It’s Derivatives, Stupid!

What started with a relatively small bank in California and was supposed to be no threat to the financial system, has expanded to a “systemic relevant” institution such as Credit Suisse, proving to be exactly what we had warned of: a precursor of the global financial collapse (cf. SAS 11/23). Aggravated by 15 years of money pumping, the overall debt bubble is bigger than in 2008, and the increase in interest rates, supposedly to fight inflation, has provoked the threat of a chain-bankruptcy.

In addition, as we forecast, central banks scrambled to pour liquidity into the system – money tightening be damned. The over $700 billion distributed by central banks across the Atlantic in the past week won’t be enough to cover the expanding hole, as contagion is already spreading throughout the system.

As a consequence of the Credit Suisse failure, a storm is hitting the market of subordinate bonds, so-called AT1 securities (Additional-Tier 1), or “contingent-convertible” (coco) bonds. Those bonds were created after the global financial crisis of 2008 as a buffer to sacrifice in case of a bank failure, in the hope of preventing a bailout. Purchasers are aware of the risk, but are nevertheless attracted by the high yields.

Even bigger than the AT1 market (some $275 billion) is the global $2 quadrillion derivatives market. Once bank failures and debt defaults begin, the spreading bankruptcy effect is not like that of simple dominoes in a row, one knocking over the other. It is like a thermonuclear chain-reaction, but in finances, as economist Lyndon LaRouche frequently explained. In other words, the various forms of debt are simply the fuse; but it is the derivatives that are the bomb, whose explosive charge is more than an order of magnitude greater than the debt alone.

Credit Suisse had a very high derivative to assets ratio: 28:1. Its counterparties in those derivative deals are American megabanks. That is why pressure to bailout CS came from overseas, where the top four American banks own 89% of the entire derivative exposure ($173 trillion dollars). Those banks are (as of the end of 2022):

  • JPMorgan Chase: $54.3 trillion in derivatives, against $3.3 trillion in assets — a 16:1 ratio;
  • Goldman Sachs: $51.0 trillion in derivatives, against $0.5 trillion in assets — a 99:1 ratio;
  • Citibank: $46.0 trillion in derivatives, against $1.7 trillion in assets — a 27:1 ratio;
  • Bank of America: $21.6 trillion in derivatives, against $2.4 trillion in assets—a 9:1 ratio.

(By contrast, China’s four largest banks have combined assets of $19 trillion, but their derivatives are estimated to be only some $7 trillion — a ratio of less than 0.4:1.)

Print Friendly, PDF & Email