Courtesy of Pam Martens.
Wall Street On Parade has reported on multiple occasions that the Federal Reserve has no idea what it’s doing with its stress testing of the largest banks on Wall Street. Last Friday’s market action, following the Brexit vote in the U.K. to leave the European Union, proved just how feeble the Fed is when it comes to assessing systemic risk and capital vaporization at the deeply interconnected Wall Street mega banks.
While the Dow Jones Industrial Average dropped 3.39 percent at the close on Friday, Morgan Stanley lost a stunning 10.15 percent of its market capital in a 6-1/2 hour trading session. At that speed, Morgan Stanley’s equity market capital could be wiped out in 10 trading sessions were this Brexit panic to continue.
Citigroup, which became a basket case during the 2008 financial crisis, ending up as a penny stock and requiring the largest bank bailout in the history of financial markets, lost 9.36 percent of its market capital in Friday’s trading session. Bank of America lost 7.41 percent while Goldman Sachs closed down 7.07 percent.
As if to underscore that this panic selling is related to the trillions of dollars of derivatives on the books of the banks, Wells Fargo, which has a much smaller exposure to derivatives than the other major Wall Street banks, lost a much milder 4.59 percent on Friday.
Another casualty of the Friday selloff was MetLife, the large insurer, which has been fighting in court to have its Fed designation as a global systemically important institution repealed. MetLife had won its battle at a lower court but the government is now in the midst of an appeal. MetLife is a derivatives counterparty and the fact that it sold off so dramatically on Friday suggests its exposure to Wall Street banks is significant. MetLife lost even more than Morgan Stanley on Friday, trimming 10.71 percent off its market cap.
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