Mnuchin Nomination for Treasury Shines Harsh Light on U.S. Politics

By Pam Martens and Russ Martens: January 4, 2017

president-elect-donald-trumps-nominee-for-treasury-secretary-comes-under-withering-criticismOver the span of the last two weeks, President-elect Donald Trump’s U.S. Treasury Secretary nominee, Steven Mnuchin, has been the subject of multiple, scathing investigative reports by the media; earned a web site established by Senate Democrats dubbing him the “Foreclosure King” and soliciting complaints from the public; garnered a television ad campaign directed against him; and has been skewered by a devastating document leaked by someone currently or formerly connected to the California State Attorney General’s Office, indicating that the bank Mnuchin ran from 2009 to 2015, OneWest, repeatedly violated California foreclosure law, including backdating documents and making illegal bids, in order to throw thousands of vulnerable people out of their homes.

Mnuchin is also a former Goldman Sachs partner and hedge fund operator who has never held public office before. His rapid rise to nominee for one of the highest posts in the U.S. government, which will also put him atop the Financial Stability Oversight Council (F-SOC), appears to be hinged to raising millions of dollars for Trump’s political campaign as his National Finance Chairman. To millions of Americans, this looks like an unseemly political quid pro quo.

In a press release, Democratic Senator Jeff Merkley had this to say about the nominee:

“Donald Trump’s choice of Mnuchin is not only a fundamental betrayal of his promise to stand up to Wall Street — it is a punch in the gut to the thousands of American families who were thrown out of their homes by Mnuchin’s bank. The voices of these Americans should be heard loud and clear as the Senate examines his record and considers his nomination.”

Senator Bernie Sanders weighed in with this:

“During the campaign, President-elect Donald Trump told the American people that he was going to change Washington by taking on Wall Street. But now that the election is over, Donald Trump’s choice for Treasury Secretary is the same old, same old Wall Street insider who made a fortune during the financial crisis as millions lost their homes. If confirmed, Steve Mnuchin would be the third Treasury Secretary to come from Goldman Sachs in the last 17 years. That is not the type of change that Donald Trump promised to bring to Washington — that is hypocrisy at its worst. The last thing we need is another Treasury Secretary from Goldman Sachs and another broken promise from Donald Trump.”

The negative television ads being run by the progressive group, Allied Progress, end with this statement: “We need a Treasury Secretary who will help us, not himself.”

The growing and widespread criticism of Mnuchin by Democrats is well earned. Unfortunately, with the exception of Senator Sanders, the Democrats remained largely silent when outrageous issues concerning the character of President Obama’s nominee for Treasury Secretary in his second term, Jack Lew, came to the fore. As Wall Street On Parade reported:

“Lew also cashed in his chips at Citigroup, taking a job there from 2006 through early 2009 that paid him millions, including a $940,000 bonus in early 2009 that was paid with bailout funds from the U.S. taxpayer after the company became insolvent from soured mortgage bets. Lew served as Chief Operating Officer of the very division that the SEC charged with hiding $39 billion of subprime debt off its balance sheet in Structured Investment Vehicles (SIVs).

“But that bonus was hardly the end of Lew’s problems. He invested in a fund in the Cayman Islands at the very street address that the President had called a tax scam. [While working at New York University, Lew received] a $1.4 million loan from endowment funds at New York University, a taxpayer subsidized nonprofit, to buy a lavish home in the Riverdale section of the Bronx; he accepted forgiveness of large amounts of the loan and a reimbursement of the interest charged on the loan from the University.

“After negotiating a lush pay package to move to Citigroup, he somehow got a $685,000 ‘severance’ payment from NYU. And, worst of all, when repeatedly asked in writing to explain the details of these transactions, he stonewalled the Senate Finance Committee. I’m not taking the word of Republican Senators on this; I did my own investigation and Lew was a master of intentional obfuscation, leading to the obvious question, what else is he hiding.

“From the editorial page of the Wall Street Journal, to the National Review, to liberal media like Democracy Now! and Rolling Stone, and this web site’s exhaustive reporting,  Lew was ruled unfit to serve as U.S. Treasury Secretary by anyone who took a serious look at his mountain of specious deals.”

Knowing that Lew was going to handily get the votes he needed to become Treasury Secretary, Senator Sanders still launched a courageous appeal to common sense, delivering the following remarks on February 27, 2013 from the Senate floor: (Excerpt.)

“…Mr. President, the next Treasury secretary will face enormous challenges. Let me give you a few examples of what I mean. The next Treasury Secretary will play a central role in regulating and overseeing Wall Street and large financial firms. Let us never forget: as a result of the greed, recklessness, and illegal behavior on Wall Street, millions of Americans lost their jobs, homes, life savings, and ability to send their kids to college.

“We need a secretary of the Treasury who does not come from Wall Street, but is prepared to stand up to the enormous power of Wall Street. We need a Treasury secretary who will end the current Wall Street business model of operating the largest gambling casino the world has ever seen and demand that Wall Street start investing in the job creating productive economy. Do I believe that Jack Lew is that person? No, I do not.

“The decisions made by the next Treasury secretary will determine whether financial institutions need another taxpayer bailout or do not. In my view, we need a Treasury secretary who will work hard to break up too-big-to-fail financial institutions so that Wall Street cannot cause another massive financial crisis. Do I believe Jack Lew will work to break-up large financial institutions? No, I do not.

“In 2008, against my strong opposition, the taxpayers of this country provided huge financial institutions with the largest bailout in the history of the world because, we were told, they were too big to fail. The Treasury Department provided $700 billion in financial assistance to the largest banks in this country, and the Federal Reserve provided over $16 trillion in virtually zero interest loans to these same financial institutions.

“What is the state of our financial system today? Today, the 10 largest banks in America are bigger than they were before the financial crisis began. Today, the six largest financial institutions in this country (J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and MetLife) have assets equal to two-thirds of the Gross Domestic Product of this country – over $9.6 trillion. Today, six financial institutions (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) issue two-thirds of all credit cards, half of all mortgages, control 95 percent of all derivatives, and hold nearly 40 percent of all bank deposits in this country…

“Mr. President, the next Treasury secretary will face enormous challenges to get this economy back on track, to reform Wall Street, to shrink our growing trade deficit, to reduce the enormous income and wealth inequality in this country, and to put millions of Americans back to work.

“After meeting with Mr. Lew in my office, after hearing his views in the Budget Committee, and after reviewing his record, I have come to the conclusion that Mr. Lew is not the right person to lead the Treasury Department at this time.”

Lew was confirmed by the Senate with a 71-26 vote in his favor.

This is the state of American politics today: the disgraceful men of Wall Street are elevated to the highest offices in government to tailor and dictate policy to the peasants, regardless of which political party controls the White House.

U.S. Quietly Drops Bombshell: Wall Street Banks Have $2 Trillion European Exposure


By Pam Martens and Russ Martens: January 3, 2017

Just 17 days from today, Donald Trump will be sworn in as the nation’s 45th President and deliver his inaugural address. Trump is expected to announce priorities in the areas of education, infrastructure, border security, the economy and curtailing the outsourcing of jobs. But Trump’s agenda will be derailed on all fronts if the big Wall Street banks blow up again as they did in 2008, dragging the U.S. economy into the ditch and requiring another massive taxpayer bailout from a nation already deeply in debt from the last banking crisis. According to a report quietly released by the U.S. Treasury’s Office of Financial Research less than two weeks before Christmas, another financial implosion on Wall Street can’t be ruled out.

The Office of Financial Research (OFR), a unit of the U.S. Treasury, was created under the Dodd-Frank financial reform legislation of 2010. It says its role is to: “shine a light in the dark corners of the financial system to see where risks are going, assess how much of a threat they might pose, and provide policymakers with financial analysis, information, and evaluation of policy tools to mitigate them.” Its 2016 Financial Stability Report, released on December 13, indicates that Wall Street banks have been allowed by their “regulators” to take on unfathomable risks and that dark corners remain in the U.S. financial system that are impenetrable to even this Federal agency that has been tasked with peering into them.

At a time when international business headlines are filled with reports of a massive banking bailout in Italy and the potential for systemic risks from Germany’s struggling giant, Deutsche Bank, the OFR report delivers this chilling statement:

“U.S. global systemically important banks (G-SIBs) have more than $2 trillion in total exposures to Europe. Roughly half of those exposures are off-balance-sheet…U.S. G-SIBs have sold more than $800 billion notional in credit derivatives referencing entities domiciled in the EU.”

When a Wall Street bank buys a credit derivative, it is buying protection against a default on its debts by the referenced entity like a European bank or European corporation. But when a Wall Street bank sells credit derivative protection, it is on the hook for the losses if the referenced entity defaults. Regulators will not release to the public the specifics on which Wall Street banks are selling protection on which European banks but just the idea that regulators would allow this buildup of systemic risk in banks holding trillions of dollars in insured deposits after the cataclysmic results of similar hubris in 2008 shows just how little has been accomplished in terms of meaningful U.S. financial reform.

Adding to the potential for another epic crash on Wall Street taking down the entire U.S. economy is data within the OFR report showing how interconnected the big Wall Street banks have become to the largest U.S. insurers through derivatives. This has been allowed to happen despite the fact that the giant insurer, AIG, required a government backstop of $182 billion following the 2008 crash because it had sold credit default protection via derivatives to the big Wall Street banks.

The OFR report includes the following data on life insurers:

“At the end of 2015, U.S. life insurers’ derivatives exposure, as reported in statutory filings, totaled $2 trillion in notional value. This $2 trillion does not include derivative contracts held in affiliated reinsurers, non-insurance affiliates, and parent companies that do not have to file statutory statements. Details on these entities’ derivatives positions are not publicly available.”

Just who is backstopping this $2 trillion in risk? The answer is mind-numbing. The counterparties to the life insurers are the same behemoth Wall Street banks who have their own potential nightmare scenario if there are major European bank defaults. The OFR report indicates the following:

“According to statutory data on insurance company legal entities, nine large U.S. and European banks are counterparties to about 60 percent of U.S. life insurers’ $2 trillion in notional derivatives. These data show that despite central clearing, derivatives interconnectedness between the U.S. life insurance industry and banks remains substantial.”

An accompanying chart shows (in order of magnitude) the following Wall Street banks with the greatest interconnectedness via derivatives to U.S. life insurers: Goldman Sachs, Deutsche Bank, Bank of America, Citigroup, Credit Suisse, Morgan Stanley, Barclays, JPMorgan Chase, and Wells Fargo.

It is impossible to overstate the dangers of this daisy chain of interconnectedness. The Wall Street banks that created the greatest financial collapse since the Great Depression in 2008 have now metastasized their failed derivatives model throughout the life insurance industry of the U.S. – raising the very real specter that in the next crash both massive banks and massive life insurers would require a taxpayer bailout.

Five of the largest U.S. banks that show up on the derivatives counterparty list to the U.S. life insurers, also show up on another list. The OFR report notes:

“The Basel Committee methodology measures banks’ complexity in part by looking at data on notional derivatives positions. These data reflect the nominal value of underlying derivatives contracts. They have been volatile since 2012 but remain highly concentrated among the five largest banks. As with OFR findings on insurance (see Section 2.5), OFR analysis suggests higher derivatives exposures for banks are associated with greater systemic risk.”

The five banks referenced above are: JPMorgan Chase, Citigroup, Goldman Sachs, Bank of America and Morgan Stanley.

The OFR report also indicates that regulators still do not have access to adequate data from the biggest banks and insurers to assess the dangers in real time. The report notes:

“Deficiencies in data and data management remain a critical vulnerability. Data needs remain unfilled, particularly in shadow banking markets. Many of the new data are not ready or available for analysis. Despite progress, the probability remains high that data deficiencies will again prevent risk managers and regulators from assessing risks before it is too late.”

President-elect Donald Trump and his closest advisers should make it their top priority to read this OFR report carefully, reflect on the current and future ramifications of the reckless and irresponsible U.S. banking model on its citizens and economy at large, and immediately begin to press Congress for the restoration of the Glass-Steagall Act upon his swearing in on January 20.

Wall Street Bank Stocks Were Particularly Weak Yesterday

By Pam Martens and Russ Martens: December 30, 2016

Wall Street Bull Statue in Lower Manhattan

Wall Street Bull Statue in Lower Manhattan

We have noticed throughout this past year that when the Standard and Poor’s 500 index of stocks sold off, big banks’ share prices sold off by dramatically more on a percentage basis. Yesterday, notwithstanding the big rally bank stocks have enjoyed since Donald Trump’s win on November 8, the big banks once again dramatically outpaced the S&P 500 on the downside. The S&P lost 0.03 percent while the major Wall Street banks like Citigroup, Goldman Sachs, Morgan Stanley and Bank of America lost over 1 percent. It was a worthwhile reminder that the hurdles the big banks have experienced this year have not diminished – by any means.

As 2016 began, the big, globally-interconnected Wall Street banks were facing serious headwinds. The Fed had just hiked rates and oil prices could not find a floor and neither could the share prices of these banks, which had heavy loan exposure to the energy sector. By January 20, Citigroup, Morgan Stanley, Goldman Sachs and Bank of America were trading at new 12-month lows.

As oil prices recovered from the $30 range to the $50 range in the Spring, bank stocks rallied as well. Then came the Brexit vote shocker in the U.K. on June 23. In New York trading the day after the vote, bank stocks were pummeled. While the Dow Jones Industrial Average lost only 3.39 percent, Morgan Stanley shed 10.15 percent; Citigroup slumped 9.36 percent; Bank of America was down 7.41 percent while Goldman closed with a loss of 7.07 percent.

Wall Street On Parade also paid close attention to the trading action of MetLife, the large insurer, on the Friday after the Brexit vote. The company is battling its designation as a Systemically Important Financial Institution (SIFI) at the Appellate Court level after winning against the U.S. government at the District Court. In a single trading session on Friday after the Brexit vote, MetLife lost even more than Morgan Stanley, shaving 10.71 percent off its market value.

What all of these bank stocks and MetLife have in common are large exposures to derivatives. (While JPMorgan Chase typically sells off less than the other bank stocks, it also has a massive derivatives book.)

On December 18, 2014, when the Financial Stability Oversight Council (F-SOC) released its report on why it was designating MetLife a SIFI, it pointed out the following:

“MetLife leads the U.S. life insurance industry in certain institutional products and capital markets activities, such as issuances of funding agreement-backed notes (FABNs), guaranteed minimum return products (such as general and separate account GICs), and securities lending activities. These activities expose other market participants to MetLife and create on– and off– balance sheet liabilities that increase the potential for asset liquidations by MetLife in the event of its material financial distress. Efforts to hedge such risks through derivatives and other financial activities are imperfect and further increase MetLife’s complexity and interconnectedness with other financial markets participants…”

The report also found that MetLife made repeated use of the emergency bailout mechanisms during the 2008 financial crisis, writing:

“During 2008 and 2009, MetLife’s subsidiary bank accessed the Federal Reserve Term Auction Facility 19 times for a total of $17.6 billion in 28- day loans and $1.3 billion in 84-day loans. In March 2009, MetLife raised $397 million through the Temporary Liquidity Guarantee Program run by the Federal Deposit Insurance Corporation (FDIC), which enabled the organization to borrow funds at a lower rate than it otherwise would have been able to obtain. Additionally, MetLife borrowed $1.6 billion through the Federal Reserve’s Commercial Paper Funding Facility.”

F-SOC made the determination that “material financial distress at MetLife could pose a threat to U.S. financial stability.” Underscoring that point, it noted:

“Large financial intermediaries, including global systemically important banks (G-SIBs) and global systemically important insurers (G-SIIs), have significant exposures and interconnections to MetLife through its institutional products and capital markets activities.”

The so-called Trump rally in bank stocks was always suspect. Trump’s promise to shred key provisions of the Dodd-Frank financial reform legislation without any stated plan as to how Wall Street would be regulated going forward should have been a negative, not a positive, in the stock market. More problematic, the Federal Reserve has very little room for error this time around. It can’t launch a multi-year easing program when it has only two interest rate cuts available in its monetary arsenal and the headwind of a $4.5 trillion balance sheet accumulated to prop up banks in the last crash.

On top of this, the giant German bank, Deutsche Bank, which the International Monetary Fund called “the most important net contributor to systemic risks” in a report in June, still has not formally settled its alleged mortgage fraud case with the U.S. Justice Department and remains under multiple investigations for potential currency market rigging and so-called mirror trades that moved billions of dollars out of Russia.

And despite the largest taxpayer-financed global bank bailout in history just eight years ago, a brand new massive taxpayer bailout is underway in Italy to rescue yet another grossly mismanaged global bank.

Both the Democratic and Republican platforms this year included a goal of restoring the Glass-Steagall Act, which would separate today’s casino banking model from banks holding taxpayer-backed insured deposits — ending the era of heads we win, tails you lose. If President-elect Donald Trump has any hope at all of surviving the next four years without another banking panic and meltdown, he needs to make the restoration of Glass-Steagall a top priority from day one.

Did Big Media Run Fake Headlines on the Deutsche Bank “Settlement” ?

By Pam Martens and Russ Martens: December 29, 2016

deutsche-bankTypically, it takes two to settle bank fraud charges – the bank committing the fraud and the law enforcement agency bringing the charges. But in the case of the announcement late last Thursday evening that Deutsche Bank and the U.S. Justice Department had reached an agreement to settle claims against the bank for allegedly swindling investors in the sale of toxic residential mortgage backed securities, all that could be heard was the sound of one hand clapping in a press release issued by the defendant, Deutsche Bank. Nowhere to be found was a statement of particulars on what the bank was admitting to or a man behind a podium bearing the seal of the U.S. Justice Department in a press briefing room, as typically occurs in a real settlement.

The lack of substantive details to this “settlement” and no confirmation from the Justice Department that an agreement actually existed did not hamper expensive media real estate from running with the story. The New York Times plopped the story on the front page of its business section on Friday, December 23 – the last trading day before Christmas – under the decidedly declarative headline: “Deutsche Bank to Settle U.S. Inquiry Into Mortgages for $7.2 Billion.” The Times article said the bank’s statement “came ahead of a formal announcement in the case.” It’s now a week later and as of this writing there is still no formal announcement from the Justice Department.

The timeline for this potentially fake news spreading like wildfire at major media outlets went like this:

At 7:56 p.m. on Thursday evening, December 22, Reuters ran this headline: “U.S. sues Barclays, ex-executives for mortgage securities fraud.” This headline was based on very material evidence. The U.S. Justice Department had just filed a 198-page lawsuit against Barclays in the U.S. District Court for the Eastern District of New York replete with allegations of breathtaking securities fraud. The lawsuit alleges that Barclays “knowingly securitized defaulted, delinquent, and defective” loans “to get them off Barclays’ books” and then lied to investors and ratings agencies about the quality of the loans. The lawsuit makes clear that the Justice Department has the emails to back up these charges. The Justice Department also disseminated a scathing press release on Thursday evening in which it excoriated the conduct of the bank and named two executives that are being charged: Paul K. Menefee, who served as Barclays’ head banker on its subprime residential mortgage backed securitizations and John T. Carroll who served as Barclays’ head trader for subprime loan acquisitions.

Just 37 minutes after this Justice Department fireball was dropped on Barclays and its red-faced legal team, Reuters was running this headline: “Deutsche Bank says it has reached settlement with U.S. DoJ on mortgages case.” The headline correctly indicates that Reuters is getting its information strictly on the basis of what the bank “says.”

Deutsche Bank’s legal team had simply released a 255-word press release to garner major headlines across big media’s digital and print platforms. In actuality, it was the Seinfeld version of a settlement agreement – it was about nothing concrete. The first clue should have been the words that ran above the title of the Deutsche Bank press release: “Ad-hoc.” According to the American Heritage Idioms Dictionary, used in that context, it means “improvised or impromptu.” Indeed, Deutsche Bank notes in the second paragraph of its 255-word missive that “The settlement is subject to the negotiation of definitive documentation, and there can be no assurance that the U.S. Department of Justice and the bank will agree on the final documentation.”

If there can be “no assurance” of a future agreement between the only two parties that can settle this case, how can this legitimately be called a settlement in headlines.

Adding to the potential for a deceptive public relations tactic on the part of Deutsche Bank, in September of this year the Wall Street Journal reported that the Justice Department was seeking $14 billion from Deutsche Bank to settle the case – almost twice what the bank now says it has reached an agreement on. The $14 billion initial tab suggests that the Justice Department has strong evidence of wrongdoing against the bank and could, as it did with Barclays, drop all that sordid laundry in a detailed complaint in Federal Court if Deutsche refuses to admit to its wrongdoing.

Another irony of big media taking the word of Deutsche Bank to write its headlines is that at the very heart of why the Justice Department is seeking billions of dollars from the bank is that it has engaged in serial deceptions.

In April of 2015, Deutsche Bank entered into a deferred prosecution agreement with the Justice Department over wire fraud and antitrust charges related to its role in manipulating U.S. Dollar LIBOR and engaging in a price-fixing conspiracy to rig Yen LIBOR. (LIBOR is an interest rate benchmark used to set rates on everything from credit cards to mortgages.) At the same time, a bank subsidiary pleaded guilty to wire fraud for manipulating LIBOR. The tab to Deutsche Bank was $775 million in criminal penalties. In June of this year, the Justice Department indicted two Deutsche Bank traders on LIBOR-rigging charges.

In November of 2015, Bloomberg News reported that “Deutsche Bank will pay $258 million and fire six employees to resolve a probe into sanctions violations from 1999 to 2006 after a string of e-mails showed employees discussed the ‘tricks’ used to move money in and out of Iran, Libya, Syria, Burma and Sudan.”

In 2013, FHFA, the conservator of Freddie Mac and Fannie Mae, announced a $1.925 billion settlement with Deutsche Bank to resolve claims that the bank had misled the mortgage giants in the sale of mortgage-related investments. Deutsche Bank did not admit wrongdoing in that settlement.

In 2010, Deutsche Bank agreed to pay $553.6 million to the U.S. and admitted criminal wrongdoing in a fraudulent tax shelter scheme that facilitated billions of dollars in U.S. tax losses.

Even after Deutsche settles or goes to court in the current matter with the Justice Department, there are still potential new charges that may be brought. According to Ed Caesar, writing in the August 29, 2016 issue of The New Yorker, Deutsche Bank is currently under investigation by “the U.S. Department of Justice, the New York State Department of Financial Services, and financial regulators in the U.K. and in Germany” for so-called “mirror trades,” a technique used to “turn rubles that were stuck in Russia into dollars stashed outside Russia.”

The above list is by no means exhaustive. It is simply meant to point out that big media should know better than to rely on a global bank that has been serially charged with egregious frauds and deceptions to write its headlines.

Shhh! Don’t Tell this Bank Regulator We’ve Got a Derivatives Problem

Source: Office of Comptroller of the Currency

Source: Office of Comptroller of the Currency

By Pam Martens and Russ Martens: December 28, 2016

Each quarter the Office of the Comptroller of the Currency (OCC) releases a detailed report showing the exposure to derivatives at U.S. banks. The most recent report for the quarter ending June 30, 2016 indicates that U.S. bank holding companies have a total notional amount (face amount) of derivatives of $252.6 trillion. Of that total, just five Wall Street banks hold $230 trillion or 91 percent, underscoring how massively concentrated this high risk game has become. Those five banks are: Citigroup, JPMorgan Chase, Goldman Sachs Group, Bank of America and Morgan Stanley.

There are numerous U.S. units of foreign banks on the derivatives list of bank holding companies but one name is conspicuously missing: the German giant, Deutsche Bank. Without knowing how much potential exposure U.S. banks have to Deutsche Bank in the derivatives arena, the U.S. public is left completely in the dark on just how dangerously exposed our banks are, once again, to the potential failure of a systemically interconnected counterparty. Here’s what we do know – no thanks to the OCC’s copious reports.

From late summer and into the fall of this year, Deutsche Bank was struggling in quick sand with Wall Street banks trading like they were tethered tightly to its sinking hulk. Here’s how Wall Street On Parade reported the situation on September 27:

“Yesterday, Germany’s largest financial institution, Deutsche Bank, lost 7.06 percent by the close of trading on the New York Stock Exchange. That plunge in one of the most globally-interconnected banks dragged down the shares of every major Wall Street bank yesterday: Bank of America lost 2.77 percent; Morgan Stanley declined by 2.76 percent; Citigroup lost 2.67 percent; Goldman Sachs shed 2.21 percent; and JPMorgan Chase closed down 2.19 percent. Deutsche Bank, whose shares traded at more than $120 pre-crisis in 2007, closed at $11.85 yesterday in New York and was down another 3 percent in overnight trading in Europe.”

Since October, Deutsche Bank has recovered some lost ground, closing yesterday on the New York Stock Exchange at $18.37. That trading price, unfortunately, still puts it at a share price loss of 86 percent over the past decade.

A major global bank bleeding gobs of equity value is cause enough for concern but Deutsche Bank raises other serious red flags to the U.S. banking system. According to a report released in June of this year by the International Monetary Fund (IMF), Deutsche Bank is “the most important net contributor to systemic risks.” The researchers wrote:

“Notwithstanding moderate cross-border exposures on aggregate, the banking sector is a potential source of outward spillovers. Network analysis suggests a higher degree of outward spillovers from the German banking sector than inward spillovers. In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country…

“Among the G-SIBs [Global Systemically Important Banks], Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse…The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures, as well as rapidly completing capacity to implement the new resolution regime.”

The report includes the graph below, indicating that a blowup at Deutsche Bank would spill out to every major Wall Street bank — banks which are holding almost half of the insured savings deposits in the U.S. – effectively mandating more massive taxpayer bailouts such as those that occurred in 2008.

In February 2005, the U.S. Treasury’s Office of Financial Research also quietly warned that U.S. banks were using foreign counterparties for their derivative trades, writing as follows:

“Surprisingly, OTC derivatives contributed only about half as much to intrafinancial system liabilities ($632 billion) as to intrafinancial system assets ($1.2 trillion). Across all OTC market participants, derivatives assets must equal derivatives liabilities, so this imbalance indicates that the U.S. banks held large positive OTC derivatives positions with financial institutions outside this group.”

If all of this wasn’t concerning enough, the very type of derivatives that blew up the giant insurer AIG in 2008 (credit derivatives) are making a big comeback at Citigroup, the recipient of the largest taxpayer bailout of a bank in U.S. history during the 2008 crash. The OCC’s June 30 report shows Citigroup’s holding company with $2.2 trillion in credit derivatives and $53.6 trillion in total notional amount of derivatives — at a bank holding company with only $1.8 trillion in assets.

According to a January 2016 report in Risk Magazine, Citigroup bought $250 billion of credit derivatives from Deutsche Bank in 2013. The same article indicates that Citigroup is now considered one of the top three market makers in single name Credit Default Swaps in both North America and EuropeIn her book, Bull by the Horns, Sheila Bair, the Chair of the Federal Deposit Insurance Corporation (FDIC) at the time of Citigroup’s implosion in 2008, singles out credit derivatives as one of the factors leading to Citigroup’s epic crash to a penny stock. Bair writes: “It was taking losses on credit default swaps entered into with weak counterparties….”

The OCC is the dominant regulator of national banks. According to its 2015 Annual Report, it has 3,959 employees and a budget of $1.09 billion. It has bank examiners stationed at the major Wall Street banks. According to its Annual Report, its regulatory model “makes it possible for examiners, bank managers, and the board of directors to identify changes in the bank’s risk profile at an early stage, which in turn provides additional time, if necessary, to develop and implement strategies for mitigating that risk.”

That statement would clearly be more reassuring to Americans had not the largest bank in the U.S. in 2008, Citigroup, blown itself up while lying to the public and its shareholders about its exposure to subprime debt and holding more than $1 trillion in assets off its balance sheet.

The OCC’s reassurance would also be more believable had JPMorgan Chase not lost more than $6.2 billion of its depositors’ money gambling in high risk derivatives in London in 2012 – just four years after the biggest financial crash since the Great Depression and just two years after the Dodd-Frank financial reform legislation was supposed to have restored sanity to the U.S. banking system.

The OCC urgently needs to defog its lenses and defang the derivative entanglements at the biggest Wall Street banks.

Systemic Risk Among Deutsche Bank and Global Systemically Important Banks (Source: IMF --  "The blue, purple and green nodes denote European, US and Asian banks, respectively. The thickness of the arrows capture total linkages (both inward and outward), and the arrow captures the direction of net spillover. The size of the nodes reflects asset size.")

Systemic Risk Among Deutsche Bank and Global Systemically Important Banks (Source: IMF — “The blue, purple and green nodes denote European, US and Asian banks, respectively. The thickness of the arrows capture total linkages (both inward and outward), and the arrow captures the direction of net spillover. The size of the nodes reflects asset size.”)

Related Articles:

Wall Street Banks Are Trading as a Herd Because They are Highly Interconnected

Interconnected Banks Pose Greatest Threat to U.S. Financial System

Bailed Out Citigroup Is Going Full Throttle into Derivatives that Blew Up AIG

Treasury Drops a Bombshell: Fed’s Stress Tests Get It Wrong