Courtesy of Pam Martens
On Friday the Dow Jones Industrial Average closed with a loss of 196 points as contagion jitters from Turkey’s worsening situation rattled markets. Among the big Wall Street banks, these were the biggest losers: Citigroup, down 2.39 percent; Morgan Stanley, down 2.12 percent; Goldman Sachs, down 1.78 percent; Bank of America, down 1.30 percent; and JPMorgan Chase closed off by 0.98 percent. Deutsche Bank, the big German lender whose U.S. subsidiary has a big footprint on Wall Street, lost 4.68 percent. Deutsche Bank has now lost 41 percent of its market value since February.
But the selloff didn’t stop there. Two big U.S. life insurers also tumbled on Friday. MetLife lost 3.19 percent while Prudential Financial was off by 2.97 percent.
What do Wall Street banks and U.S. life insurers have to do with a selloff in Turkey’s currency? Not that much. But they have a lot to do with European banks and European banks have a lot of exposure to Turkey in the way of loans as well as ownership stakes in several large banks in Turkey. According to the Bank for International Settlements, European banks have $194 billion exposure to Turkish debt.
Dragging down the U.S. stock market along with U.S. bank and insurer stocks is the fear that the crisis in Turkey will create a selloff contagion in European banks – which are big counterparties to trillions of dollars in derivatives held by the largest Wall Street banks. Likewise, MetLife and Pru are derivative counterparties.
The Office of Financial Research (OFR), the Federal agency at which the Trump administration cut 40 jobs last week after slashing its budget by 25 percent, warned about all of this in its 2016 annual report. The following excerpt sums up the growing panic on Wall Street:
“U.S. global systemically important banks (G-SIBs) have more than $2 trillion in total exposures to Europe. Roughly half of those exposures are off-balance-sheet…U.S. G-SIBs have sold more than $800 billion notional in credit derivatives referencing entities domiciled in the EU.”
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