Trading Report: 5 U.S. Banks Each Have $40+ TRILLION In Derivatives Exposure


by Michael Snyder

When is the U.S. banking system going to crash?  I can sum it up in three words.  Watch the derivatives.  It used to be only four, but now there are five “too big to fail” banks in the United States that each have more than 40trillion dollars in exposure to derivatives.  Today, the U.S. national debt is sitting at a grand total of about 17.7 trillion dollars, so when we are talking about 40 trillion dollars we are talking about an amount of money that is almost unimaginable....


JPMorgan Chase

Total Assets: $2,476,986,000,000 (about 2.5 trillion dollars)

Total Exposure To Derivatives: $67,951,190,000,000 (more than 67 trillion dollars)


Total Assets: $1,894,736,000,000 (almost 1.9 trillion dollars)

Total Exposure To Derivatives: $59,944,502,000,000 (nearly 60 trillion dollars)

Goldman Sachs

Total Assets: $915,705,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $54,564,516,000,000 (more than 54 trillion dollars)

Bank Of America

Total Assets: $2,152,533,000,000 (a bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,457,605,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $831,381,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $44,946,153,000,000 (more than 44 trillion dollars)

Please read more here and here. Another "Iris Mack Warned Larry Summers About Derivatives" Article...

Summers Debate With Hubbard At Steve Cohen’s House Missed Key Points

by Mark Melin

Sure appears as though Larry Summers likes ordering around women and when he is told no he gets aggressively mad.

Larry Summers

Summers’ debate with Hubbard

Summers was the flashpoint of a recent closed door debate with the conservative dean of Columbia University’s business school, Glen Hubbard. The private event, hosted at the Greenwich, CT mansion of well known hedge fund executive Steve Cohen and reported by Fox Business News, covered financial reform, “Obamacare” and taxes – but likely avoided the real issues that matter in Summers’ past.

But on this night Summers wasn’t shy about displaying his personality by doing something rarely done to male Federal Reserve Chairmen. Summers, a stalwart of the big banking elite from the start of derivatives deregulation in 1998, was openly critical of the sitting Fed Chairwoman Janet Yellen, calling out her recent comments that certain sectors of the stock market may be in a bit of a bubble.

Summers didn’t need to call out Yellen’s encroachment into stock picking territory – it had been well covered and generally acknowledged as a misstep. The question is would the man who was turned down as Fed Chairman in favor of Yellen have done that to a man?

Summers never publicly called out former Fed bosses Ben Bernanke or Alan Greenspan despite their much more serious missteps? Were his vocal cords not working when the Fed Chaimmen made what are publicly documented mistakes?

Is a different standard at play?

Consider that Summers wanted to manage interest rates at the Fed, but had no clue about interest rate direction. But what’s even worse, he was warned.

Summers humiliated Brooksley Born

We could highlight the obvious Brooksley Born hit. This is where Summers is documented to have worked at the reported behest of the largest banks to remove Born in humiliating fashion as CFTC Chairwoman because she only asked for information on the unregulated derivatives that would ultimately blow up the economy.

Summers was said to have treated Born in a demeaning fashion, which is the polite language for what actually happened.

But that’s the easy story to tell.

Perhaps the more significant story is to put the proper frame around the man who can be considered a responsible for the derivatives disasters of past, present and future is his time spent at Harvard University working as a trader… er… I mean school president.  During his tenure Summers was credited with losing $1.8 billions on wrong way derivatives trades – on interest rates.

Consider that Summers wanted to manage interest rates at the Fed, but had no clue about interest rate direction. But what’s even worse, he was warned.

Dr. Iris Mack, now a well-known derivatives expert teaching at Tulane University, was an up and coming derivatives wiz kid in a very unusual sense.  She is smart, beautiful, African-American woman – a triple whammy in the clubby derivatives industry, where both females and African-Americans are in short supply among the trading ranks.

But it was Mack who warned Summers about his impending derivatives implosion with Harvard’s money. It was a logical warning, backed by mathematical analysis and exposure ratios, according to sources involved in the incident.

But the advice was ignored. Perhaps it was because she was female the risk management discussion was avoided, perhaps it was the color of her skin, or perhaps Summers just couldn’t believe that unregulated derivatives, the backbone of his existence, could betray him.  Who knows. Getting into a traders head during a derivatives implosion is a scary place.

Summers lashes back on risk management discussion

What is clear is that Summers didn’t just politely ignore the risk management discussion.  He lashed back, giving Mack a beatdown that appeared to go past the humiliation felt by Born.

Mack recovered and went on to form, a math and financial literacy educational organization,  in-between international assignments, book writing and teaching.

Please read more here.

Thanks to Harvard, Larry Summers & the Economic Policy Journal!

Harvard Money Management Should Have Listened to Iris Mack....

The Economic Policy Journal
...instead of firing her, when she warned them about their dangerous derivatives positions.. (SEE: Is a Big Problem Brewing for Larry Summers?).

Larry Summers is the Gift that Keeps on Giving....

Free publicity is good when you are about to publish a book.

Thanks, Larry!


Friday, July 5, 2013

Masters of Mertonian Metrics

            Beauty and the Beasts
Libby Rey Schunn 
            CPW News Service

     There is nothing blithe about the 2007-2009 U.S. financial meltdown blamed on the economic engineering that MIT economist Paul Samuelson called “fiendish, Frankenstein monsters of financial engineering.”
    Who were the masters of the financial universe created by the post-Reagan era of deregulation which ironically, or not, included in William Jefferson Clinton’s last year in office, 1999, the repeal of the Glass-Stegall Act that restricted the marriage of banks to investment houses?  This was the financial arrangement that the early years of the republic forbade.  “Banking speculators were hung,” says Occupy Wall Street supporter and best selling author, Christopher Hedges.  Hedges also claims that liberalism in America has given up its prophetic role of holding bankers, investors and political leaders accountable, generally through what was the power of the academic pulpit which has been largely privatized by the investment bankers and politicians.  Today the banks also have a  stranglehold on students' through tuition loans that spread fear and compulsion by design. 

     Credit default swaps are the equivalent of shifting risk from one corporation to another somewhere in the middle of a mortgage’s term like a bundle of horse bets half way through  the Kentucky Derby being traded among the biggest gamblers some of whom will be left holding the bag when the race ends.  If the housing bubble was the horse race, the majority of responsible local banks weren't playing.  They were closer to the horse stable. To them it was like musical chairs which leave the chairless bag holder taking the licking as did Lehman Brothers and Shearson, Bear and Stearns. Credit default swaps were not, however, the brainchild of Blythe Masters as the majority of the U.S. media want people to believe.  Using the Milton Friedman argument for a Darwinian marketplace those who still had chairs at the horse race wanted a do-over with taxpayers sovereign dollars.  Bets were re-cast and the starting bell rung by Henry Paulson, but without Glass-Steagall reinstituted by the bankers or the their political minions in Washington.
     Blythe Masters, is the JP Morgan investment banker who grew up in Kent, England, went to school in Cambridge to ascended through the complicated back channels of arbitrage and hedge fund management to become known as the creator of the credit default swap.  In his June 1, 2009 article in The New Yorker. John Lancaster described how Exxon needed someone to guarantee a line of credit to cover potential damages of $5 billion for  the Exxon Valdez oil spill.  Lancaster wrote:
     In late 1994, Blythe Masters, a member of the J. P. Morgan swaps team, pitched the idea of selling the credit risk to the European Bank of Reconstruction and Development. So, if Exxon defaulted, the E.B.R.D. would be on the hook for it—and, in return for taking on the risk, would receive a fee from J. P. Morgan. Exxon would get its credit line, and J. P. Morgan would get to honor its client relationship but also to keep its credit lines intact for sexier activities. The deal was so new that it didn’t even have a name: eventually, the one settled on was ‘credit-default swap.  The mathematics of valuation models—horrendously complex equations to assess probabilities and correlations, cooked up in mad-scientist style by the firms’ “quants”—took on the burden of assessing statistical risk. The idea that a banker looks a borrower in the eye and takes a view on whether he can trust him came to seem laughably nineteenth-century. As for the risks? Well, as Lawrence Summers said when he was Deputy Secretary of the Treasury, “The parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.”
     Alas, Richard A. Posner, a judge on the U.S. Court of Appeals for the Seventh Circuit, observes with pointed restraint, “That turned out not to be true.” The result has been, in the title phrase of Posner’s new book, “A Failure of Capitalism”.

     In fact, with 92 percent of the local U.S. banks solvent and not in need of Hank Paulson’s bailout in 2008, the problem was clearly a Wall Street and U.S. government regulation issue.  The wolves were in both hen houses. Larry Summer’s uncle and Robert K. Merton's teacher, Paul Samuelson, was one of the creators, perhaps by association and lending his credibility to the small group I call MOMM ("Masters of Mertonian Metrics"....sometimes called "Masters of Mertonian Mayhem") the main creator, of these horrendously complex equations. Larry Summer's other uncle, Kenneth Arrow, describes (Arrow more than any other with the exception of Robert C. Merton, showed the value of applied sociology to politics and economics and vice versa) how economic theory was considered mysticism before the advent of the incorporation of the sophisticated gaming theory that Paul Samuelson initially refuted before endorsing only to call it the 'fiendish, Frankenstein monsters of financial engineering."  Ronald Reagan's contrarian economist, David Stockman, claims that Paul Samuelson was the last one to have claimed ignorance of Dr. Frankenstine's Mertonian metrics lab.

     Larry Summers was Bill Clinton's Deputy Treasury Secretary in 1999, the year that the Glass-Steagall Act forbidding bank/investment speculation was repealed.   Summers was also president of Harvard where the endowment funds' investment in risky derivatives was pointed out by Iris Mack by email and letter.  In keeping with the necessity for corporate amnesia, Mack was promptly fired. In the last year of Bill Clinton’s administration the legislated wisdom gleaned from the 1929 stock market crash, Glass-Steagall, went up in smoke opening the draw-bridge to the horde.  This reintroduced the snug sheet-splitting of banks and investment firms like un-chaperoned adolescents at summer camp.  The same thing happened with Arthur Anderson when its time-honored and respected accounting principles were compromised by its wholesale embrace of an investment counseling function for Enron. Restricted from copulation for fear that Wall Street would turn into a unprincipled orgy with multiple unwanted pregnancies without Glass-Steagall,  it became , in fact, an unprincipled orgy and a house filled with countless unwanted orphans some of which looked like Rosemary's Baby. Blythe Masters is in some ways a convenient scape goat for Wall Street and obviously one woman who does not share Iris Mack's concerns, or if she does she has not articulated them, yet.  She is the Beauty, but behind her are the hidden Beasts of America’s growing blood-sucker-class.  Sadly,  the real names seem stripped from the story line, hidden from the drama and rarely seen for who and what they are. Oddly, the Koch Brother may have seen it coming when in the late 80's they offered to fund an ethics department within the Harvard Business School.  Their gift was denied, but denied perhaps for reasons that served the Mertonian metrics magicians.  The Kochs were far too close to other prominent Harvard Business School alumni and with their German Bund connections through Koch Industries and John Birch society founder Fred Koch, would have brought much heat on the Mertonians' emerging metrics-mission.
   “Growing up in Kent, England, you would have expected that Blythe Masters understood that the ancestral homeland of Kent with Dover’s White Cliffs, was different from all of England.  It was there that the laws of primogeniture that controlled the rest of Britain were set aside in favor of egalitarian principles of wealth and ownership.  Queen Elizabeth had said of Kent as she faced the possibility of defeat by the Spanish that “if it had not been for Kent all of England would already have gone over to the Spaniards.”  Saved from the Spanish by a storm as the Americans would be saved by a storm from the British in 1812, will this storm save us from ourselves or is the keel cracked?  Kent would inform the Puritans whose anti-primogeniture principles would be written into U.S. law through Thomas Jefferson as well as inform Winston Churchill’s deep distrust of the Royal Windsors and his authorship of books on the world-changing contributions of democracy to Western Civilization.  Puritan leader Oliver Cromwell had repatriated the Jews to England following their exile during the reign of King Edward or “Longshanks” in the 12th Century and their anti-primogeniture leanings, inherent in Moses’ distrust of Pharaoh and David’s unusual ascent to power, made the Jews a natural ally, but also making the Summers, Paulson, Merton and Arrow contributions to the melt down greater cause for alarm. Identifying with Joseph instead of Moses the game of pleasing the Pharoah becomes intoxicating and triggers all manner of imaginative tricks to further personal ambitions," said a relative of Jay Sarno, founder of Caesars' Palace in Las Vegas whose current owners are also deeply invested in the University of Phoenix where gaming is part of the curriculum and commercial loans for student tuition, at a time when government loan rates are rising, is even higher.
    With 90 percent of all U.S. wealth in the hands of the top 2 percent of the population and often passed on to family members through interlocking corporate directorates and family dynasties with phalanxes of corporate lawyers protecting their empires, Robert C. Merton and Blythe Masters served the old system that always seeks to resurrect itself.  So did Robert Merton’s father.  "Vance Packard reported that after the Great Depression that wealth was in the hand of the top 27 percent of Americans.  There is a fundamental choice that all Jews must make like everyone else.  Am I like Joseph serving Pharaoh or Moses serving the Law?" said one Jewish critic of Summers and his circle of metrics mystics.
     In the years following World War II, Robert K. Merton, the Columbia University sociologist, became with fellow sociologist, Paul Lazarfeld, the wizard of Applied Sociology.  Sociology may be the science of the study of societies, but applied sociology is of infinitely more value to those who wish to influence, manipulate and control whole societies.  Robert K. Merton, the economist’s father, understood what motivated societies and with research funded in large measure by the U.S. intelligence community through the communications and sociology departments of Columbia came the future presidents of CBS, ABC and NBC.  Merton’s opposition on campus came from sociologists like C. Wright Mills and Vance Packard.  Both Mills and Packard came out of a liberal mindset with an appreciation for wise government regulation and a distrust of power.  More importantly, Merton’s predecessors were concerned with education being a tool for building upon the past.  Merton’s academic bent was development of focus groups and polling panels which hinged on the immediate response to focusing questions which made the lessons of the past irrelevant. People weren't citizens to be empowered, but votes to be manipulated or purchasing units to be motivated.  The combination of applied sociology to gaming theory economics was a hypnotist's dream  come true.  Mills, on the other hand, a great grand nephew of Civil War General Braxton Bragg had seen the down side of the life in the U.S. military industrialist complex.  Vance Packard, a writer for The American Magazine of Ida Tarbell was a muckraker like Upson Sinclair and wrote landmark books like The Hidden PersuadersNation of StrangersThe Waste MakersThe Status SeekersThe Pyramid Climbers and The Ultra Rich: How Much Is Too Much. Before his death Packard was shouting for American capitalism to reinvent itself with new forms of renewable energy and a concern for redressing the assault on the American middle class.  It was these voices in the wilderness that needed to be silenced if a Reagan era of deregulation was to unleash the bulls of Wall Street into the China shop of American investing.   Today, Blythe Masters is working in JP Morgan’s carbon derivatives program while renewable energy development is still anemic.  Larry Summers is floating around the internet claiming the power of compound interest....a metric far removed from what Iris Mack saw as a danger at Harvard....and showing how China and India are enjoying stellar growth rates in comparison to the U.S., but avoiding talking about the real social costs of that growth.
      Robert K. “Merlin” Merton had shown how applied sociology could take Packard’s list of hidden persuaders and refine them through tested applications for use by Madison Avenue, media moguls, corporate planners, marketers, politicians and the intelligence community.  This is handy information for  leading people to accept the formerly impalatable…like the revocation of Habeas Corpus or removal of barriers to predatory corporate profit harvesting.   Combining these applications with new explanations of risk and moral hazard opened the door for the abuses that culminated in the 2008 Paulson panic attack. 
     According to Lee Wow Wee of the Institute for the Study of Sublimated Wisdom in San Francisco, California, “We saw this happen in China where our culture was replaced by what we have today, choking on the fuels of carbon fossils, but in nice shiny new buildings. Larry Summers should come over here and start riding a bicycle.  It would help him lose that belly roll, but it will give him emphysema or worse. Summers and his Mertonian metric mystics and their introduction of societal amnesia was previously achieved in China by the sale of opium from Britain and then the U.S.. Wisdom of the past must be abandoned by removing people’s point of reference.  Boom.  Sheep. When that point of reference is removed they are malleable and controllable, grounded in nothing but the uncertain present and an easily misdirected future. This is why researcher Robert Lynd said, "Research without an actively selective point of view is like the ditty bag of an idiot, filled with bits of pebbles, straw, feathers and other random hoardings,’” said Wee.
     “When the CIA used LSD in it post World War II mind control program, MK-Ultra, it was seeking to use the drug as a catalyst for psychotic break and accompanying malleability,” said Wee.  “Keep the people blind and stupid and they become trusting.  They will even turn on their own kind as the fight promoters who control both corners have shown.  That's essentially what happened to us with the Chinese invasion by Japan who believed us incapable of standing up to the onslaught,” said Wee.  "China was Abel, Japan was Cain and the Brits and Americans were Don King....hell, not Don King, but Dana White.....this was blood sport cage fighting.  Wee believes that the U.S. housing bubble used the power of Mertonian metrics to provide opiate-like mass manipulation of markets and the accompanying economic formulas to profit from the mass amnesia.
     The framework for credit default swap formulations came from Paul Samuelson’s student and Robert K. Merton’s son, Robert C. Merton.  The credit default formula provided by Merton was in the journal article On Pricing Corporate Debt: The Risk Structure of Interest Rates, The Journal of Finance (Vol. 29, 1974) over twenty years before Blythe Masters began to promote them.  Stating that debt could be valued as an option, he built upon the Black-Scholes option pricing theory.  This led to Merton receiving the Nobel Prize for economics in 1997.  Merton’s hedge fund would become a casualty of his own debt metrics formulas while leaving many wondering just where all the money went.
     Blythe Masters would serve on the board of Security Industry and Financial Markets Association with members of Bernie Madoff’s family and ultimately be blamed for the credit default jungle to which she was actually a late arriving explorer. 
    In Lancaster’s New Yorker article, Outsmarted, he says that Akerlof and Shiller’s book, The Failure of Capitalism….  "does give the profession some suggestions for the search. 'What allows capitalism to function is the regulations,' they write. This should be an enduring lesson of the crisis—an understanding that the rules governing the operating of markets were not handed down on stone tablets but are made by men, and are in constant need of revision, supervision, and active, imaginative enforcement. All these books coincide on this point: human beings make markets. A general recognition of that fact, led by the economic profession and taken to heart by politicians, would be a step so important as to be almost worth what it has cost to be reminded of it.”
   Spoken like a true New York insider sensitive about criticism of Wall Street or Columbia University.

    In fact, the sociologists and economists initially argue that only they understand their own theories, then when those theories are widely accepted anyone can drive the car.... until it crashes for lack of a guard rail.  By then the metrics wizard has gotten out at the last stop, but when confronted by investigators claim ignorance of what happened.
   C. Wright Mills and Vance Packard would argue with Lancaster and the two Merton’s.  Western Civilization was built on the rule of law and until Moses and his often wayward supporters agreed to replace the dictator with the law, just as the Greeks had done, there will be nothing for the economic profession and the politicians to take to heart, but the love of money, rooted as it is in lesser things.  Whether or not the Mertonian metrics' injection of massive debt that the Bush/Paulson bailout ordered for the sick economy and which the Obama administration  continues without significant strings attached proves fatal to the republic is anyone guess.

Please read more here:

The Untold Story: Brooksley Born, Larry Summers & the Truth About Unlimited Risk Potential

By Mark Melin

Larry Summers is attempting to re-write history at the expense of Brooksley Born, according to some, as fundamental principles of leverage & derivatives management are woefully ignored.

As the western world wakes to the fact it is in the middle of a debt crisis spiral, intelligent voices are wondering how this manifested itself?

As we speak, those close to the situation could be engaging in historical revisionism to obfuscate their role in the design of faulty leverage structures that were identified in the derivatives markets in 1998 and 2008.

These same design flaws, first identified in 1998, are persistent today and could become graphically evident in the very near future under the weight of a European debt crisis.

Please read more here.

Derivatives Regulations Debate Goes Behind Closed Doors

In the long war over Wall Street regulation, a little-noticed clash erupted this week over a plan to rein in risky trading overseas.

Signs that a clash was brewing behind the scenes came after the Commodity Futures Trading Commission abruptly canceled a meeting to vote on the overseas trading proposal with just hours to spare. The agency provided no explanation, sending out only a short e-mail that it would “no longer hold a scheduled meeting on June 21, 2012.”

So much for President Obama's promise of transparency in his administration!

Joe Cross: From Derivatives Trader to Juicing Phenom

Here's more on Joe Cross - the dude from the Fat, Sick & Nearly Dead movie!

Top Hedge Fund: "The End Game: 2012 And 2013 Will Usher In The End"

Retired hedge fund manager and former Goldman Sachs executive writes a disturbing and scary forecast of the future of the world and the end of fiat money.

Nassim Taleb Explodes: JP Morgan CIO Paid More Than Mafia Boss For Taking Risks With Our Money

More Trading Losses @ JP Morgan Chase

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