaid through breakthrough creativity, however, the probable way that this WILL work out is for this to continue being built bigger and bigger and bigger, until there is finally global genocidal wars, with matching democidal martial law. The ONLY way that these "sovereign" debts can be cleared appears to be with an orgy of sovereign murders, because human beings are apparently collectively too stupid to become creative enough, instead of more collectively suicidal. Thus, these things are necessarily headed towards bloodshed on an astronomically amplified scale, as the REAL system of electronic fraud, backed by atomic weapons, finally crashes itself. ... I WISH that some social psychiatry could mitigate and ameliorate the psychotic social breakdowns that are coming ... However, I see no good reasons to believe that will actually happen.

Every step along the way, these runaway financial frauds were powered by governments. It was governments that gave the runaway financial frauds the power to force everyone else to accept them, and to adapt their whole lives around that fundamentally fraudulent financial accounting system. It was the sovereign power to rob, and to back that up with murder, through taxation, and legal tender laws, that made it possible for private banks to take control of the ability to make endless money out of nothing as debts.

The only theoretical cures would be to directly address the militarism that made and maintained the money system. Design science creativity would have to be astronomically amplified, instead of that being applied to have astronomically amplified debts and destruction. Everything that this article correctly describes is due to sovereign bonds being based on the sovereign power to rob and to kill, which were privatized and distributed to private banks, because the international banksters were the best organized gangs of criminals, that had acted covertly, to do the best robbery, backed up with the best murders, that enabled them to take control of the sovereign powers, to direct those powers to rob, backed by the power to kill, to be more and more used to feed the social pyramid system of sucking the wealth up and pumping it to the top of the social pyramid. That system is doing what it was designed to do extremely well. However, its basic design is based on the runaway triumph of fraud, being able to continue to grow forever!

What we should do is perceive that that social pyramid is actually a toroidal vortex, and therefore, perceive how it is possible to pump the wealth around and around, but that means we have to pump the death control around and around too. The paradoxes are sublime. There is nothing wrong with the legal theories, written on paper, in almost all of the countries around the world. The problem is that the vast majority of those people have social habits were are adaptations to accepting frauds controlling their lives. The power of We the People is used to rob them blind. They have been so totally blinded, that is practically impossible for them to see the plainly obvious social facts before their eyes.

Everything about this runaway sovereign bond problem, where the illusion of collective security has become the greatest overall threat, is reaching some apparent climax. Everything that made and maintained that system was the underlying power to murder, which was the central historical feature of sovereign power. Power is always distributed. Everyone is to some degree a sovereign, because everyone can rob and kill. Those powers can be assembled and channelled, and those powers obviously have been!

The sovereign bond problem is the basic problem of the pyramidion people directing the use of the power to murder, to back up their monetary systems, in ways that they specialized in misrepresenting. The REAL bottom line to the Sovereign bond problems is the sovereign murder system problems. Unless we had a series of political miracles, to breakthrough to more radical truth about all of these things, then the collapses to chaos that are coming instead will see these impossible to repay debts being repaid by blood. Indeed, balancing these books with blood is actually the only thing that seems possible, since those books were only possible to be made and maintained by the history of the sovereign powers backed by murder, and the vast majority of people have been completely conditioned to not be able to understand that, because they do not want to understand that.

Fiat money can only exist because of the reality of robbery behind it. The reality of robbery got channelled through governments, which could force everyone to pay their taxes with that money, and force everyone to conduct all their transactions using that legal tender. Leveraging lies, until there are quadrillions of dollars of debts, is the result of application of science and technology to grow the social pyramid systems, to benefit the pyramidion people operating those systems. (Legalized lies, backed by legalized violence.) The only good solutions should be design science revolutions in the shape of society. However, the most probable actual "solutions" are mass murders, on an astronomically amplified scale, because everything that has been built was built on the basis of the historical triumph of one murder at a time, enabling runaway financial frauds to take almost total control of the sovereign powers, which the people have paid for through taxes, and will later, therefore, probably pay for with their lives.

From a sublime point of view, my macabre sense of humour finds it amusing that facing these fundamental social facts, and then talking about real solutions based on those facts, is a pretty well totally useless waste of time ... I see no good reasons to believe that anything can actually be done to prevent these runaway sovereign bond problems from not finally ending in a blood bath. The theories about how to do that better are practically non-starters, and so, therefore, we will likely keep on going and going, towards finally collapsing into chaos in the worst possible ways. WE CAN COUNT ON THE MASS MEDIA TO CONTINUE TO BE THE BEST PROFESSIONAL LIARS, TRICKING MOST PEOPLE!

Zero Govt's picture

"...Wall Street banks are now sitting on over $700 trillion worth of derivatives trades."

..and Barney Frank is sitting atop that mountain of muck, not to mention twin terrors Fannie and Freddie swept under the rug, as "financial oversight" ..well done Barney too the US Regulatory system too the Fed who has a vested interest, they're supposed to be back-stopping this mountain of WS crap

With goalkeepers like these turkeys who needs financial enemies

falak pema's picture

lol, forget Greece, forget Spain and Italy sovereign debts, concentrate on banks 700T derivative mountain and what's back stopping it....

Now why doesn't anyone in US or EUro zone government TALK about that?

Why don't these all powerful notationals HOWL to hell about that in the MARKETPLACE?

Are all these people lying to their people. Is the market lying when it says "we don't believe you Spain, Greece; your sovereign debts are out of step".

Is all that BS and market MANIPULATION? All false mirrors...while the wolves howl these countries are bankrupt. 

Is the real issue, guys, our PRIVATE banks are all hocked on OTC opaque intrabank cushy margin bets to a point where electronic money is  floating around like photons emitted by the sun!

High Noon!

Boris Alatovkrap's picture

If banks is aware of other banks' exposure, maybe is get scared and begin wholesale conversion from sale of derivatives to purchase of hard assets. Maybe is start of hyper inflation, no? Right now is inflation moderate, but QE? money is float in Bank-o-sphere in present. If this money is put in circulatory system, what is economist say about too much money is chase too tiny goods!?

Boris Alatovkrap's picture

Remember, always apply a little Greece before getting screwed, is less painful!