Courtesy of Pam Martens
Howie Hubler, Former Top Bond Trader at Morgan Stanley
According to a report from one of the regulators of national banks, the Office of the Comptroller of the Currency, as of September 30, 2015, insured U.S. commercial banks and savings associations had exposure to $192.2 trillion notional (face amount) of derivatives. (Yes, that’s trillion with a “t”.) The report goes on to terrify with the revelation that only four banks hold 90.8 percent of all derivatives: Citigroup, JPMorgan Chase, Goldman Sachs and Bank of America.
But that’s far from an accurate picture. Buried deep in the report is Table 2, which broadens the landscape beyond just the commercial banking units of the mega Wall Street firms to what is lurking in the holding companies. In Table 2 we learn that Morgan Stanley ranks right up there with the other big boys on Wall Street, holding $31 trillion notional in derivatives. (See chart below.)
Adding in Morgan Stanley’s derivatives, the total rises to $247 trillion in notional derivatives with just these five banks holding 93 percent of the total. Equally noteworthy, the table shows that within Morgan Stanley’s $31 trillion in derivatives there are $1.6 trillion in notional credit derivatives – those pesky instruments that took down the big insurer AIG in 2008 and almost took down Morgan Stanley.
Since July of last year, Morgan Stanley’s share price has been on a slow bleed, closing yesterday at $25.24 – a loss of 38 percent from its July high of $41.04. That’s not the kind of trading action that one wants to see from financial institutions holding hundreds of billions of dollars in the life savings of Americans.
Who and what exactly is Morgan Stanley and why should its derivatives concern us? Morgan Stanley was created in 1935 after the Glass-Steagall Act barred JPMorgan from holding insured deposits while simultaneously operating an investment bank to engage in underwriting and speculating in stocks. The massive losses experienced by banks after the 1929 crash was blamed on reckless speculations in the stock market and a leading cause of the Great Depression. Prior to the Glass-Steagall Act in 1933, there was no FDIC insurance on bank deposits, thus millions of people lost everything that had been in the failed banks as a result of the crash. JPMorgan chose to remain a commercial bank accepting newly insured deposits while other partners left the firm to form the investment bank, Morgan Stanley.
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