Why Wall Street Should Be Viewed as a Major National Threat

By Pam Martens and Russ Martens: July 5, 2017

Wall Street Street SignThe day before the 4th of July, when most Americans were hustling about preparing for family barbecues, the New York Times finally decided to publish an editorial warning about Wall Street’s potential threat to the nation. Unfortunately, it did so with the kind of timidity we see regularly from cowed or compromised Wall Street banking regulators. The editorial writers noted that: “It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate,” and they called for “heightened vigilance of derivatives in particular” without providing any detailed data.

A more accurate assessment of the situation would have been this: There is only one industry in the United States that has twice in a period of less than 100 years brought about a devastating economic crisis in the country. Wild speculation coupled with poor regulation of mega Wall Street banks brought about the Great Depression in the 1930s, leading to massive job losses, bank failures, poverty and economic misery for tens of millions of innocent Americans. The precise same combination of wild speculation and crony regulators created the Wall Street crash of 2008, throwing millions of Americans into unemployment and foreclosure while creating obscene bailouts and bonuses for bankers, and leaving the U.S. with such a low economic growth rate to this day that many Americans feel they are still living in the Great Recession.

If a foreign country did this kind of damage to the U.S. economy with a military weapon, that country would have been reduced to bombed-out, smoldering ruins by now. But despite research coming directly from our own Federal government illustrating that Wall Street’s threat to the nation is more dangerous than ever, both the Obama and Trump administrations appointed Wall Street’s own former lawyers as regulators and allowed the derivatives bomb to re-arm itself and point directly at the heart of the nation’s economy.

On July 3, the same day that the New York Times editorial ran, the Federal regulator of national banks, the Office of the Comptroller of the Currency (OCC), published its trading and derivatives report covering the first quarter of 2017. The report found that just four mega Wall Street banks “held more than 89 percent of the total banking industry notional amount [face amount] of derivatives.”

Comparing the OCC’s first quarter 2017 data on derivatives to its first quarter of 2008 data (the year of the 2008 epic Wall Street crash) reveals this stunning finding: as of March 31, 2008, Citigroup held $41.3 trillion in notional derivatives. Today, that figure stands at $54.8 trillion. Not to put too fine a point on it, but Citigroup is the institution that received the largest taxpayer bailout in financial history from 2007 to 2010 after blowing itself up with derivatives and toxic subprime debt. The U.S. Treasury infused $45 billion in capital into Citigroup to prevent its total collapse; the government guaranteed over $300 billion of Citigroup’s assets; the Federal Deposit Insurance Corporation (FDIC) guaranteed $5.75 billion of its senior unsecured debt and $26 billion of its commercial paper and interbank deposits; the Federal Reserve secretly funneled $2.5 trillion in almost zero-interest loans to units of Citigroup between 2007 and 2010. And that’s just the details that have been made public thus far.

Now ask yourself this. The entire world GDP was only $75.6 trillion in nominal terms for 2016 according to the World Bank. What is just one U.S. bank holding company, Citigroup, doing with 72 percent of total world GDP in derivatives? Equally important, how could there be adequate counterparties to hedge this risk?

After Wall Street blew itself up with derivatives in 2008, the Obama administration promised that under the Dodd-Frank financial reform legislation, derivatives would be exposed to the light of day by becoming centrally cleared. According to the report just released by the OCC, less than 40 percent of derivatives today are being centrally cleared. The balance remains behind a dark curtain as Over-the-Counter private contracts between one financial institution and another.

Last year, the Office of Financial Research, a unit of the U.S. Treasury, released a detailed report on the threat from derivatives which included this statement:

“Systemic concentration risks are not possible to infer when supervisors examine bilateral exposures that lack granular data such as contract details.”

In other words, much of Wall Street is still a black hole for regulators.

The Obama administration also promised that under Dodd-Frank, derivatives would be pushed out of the FDIC-insured depository bank into an uninsured unit to prevent a repeat of the taxpayer bailout of 2008. But in December 2014, Citigroup effectively repealed that part of Dodd-Frank by using its muscle to have an amendment tacked on to the must-pass spending bill to keep the U.S. government running.

Crony Federal regulators have also sat by while Citigroup has loaded up on Credit Default Swaps, the very instruments that blew up the behemoth insurer AIG in 2008, forcing a taxpayer bailout of $185 billion. According to the latest data from the OCC, Citigroup has $1.979 trillion in credit derivatives with 82 percent of that position not being centrally cleared.

Americans should also be highly alarmed that the Dodd-Frank legislation mandated that the President of the United States appoint a Vice Chairman for Supervision at the Federal Reserve Board of Governors, a position that has never been filled since the legislation’s signing in 2010.

Section 1108 of Dodd-Frank requires: “The Vice Chairman for Supervision shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board, and shall oversee the supervision and regulation of such firms.”

Both the Democrat and Republican party platforms for the 2016 presidential campaign promised to rein in the abuses of Wall Street by restoring the Glass-Steagall Act and its separation of insured banks from the wild speculations of investment banks on Wall Street. Only an uproar from the American people and strident, ongoing editorials from our nation’s newspapers will bring that critical legislation to the fore.

New York Times Runs Editorial Today on the Mega Banks: You Need to Pay Attention

By Pam Martens and Russ Martens: July 3, 2017

The Federal Reserve Building in Washington, D.C.

The Federal Reserve Building in Washington, D.C.

We have frequently called out the New York Times for running sycophantic articles on the big, mean, untamed Wall Street banking behemoths which just happen to be one of its home town’s largest industries and source of the biggest paychecks, which, in turn, boost its real estate markets, restaurants and retail sales – not to mention its own ad revenues. According to the Federal government’s Bureau of Labor Statistics, financial activities represented 468,600 jobs in New York City as of April 2017. According to a  report from the New York State Department of Labor on New York City’s largest industries, as of 2014 the “average annual wage ($404,800) paid in the securities and commodity contracts industry is nearly five times the all-industry average annual wage ($84,752) for 2014.”

But today, the New York Times’ Editorial Board has joined Wall Street On Parade in expressing skepticism about the Federal Reserve giving a green light on the stress tests for 34 banks last week. After sounding the alarm about the Trump administration’s plans to roll back Obama-era reforms of Wall Street, the New York Times editorial raises the following concerns:

“It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate. By the Fed’s calculations, capital held by the nation’s eight largest banks was nearly 14 percent of assets, weighted by risk, at the end of 2016.

“Alternative calculations of capital, including those that use international accounting rules rather than American accounting principles, put the capital cushion much lower, at 6.3 percent. The difference is largely attributable to regulators’ differing assessment of the risks posed by derivatives, the complex instruments that blew up in the financial crisis and that still are a major part of the holdings of big American banks.

“The passing grades on the Fed’s stress tests pave the way for banks to pay their largest dividends in almost a decade. The hands-down winners will be shareholders and bank executives, who could see their stock-based compensation packages expand further.

“But without continued bank regulation, and heightened vigilance of derivatives in particular, the good fortune of bank investors and bank executives is all too likely to come at the expense of most Americans, who do not share in bank profits but suffer severe and often irreversible setbacks when deregulation leads to a bust.”

We have only two quibbles with this editorial: the tenor is not strong enough and its assertion that “It’s entirely possible that the system is more fragile than the Fed’s stress tests indicate” is false. It’s absolutely certain that the system is more fragile. Here’s how we know.

Two years after the Dodd-Frank financial reform legislation was signed into law on July 21, 2010, the largest U.S. bank, JPMorgan Chase, was caught using billions of dollars of depositors’ life savings to gamble in exotic derivatives in London. If reporters at the Wall Street Journal and Bloomberg News had not gotten wind of the massive market-moving trades by the so-called “London Whale,” which grabbed the attention of regulators, who knows how deep the losses might have been. As it was, the bank was forced to concede at least $6.2 billion in losses.

According to the assessment of Senator Carl Levin, who chaired the Senate’s Permanent Subcommittee on Investigations at the time and issued a 307-page extensive report on the matter, JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” And that was two years after the passage of the Dodd-Frank financial reform legislation which Republicans in Congress now want to water down further.

According to London Whale documents released by the Senate’s Permanent Subcommittee on Investigations, as of the close of business on January 16, 2012, JPMorgan’s Chief Investment Office, which had overseen the gambles in London, held $458 billion notional (face amount) in domestic and foreign credit default swap indices. Of that amount, $115 billion was in an index of corporations with junk bond ratings, which the bank was not allowed to own. To get around that, according to the Office of the Comptroller of the Currency (OCC), JPMorgan “transferred the market risk of these positions into a subsidiary of an Edge Act corporation, which took most of the losses.” An Edge Act corporation refers to the ability of a bank to obtain a special charter from the Federal Reserve. By establishing an Edge Act corporation, U.S. banks are able to engage in investments not available under standard banking laws.

In 2013, the OCC released its cease and desist consent orders against JPMorgan Chase. Alarmingly, the OCC found that the largest bank in the U.S. had “engaged in unsafe or unsound banking practices” and had “deficiencies in its internal controls.” Again, this conduct occurred after the so-called financial reform legislation was in place.

The OCC detailed the following failings by the bank:

“(a) The Bank’s oversight and governance of the credit derivatives trading conducted by the CIO were inadequate to protect the Bank from material risks in those trading strategies, activities and positions;

“(b) The Bank’s risk management processes and procedures for the credit derivatives trading conducted by the CIO did not provide an adequate foundation to identify, understand, measure, monitor and control risk;

“(c) The Bank’s valuation control processes and procedures for the credit derivatives trading conducted by the CIO were insufficient to provide a rigorous and effective assessment of valuation;

“(d) The Bank’s internal audit processes and procedures related to the credit derivatives trading conducted by the CIO were not effective; and

“(e) The Bank’s model risk management practices and procedures were inadequate to provide adequate controls over certain of the Bank’s market risk and price risk models.”

In order to rid the public of the threat that derivatives would once again lead to a massive taxpayer bailout of financial firms as occurred in 2008, the Dodd-Frank legislation promised that derivatives would be “pushed out” of the FDIC-insured commercial bank. What happened instead was that in December 2014, Citigroup used its muscle to repeal that provision of the Dodd-Frank legislation by having an amendment tacked on to the must-pass spending legislation that would keep the country running.  According to data in the December 31, 2016 report on trading and derivatives from the OCC, the concentration of risk from derivatives and the sheer quantity of derivatives dwarfs the situation during the crash of 2008.

The OCC writes that “A small group of large financial institutions continues to dominate derivative activity in the U.S. commercial banking system. During the fourth quarter of 2016, four large commercial banks represented 89.3 percent of the total banking industry notional amounts…” Those four banks  are JPMorgan Chase with notional derivatives of $47.5 trillion; Citibank N.A. (the banking unit of Citigroup which received the largest taxpayer bailout in U.S. history in 2008) with notional derivatives of $43.9 trillion; Goldman Sachs Bank USA at $34.9 trillion; and Bank of America with $21.1 trillion.

Last November, the Congressional watchdog, the Government Accountability Office (GAO), found the following regarding the Fed’s stress tests:

“The Federal Reserve also has not conducted analyses to determine if its single severe supervisory scenario is sufficiently robust and reliable to promote the resilience of the banking system against a range of potential crises. Such analyses—including performing sensitivity analysis involving multiple scenarios—could help the Federal Reserve understand the range of outcomes that might result from different scenarios and explore trade-offs associated with reliance on a single severe supervisory scenario.”

In March of 2016, a research report from the Office of Financial Research (OFR), a unit of the U.S. Treasury created under the Dodd-Frank financial reform legislation, came to more alarming conclusions.

OFR researchers Jill Cetina, Mark Paddrik, and Sriram Rajan found that the Fed’s stress tests are measuring counterparty risk for the trillions of dollars in derivatives held by the largest banks on a bank by bank basis. The critical problem, say the researchers, is the contagion that could spread rapidly if one mega bank’s counterparty was also a key counterparty to other systemically important Wall Street banks. The researchers warn:

“A BHC [bank holding company] may be able to manage the failure of its largest counterparty when other BHCs do not concurrently realize losses from the same counterparty’s failure. However, when a shared counterparty fails, banks may experience additional stress. The financial system is much more concentrated to (and firms’ risk management is less prepared for) the failure of the system’s largest counterparty. Thus, the impact of a material counterparty’s failure could affect the core banking system in a manner that CCAR [one of the Fed’s stress tests] may not fully capture.”

If the New York Times wants to genuinely sound the alarm bells before the next implosion on Wall Street creates another economic crisis in the U.S. and its own home town, it needs to take a more strident tone using the mountain of evidence that readily exists showing that Wall Street has been anything but reformed.

Following Latest Woman Bashing, Growing Numbers Question Trump’s Fitness for President

By Pam Martens and Russ Martens: June 30, 2017

President Donald Trump Addresses a Joint Session of Congress, February 28, 2017

President Donald Trump Addresses a Joint Session of Congress, February 28, 2017

“Donald Trump Is Not Well,” is the headline over an OpEd at the Washington Post this morning by Mika Brzezinski and Joe Scarborough, hosts of the MSNBC show, Morning Joe. The OpEd comes in response to a sexist rant against Mika Brzezinski by the President of the United States yesterday on his Twitter page. Invoking for the second time his fixation about women and blood, the President called Brzezinski “low I.Q. Crazy Mika” and said that at a prior visit to his Mar-a-Lago residence in Palm Beach she was “bleeding badly from a face-lift.” (The hosts called the face-lift allegation a lie.)

Adding some background evidence to their claim that the President “is not well,” the MSNBC hosts wrote:

“From his menstruation musings about Megyn Kelly, to his fat-shaming treatment of a former Miss Universe, to his braggadocio claims about grabbing women’s genitalia, the 45th president is setting the poorest of standards for our children.”

Members of Trump’s own Republican party quickly criticized the President with numerous members condemning the Tweet as beneath the dignity of the President and an embarrassment to the country. Ben Sasse, a Republican Senator from Nebraska, Tweeted “Please just stop. This isn’t normal and it’s beneath the dignity of your office.”

This is not the first time we’ve heard someone claim that the President’s behavior is “not normal.” Just a month before the election, Trump had to admit and apologize for a video showing he had said the following about his treatment of women: “And when you’re a star, they let you do it. You can do anything — grab them by the p—-.” Shortly thereafter, First Lady Michelle Obama gave a speech in New Hampshire where she offered this about Presidential Candidate Trump:

“The fact is that in this election, we have a candidate for president of the United States who, over the course of his lifetime and the course of this campaign, has said things about women that are so shocking, so demeaning that I simply will not repeat anything here today. And last week, we saw this candidate actually bragging about sexually assaulting women. And I can’t believe that I’m saying that a candidate for president of the United States has bragged about sexually assaulting women…

“This wasn’t just locker-room banter. This was a powerful individual speaking freely and openly about sexually predatory behavior, and actually bragging about kissing and groping women, using language so obscene that many of us were worried about our children hearing it when we turn on the TV…

“But, New Hampshire, be clear: this is not normal. This is not politics as usual. This is disgraceful. It is intolerable. And it doesn’t matter what party you belong to – Democrat, Republican, independent – no woman deserves to be treated this way.”

As women on Wall Street have learned so well over the years, when a sexist, predatory male sits in the boss’s chair, he will have no difficulty finding some female sycophant in his employ who is willing to attempt to justify his behavior as not only normal but necessary. Enter stage right Sarah Huckabee Sanders, the President’s Deputy Press Secretary, who had this to say about Trump’s attack on Brzezinski: “Look, the American people elected a fighter. They didn’t elect somebody to sit back and do nothing.”

The President’s behavior apparently can’t be reined in by his advisors or his closest family members, despite First Lady Melania Trump’s pledged campaign against cyberbullying and his daughter, Ivanka’s, promise to work to empower women.

The Republican Party now has only three choices: allow this President to continue to demean women and humiliate the United States in the eyes of the world; give him an ultimatum to conduct himself in a dignified manner befitting the Oval Office; or send him packing before he does something so humiliating that there is no ability for the party to redeem itself.


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After Passing Stress Tests, Wall Street Banks to Spend Like a Drunken Sailor – on their Own Stock Buybacks

By Pam Martens and Russ Martens: June 29, 2017

The Fed's Stress Tests Are  Like the Wizard of Oz: An Illusion to Delude the Public

The Fed’s Stress Tests Are Like the Wizard of Oz: An Illusion to Delude the Public

Yesterday, the Federal Reserve announced the second leg of its 2017 stress tests for the nation’s most systemic financial institutions. Known as the Comprehensive Capital Analysis and Review (CCAR), the Fed said it “did not object to the capital plans of all 34 bank holding companies” although Capital One Financial will be required to “submit a new capital plan within six months that addresses identified weaknesses in its capital planning process.”

That all clear from the Fed unleashed what JPMorgan Chase CEO Jamie Dimon fondly refers to as “animal spirits” on Wall Street. The Fed had barely made its announcement when three of the biggest Wall Street banks announced they were earmarking about $47 billion to gorging on their own share buybacks. JPMorgan Chase led the pack with a potential buyback of $19.4 billion over the next 12 months, according to Bloomberg News. Citigroup has projected potential buybacks of $15.6 billion while Bank of America said it may buy back as much as $12 billion.

The mega banks on Wall Street are engaging in these buyback binges despite a growing chorus of critics who say the practice harms the overall economy.

In the September 2014 issue of the Harvard Business Review, William Lazonick wrote the following:

“Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

“The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.”

Last year U.S. Senators Tammy Baldwin and Jeff Merkley, together with co-sponsors Elizabeth Warren and Bernie Sanders, introduced legislation in the Senate that seeks to rein in the short term focus on quarterly profits that can be pumped up by share buybacks. In introducing the bill, known as the Brokaw Act, Senator Merkley said:

“Hollowing out longstanding companies so that a small group of the wealthy and well-connected can reap a short-term profit is not the path to a strong and sustainable economy for our nation. It’s time to take on this rigged system and stop the short-term game playing that sells our workers, businesses and economy short.”

In 2015, economist Michael Hudson authored a seminal work on the devolution of modern finance in his book “Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.” Chapter 8 opens with this quotation from John Maynard Keynes: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” Hudson writes further:

“Instead of warning against turning the stock market into a predatory financial system that is de-industrializing the economy, [business schools] have jumped on the bandwagon of debt leveraging and stock buybacks. Financial wealth is the aim, not industrial wealth creation or overall prosperity. The result is that while raiders and activist shareholders have debt-leveraged companies from the outside, their internal management has followed the post-modern business school philosophy viewing ‘wealth creation’ narrowly in terms of a company’s share price. The result is financial engineering that links the remuneration of managers to how much they can increase the stock price, and by rewarding them with stock options. This gives managers an incentive to buy up company shares and even to borrow to finance such buybacks instead of to invest in expanding production and markets.”

Last year Rana Foroohar, then the Assistant Managing Editor at Time magazine, now a Global Economic Analyst at CNN and Global Business Columnist and Associate Editor at the Financial Times, authored the insightful book “Makers and Takers: The Rise of Finance and the Fall of American Business. In one case study, Foroohar looks at the technology company, Apple, and its exorbitant use of share buybacks using borrowed money. Foroohar writes:

“…Apple’s behavior is no aberration. Stock buybacks and dividend payments of the kind being made by Apple – moves that enrich mainly a firm’s top management and its largest shareholders but often stifle its capacity for innovation, depress job creation, and erode its competitive position over the longer haul – have become commonplace. The S&P 500 companies as a whole have spent more than $6 trillion on such payments between 2005 and 2014, bolstering share prices and the markets even as they were cutting jobs and investment.”

The result says Foroohar is that “our economy limps along in a ‘recovery’ that is tremendously bifurcated. Wage growth is flat. Six out of the top ten fastest-growing job categories pay $15 an hour and workforce participation is as low as it’s been since the late 1970s. It used to be that as the fortunes of American companies improved, the fortunes of the average American rose, too. But now something has broken that relationship.”

There is one more serious problem with Wall Street banks buying back their own shares. For reasons no Federal regulator has yet to explain, the banks are allowed to operate their own quasi stock exchanges known as Dark Pools and trade in their own and other Wall Street bank stocks – a potential means of manipulating the market if ever there was one. (See related articles below.)

Related Articles:

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Fed Chair Janet Yellen Seriously Misleads in London on U.S. Banking Reform

By Pam Martens and Russ Martens: June 28, 2017 

Janet Yellen at London Conference on June 27, 2017 with Nicholas Stern, President of the British Academy

Janet Yellen at London Conference on June 27, 2017 with Nicholas Stern, President of the British Academy

Yesterday the Chair of the U.S. Federal Reserve, Janet Yellen, was in London for a wide-ranging financial markets discussion with Nicholas Stern, the President of the British Academy. Making headlines from that discussion was Yellen’s stated belief that there will not be another financial crisis in our lifetimes. Yellen stated to Stern:

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we are much safer, and I hope that it will not be in our lifetimes and I don’t believe it will be.”

While that remark has dominated the news, the more meaningful story is that Yellen (the top monetary authority in the United States; the head of the U.S. central bank; and the top dog at the Federal watchdog that regulates the largest bank holding companies on Wall Street) either intentionally misled the British Academy and global financial media yesterday or is unaware of the systemic risk in derivatives still on the books of the largest insured depository banks in the U.S.

In attempting to reassure global financial markets that the U.S. financial system is now much stronger and safer that at the time of the crisis in 2008, Yellen stated the following:

“We have been very focused on making sure that the core of our financial system has enough capital that we can provide assurance that our major banks would be able to go on lending and providing credit to the economy even after a very severe shock. We do what are called stress tests and the Fed just completed the first half of these stress tests last week and we hit the major banks that we subjected to these stress tests with enormous shocks: unemployment increasing to 10 percent; huge declines in house prices, commercial real estate prices, enormous shocks. And publicized exactly how these firms would fare and what losses they would take in every portfolio, what their capital position would be at the end of that.

“I think the public can see that the capital positions of the major banks are very much stronger at this point. This year all of the firms passed the quantitative part of the stress test….

On the matter of liquidity at the largest banks, Yellen had this to say:

“So suppose there were a scare and depositors decided ‘we want our money, we’re worried that there’s something wrong in your bank.’ Well, having enough liquidity that you would be able to meet deposit outflows that could occur, let’s say over a 30-day period even if they were severe, we’ve put in place for systemic banks – internationally-active banks, liquidity requirements they hold in order of magnitude more liquid assets.”

The problem with this concept is that the run on any of the major Wall Street banks would not be limited to depositors. Their derivative counterparties would attempt to grab capital ahead of the next guy, sending rumors flying and driving down the share price of the bank in the stock market, further intensifying the panic by wiping out billions of dollars of equity capital. Consider what we wrote about Citigroup’s rapid financial meltdown on November 24, 2008:

“Citigroup’s five-day death spiral last week was surreal. I know 20-something newlyweds who have better financial backup plans than this global banking giant. On Monday came the Town Hall meeting with employees to announce the sacking of 52,000 workers.  (Aren’t Town Hall meetings supposed to instill confidence?)  On Tuesday came the announcement of Citigroup losing 53 percent of an internal hedge fund’s money in a month and bringing $17 billion of assets that had been hiding out in the Cayman Islands back onto its balance sheet.  Wednesday brought the cheery news that a law firm was alleging that Citigroup peddled something called the MAT Five Fund as ‘safe’ and ‘secure’ only to watch it lose 80 percent of its value. On Thursday, Saudi Prince Walid bin Talal, from that visionary country that won’t let women drive cars, stepped forward to reassure us that Citigroup is ‘undervalued’ and he was buying more shares. Not having any Princes of our own, we tend to associate them with fairytales. The next day the stock dropped another 20 percent with 1.02 billion shares changing hands. It closed at $3.77.

“Altogether, the stock lost 60 per cent last week and 87 percent this year.  The company’s market value has now fallen from more than $250 billion in 2006 to $20.5 billion on Friday, November 21, 2008.  That’s $4.5 billion less than Citigroup owes taxpayers from the U.S. Treasury’s bailout program.”

Yellen then attempted to downplay the risk from derivatives, making a seriously misleading statement that suggested the risk from derivatives at the major U.S. banks has been reined in. Yellen said:

“We’ve also changed the system in how derivatives work. Now, most standardized derivatives are centrally cleared….”

Yellen’s statement does not capture the enormous risk still prevalent in derivatives at the largest Wall Street banks. According to the U.S. Office of the Comptroller of the Currency’s (OCC) most recent “Quarterly Report on Bank Trading and Derivatives Activities” for the quarter ending December 31, 2016 only “38.8 percent of the derivative market was centrally cleared.”

The most dangerous part of the derivatives market, the credit default swaps, remain largely uncleared. The OCC wrote in its most recent report that only “22.5 percent of investment grade and 15.5 percent of non-investment-grade transactions were centrally cleared” in credit derivatives.

OCC Report on Centrally Cleared Derivatives as of December 31, 2016

OCC Report on Centrally Cleared Derivatives as of December 31, 2016

Yellen now follows firmly in the footsteps of former President Barack Obama in misleading the public on the derivative risks that remain at the mega Wall Street banks. As the OCC pointed out in its latest report, “A small group of large financial institutions continues to dominate derivative activity in the U.S. commercial banking system. During the fourth quarter of 2016, four large commercial banks represented 89.3 percent of the total banking industry notional amounts…” Those four banks  are JPMorgan Chase with notional derivatives of $47.5 trillion; Citibank N.A. (the banking unit of Citigroup which received the largest taxpayer bailout in U.S. history in 2008) with notional derivatives of $43.9 trillion; Goldman Sachs Bank USA at $34.9 trillion; and Bank of America with $21.1 trillion.

Pretending that the U.S. has reined in the excesses of Wall Street and that the Federal regulators have a firm grasp of the situation is an illusion built on quicksand.

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