Major Problems Announced At One Of The Largest Too Big To Fail Banks In The United States

Wells FargoDo you remember when our politicians promised to do something about the “too big to fail” banks?  Well, they didn’t, and now the chickens are coming home to roost.  On Thursday, it was announced that one of those “too big to fail” banks, Wells Fargo, has been slapped with 185 million dollars in penalties.  It turns out that for years their employees had been opening millions of bank and credit card accounts for customers without even telling them.  The goal was to meet sales goals, and customers were hit by surprise fees that they never intended to pay.  Some employees actually created false email addresses and false PIN numbers to sign customers up for accounts.  It was fraud on a scale that is hard to imagine, and now Wells Fargo finds itself embroiled in a major crisis.

There are six banks in America that basically dwarf all of the other banks – JPMorgan Chase, Citibank, Bank of America, Wells Fargo, Morgan Stanley and Goldman Sachs.  If a single one of those banks were to fail, it would be a catastrophe of unprecedented proportions for our financial system.  So we need these banks to be healthy and running well.  That is why what we just learned about Wells Fargo is so concerning…

Employees of Wells Fargo (WFC) boosted sales figures by covertly opening the accounts and funding them by transferring money from customers’ authorized accounts without permission, the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency and Los Angeles city officials said.

An analysis by the San Francisco-headquartered bank found that its employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers, the officials said. Many of the transfers ran up fees or other charges for the customers, even as they helped employees make incentive goals.

Wells Fargo says that 5,300 employees have been fired as a result of this conduct, and they are promising to clean things up.

Hopefully they will keep their word.

It is interesting to note that the largest shareholder in Wells Fargo is Berkshire Hathaway, and Berkshire Hathaway is run by Warren Buffett.  There has been a lot of debate about whether or not this penalty on Wells Fargo was severe enough, and it will be very interesting to hear what he has to say about this in the coming days…

Wells Fargo is the most valuable bank in America, worth just north of $250 billion. Berkshire Hathaway (BRKA), the investment firm run legendary investor Warren Buffett, is the company’s biggest shareholder.

“One wonders whether a penalty of $100 million is enough,” said David Vladeck, a Georgetown University law professor and former director of the Federal Trade Commission’s Bureau of Consumer Protection. “It sounds like a big number, but for a bank the size of Wells Fargo, it isn’t really.”

After the last crisis, we were told that we would never be put in a position again where the health of a single “too big to fail” institution could threaten to bring down our entire financial system.

But our politicians didn’t fix the “too big to fail” problem.

Instead it has gotten much, much worse.

Back in 2007, the five largest banks held 35 percent of all bank assets.  Today, that number is up to 44 percent

Since 1992, the total assets held by the five largest U.S. banks has increased by nearly fifteen times! Back then, the five largest banks held just 10 percent of the banking industry total. Today, JP Morgan alone holds over 12 percent of the industry total, a greater share than the five biggest banks put together in 1992.

Even in the midst of the global financial crisis, the largest U.S. banks managed to increase their hold on total bank industry assets. The assets held by the five largest banks in 2007 – $4.6 trillion – increased by more than 150 percent over the past 8 years. These five banks went from holding 35 percent of industry assets in 2007 to 44 percent today.

Meanwhile, nearly 2,000 smaller institutions have disappeared from our financial system since the beginning of the last crisis.

So the problem of “too big to fail” is now larger than ever.

Considering how reckless these big banks have been, it is inevitable that one or more of them will fail at some point.  When that takes place, it will make the collapse of Lehman Brothers look like a Sunday picnic.

And with each passing day, the rumblings of a new financial crisis grow louder.  For example, this week we learned that commercial bankruptcy filings in the United States in August were up a whopping 29 percent compared to the same period a year ago…

In August, US commercial bankruptcy filings jumped 29% from a year ago to 3,199, the 10th month in a row of year-over-year increases, the American Bankruptcy Institute, in partnership with Epiq Systems, reported today.

There’s money to be made. While stockholders and some creditors get raked over the coals, lawyers make a killing on fees. And some folks on the inside track, hedge funds, and private equity firms can make a killing picking up assets for cents on the dollar.

Companies are going bankrupt at a rate that we haven’t seen since the last financial crisis, but nobody seems concerned.

Back in 2007 and early 2008, Federal Reserve Chair Ben Bernanke, President Bush and a whole host of “experts” assured us that everything was going to be just fine and that a recession was not coming.

Today, Federal Reserve Chair Janet Yellen, Barack Obama and a whole host of “experts” are assuring us that everything is going to be just fine and that a recession is not coming.

I hope that they are right.

I really do.

But there is a reason why so many firms are filing for bankruptcy, and there is a reason why so many Americans are getting behind on their auto loans.

Our giant debt bubble is beginning to burst, and this is going to cause a tremendous amount of financial chaos.

Let us just hope that the “too big to fail” banks can handle the stress this time around.

This Is For The ‘Nothing Is Happening’ Crowd…

Wake Up - Public DomainA lot of people out there expected something to happen in September that did not ultimately happen.  There were all kinds of wild theories floating around, and many of them had no basis in reality whatsoever.  But without a doubt, some very important things did happen in September.  As I warned about ahead of time, we are witnessing the most significant global financial meltdown since the end of 2008.  All of the largest stock markets in the world are crashing simultaneously, and so far the amount of wealth that has been wiped out worldwide is in excess of 5 trillion dollars.  In addition to stocks, junk bonds are also crashing, and Bank of America says that it is a “slow moving trainwreck that seems to be accelerating“.  Thanks to the commodity price crash, many of the largest commodity traders on the planet are now imploding.  I wrote about the death spiral that has gripped Glencore yesterday.  On Tuesday, the stock price of the largest commodity trader in Asia, the Noble Group, plummeted like a rock and commodity trading giant Trafigura appears to be in worse shape than either Glencore or the Noble Group.  The total collapse of any of them could easily be a bigger event than the implosion of Lehman Brothers in 2008.  So I honestly do not understand the “nothing is happening” crowd.  It takes ignorance on an almost unbelievable level to try to claim that “nothing is happening” in the financial world right now.

Within the last 60 days, we have seen some things happen that we have never seen before.

For example, did you know that we witnessed the greatest intraday stock market crash in U.S. history on August 24th?

During that day, the Dow Jones Industrial Average plunged from a high of 16,459.75 to a low of 15,370.33 before rebounding substantially. That intraday point swing of 1,089 points was the largest in all of U.S. history.

Overall, the Dow has down 588.40 points that day.  When you combine that decline with the 530.94 point plunge from the previous Friday, you get a total drop of 1119.34 points over two consecutive trading days.  Never before in history had the Dow fallen by more than 500 points on two trading days in a row.  If that entire decline had fallen within one trading day, it would have been the largest stock market crash in U.S. history by a very wide margin, and everyone would be running around saying that author Jonathan Cahn was right again.

But because this massive decline fell over two consecutive trading days that somehow makes him wrong?

Are you kidding me?

Come on people – let’s use some common sense here.  We are already witnessing the greatest global stock market decline in seven years, and after a brief lull things are starting to accelerate once again.  Last night, stocks in Hong Kong were down 629 points and stocks in Japan were down 714 points.  In the U.S., the Nasdaq has had a string of down days recently, and the “death cross” that has just formed has many investors extremely concerned

The Nasdaq composite spooked investors on Monday after forming a death cross, a trading pattern that shows a decline in short-term momentum and is often a precursor to future losses.

A death cross occurs when the short-term moving average of a security or an index pierces below the long-term trend, in this case the 50-day moving average breaking through the 200-day moving average.

In the past month, similar chart patterns formed in the S&P 500, Dow and small-cap Russell 2000, but the Nasdaq avoided a death cross formation until Monday.

What we witnessed in September was not “the end” of anything.

Instead, it is just the beginning.

And if you listen carefully, some of the biggest names on Wall Street are issuing some very ominous warnings about what is coming.  For instance, just consider what Carl Icahn is saying

Danger ahead—that’s the warning from Carl Icahn in a video coming Tuesday.

The activist says low rates caused bubbles in art, real estate and high-yield bonds—with potentially dramatic consequences.

“It’s like giving somebody medicine and this medicine is being given and given and given and we don’t know what’s going to happen – you don’t know how bad it’s going to be. We do know when we did it a few years ago it caused a catastrophe, it caused ’08. Where do you draw the line?”

Even people like Jim Cramer are starting to freak out.  He recently told his audience that “we have a first-class bear market going”

Jim Cramer, the ex-hedge fund manager and host of CNBC’s show “Mad Money,” has been vocal recently on air, saying repeatedly that he doesn’t like the market now, and last week said “we have a first-class bear market going.” Similarly, Gary Kaltbaum, president of Kaltbaum Capital Management, has been sending out notes to clients and this newspaper for weeks, saying the poor price action of the stock market and many hard-hit sectors, such as energy and the recently clobbered biotech sector, has all the earmarks of a bear market. Over the weekend, Kaltbaum said: “We remain in a worldwide bear market for stocks.”

As I have warned repeatedly, there will continue to be ups and downs.  The stock market is not going to fall every day.  In fact, on some days stocks will absolutely soar.

But without a doubt, we have entered the period of time that I have warned about for so long.  The global financial system is now beginning to unravel, and any piece of major bad news will likely accelerate things.

For instance, the total collapse of Deutsche Bank, Petrobras, Glencore, the Noble Group, Trafigura or any of a number of other major financial institutions that I am currently watching could create mass panic on the global financial stage.

In addition, an unexpected natural disaster that hits a financially important major city or a massive terror attack in the western world are other examples of things that could accelerate this process.

Our world is becoming increasingly unstable, and we all need to learn to expect the unexpected.

The period of relative peace and security that we all have been enjoying for so long is ending, and now chaos is going to reign for a time.

So get prepared while you still can, because there is very little time remaining to do so…

The Six Too Big To Fail Banks In The U.S. Have 278 TRILLION Dollars Of Exposure To Derivatives

Bankers - Public DomainThe very same people that caused the last economic crisis have created a 278 TRILLION dollar derivatives time bomb that could go off at any moment.  When this absolutely colossal bubble does implode, we are going to be faced with the worst economic crash in the history of the United States.  During the last financial crisis, our politicians promised us that they would make sure that “too big to fail” would never be a problem again.  Instead, as you will see below, those banks have actually gotten far larger since then.  So now we really can’t afford for them to fail.  The six banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo.  When you add up all of their exposure to derivatives, it comes to a grand total of more than 278 trillion dollars.  But when you add up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars.  In other words, these “too big to fail” banks have exposure to derivatives that is more than 28 times greater than their total assets.  This is complete and utter insanity, and yet nobody seems too alarmed about it.  For the moment, those banks are still making lots of money and funding the campaigns of our most prominent politicians.  Right now there is no incentive for them to stop their incredibly reckless gambling so they are just going to keep on doing it.

So precisely what are “derivatives”?  Well, they can be immensely complicated, but I like to simplify things.  On a very basic level, a “derivative” is not an investment in anything.  When you buy a stock, you are purchasing an ownership interest in a company.  When you buy a bond, you are purchasing the debt of a company.  But a derivative is quite different.  In essence, most derivatives are simply bets about what will or will not happen in the future.  The big banks have transformed Wall Street into the biggest casino in the history of the planet, and when things are running smoothly they usually make a whole lot of money.

But there is a fundamental flaw in the system, and I described this in a previous article

The big banks use very sophisticated algorithms that are supposed to help them be on the winning side of these bets the vast majority of the time, but these algorithms are not perfect.  The reason these algorithms are not perfect is because they are based on assumptions, and those assumptions come from people.  They might be really smart people, but they are still just people.

Today, the “too big to fail” banks are being even more reckless than they were just prior to the financial crash of 2008.

As long as they keep winning, everyone is going to be okay.  But when the time comes that their bets start going against them, it is going to be a nightmare for all of us.  Our entire economic system is based on the flow of credit, and those banks are at the very heart of that system.

In fact, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system.

So that is why they are called “too big to fail”.  We simply cannot afford for them to go out of business.

As I mentioned above, our politicians promised that something would be done about this.  But instead, the four largest banks in the country have gotten nearly 40 percent larger since the last time around.  The following numbers come from an article in the Los Angeles Times

Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.

And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.

During this same time period, 1,400 smaller banks have completely disappeared from the banking industry.

So our economic system is now more dependent on the “too big to fail” banks than ever.

To illustrate how reckless the “too big to fail” banks have become, I want to share with you some brand new numbers which come directly from the OCC’s most recent quarterly report (see Table 2)

JPMorgan Chase

Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)

Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)

Citibank

Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)

Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)

Goldman Sachs

Total Assets: $856,301,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)

Bank Of America

Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $801,382,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)

Wells Fargo

Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)

Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)

Compared to the rest of them, Wells Fargo looks extremely prudent and rational.

But of course that is not true at all.  Wells Fargo is being very reckless, but the others are being so reckless that it makes everyone else pale in comparison.

And these banks are not exactly in good shape for the next financial crisis that is rapidly approaching.  The following is an excerpt from a recent Business Insider article

The New York Times isn’t so sure about the results from the Federal Reserve’s latest round of stress tests.

In an editorial published over the weekend, The Times cites data from Thomas Hoenig, vice chairman of the FDIC, who, in contrast to the Federal Reserve, found that capital ratios at the eight largest banks in the US averaged 4.97% at the end of 2014, far lower than the 12.9% found by the Fed’s stress test.

That doesn’t sound good.

So what is up with the discrepancy in the numbers?  The New York Times explains…

The discrepancy is due mainly to differing views of the risk posed by the banks’ vast holdings of derivative contracts used for hedging and speculation. The Fed, in keeping with American accounting rules and central bank accords, assumes that gains and losses on derivatives generally net out. As a result, most derivatives do not show up as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets.

Mr. Hoenig uses stricter international accounting rules to value the derivatives. Those rules do not assume that gains and losses reliably net out. As a result, large derivative holdings are shown as assets on the balance sheet, an addition that reduces the ratio of capital to assets to the low levels reported in Mr. Hoenig’s analysis.

Derivatives, eh?

Very interesting.

And you know what?

The guys running these big banks can see what is coming.

Just consider the words that JPMorgan Chase chairman and CEO Jamie Dimon wrote to his shareholders not too long ago

Some things never change — there will be another crisis, and its impact will be felt by the financial market.

The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets

In the same letter, Dimon mentioned “derivatives moved by enormous players and rapid computerized trades” as part of the reason why our system is so vulnerable to another crisis.

If this is what he truly believes, why is his firm being so incredibly reckless?

Perhaps someone should ask him that.

Interestingly, Dimon also discussed the possibility of a Greek exit from the eurozone

“We must be prepared for a potential exit,”  J. P. Morgan Chief Executive Officer Jamie Dimon said. in his annual letter to shareholders. “We continually stress test our company for possible repercussions resulting from such an event.”

This is something that I have been warning about for a long time.

And of course Dimon is not the only prominent banker warning of big problems ahead.  German banking giant Deutsche Bank is also sounding the alarm

With a U.S. profit recession expected in the first half of 2015 and investors unlikely to pay up for stocks, the risk of a stock market drop of 5% to 10% is rising, Deutsche  Bank says.

That’s the warning Deutsche Bank market strategist David Bianco zapped out to clients today before the opening bell on Wall Street.

Bianco expects earnings for the broad Standard & Poor’s 500-stock index to contract in the first half of 2015 — the first time that’s happened since 2009 during the financial crisis. And the combination of soft earnings and his belief that investors won’t pay top dollar for stocks in a market that is already trading at above-average valuations is a recipe for a short-term pullback on Wall Street.

The truth is that we are in the midst of a historic stock market bubble, and we are witnessing all sorts of patterns in the financial markets which also emerged back in 2008 right before the financial crash in the fall of that year.

When some of the most prominent bankers at some of the biggest banks on the entire planet start issuing ominous warnings, that is a clear sign that time is running out.  The period of relative stability that we have been enjoying has been fun, and hopefully it will last just a little while longer.  But at some point it will end, and then the pain will begin.

 

Too Big To Fail Banks Are Taking Over As Number Of U.S. Banks Falls To All-Time Record Low

Lower East Manhattan - Photo by Eric KilbyThe too big to fail banks have a larger share of the U.S. banking industry than they have ever had before.  So if having banks that were too big to fail was a “problem” back in 2008, what is it today?  As you will read about below, the total number of banks in the United States has fallen to a brand new all-time record low and that means that the health of the too big to fail banks is now more critical to our economy than ever.  In 1985, there were more than 18,000 banks in the United States.  Today, there are only 6,891 left, and that number continues to drop every single year.  That means that more than 10,000 U.S. banks have gone out of existence since 1985.  Meanwhile, the too big to fail banks just keep on getting even bigger.  In fact, the six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years.  If even one of those banks collapses, it would be absolutely crippling to the U.S. economy.  If several of them were to collapse at the same time, it could potentially plunge us into an economic depression unlike anything that this nation has ever seen before.

Incredibly, there were actually more banks in existence back during the days of the Great Depression than there is today.  According to the Wall Street Journal, the federal government has been keeping track of the number of banks since 1934 and this year is the very first time that the number has fallen below 7,000…

The number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the Federal Deposit Insurance Corp.

And the number of active bank branches all across America is falling too.  In fact, according to the FDIC the total number of bank branches in the United States fell by 3.2 percent between the end of 2009 and June 30th of this year.

Unfortunately, the closing of bank branches appears to be accelerating.  The number of bank branches in the U.S. declined by 390 during the third quarter of 2013 alone, and it is being projected that the number of bank branches in the U.S. could fall by as much as 40 percent over the next decade.

Can you guess where most of the bank branches are being closed?

If you guessed “poor neighborhoods” you would be correct.

According to Bloomberg, an astounding 93 percent of all bank branch closings since late 2008 have been in neighborhoods where incomes are below the national median household income…

Banks have shut 1,826 branches since late 2008, and 93 percent of closings were in postal codes where the household income is below the national median, according to census and federal banking data compiled by Bloomberg.

It turns out that opening up checking accounts and running ATM machines for poor people just isn’t that profitable.  The executives at these big banks are very open about the fact that they “love affluent customers“, and there is never a shortage of bank branches in wealthy neighborhoods.  But in many poor neighborhoods it is a very different story

About 10 million U.S. households lack bank accounts, according to a study released in September by the Federal Deposit Insurance Corp. An additional 24 million are “underbanked,” using check-cashing services and other storefront businesses for financial transactions. The Bronx in New York City is the nation’s second most underbanked large county—behind Hidalgo County in Texas—with 48 percent of households either not having an account or relying on alternative financial providers, according to a report by the Corporation for Enterprise Development, an advocacy organization for lower-​income Americans.

And if you are waiting for a whole bunch of new banks to start up to serve these poor neighborhoods, you can just forget about it.  Because of a whole host of new rules and regulations that have been put on the backs of small banks over the past several years, it has become nearly impossible to start up a new bank in the United States.  In fact, only one new bank has been started in the United States in the last three years.

So the number of banks is going to continue to decline.  1,400 smaller banks have quietly disappeared from the U.S. banking industry over the past five years alone.  We are witnessing a consolidation of the banking industry in America that is absolutely unprecedented.

Just consider the following statistics.  These numbers come from a recent CNN article

-The assets of the six largest banks in the United States have grown by 37 percent over the past five years.

-The U.S. banking system has 14.4 trillion dollars in total assets.  The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.

-Approximately 1,400 smaller banks have disappeared over the past five years.

-JPMorgan Chase is roughly the size of the entire British economy.

-The four largest banks have more than a million employees combined.

-The five largest banks account for 42 percent of all loans in the United States.

-Bank of America accounts for about a third of all business loans all by itself.

-Wells Fargo accounts for about one quarter of all mortgage loans all by itself.

-About 12 percent of all cash in the United States is held in the vaults of JPMorgan Chase.

As you can see, without those banks we do not have a financial system.

Our entire economy is based on debt, and if those banks were to disappear the flow of credit would dry up almost completely.  Without those banks, we would rapidly enter an economic depression unlike anything that the United States has seen before.

It is kind of like a patient that has such an advanced case of cancer that if you try to kill the cancer you will inevitably also kill the patient.  That is essentially what our relationship with these big banks is like at this point.

Unfortunately, since the last financial crisis the too big to fail banks have become even more reckless.  Right now, four of the too big to fail banks each have total exposure to derivatives that is well in excess of 40 TRILLION dollars.

Keep in mind that U.S. GDP for the entire year of 2012 was just 15.7 trillion dollars and the U.S. national debt is just 17 trillion dollars.

So when you are talking about four banks that each have more than 40 trillion dollars of exposure to derivatives you are talking about an amount of money that is almost incomprehensible.

Posted below are the figures for the four banks that I am talking about.  I have written about this in the past, but in this article I have included the very latest updated numbers from the U.S. government.  I think that you will agree that these numbers are absolutely staggering…

JPMorgan Chase

Total Assets: $1,947,794,000,000 (nearly 1.95 trillion dollars)

Total Exposure To Derivatives: $71,289,673,000,000 (more than 71 trillion dollars)

Citibank

Total Assets: $1,319,359,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $60,398,289,000,000 (more than 60 trillion dollars)

Bank Of America

Total Assets: $1,429,737,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $42,670,269,000,000 (more than 42 trillion dollars)

Goldman Sachs

Total Assets: $113,064,000,000 (just a shade over 113 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $43,135,021,000,000 (more than 43 trillion dollars)

Please don’t just gloss over those huge numbers.

Let them sink in for a moment.

Goldman Sachs has total assets worth approximately 113 billion dollars (billion with a little “b”), but they have more than 43 TRILLON dollars of total exposure to derivatives.

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 381 times greater than their total assets.

Most Americans do not understand that Wall Street has been transformed into the largest casino in the history of the world.  The big banks are being incredibly reckless with our money, and if they fail it will bring down the entire economy.

The biggest chunk of these derivatives contracts that Wall Street banks are gambling on is made up of interest rate derivatives.  According to the Bank for International Settlements, the global financial system has a total of 441 TRILLION dollars worth of exposure to interest rate derivatives.

When that Ponzi scheme finally comes crumbling down, there won’t be enough money on the entire planet to fix it.

We had our warning back in 2008.

The too big to fail banks were in the headlines every single day and our politicians promised to fix the problem.

But instead of fixing it, the too big to fail banks are now 37 percent larger and our economy is more dependent on them than ever before.

And in their endless greed for even larger paychecks, they have become insanely reckless with all of our money.

Mark my words – there is going to be a derivatives crisis.

When it happens, we are going to see some of these too big to fail banks actually fail.

At that point, there will be absolutely no hope for the U.S. economy.

We willingly allowed the too big to fail banks to become the core of our economic system, and now we are all going to pay the price.

Too Big To Fail Is Now Bigger Than Ever Before

Lower Manhattan At Night - Photo by Hu TotyaThe too big to fail banks are now much, much larger than they were the last time they caused so much trouble.  The six largest banks in the United States have gotten 37 percent larger over the past five years.  Meanwhile, 1,400 smaller banks have disappeared from the banking industry during that time.  What this means is that the health of JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley is more critical to the U.S. economy than ever before.  If they were “too big to fail” back in 2008, then now they must be “too colossal to collapse”.  Without these banks, we do not have an economy.  The six largest banks control 67 percent of all U.S. banking assets, and Bank of America accounted for about a third of all business loans by itself last year.  Our entire economy is based on credit, and these giant banks are at the very core of our system of credit.  If these banks were to collapse, a brutal economic depression would be guaranteed.  Unfortunately, as you will see later in this article, these banks did not learn anything from 2008 and are being exceedingly reckless.  They are counting on the rest of us bailing them out if something goes wrong, but that might not happen next time around.

Ever since the financial crisis of 2008, our politicians have been running around proclaiming that they will not rest until they have fixed “the too big to fail problem”, but instead of fixing it those banks have rapidly gotten even larger.  Just check out the following figures which come from the Los Angeles Times

Just before the financial crisis hit, Wells Fargo & Co. had $609 billion in assets. Now it has $1.4 trillion. Bank of America Corp. had $1.7 trillion in assets. That’s up to $2.1 trillion.

And the assets of JPMorgan Chase & Co., the nation’s biggest bank, have ballooned to $2.4 trillion from $1.8 trillion.

We are witnessing a consolidation of the banking industry that is absolutely stunning.  Hundreds of smaller banks have been swallowed up by these behemoths, and millions of Americans are finding that they have to deal with these banking giants whether they like it or not.

Even though all they do is move money around, these banks have become the core of our economic system, and they are growing at an astounding pace.  The following numbers come from a recent CNN article

-The assets of the six largest banks in the United States have grown by 37 percent over the past five years.

-The U.S. banking system has 14.4 trillion dollars in total assets.  The six largest banks now account for 67 percent of those assets and the other 6,934 banks account for only 33 percent of those assets.

-Approximately 1,400 smaller banks have disappeared over the past five years.

-JPMorgan Chase is roughly the size of the entire British economy.

-The four largest banks have more than a million employees combined.

-The five largest banks account for 42 percent of all loans in the United States.

As I discussed above, without these giant banks there is no economy.  We should have never, ever allowed this to happen, but now that it has happened it is imperative that the American people understand this.  The power of these banks is absolutely overwhelming

One third of all business loans this year were made by Bank of America. Wells Fargo funds nearly a quarter of all mortgage loans. And held in the vaults of JPMorgan Chase is $1.3 trillion, which is 12% of our collective cash, including the payrolls of many thousands of companies, or enough to buy 47,636,496,885 of these NFL branded toaster ovens. Thanks for your business!

A lot of people tend to focus on many of the other threats to our economy, but the number one potential threat that our economy is facing is the potential failure of the too big to fail banks.  As we saw in 2008, when they start to fail things can get really bad really fast.

And as I have written about so many times, the number one threat to the too big to fail banks is the possibility of a derivatives crisis.

Former Goldman Sachs banker and best selling author Nomi Prins recently told Greg Hunter of USAWatchdog.com that the global economy “could implode and have serious ramifications on the financial systems starting with derivatives and working on outward.” You can watch the full video of that interview right here.

And Nomi Prins is exactly right.  Just like we witnessed in 2008, a derivatives panic can spiral out of control very quickly.  Our big banks should have learned a lesson from 2008 and should have greatly scaled back their reckless betting.

Unfortunately, that has not happened.  In fact, according to the OCC’s latest quarterly report on bank trading and derivatives activities, the big banks have become even more reckless since the last time I reported on this.  The following figures reflect the new information contained in the latest OCC report…

JPMorgan Chase

Total Assets: $1,948,150,000,000 (just over 1.9 trillion dollars)

Total Exposure To Derivatives: $70,287,894,000,000 (more than 70 trillion dollars)

Citibank

Total Assets: $1,306,258,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $58,471,038,000,000 (more than 58 trillion dollars)

Bank Of America

Total Assets: $1,458,091,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,543,003,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $113,743,000,000 (a bit more than 113 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $42,251,600,000,000 (more than 42 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 371 times greater than their total assets.

How in the world can anyone say that Goldman Sachs is not being incredibly reckless?

And remember, the overwhelming majority of these derivatives contracts are interest rate derivatives.

Wild swings in interest rates could set off this time bomb and send our entire financial system plunging into chaos.

After climbing rapidly for a couple of months, the yield on 10 year U.S. Treasury bonds has stabilized for the moment.

But if that changes and interest rates start going up dramatically again, that is going to be a huge problem for these too big to fail banks.

And I know that a lot of you don’t have much sympathy for the big banks, but remember, if they go down we go down too.

These banks have been unbelievably reckless, but when they fail, we will all pay the price.

Prepare For Tough Times If Your Job Has Anything To Do With Real Estate Or Mortgages

Housing Crash 2013If you have a job that involves building homes, buying homes, selling homes or that is in any way related to the mortgage industry, you might want to start searching for alternate employment.  Seriously.  Interest rates are starting to rise dramatically, and mortgage lenders such as Bank of America, Wells Fargo and JPMorgan Chase are all cutting thousands of mortgage-related jobs.  Last week, mortgage refinance activity plunged to the lowest level that we have seen since June 2009 and total mortgage activity dropped to the lowest level since October 2008.  Unfortunately, this is only the beginning.  Mortgage rates closely mirror the yield on 10 year U.S. Treasuries, the the yield on 10 year U.S. Treasuries has nearly doubled since early May.  But it is still only sitting at about 3 percent right now.  As I have written about previously, it has a ton of room to go up before it hits “normal” historical levels, and so do mortgage rates.  As I noted the other day, some analysts believe that the yield on 10 year U.S. Treasuries is going to hit 7 percent eventually.  If that happens, mortgage rates will be more than double what they are today.  And we have already seen the average rate on a 30 year fixed rate mortgage go from 3.35 percent in May to 4.57 percent last week.  If interest rates continue to rise we could be heading for a “housing Armageddon” that will make the last housing crash look like a Sunday picnic.

The mini-housing bubble that we have been enjoying for the last couple of years is coming to an abrupt end.  It doesn’t matter what the mainstream media is telling you about a “sustainable” housing recovery.  Just look at how the big mortgage lenders are behaving.  They know the gig is up.  According to Bloomberg, Bank of America has just announced that they will be eliminating 2,100 mortgage-related jobs…

Bank of America Corp., the second-largest U.S. lender, will eliminate about 2,100 jobs and shutter 16 mortgage offices as rising interest rates weaken loan demand, said two people with direct knowledge of the plans.

Would they be doing that if we were really heading into a “sustainable housing recovery”?

And Wells Fargo and JPMorgan Chase are also both eliminating thousands of mortgage-related jobs

Mortgage lenders are paring staff as higher interest rates discourage refinancing and cast doubt on how long the housing market rebound will last. Wells Fargo & Co., the biggest U.S. home lender, plans more than 2,300 job cuts, and JPMorgan Chase & Co. may dismiss 15,000.

Would they be doing this if they thought that brighter days were ahead?

Of course not.

In fact, Well Fargo just announced that it expects to make 30 percent fewer home loans this quarter because of rapidly rising interest rates.

It’s over folks.

The mini-housing bubble that the mainstream media has been hyping so much is over.

If your job has anything to do with real estate or mortgages, it is time to start thinking about a career change.

This is especially true if your job is related to refinancing mortgages.  All of the smart people have already refinanced.  As rates continue to rise rapidly, the only ones that will be refinancing are really stupid people.  According to Zero Hedge, mortgage refinance activity has already dropped by a whopping 70 percent since early May…

For the 16th of the last 18 weeks, mortgage refinance activity plunged (dropping 20% this week alone). Since early May, when the dreaded word “Taper” was first uttered, refis have collapsed over 70%. With mortgage servicers and providers large and small laying people off, it seems hard for even the most egregiously biased bull to still suggest that the housing recovery is sustainable.

And this rise in interest rates is just getting started.  The Federal Reserve has not even begun to “taper” yet.  Once that starts happening, the consequences could be quite dramatic

“In early 1994, when the U.S. recovery gained strength, the Fed started a tightening cycle and bond markets crashed not only in the U.S. but also around the world,” European Central Bank Executive Board member Joerg Asmussen said on Tuesday.

“If spillovers were large in 1994, we can expect them to be even larger today in an even more deeply interconnected world,” he added in the text of a speech for delivery in Brussels.

Of course when the Federal Reserve “tapers” their quantitative easing it won’t really be “tightening” as much as it will be slowing down the pace at which they are recklessly creating tens of billions of dollars out of thin air.  But the effect will be similar to what we saw back in 1994.

As interest rates rise, it will become much more expensive to buy a home and much more difficult to sell a home.  To give you an idea of how dramatically interest rates can affect housing affordability, I wanted to share some numbers from one of my previous articles

A year ago, the 30 year rate was sitting at 3.66 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate would be $1374.07.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn’t.  8 percent was considered to be normal back in the year 2000.

Are you starting to get the picture?

As interest rates go up, home prices will have to fall.  Otherwise, nobody will be able to afford them.

In the end, we could end up with tens of millions more homeowners that are substantially “underwater” on their mortgages.

So who is to blame?

The Federal Reserve of course.

They created this bubble by forcing interest rates down to record low levels.

At some point it was inevitable that interest rates would start reverting back to more “normal” levels, and that “adjustment” is going to be immensely painful for the U.S. economy.

As we saw back in 2008 and 2009, when the housing industry suffers the entire economy suffers.

And the higher that interest rates go, the more suffering there will be.

So let us hope and pray that interest rates do not go any higher, but let us also start preparing for the very worst.

Wall Street Banks Extract Enormous Fees From The Paychecks Of Millions Of American Workers

Greed - Photo by J. Solana from Madrid, SpainWould you be angry if you had to pay a big Wall Street bank a fee before you could get the money that you worked so hard to earn?  Unfortunately, that is exactly the situation that millions of American workers find themselves in today.  An increasing number of U.S. companies are paying their workers using payroll cards that are issued by large financial institutions.  Wal-Mart, Home Depot, Walgreens and Taco Bell are just some of the well known employers that are doing this.  Today, there are 4.6 million active payroll cards in the United States, and some of the largest banks in the country are issuing them.  The list includes JPMorgan Chase, Bank of America, Wells Fargo and Citigroup.  The big problem with these cards is that there is often a fee for just about everything that you do with them.  Do you want to use an ATM machine?  You must pay a fee.  Do you want to check your balance?  You must pay a fee.  Do you want a paper statement?  You must pay a fee.  Did you lose your card?  You must pay a big fee.  Has your card been inactive for a while?  You must pay a huge fee.  The big Wall Street banks are systematically extracting enormous fees from the working poor, and someone needs to do something to stop this.

The truth is that most American families need every penny that they earn.  In America today, 53 percent of all workers make less than $30,000 a year.

It is hard to do everything that you need to do on less than $2,500 a month.  If you doubt this, you should try it some time.

That is one reason why the fees that the big Wall Street banks hit payroll card users with are so insidious.  The following is a short excerpt from a recent CNBC article about this phenomenon…

But in the overwhelming majority of cases, using the card involves a fee. And those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.’s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards.

These fees can take such a big bite out of paychecks that some employees end up making less than the minimum wage once the charges are taken into account, according to interviews with consumer lawyers, employees, and state and federal regulators.

Devonte Yates, 21, who earns $7.25 an hour working a drive-through station at a McDonald’s in Milwaukee, says he spends $40 to $50 a month on fees associated with his JPMorgan Chase payroll card.

If you are just barely scraping by every month, can you really afford to be paying $50 a month in fees to the fatcats at JPMorgan Chase?

Of course not.

But JPMorgan Chase is far from alone.  Just check out all of the fees that another large financial institution is hitting users with…

On some of its payroll cards, NetSpend charges $2.25 for out-of-network A.T.M. withdrawals, 50 cents for balance inquiries via a representative, 50 cents for a purchase using the card, $5 for statement reprints, $10 to close an account, $25 for a balance-protection program and $7.50 after 60 days of inactivity, according to an April presentation by the company reviewed by The Times.

They are taking advantage of extremely vulnerable people and they know it.

And we see this kind of thing happening with other types of cards as well.  For example, in some states unemployment benefits are now deposited on prepaid debit cards, and the banks that issue these cards are more than happy to extract huge fees from unemployed people

Shawana Busby does not seem like the sort of customer who would be at the center of a major bank’s business plan. Out of work for much of the last three years, she depends upon a $264-a-week unemployment check from the state of South Carolina. But the state has contracted with Bank of America to administer its unemployment benefits, and Busby has frequently found herself incurring bank fees to get her money.

To withdraw her benefits, Busby, 33, uses a Bank of America prepaid debit card on which the state deposits her funds. She could visit a Bank of America ATM free of charge. But this small community in the state’s rural center, her hometown, does not have a Bank of America branch. Neither do the surrounding towns where she drops off her kids at school and attends church.

She could drive north to Columbia, the state capital, and use a Bank of America ATM there. But that entails a 50 mile drive, cutting into her gas budget. So Busby visits the ATMs in her area and begrudgingly accepts the fees, which reach as high as five dollars per transaction. She estimates that she has paid at least $350 in fees to tap her unemployment benefits.

There is something that is so greedy about all of this.

When the financial crisis hit back in 2008, the big banks had no problem begging the entire nation for mercy.

But when it comes time to show mercy to the poor, they tell us that it is “just business”.

In America today, there are tens of millions of families that are just barely surviving from month to month.  The big banks should not be preying on them like this.

With each passing year, the ranks of the working poor in this country continue to get larger.  The following statistics are from one of my previous articles entitled “35 Statistics About The Working Poor In America That Will Blow Your Mind“…

#1 According to the U.S. Census Bureau, more than 146 million Americans are either “poor” or “low income”.

#2 According to the U.S. Census Bureau, 57 percent of all American children live in a home that is either “poor” or “low income”.

#3 Back in 2007, about 28 percent of all working families were considered to be among “the working poor”.  Today, that number is up to 32 percent even though our politicians tell us that the economy is supposedly recovering.

#4 Back in 2007, 21 million U.S. children lived in “working poor” homes.  Today, that number is up to 23.5 million.

#5 In Arkansas, Mississippi and New Mexico, more than 40 percent all of working families are considered to be “low income”.

#6 Families that have a head of household under the age of 30 have a poverty rate of 37 percent.

#7 Half of all American workers earn $505 or less per week.

#8 At this point, one out of every four American workers has a job that pays $10 an hour or less.

#9 Today, the United States actually has a higher percentage of workers doing low wage work than any other major industrialized nation does.

#10 Median household income in the United States has fallen for four consecutive years.

#11 Median household income for families with children dropped by a whopping $6,300 between 2001 and 2011.

#12 The U.S. economy continues to trade good paying jobs for low paying jobs.  60 percent of the jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created since then have been low wage jobs.

#13 Back in 1980, less than 30% of all jobs in the United States were low income jobs.  Today, more than 40% of all jobs in the United States are low income jobs.

#14 According to the U.S. Census Bureau, the middle class is taking home a smaller share of the overall income pie than has ever been recorded before.

#15 There are now 20.2 million Americans that spend more than half of their incomes on housing.  That represents a 46 percent increase from 2001.

#16 Low income families spend about 8.6 percent of their incomes on gasoline.  Other families spend about 2.1 percent.

#17 In 1999, 64.1 percent of all Americans were covered by employment-based health insurance.  Today, only 55.1 percent are covered by employment-based health insurance.

#18 According to one survey, 77 percent of all Americans are now living paycheck to paycheck at least part of the time.

#19 Millions of working poor families in America end up taking on debt in a desperate attempt to stay afloat, but before too long they find themselves in a debt trap that they can never escape.  According to a recent article in the New York Times, the average debt burden for U.S. households that earn $20,000 a year or less “more than doubled to $26,000 between 2001 and 2010“.

#20 In 1989, the debt to income ratio of the average American family was about 58 percent.  Today it is up to 154 percent.

You can find the rest of the list right here.

The working poor simply cannot afford to be paying hundreds of dollars in fees to the big banks each year just to use the money that they worked so very hard to earn.

Unfortunately, we seem to be living during a time when the big financial institutions will squeeze every nickel that they possibly can out of average Americans no matter how high the human cost is.