|From: Sam||1/31/2021 12:46:18 AM|
|This is from Dealbook's newsletter. The formatting can't be helped. Here is the URL for easier reading:|
Rules for renegades
|There is a lot going on in crypto right now. Some say too much, too fast. Others complain that the United States is too slow, falling behind because its rules are outdated and unfit to address the inventions that blockchain technology has created.|
|But markets and regulators have been here before. “The basic, overarching issue is that digital asset innovation has outpaced our regulatory framework,” said Timothy Massad of Harvard, who is formerly the chairman of the Commodity Futures Trading Commission and has written extensively about crypto asset oversight. “That’s not unusual. There’s always a tension between innovation and regulation.”|
|It is not problematic, he said, unless regulators wait for a crisis and then respond in a rush, which they often do. “Regulation won’t stop innovation,” Mr. Massad said, “unless it’s done badly.”|
|But there is reason to believe the Biden administration’s financial regulators will be crypto savvy, based largely on the fact that Gary Gensler, the nominee for chairman of the Securities and Exchange Commission, has taught courses on blockchain and digital currencies at M.I.T. Let’s drop in on a class to get a sense of him as a regulator …|
|Excerpts from an opening class in 2018 of the “ Blockchain and Money” course taught by Mr. Gensler at the M.I.T. Sloan School of Management:|
|Are cryptocurrencies commodities or securities? “It’s a moving target,” he said of one the biggest debates among crypto regulators (more on that below). In a “broad sense of what the S.E.C. is trying to accomplish,” he said, consider this: “Whenever you’re thinking about public policy, folks like myself who once was a regulator, we think in the ‘duck test.’ And then we secondarily think about the actual words in the congressional act. Where is the common sense? And if it quacks and walks like a duck, it’s probably a security.”|
|Regulators deal with start-ups and incumbents in different ways. In the fintech world, new challengers “take risks and beg for forgiveness, whereas incumbents tend to have to ask for permission,” Mr. Gensler said. This creates an “unlevel field,” but “I’m not crying for JPMorgan,” he added. “The big incumbents, they have their advantages.”|
|Robinhood is a “wonderful” app. When he asked the class if they had ever used the fee-free trading app, half of the students raised their hands. “If anybody is interested, show up and I’ll do office hours on how Robinhood commercializes your order flow,” he said. “But it’s a sort of wonderful app. Millennials love it.”|
|The S.E.C.: Ripple of uncertainty|
|Many of the things that Mr. Gensler lectured about will soon be applied in real-life regulatory scenarios, perhaps most immediately what to do about brokers straining to handle the trading volumes in heavily shorted stocks. For crypto, specifically, a priority will most likely be a case the S.E.C. filed late last month against Ripple Labs and two of its executives.|
|The agency accuses the execs and the company of having raised more than $1.3 billion since 2013 in unregistered securities offerings by selling the cryptocurrency XRP to investors. By not registering as a security, Ripple created an “information vacuum” for investors about how XRP was used to fund Ripple’s operations, the S.E.C. said.|
|The Ripple case is a moment of reckoning for many cryptocurrencies issued and distributed by companies or people, unlike Bitcoin, which is released via a decentralized network of computers and considered by most to be a commodity, which triggers fewer rules for buying and selling. To judge whether XRP is a security, the agency will apply the “Howey Test,” which refers to a Supreme Court case in 1946 involving a citrus farm in Florida.|
|The “complaint is historic, and not in a good way,” said Ripple’s defense counsel, Joseph Grundfest, a professor at Stanford Law and a former S.E.C. commissioner. The agency has “no coherent crypto strategy” and is imposing 20th-century precedent on 21st-century technology, he said. He declined to predict what Mr. Gensler’s crypto credentials might mean for the matter: “I’m not in the speculation business.”|
|Two other issues to watch at the S.E.C.:|
|Will it ever approve a Bitcoin exchange traded fund? Many have tried, and it would be a major move toward mainstreaming crypto investment.New rules for brokers holding digital assets. Last month, the agency requested input for custody regulations for cryptocurrencies that would address their “unique attributes.” The Blockchain Association, a trade group, was working on its submissions, but its executive director, Kristin Smith, said the crypto community was more worked up about rules proposed by the Treasury Department.|
|The Treasury: Riled up about reporting|
|This week, the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN, extended by 60 days the comment period for proposed reporting rules on digital wallet transactions that it says would prevent money laundering. First announced on Dec. 23, with a 15-day comment period, the move incited outrage in the crypto community. The regulator has twice relented, noting the “robust” engagement that came after what opponents called “midnight rulemaking” by Steven Mnuchin, the secretary of the Treasury at the time.|
|The incongruity between the treatment of cash and cryptocurrency under FinCEN’s proposal will inhibit adoption of cryptocurrency and invade the privacy of individuals. Yet, the rule fails to explain the difference in risk.|
|The procedural win doesn’t guarantee that the new secretary of the Treasury, Janet Yellen, will shift gears on the matter. At her confirmation hearing, she suggested that many cryptocurrency transactions were associated with illicit activity, which Ms. Smith of the Blockchain Association called “a very disappointing reaction.” In written testimony released later, Ms. Yellen offered a more nuanced take, saying regulators should “look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities.”|
|Chris Brummer, a professor at Georgetown Law and a “ fintech guru,” is in the running to become the next commissioner of the C.F.T.C. Picked for the same gig in 2016, his nomination was withdrawn by the Trump administration. Since then, Mr. Brummer has testified before Congress on blockchain policy, edited an online journal and book on crypto assets, and written a textbook, “ Fintech Law in a Nutshell.” He’s an expert, in other words.|
|But whoever takes over, “knowledge can’t fill the major regulatory gaps,” Mr. Massad, of Harvard, said. In his view, however crypto savvy the next financial regulators are, they can’t solve the problems that are raised by new technologies without a comprehensive law designed for digital assets. Otherwise, too much crypto activity will be left unregulated for too long.|
|A case in point, perhaps, is the civil enforcement action filed in the fall by the C.F.T.C., accusing BitMEX, a cryptocurrency exchange, of operating an unregistered trading platform selling crypto derivatives. It is accused of facilitating transactions that earned more than $1 billion in fees since 2014 without “the most basic compliance procedures.” BitMEX owes a reply next month.|
|The O.C.C.: Crypto comptrollers|
|The Office of the Comptroller of the Currency briefly had a crypto insider at its helm: Brian Brooks left his job as chief legal counsel at Coinbase to become O.C.C.’s acting chief for eight months. Among the achievements that he cited when stepping down earlier this month was helping to clarify “certain activities related to crypto assets” for federal bank regulations.|
|The President’s Working Group on Financial Markets, which features the heads of the Treasury, Fed, S.E.C. and C.F.T.C., sought his views on stablecoins — cryptocurrencies with steady values designed to be used as means of exchange — and the group’s statement seemed to bear his mark. It’s positive about the potential for digital tokens to “improve efficiencies, increase competition, lower costs and foster broader financial inclusion.”|
|Michael Barr, the dean of public policy at the University of Michigan who served as an assistant Treasury secretary under the Obama administration, is a leading candidate for the top O.C.C. job. He was once a member of Ripple’s board (he left before it was sued by the S.E.C.) and had advised a fintech trade group. The O.C.C. decides whether to grant banking charters to new firms, like fintech and crypto companies, and his ties to these firms have led some progressives to lobby against his appointment.|
|This week, Representatives Jamaal Bowman of New York and Ayanna Pressley of Massachusetts urged President Biden to nominate Mehrsa Baradaran, a banking law scholar at U.C. Irvine, to lead the agency and prioritize racial and economic equity. In Senate testimony in 2019, Ms. Baradaran said, “I do not believe cryptocurrency is the best solution to the problems of financial inclusion and equity in banking.”|
|What three crypto market watchers predict for rules and regulators in 2021:|
|?? Petal Walker, special counsel at Wilmer Hale, formerly a chief counsel at the C.F.T.C.|
|Wants: A robust regulator to simplify the process for entrepreneurs.|
Dreads: Fear-driven regulation that’s not data-driven and stifles innovation.
Person to watch: Mr. Gensler. On the Hill, the S.E.C. is seen as the top cop on the beat.
|?? Nikhilesh De, regulatory reporter at CoinDesk|
|Expects: Scrutiny on decentralized finance, or DeFi, after its banner year in 2020.|
Suspects: Approving the FinCEN wallet rules will deter U.S. crypto businesses.
Person to watch: Mr. Gensler. The industry claims to seek clarity. He may provide it.
|?? Timothy Massad, senior fellow at Harvard’s Kennedy School, formerly the chairman of the C.F.T.C.|
Wishes: Nonbank payment systems reliant on digital assets get more scrutiny.
Rejects: A piecemeal approach to crypto oversight.
Person to watch: Overall strategy, not specific individuals.
|RecommendKeepReplyMark as Last Read|
|From: The Ox||3/30/2021 10:01:26 AM|
One of World’s Greatest Hidden Fortunes Is Wiped Out in DaysBy
March 29, 2021, 4:30 PM PDTUpdated on March 29, 2021, 5:26 PM PDT
Bill Hwang’s vast wealth and wagers were well-kept secrets
Wall Street is still trying to figure out how much he’s lost
Archegos Is Like a Giant Rock Thrown Into the Market: Virtu Financial CEO
WATCH: Doug Cifu, CEO of Virtu Financial, discusses the turmoil at Archegos Capital Management.
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From his perch high above Midtown Manhattan, just across from Carnegie Hall, Bill Hwang was quietly building one of the world’s greatest fortunes.
Even on Wall Street, few ever noticed him -- until suddenly, everyone did.
Bill Hwang in 2013.
Photographer: Emile Wamsteker/Bloomberg
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Hwang and his private investment firm, Archegos Capital Management, are now at the center of one of the biggest margin calls of all time -- a multibillion-dollar fiasco involving secretive market bets that were dangerously leveraged and unwound in a blink.
Hwang’s most recent ascent can be pieced together from stocks dumped by banks in recent days -- ViacomCBS Inc., Discovery Inc. GSX Techedu Inc., Baidu Inc. -- all of which had soared this year, sometimes confounding traders who couldn’t fathom why.
One part of Hwang’s portfolio, which has been traded in blocks since Friday by Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co., was worth almost $40 billion last week. Bankers reckon that Archegos’s net capital -- essentially Hwang’s wealth -- had reached north of $10 billion. And as disposals keep emerging, estimates of his firm’s total positions keep climbing: tens of billions, $50 billion, even more than $100 billion.
It evaporated in mere days.
“I’ve never seen anything like this -- how quiet it was, how concentrated, and how fast it disappeared,” said Mike Novogratz, a career macro investor and former partner at Goldman Sachs who’s been trading since 1994. “This has to be one of the single greatest losses of personal wealth in history.”
Late Monday in New York, Archegos broke days of silence on the episode.
“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” Karen Kessler, a spokesperson for the firm, said in an emailed statement. “All plans are being discussed as Mr. Hwang and the team determine the best path forward.”
The cascade of trading losses has reverberated from New York to Zurich to Tokyo and beyond, and leaves myriad unanswered questions, including the big one: How could someone take such big risks, facilitated by so many banks, under the noses of regulators the world over?
One part of the answer is that Hwang set up as a family office with limited oversight and then employed financial derivatives to amass big stakes in companies without ever having to disclose them. Another part is that global banks embraced him as a lucrative customer, despite a record of insider trading and attempted market manipulation that drove him out of the hedge fund business a decade ago.
Boom and BustThe value of the portfolio of positions block traded dropped 46% in the last week, erasing 2021 gains.
A disciple of hedge-fund legend Julian Robertson, Sung Kook “Bill” Hwang shuttered Tiger Asia Management and Tiger Asia Partners after settling an SEC civil lawsuit in 2012 accusing them of insider trading and manipulating Chinese banks stocks. Hwang and the firms paid $44 million, and he agreed to be barred from the investment advisory industry.
He soon opened Archegos -- Greek for “one who leads the way” -- and structured it as a family office.
Family offices that exclusively manage one fortune are generally exempt from registering as investment advisers with the U.S. Securities and Exchange Commission. So they don’t have to disclose their owners, executives or how much they manage -- rules designed to protect outsiders who invest in a fund. That approach makes sense for small family offices, but if they swell to the size of a hedge fund whale they can still pose risks, this time to outsiders in the broader market.
“This does raise questions about the regulation of family offices once again,” said Tyler Gellasch, a former SEC aide who now runs the Healthy Markets trade group. “The question is if it’s just friends and family why do we care? The answer is that they can have significant market impacts, and the SEC’s regulatory regime even after Dodd-Frank doesn’t clearly reflect that.”
Valuable CustomerArchegos established trading partnerships with firms including Nomura Holdings Inc., Morgan Stanley, Deutsche Bank AG and Credit Suisse Group AG. For a time after the SEC case, Goldman refused to do business with him on compliance grounds, but relented as rivals profited by meeting his needs.
The full picture of his holdings is still emerging, and it’s not clear what positions derailed, or what hedges he had set up.
One reason is that Hwang never filed a 13F report of his holdings, which every investment manager holding more than $100 million in U.S. equities must fill out at the end of each quarter. That’s because he appears to have structured his trades using total return swaps, essentially putting the positions on the banks’ balance sheets. Swaps also enable investors to add a lot of leverage to a portfolio.
Morgan Stanley and Goldman Sachs, for instance, are listed as the largest holders of GSX Techedu, a Chinese online tutoring company that’s been repeatedly targeted by short sellers. Banks may own shares for a variety of reasons that include hedging swap exposures from trades with their customers.
‘Unhappy Investors’Goldman increased its position 54% in January, according to regulatory filings. Overall, banks reported holding at least 68% of GSX’s outstanding shares, according to a Bloomberg analysis of filings. Banks held at least 40% of IQIYI Inc, a Chinese video entertainment company, and 29% of ViacomCBS -- all of which Archegos had bet on big.
“I’m sure there are a number of really unhappy investors who have bought those names over the last couple of weeks,” and now regret it, Doug Cifu, chief executive officer of electronic-trading firm Virtu Financial Inc., said Monday in an interview on Bloomberg TV. He predicted regulators will examine whether “there should be more transparency and disclosure by a family office.”
Big With BanksBanks reported huge stakes in some of the companies in the Archegos portfolio.
Source: SEC filings, Bloomberg
Without the need to market his fund to external investors, Hwang’s strategies and performance remained secret from the outside world. Even as his fortune swelled, the 50-something kept a low profile. Despite once working for Robertson’s Tiger Management, he wasn’t well-known on Wall Street or in New York social circles.
Hwang is a trustee of the Fuller Theology Seminary, and co-founder of the Grace and Mercy Foundation, whose mission is to serve the poor and oppressed. The foundation had assets approaching $500 million at the end of 2018, according to its latest filing.
“It’s not all about the money, you know,” he said in a rare interview with a Fuller Institute executive in 2018, in which he spoke about his calling as an investor and his Christian faith. “It’s about the long term, and God certainly has a long-term view.”
His extraordinary run of fortune turned early last week as ViacomCBS Inc. announced a secondary offering of its shares. Its stock price plunged 9% the next day.
The value of other securities believed to be in Archegos’ portfolio based on the positions that were block traded followed.
By Thursday’s close, the value of the portfolio fell 27% -- more than enough to wipe out the equity of an investor who market participants estimate was six to eight times levered.
“You have to wonder who else is out there with one of these invisible fortunes,” said Novogratz. “The psychology of all that leverage with no risk management, it’s almost nihilism.”
— With assistance by Benjamin Bain, Benjamin Stupples, Erik Schatzker, Gillian Tan, David Gillen, Donal Griffin, and Emily Cadman
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|To: The Ox who wrote (2752)||3/30/2021 8:24:30 PM|
The Archegos Capital Management hedge fund implosion has, thus far, delivered billions of dollars in losses to the shareholders of global banks Credit Suisse and Nomura, whose market values have plummeted; done serious reputational damage to Goldman Sachs and Morgan Stanley, both of whom are allowed to own federally-insured banks even after they came close to blowing themselves up in 2008 and surely would have without gargantuan secret bailouts from the Federal Reserve; cut the market value of ViacomCBS in half; dropped the market value of Discovery by 40 percent; shaved billions of dollars off the market value of major Wall Street banks yesterday as rumors ran wild about who is hiding losses; and raised critical questions, once again, about the competency of the Federal Reserve to supervise these federally-insured trading casinos.
The Archegos meltdown has done one more thing. It has reminded the readers of Wall Street On Parade that our decade of hand-wringing over the dangerous brew of allowing federally-insured, deposit-taking banks to own tens of trillions of dollars in opaque, over-the-counter derivatives remains the biggest threat to the financial stability of the United States.
What has been pieced together thus far, and not denied by any of the parties involved, is as follows:
After pleading guilty to wire fraud involving insider trading in 2012 on behalf of another hedge fund he founded, Sung Kook “Bill” Hwang sometime thereafter quietly founded a “family office,” a hedge fund that is allowed to decide for itself if it needs to register with the Securities and Exchange Commission. There are no filings with the SEC to suggest it knows Archegos exists or how it operates and there are no 13-F filings with the SEC to show the dangerous levels of stock exposure and leverage it had amassed through derivatives contracts with some of the biggest banks on Wall Street. This, of course, raises the question as to just how much of this booming stock market is based on secret derivative contracts between dodgy hedge funds and federally-insured banks.
Bloomberg News reported yesterday that Archegos may have leveraged $5 to $10 billion in assets up to $50 billion in exposure. Instead of buying stock outright or buying stock options on exchanges, according to Bloomberg News and other media outlets, Archegos was using private derivative contracts (over-the-counter) to obtain tens of billions of dollars in stock exposure. A big chunk of that exposure was in shares of ViacomCBS and Discovery as well as Chinese tech stocks. As those positions had to be unwound as Archegos was unable to meet margin calls, ViacomCBS tanked over 50 percent with Discovery down more than 40 percent. (See chart above.)
According to the Financial Times, the five global banks known thus far to have supplied leverage to Archegos are Goldman Sachs, Morgan Stanley, Credit Suisse, Nomura and UBS. The Wall Street Journal reports that Deutsche Bank was also involved in dumping stock related to Archegos’ holdings.
Nomura has released a statement acknowledging a potential $2 billion in losses. Credit Suisse has released this statement:
“A significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks. Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions. While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first quarter results, notwithstanding the positive trends announced in our trading statement earlier this month. We intend to provide an update on this matter in due course.”
As of 8:30 this morning, Goldman Sachs, Morgan Stanley and UBS have not publicly commented on any potential losses to their respective firms.
By the close of trading yesterday in New York, Nomura had lost 14.07 percent of its market value; Credit Suisse notched a loss of 11.5 percent; Deutsche Bank was down 3.24 percent; Morgan Stanley had lost 2.63 percent. Goldman Sachs, after anonymously leaking to the media that its losses would likely be “immaterial,” closed yesterday with a loss of just 0.51 percent.
The number of shares traded in ViacomCBS Class B in the past four trading sessions suggests that there are a lot more undisclosed losses out there.
ViacomCBS Class B typically trades about 27 million shares a day. But the volume in the stock over the past few trading sessions grew to 8 times that amount as the share price logged staggering losses. On Wednesday, ViacomCBS’ share volume was 89.8 million; Thursday it traded 44.2 million shares; Friday’s volume spiked to 216.6 million shares while Monday’s volume reached 213.57 million shares.
Making the situation even more striking, the prospectus filed with the SEC by ViacomCBS for a secondary offering last week to sell approximately $1.67 billion of its Class B common stock and approximately $1 billion of its Series A Mandatory Convertible Preferred stock, had six Joint Book-Running Managers, two of which include – wait for it – Morgan Stanley (listed as number one) and Goldman Sachs (listed as number four). The underwriters priced the common stock at $85 a share. The press release for the deal said it was expected to close last Friday, March 26. That’s the day that the stock traded in the open market at a high of $66.27 and a low of $39.81 and Morgan Stanley and Goldman Sachs were dumping shares of ViacomCBS because of their involvement with the highly leveraged hedge fund, Archegos Capital Management.
As we have stated repeatedly, this market structure is the market structure from hell.
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|From: Worswick||4/16/2021 9:39:16 AM|
|It's about that time again for an overview as to where we are in derivative land .....hello to you all!|
JPMorgan’s Federally-Insured Bank Holds $2.65 Trillion in Stock Derivatives; How Did It Avoid the Archegos Blowup?
“This raises the serious question as to whether the Senate Banking and House Financial Services Committees should be investigating the gamification of markets or the monetization of the stock market via Wall Street’s ownership of federally insured deposits.”
For the Martens's extra ordinary work ... we should all thank them for years of posts.
They are that rare city on a hill in "the great looting of this once fair and great country: My italics.
By Pam Martens and Russ Martens: April 5, 2021 ~
In late March, the Office of the Comptroller of the Currency (OCC) released its quarterly report on “Bank Trading and Derivatives Activities.” Graph 15 of the report shows that using data submitted by banks on their form RC-R of their call reports, JPMorgan Chase’s federally insured bank had exposure to $2.65 trillion in notional equity (stock) derivatives as of December 31, 2020. (Notional means face amount.)
That’s a stunning figure for the largest federally-insured bank in the United States to have in exposure to the stock market. But more stunning is the fact that according to the OCC, JPMorgan Chase’s equity derivative contracts represent 63 percent of the total $4.197 trillion of equity derivative contracts held by all federally insured banks and savings associations in the United States. To put it another way, there were 5,033 federally insured banks and savings associations in the United States as of September 30, 2020 according to the Federal Deposit Insurance Corporation (FDIC). But just one of them, JPMorgan Chase, accounts for 63 percent of all equity derivatives. (See Editor’s Note below.)
Making the situation even more jaw-dropping, of the $2.65 trillion that JPMorgan Chase holds in equity derivative contracts, 72 percent of them are private, bilateral contracts, known as over-the-counter contracts. This means that federal regulators likely have little to no knowledge of the terms of those contracts; who the counter-party is to JPMorgan Chase; if that counter-party has also obtained leverage under similar contracts at other Wall Street banks and is at risk of blowing up the whole of Wall Street if it implodes. (Think Citigroup, AIG and Lehman Brothers in 2008.)
As to just how effectively the Obama-era Dodd-Frank financial reform legislation of 2010 actually reined in risk on Wall Street, the following statistic offers significant insight: According to OCC data, at the height of the financial crisis in the fourth quarter of 2008, equity derivative contracts held by federally insured banks totaled $2.2 trillion, versus $4.197 trillion today.
This raises the serious question as to whether the Senate Banking and House Financial Services Committees should be investigating the gamification of markets or the monetization of the stock market via Wall Street’s ownership of federally insured deposits.
Given the outsized exposure that JPMorgan Chase has to equity derivatives and its history of high-risk dealings that have backfired, it strikes us as peculiar that the bank has not released a statement regarding its exposure (or non-exposure) to losses from the recent blowup of the hedge fund Archegos Capital Management as a result of its highly-leveraged equity derivative contracts with some of the biggest banks on Wall Street.
Given JPMorgan Chase’s five felony counts over the past seven years for its wild risk appetite, one has to wonder if there has been no mention by it of Archegos’ losses because it has gotten better at managing risk or simply better at managing the New York media.
One notable fact stands out. According to JPMorgan Chase’s 13F filing with the Securities and Exchange Commission for the period ending December 31, 2020, JPMorgan Chase held 23.9 million shares of Discovery Inc. common stock – one of the key stock positions that collapsed in price in late March and helped to bring down the Archegos hedge fund. According to press reports, Archegos likely owned exposure to Discovery Inc. via an equity derivatives contract with a major Wall Street bank.
Editor’s Note: The graph above does not include equity derivatives held at other parts of the financial institution. The OCC data in the graph represents just the federally insured bank. For example, Morgan Stanley’s bank holding company had $31.9 trillion in total notional derivatives of all kinds at the various parts of its bank holding company as of December 31, 2020 but only $66 billion at its federally insured bank, according to OCC data available elsewhere in the OCC report linked above. (See Table 2 in the Appendix.) The OCC does not break out equity derivative data for other parts of the bank holding company; just for the federally insured bank.
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|To: Worswick who wrote (2754)||4/16/2021 5:56:09 PM|
|Interesting tale about Citadel/Rehypothecation|
TL;DR- Citadel and friends have shorted the treasury bond market to oblivion using the repo market. Citadel owns a company called Palafox Trading and uses them to EXCLUSIVELY short & trade treasury securities. Palafox manages one fund for Citadel - the Citadel Global Fixed Income Master Fund LTD. Total assets over $123 BILLION and 80% are owned by offshore investors in the Cayman Islands. Their reverse repo agreements are ENTIRELY rehypothecated and they CANNOT pay off their own repo agreements until someone pays them, first. The ENTIRE global financial economy is modeled after a fractional reserve system that is beginning to experience THE MOTHER OF ALL MARGIN CALLS.
THIS is why the DTC and FICC are requiring an increase in SLR deposits. The madness has officially come full circle.
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|From: Worswick||4/19/2021 9:02:33 AM|
|Fun Facts |
The $2.3 Quadrillion Global Timebomb
BY TYLER DURDENMONDAY, APR 19, 2021 Egon von Greyerz via GoldSwitzerland.com,
Credit Suisse is hours from collapse and the consequences could be a systemic failure of the financial system...
Disappointingly, my dream last night stopped there. So unfortunately I didn’t experience what actually happened.
As I warned in last week’s article on Archegos and Credit Suisse, investment banks have created a timebomb with the $1.5 quadrillion derivatives monster.
A few years ago, the BIS (Bank of International Settlement) in Basel reduced the $1.5 quadrillion to $600 trillion with a pen stroke. But the real gross figure was still $1.5q at the time. According to my sources, the real figure today is probably over $2 quadrillion.
A major part of the outstanding derivatives are OTC (over the counter) and hidden in off balance sheet special purpose vehicles.
LEVERAGED ASSETS JUST GO UP IN SMOKE
The $30 billion in Archegos derivatives that went up in smoke over a weekend is just the tip of the iceberg. The hedge fund Archegos lost everything and the normal uber-leveraged players Goldman Sachs, Morgan Stanley, Credit Suisse, Nomura etc lost at least $30 billion.
These investment banks are making casino bets that they can’t afford to lose. What their boards and top management don’t realise or understand is that the traders, supported by easily manipulated risk managers, are betting the bank on a daily basis.
Most of these ludicrously high bets are in the derivatives market. The management doesn’t understand how they work or what the risks are and the account managers and traders can bet billions on a daily basis with no skin in the game but massive potential upside if nothing goes wrong.
DEUTSCHE BANK – DERIVATIVES 600X EQUITY
But we are now entering an era when things will go wrong. The leverage is just too high and the bets totally out of proportion to the equity.
Just take the notorious Deutsche Bank (DB) that has outstanding derivatives of €37 trillion against total equity of €62 billion. Thus the derivatives position is 600X the equity.
Or to put it in a different way, the equity is 0.17% of the outstanding derivatives. So a loss of 0.2% on the derivatives will wipe the share capital and the bank out!
Now the DB risk managers will argue that the net derivatives position is just a fraction of the €37 trillion at €20 billion. That is of course nonsense as we saw with Archegos when a few banks let $30 billion over a weekend.
Derivatives can only be netted down on the basis that counterparties pay up. But in a real systemic crisis, counterparties will disappear and gross exposure will remain gross.
So all that netting doesn’t stand up to real scrutiny. But it is typical for today’s casino banking world when depositors, shareholders and governments take all the downside risk and the management all the upside.
So let us look at the global risk picture in the financial system:
The $2.3 quadrillion above is what the world is exposed to when this timebomb explodes.
That is the total sum of global debt, derivatives and unfunded liabilities. When all the dominos start falling, and no one can meet their obligations, this is what governments are left to finance.
Yes, they will print this money and much more as deficits mount exponentially due to collapsing currencies. But the MMT (Modern Monetary Theory) clowns will then find out that printed money rightfully has ZERO value.
If these clowns studied history they would learn that MMT has never worked. Just check the Roman Empire 180-280 AD, France in the early 18th century, or the Weimar Republic, Zimbabwe, Argentina and Venezuela in the 19th and 20th centuries.
So when Fiat money dies, how much gold is required to repair the damage?
If we look at the cube below with all the gold ever produced in history, we see that it is 198,000 tonnes valued at $11 trillion.
Below the cube the total central bank and investment gold is shown. This amounts to 77,000 tonnes or $4.3 trillion. That sum represents 0.2% of the total debt and liabilities of $2.3 quadrillion as shown in the Timebomb.
The $4.3 trillion gold value is at a gold price of $1,750 per ounce. This minuscule 0.2% of liabilities obviously is far too small to support global debt. A 20% gold backing of total liabilities would be a minimum.
That would be 100X the current 0.2% or a gold price of $175,000.
I am not forecasting this level or saying that it is likely to happen. All I am doing is looking at the total risk that the world is facing and relating it to the only money that will survive.
Also, measuring the gold price in dollars serves no purpose because when/if this scenario happens, the dollar will be worthless and the gold price measured in worthless dollars at infinity.
FOCUS ON WEALTH PRESERVATION
Rather than focusing on a potential gold price measured in dollars, investors should worry about preserving their wealth in real assets held outside a bankrupt financial system.
Regardless of what price gold and silver reach, history proves that it is the ultimate form of wealth preservation.
It will not be different this time. Therefore, in the coming crisis, precious metals will be the best insurance to hold as protection against unprecedented global risk.
Gold’s rise since 2000 in no way reflects the massive money printing we have seen in this century.
Investors have the following choice:
1. Either they follow the coming crash in bubble assets like stocks, property and bonds all the way to the bottom which is likely to be 75-95% lower in real terms (measured in gold).
2. Or they protect their wealth in physical precious metals, stored outside a fractured financial system.
As always, history gives the answer as to which path to take.
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