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   Non-TechDerivatives: Darth Vader's Revenge

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From: Worswick8/8/2016 2:02:53 PM
   of 2741
Riding the Pestilence ....

Everyone ready to rock and roll?

Checkout the strap hangers at Citi, at the end of the article....

Buffett Exits Entire Credit Default Swap Exposure, As Citi's Appetite For Derivative Destruction Surges

Aug 8, 2016 11:03 AM Zero Hedge

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It was considered one of the bigger paradoxes for years. Back in 2003, Warren Buffett famously dubbed derivatives “financial weapons of mass destruction” and yet over the next several years went ahead and entered a number of the contracts, including both equities and credit, ostensibly by selling CDS to collect monthly premiums, although not to the same degree as AIG, which infamously had to be bailed out due to massive losses on its CDS book.

The billionaire had argued that agreements he made were attractive because they gave him money up front that he could invest. Berkshire’s derivatives also differed from contracts that brought down other financial institutions during the 2008 credit crisis, because he had less onerous collateral requirements.

However, at least when it comes to CDS, after several years of Berkshire trimming its credit derivative exposure, it is now completely out, and as Bloomberg reports the Omaha billionaire "just took another step to simplify Berkshire Hathaway Inc.’s stockpile of derivatives."

The company paid $195 million in July to wind down the last contract in which Omaha, Nebraska-based Berkshire provided protection against losses on bonds, according to a regulatory filing Friday that didn’t identify the counterparty. As of June 30, the maximum risk on that credit-default agreement was about $7.8 billion."

For years, the billionaire has been winding down derivatives or letting them expire. In 2012, he struck a deal to terminate contracts linked to municipal bonds. Others tied to corporate debt expired the following year.

While not as bad as AIG, Berkshire’s derivatives have been the source of some pain. Bloomberg notes that in 2008, the SEC asked Berkshire to make “more robust disclosure” on how it valued the contracts, which the company eventually did. The following year, Moody’s Investors Service and Fitch Ratings cited derivatives when the ratings firms stripped Berkshire of its top credit grade. Changes in the values of the contracts are reflected on Berkshire’s income statement, sometimes causing wild swings in quarterly profit.

“That was a very interesting chapter for Berkshire and its shareholders,” said David Rolfe, chief investment officer at Wedgewood Partners, a Berkshire investor that oversees about $7.8 billion. “And it looks like that chapter is winding down.” Perhaps because Berkshire’s last CDS had such a long potential lifespan that it could’ve continued under the next chief executive officer, that Buffett may wondered “why even bother someone with that?” Rolfe said.

The contract covered in the July agreement was written in 2008 and related to municipal debt issues with maturities from 2019 to 2054, according to regulatory filings. Buffett didn’t respond to a request for comment outside normal business hours.

Buffett has repeatedly told shareholders to look past the fluctuations from derivatives and focus instead on the underlying earnings for Berkshire’s dozens of businesses, from railroad BNSF to ice-cream chain Dairy Queen. On Friday, the company reported that operating earnings climbed 18 percent to $4.61 billion in the second quarter, driven by gains at insurance and manufacturing businesses.

Perhaps Buffett is worried about sharp fluctuations on the securities, which are essentially a bond short. “When you have to mark these contracts to market in a downturn like 2008, it gives the appearance that Berkshire’s fortress balance sheet is weakened,” said Richard Cook at Cook & Bynum Capital Management, which oversees about $350 million including Berkshire shares. “I would prefer Buffett to have as much flexibility as possible when the tide rolls out.”

Despite exiting CDS, Buffett still has equity-linked derivative exposure, as Berkshire still has some derivatives tied to the performance of stock indexes. Potential liabilities on those agreements have narrowed in recent years as markets rallied. Liabilities on the equity index puts - which expire between June 2018 and early 2026 - stood at about $4.4 billion at the end of the second quarter, Bloomberg reports.

Some of Berkshire’s energy businesses also use derivatives to hedge fuel costs. But Buffett has been downplaying the role the contracts will play at his company when he’s no longer around. “I don’t think there’ll be much of a derivatives book” under a new CEO, he said at Berkshire’s annual shareholder meeting in 2012. “There are a few operating businesses that will have minor positions.”

And with Buffett unwinding, something must be accumulating a position. One possible suspect is Citigroup. According to a Bloomberg report on Friday, Citigroup, the U.S. bank with the most derivatives, purchased a portfolio of credit-default swaps from retreating rival Credit Suisse Group AG, two people with knowledge of the matter said.

Credit Suisse said last week it had agreed to sell the positions, which consist of about 54,000 trades, to an unidentified buyer, reducing its leverage exposure by $5 billion. The gross notional value of the portfolio is about $380 billion, said people with knowledge of the assets, who asked not to be identified because the size of the portfolio or identity of the buyer aren’t public.

Credit Suisse Chief Executive Officer Tidjane Thiam is pulling out of some securities businesses as he seeks to boost the bank’s capital ratios and rein in a culture he said took too much risk before he joined. The deal shows how some of the biggest U.S. banks are looking to gain market share in trading from the restructurings of European rivals, including Credit Suisse and Deutsche Bank AG.

In order to boost returns, Citi has been on a CDS buying spree in recent months. In 2015, the bank bought about $250 billion in notional value of credit derivatives from Deutsche Bank last year and was in talks with the German bank to buy more, Bloomberg reported in March. The New York-based firm had $2.1 trillion of notional credit derivatives, and more total derivatives than any other U.S. lender, at the end of March, according to a report from the Office of the Comptroller of the Currency.

The portfolio encompassed all the CDS the Swiss bank had in its strategic resolution unit, the part of the firm it’s winding down, while it still has some credit derivatives in the ongoing trading business. Credit Suisse wants to reduce leverage exposure at the SRU by about 70 percent over the next three years, Chief Financial Officer David Mathers said last week. That measure was $148 billion at the end of June, down from $167 billion at March 31.

As a reminder, one of the reasons why Deutsche Bank has seen its stock pressured in recent months is due to investor concerns over its derviative exposure, something we first pointed out in 2013. And while unwinding a quarter trillion in derivative is a welcome start, the German banks still has tens of trillions in residual derivative exposure left, whose breakdown is largely unknown, and which may result in another risk flare up episode in coming quarters should there be a dramatic reversal in key underlying financial metrics such as interest rates.

For now, however, what we do know is that as Berkshire is unwinding Citi is, well, winding, in a long telegraphed move. Recall that at the end of 2014 it was revealed that none other than Citigroup lawyers had insert language in the Omnibus language which allowed financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp, explicitly putting taxpayers on the hook for losses caused by these contracts.

So what explains Citi's relentless appetite to add derivative exposure on its balance sheet? Simple: because depositors, and thus taxpayers, are on the hook at the FDIC-insured entity - as the bank assured when it drafted the appropriate legislation - as they were before the 2008 financial crash and subsequent bailout

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From: Sam9/14/2016 6:05:53 AM
   of 2741
I'm not sure that this belongs on this thread, but it has to do with banking risks and it doesn't fit anywhere else, so I am putting it here for future reference.

There’s a $300 Billion Exodus From Money Markets Ahead

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From: Worswick9/27/2016 1:47:15 PM
3 Recommendations   of 2741

Deutsche Bank on the buffers.

.... it is probably time for American to again institute Marshall Plan #3.

#2 happening in 2008?

The first plan was in 1948, which dispensed the today equivalent of financial $120 Billion to aid Europe.


If my maths are right the $60 trillion in derivatives on the books of Deutsche Bank is 500 times (approximately) what the US ponied up for Europe in inflation inflation adjusted dollars, of course, for PLAN #1.

No wonder Ken Rogoff wants to do away with currency. He is a new kind of Buddhist visionary in
a HAPPY new kind of era WHERE EVERONE LIVES in Disneyland.

Best to all of you,


Is a "$46 TRILLION" Lehman Brothers Event Just Around the Corner?
DB is not alone here. Across the board, we’re getting signs of an impending banking crisis in Europe.

Credit Suisse (CS) is trading BELOW its 2012 banking crisis lows.

The EU banking system is $46 TRILLION in size. This is THREE TIMES larger than the US banking system, which nearly imploded the markets in 2008.

And the EU as a whole is leveraged at 26 to 1. Lehman Brothers was leveraged only slightly higher than
this at 30 to 1.

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To: Worswick who wrote (2668)9/27/2016 2:44:42 PM
From: ggersh
1 Recommendation   of 2741
Never seen it put like that, but ya it's time for Yellen to go in SWAP mode.

".... it is probably time for American to again institute Marshall Plan #3.

#2 happening in 2008?

The first plan was in 1948, which dispensed the today equivalent of financial $120 Billion to aid Europe."

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From: Worswick10/2/2016 4:31:53 PM
1 Recommendation   of 2741
According To JPMorgan, This Is The Biggest Risk Facing Deutsche Bank At This Point For the charts see:

However, as noted previously, Lehman failed as a result of its corporate counterparties suffocating the bank by rapidly pulling out their liquidity lines. Lehman, however, was lucky in that it didn't have retail depositors: it's death would have likely come far faster as the capital panic was not limited to institutions but also included a retail depositor bank run.

This is where Deutsche Bank is very different from Lehman, and far riskier, because if the institutional panic spreads to the depositor base, which as the table below shows amounts to some €566 billion in total, and €307 billion in retail deposits...

... then all bets are off.

Which is why it is so critical for Angela Merkel to halt the plunging stock price, an indicator DB's retail clients, simplistically (and not erroneously) now equate with the bank's viability, and the lower the price drops, the faster they will pull their deposits, the quicker DB's liquidity hits zero, the faster the self-fulfilling prophecy of Deutsche Bank's death is confirmed.

Which ultimately means that DB really has four options: raise capital (sell equity, convert CoCos, which may results in an even bigger drop in the stock price due to dilution or concerns the liquidity raise may not be sufficient), approach the ECB for a liquidity bridge (this may also backfire as counterparties scramble to flee a central bank-backstopped institution), appeal for a state bailout (Merkel has so far said "Nein") or implement a bail-in, eliminating billions in unsecured claims (and deposits) and leading to a full-blown systemic bank run as depositors everywhere rush to withdraw their savings, leading to a collapse of the fractional reserve banking mode (in which there is only 10 cents in physical deliverable cash for every dollar in depositor claims).

Which of the four choices Deutsche Bank will pick should become clear in the coming days. Until it does, it will keep the market on edge and quite volatile, because as Jeff Gundlach explained today, a "do nothing" scenario is no longer an option for CEO John Cryan as the market will keep pushing the price of DB lower until it either fails, or is bailed out.

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From: Worswick10/2/2016 4:35:31 PM
1 Recommendation   of 2741
Deutsche Bank ’s Problems Could Snowball... As Soon As Next Week! For the charts see:

by Secular Investor Oct 2, 2016

Last week, the situation of Deutsche Bank kept the entire financial world busy as a $14B fine was hanging like a sword of Damocles over the company’s virtual head. We have to admit we had a good chuckle when the mainstream media were falling over themselves to report on Deutsche Bank’s problems, because most open-minded people in this sector already knew the company was one of the weakest links in the entire financial system, with the possibility to infect dozens of other players.

A weak link indeed, but most definitely not an unimportant link considering Deutsche Bank isn’t just ‘too big to fail’ but ‘waaaaay too big to be allowed fail’, and the existing problems very likely are just the tip of the iceberg. The markets were suddenly spooked by a potentially massive fine related to the sale of toxic mortgage bonds, but the concerns seemed to alleviate after the CEO of the bank published an open letter emphasizing the bank still has plenty of liquidity and reserves of in excess of 215B EUR.

It does look like the term ‘reserves’ has been used in quite a loose way, considering the majority of these so-called reserves are actually debt, and the market shouldn’t confuse ‘reserves’ with ‘liquidity reserves’. Even if you have 200B+ in liquidity, there will be a point in time when a company has to repay its creditors or refinance the existing debt, so relying on borrowed liquidity is usually just kicking the can further down the road. Indeed, after checking the H1 financial results of Deutsche Bank, the equity portion of the balance sheet is just a fraction of the 215B EUR in claimed reserves. The total shareholders equity was just 62B EUR as of at the end of June, with an equity/total assets ratio of just 3.3% compared to 12.2% at Bank of America and 12.75% at Citigroup. Even Banco Santander’s equity/total assets ratio is twice as high as Deutsche’s!

Die Zeit reported earlier this week the government and financial authorities were already preparing a rescue plan in case the bank could not meet its commitments by raising cash on the open market, because even selling the Abbey Life insurance group to Phoenix Life holdings for approximately $1.2B last week won’t move the needle in case of a huge liquidity crunch.

Indeed, the market wasn’t buying CEO Cryan’s optimistic speech, and on the open market the 6% CoCo bonds fell to less than 70 cents on the dollar, indicating a lot of debtholders wanted to get out of these CoCo’s as fast as possible, and the price of these bonds recovered slightly after the rumor about a $5.4B settlement was in the making.


We are uncertain about why the market thinks a $5.4B settlement would be good news. Sure, it’s less than the $14B the DoJ was originally seeking from Deutsche Bank, but even if the $5.4B number would be correct (Morgan Stanley thinks the total settlement will be closer to $6B, which we consider to be more likely considering Citigroup was slapped with a $12B fine, but settled for $7B), it would wipe out the entire provision on the balance sheet! Indeed, at the end of the second quarter of this year, the total amount of provisions on Deutsche Bank’s balance sheet was just 5.5B EUR ($6.1B), so a $6B settlement would wipe this out completely.

If you really believe a $5.4-6B settlement would solve all problems, think again. Selling toxic mortgages isn’t Deutsche Bank’s problem, but the exposure to the derivatives market is. And this problem could start snowballing, anytime now.

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From: Sam10/5/2016 11:22:20 PM
   of 2741
QE purchases near record even as doubts grow
Although doubts over central banks’ policies have risen, the pace of purchases is near an all-time high
YESTERDAY by: Elaine Moore

Central banks are embarking on the largest quarterly purchase of assets since quantitative easing was introduced following the financial crisis, as policymakers double down on monetary policy despite growing concern it has reached its limits.

In the final three months of the year, the UK, Japan and Europe are expected to spend a combined $506bn on assets — the largest quarterly sum created since the early days of the US Federal Reserve’s QE programme in 2009.

Figures from JPMorgan Asset Management show that rolling quarterly asset purchases have intensified after the UK’s vote leave the EU as the Bank of Englandjoins the European Central Bank and Bank of Japan in cutting interest rates and creating money to buy assets — mostly government bonds — in a bid to expand credit and spur investment.

Central bank governors including the BoE’s Mark Carney and ECB’s Mario Draghi insist QE has aided economic stability and prevented catastrophe, but the success of the scheme is contested by those who say inflation remains limp and that asset purchases have fuelled inequality, encouraged profligacy and hit the incomes of those who rely on savings.

“It is now nearly a decade since the financial crisis. In this time central banks have amassed huge balance sheets through quantitative easing and there is as yet no end in sight,” said Steven Major, global head of fixed income research at HSBC, who expects global bond yields to be no higher in 2021 than they are now.

“All the evidence suggests a long drawn-out process of deleverage. We should be thinking in terms of decades, not single years.”

While the US concluded its QE operations in 2014, the BoJ, BoE and ECB are still expanding, pushing the collective balance sheets of G4 central banks to more than $13tn.

Citi estimates that the collective balance sheets of central banks is now equal to about 40 per cent of global GDP, a move that is shrinking the universe of securities available for investment, according to credit strategist Hans Lorenzen.

continues at

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From: Worswick10/9/2016 3:05:57 PM
1 Recommendation   of 2741
The twilight dance hour approaches?

Deutsche Bank Tells Investors Not To Worry About Its €46 Trillion In Derivatives for the lovely charts & pictures see:

by Tyler Durden Oct 9, 2016

Having first flagged Deutsche Bank enormous derivative book for the first time back in 2013, it wasn't until last week that JPMorgan admitted just what the biggest risk facing Deutsche Bank was. In a note by JPMorgan's Nikolaos Panigirtzoglou, the strategist warned that, "in our opinion it is not so much funding issues but rather derivatives exposures that more likely to trouble markets going forward if Deutsche Bank concerns continue. This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts."

For those new to the story, Deutsche has one of the world’s largest notional derivatives books — its portfolio of financial contracts based on the value of other assets. As we first noted in 2013, It peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of last year. That’s around 12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements. It was €46 trillion as of Q2 measured by notional outstanding.

JPMorgan bank analysts confirmed the size of DB's book, and note that BIS data provide an alternative but indirect way to gauge the size of derivatives exposures. According to BIS data the exposure of foreign banks to German counterparties via derivatives contracts stood at $312bn as of Q1 2016.

While the topic of DB's derivative book size emerges any time the bank's stock slides, it tends to be swept under the rug whenever due to fake rumors or otherwise, the stock rebounds.

And in light of yesterday's latest news, in which Germany's Bild reported that Deutsche bank CEO John Cryan "failed to reach an agreement with the US Justice Department", it is possible that on Monday the stock will have an adverse reaction, which also means that attention will once again turn to what JPM believes is the biggest concern for investors for the world's most systematically risky bank.

So what is the embattled German lender, the same one which two weeks ago at the depth of its stock plunge blamed its woes on market " speculators", to do?

As the Chief Risk Officer Stuart Lewis told Welt am Sonntag in an interview published on Sunday, it was to take a preemptive stance on market concerns about Deutsche Bank's staggering derivative position.

Speaking to the German publication, Lewis said that Deutsche Bank continues to cut back the size of its derivatives book, "which is not as risky as investors may believe." Well, not just investors: it also includes that "other" bank with some $53.3 trillion in derivatives, JPMorgan.

"The risks in our derivatives book are massively overestimated," Lewis told the paper cited by Reuters. He said 46 trillion euros in derivatives exposure at Deutsche appeared large but reflected only the notional value of the contracts, while the bank's net exposure to derivatives was far lower, at around €41 billion.

"The 46 trillion euros figure sounds gigantic, but it is completely misleading. The real risk is far lower," Lewis said, adding that the level of risk on Deutsche Bank's books was in line with that seen at other investment banking peers. While he is largely correct about gross notional netting down to a vastly smaller number in a functioning, stable derivatives market in which there is no contagion and all counterparties continue to function during a Deutsche Bank "stress event", that assumption falls out of the window the moment a counterparty fails, and becomes even worse should any of the underlying derivative collateral be found to have been rehypothecated more than once, something not just we, but the BIS itself warned about in 2013.

But back to Deutsche Bank, whose Chief Risk Officer tried to further belay concerns of a derivative fiasco when he said that "we are trying to make our business less complex and are paring back our derivatives book. Parts of it were transferred into a non-core unit some years ago." While that is true, most of its exposure remains in the core unit (where the deposits are to be found), and what's worse, one wonders why DB hasn't had more success with derisking its gross notional derivative holdings, which still remain a substantial outlier within the European banking system.

More to the point, it is worth recalling that only two short months ago, on July 31, the same Stuart Lewis, when interviewed by Frankfurter Allgemeine said exactly the same thing, in an article titled "We are not dangerous"...

.. and promising that concern for the bank in the aftermath of the IMF report labeling it the most systematically risky bank in the world, was unfounded.

When asked if Deutsche Bank is indeed the most important net contributor to systemic risks, he replied:

“No, not at all. Only one IMF report has recently muddled up the situation: We are not dangerous. We are very relevant. Deutsche Bank is interwoven with the entire financial sector. We are one of the largest universal banks in the world. But to make it clear: Our house is stable. The balance sheet is healthy.”

When further asked if he can make this claim in good conscience, he said:

“Absolutely. Look at how we have capitalized the bank since the Financial Crisis. We have taken €115 billion in risks off the balance sheet and have €220 billion of liquidity. Concern for us is unfounded.”

Two months later it turned out that concern for us was, in fact, "founded."

Amusingly, when Wolf Richter pointed out Lewis' comments, he noted that "wisely, Deutsche Bank’s elephantine exposure to derivatives didn’t even come up. It’s better to silence the topic to death than to cause a panic with it."

Now, just over two months later, the topic has come up, and this time Stuart Lewis is scrambling to preempt concerns about the dozens of trillions in derivatives, using the same exact rhetoric: please ignore the elephant in the room; Deutsche Bank is fine.

But the biggest irony from Lewis' August appeal to investors was the following: “The good news is: the taxpayer does not have to step in; according to the new regulations for banks, bondholders will get hit first.” If anything, events over the past two weeks confirmed that this will not happen.

* * *

Still, perhaps an even more important story ahead of Monday's open is not Deutsche Bank's latest attempt to ease investor concerns about its balance sheet and trillions in derivatives, but Friday's report that global banking regulators are sticking to their guns on capital standards in the face of intense European pressure to soften planned rule-changes.

As Bloomberg reported on Friday, the Basel Committee on Banking Supervision will wrap up work on the post-crisis capital framework, known as Basel III, on schedule by the end of the year, William Coen, the regulator’s secretary general, said on Friday. Key elements criticized by European Union policy makers will be retained, according to the text of Coen’s remarks in Washington.

One flashpoint is a proposed new capital floor that caps the benefit banks can gain by measuring asset risk using their own models compared with a formula set by regulators. Coen said “discussions are still under way” on the floor, though Valdis Dombrovskis, the EU’s financial-services chief, called last month for it to be scrapped.

What this means is that as it wraps up Basel III, the regulator is under instructions not to increase overall capital requirements significantly in the process. That promise, first made in January, left open the possibility that individual countries or banks could face a marked increase.

“This is not an exercise in increasing regulatory capital requirements,” Coen said. “However, this does not mean that the minimum capital requirement for all banks will remain the same; variability in risk-weighted assets can only be reduced if there is some impact on the outlier banks.

So some banks which are genuinely outliers may face a significant increase in requirements as a result.”

Banks such as Deutsche Bank, which while not named can be inferred: among the most vocal opponents to a boost in overall capital levels is German Finance Minister Wolfgang Schaeuble who has insisted that the Basel Committee not only keep any overall increase in capital requirements to a minimum, but also ensure the rules have no “particularly negative consequences for specific regions,” such as Europe. Or rather, Germany.

In the current round of talks, Europe and Japan are keen to retain risk-sensitivity in the capital rules, including the use of models where appropriate. The European Commission, the EU’s executive arm, doesn’t believe capital floors are an “essential part of the framework,” Dombrovskis said. Europe also opposes the Basel Committee’s proposal to bar some asset classes from modeling entirely, and objects to the calibration of risk-weights in the standardized approach to credit risk.

Why is Europe, and its biggest bank, "keen" on retaining the existing model-based framework which would not require substantial capital increases for risky banks, of which Deutsche Bank is at the very top?

Simple: the largest German lender is already notably undercapitalized, and any further capital needs would only lead to further pressure on its stock, forcing it to seal even more equity when the inevitable capital raising moment arrives; it also means that the models used by DB's risk managers are likely to materially misrepresent the bank's true value at risk, not only when it comes to its loan book, and especially Level II and III assets, but more importantly, its derivative book, where while we appreciate

Mr. Lewis' assertion that the bank's €46 trillion in gross notional derivatives collapse to just €41 billion, we would be far more interested in seeing the

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From: Worswick10/16/2016 3:37:00 PM
1 Recommendation   of 2741
The dollar the now most fungible financial instrument ... for a bit anywhere ....

The (Dollar) Straw That Breaks The Camel's Back Of Political Correctness

by Tyler Durden
Oct 16, 2016 1:01 PM


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Submitted by Eugen von Bohn-Bawerk via,

One year ago we showed the following chart to explain the relative strong dollar that was on everyone’s mind at the time. With a second leg higher in the US dollar imminent, this particular chart will be more important than ever. Claims to dollars, such as demand and time deposits, or even more opaque money-like products created by the shadow banking system is just that, a claim or derivative on the final mean of payment, namely base money. When trust breaks down and owners of dollar claims rush to exchange them for actual dollars, the price of dollars goes up in relation to goods and services because there are not enough dollars to satisfy all the claims outstanding.

In monetary terms deflation takes hold and there are no market mechanism that can clear this anomaly (because it was never a proper market to begin with) as the price of the underlying and the derivative will move in perfect proportion to each other. Enter the Federal Reserve with their QE programs, id est base money creation, to meet dollar demand and stem the ensuing panic.

Unfortunately, something even more sinister has been going on with dollar derivatives internationally. In addition to domestic claims to dollars, there are a massive market for dollars internationally called Eurodollars. Foreign banks, particularly European banks, help global investors, merchants, exporters and importers trade and settle in USD, with very few actual dollars present. As long as everybody trust each other, this highly efficient system can operate smoothly with a high degree of leverage. Money market funds and filthy rich commodity exporters have a long tradition for placing their money in these markets allowing the financial system to benefit greatly.

In every over-leveraged system, small changes can have great ripple effects. Money market reform fully implemented last week forced money markets to float their NAV and implement liquidity fees and suspension gates as means to prevent a run on the fund; unless these are invested in government securities of course. If they do, the new rules do not apply. Therefore, it is of no surprise that money has rushed out en masse from prime funds and subsequently into government money market funds. Implementation of the new rules happened just as oil exporters from the Middle East and other SWFs had to pull out from money markets to fund rapidly rising twin deficits. The result has been a notably increase in the TED spread, signalling scarcity in available dollar funding internationally.

Troubled banks, like Deutsche Bank and the rest of its brethren in Europe, undercapitalized, burdened by an overzealous DoJ with a “you-tax-Apple-we-take-down-your-banks” attitude and funded mostly by AT1 CoCo bonds have felt the effects of higher funding costs more than any. A scramble for dollars are likely to ensue when one of the European behemoths fall.

The USD is coincidentally perfectly positioned for a breakout from an increasingly narrow channel. Last year, in November of 2015 it broke out from a similar channel on back of rational asset allocation based on the upcoming Federal Reserve rate hike in December of that year. Further four hikes were communicated in 2016, but so far none as materialized. The USD thus fell back into a new channel. This time it will be pushed up, not from rational expectations of more favorable yield differentials, but from fear as dollar scarcity increases. The Fed may or may not raise rate in December, we do not care much as the US is heading straight into recession (as we have warned here several times) and that is when the stampede will begin in earnest.

A massively overleveraged financial system is once again on the brink. All it take is a second leg higher in the USD and European banking is dead in the water with monstrosities like Deutsche Bank being one of the most interconnected institutions on the planet. Knock-on effects on the global economy will be severe as dollar funding dries up. The USD SWAP line between ECB and the Federal Reserve will quickly reach a trillion dollars and the newly elected US Congress will throw hissy-fits as they are essentially asked to bail out the international Eurodollar market.

Political risk in Europe are on the rise as the once prosperous middle class are forgotten, both financially (cannot compete with low cost Chinese workers) and culturally (if you do not like what is happening to your neighborhood you are a deplorable and irredeemable racist bigot and we do not need to listen to you).

Losing life savings as deposits are bailed in left and right will be the straw that bring down any pretense of political correctness.

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From: Sam12/15/2016 10:42:23 AM
   of 2741
U.S. banks must pay up to $2 bln more per year to shield Wall Street -Fed
REUTERS 10:40 AM ET 12/15/2016

Symbol Last Price Change
56 +1.3 (+2.38%)
86.059 +1.329 (+1.57%)
23.12 +0.45 (+1.99%)
60.16 +0.71 (+1.19%)
80.08 +0.7 (+0.88%)
48.48 +0.41 (+0.85%)
43.171 +0.311 (+0.73%)
243.955 +4.025 (+1.68%)
QUOTES AS OF 10:40:32 AM ET 12/15/2016

WASHINGTON, Dec 15 (Reuters) - The largest U.S. banks will have to pay as much as $2 billion more a year to insure against a future market collapse, the U.S. Federal Reserve said on Thursday, as it outlined a new rule designed to further protect the financial system.

The rule demands Wall Street holds more debt that could be converted to shareholder equity if a bank is pushed to bankruptcy. Investor-owned stock is the main buffer against a bank failure.

Half of the eight largest U.S. banks would need to issue roughly $50 billion in fresh debt to satisfy the new standard, known as Total Loss Absorbing Capacity (TLAC), according to Fed estimates.

Taken together, the eight banks' overall annual funding costs are set to increase by between $680 million and $2 billion, the Fed has said.

Fed officials declined to identify the four banks that lack sufficient debt. Wells Fargo & Co(WFC) said in November it envisioned issuing at least an additional $29 billion in debt to satisfy the rule.

Large banks were already making significant strides to satisfy the new rule, Fed officials said.

The final rule issued on Thursday largely upholds a draft issued early this year, but with a few concessions to the industry.

Much existing debt will be counted towards satisfying the new rule, the Fed said, a process known as 'grandfathering'.

"This grandfathering should significantly reduce the burden of complying with the requirements," the Fed said in a statement.

Besides Wells Fargo(WFC), the banks expected to satisfy the new rule are JPMorgan Chase & Co(JPM), Bank of America Corp(BAC) , Citigroup Inc(C), State Street Corp(STT), Bank of New York Mellon Corp(BK), Morgan Stanley(MS) and Goldman Sachs Group Inc.(GS)

Some of the largest subsidiaries of foreign banks must also satisfy TLAC. (Reporting By Patrick Rucker in Washington; Additional reporting by Dan Freed and David Henry in New York; Editing by Bill Rigby)

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