Courtesy of Pam Martens.
Source: Financial Crisis Inquiry Commission
By Pam Martens and Russ Martens: April 15, 2019 ~
If you want to very quickly understand why banks stopped lending to one another in 2008, credit markets froze, bank stock prices collapsed, and the Federal Reserve secretly pumped $16 trillion into banks, just take a few moments to study this chart from the Financial Crisis Inquiry Commission of the derivatives casino that Goldman Sachs and the major banks on Wall Street had become in June of 2008. Wall Street banks knew they had created a collapsing house of cards but they didn’t know just how much exposure each bank had or which bank would fail first, so they simply stopped lending to each other, causing a run on the banks.
Now, take a deep breath, because we have to tell you that if there was a derivatives graph of every other major Wall Street bank in June of 2008, you would see the same handful of bank counterparties to tens of trillions of dollars more in opaque over-the-counter derivatives. A small handful of Wall Street banks and their global counterparts were on the hook for hundreds of trillions of dollars in derivatives without anywhere near the capital to make good on these casino bets.
Now take another deep breath because the tragic truth is that little has materially changed in this situation today — even after the crisis has been studied and examined for a decade; after the massive Dodd-Frank financial reform legislation has been enacted; and after new Federal bodies like the Office of Financial Research and the Financial Stability Oversight Council have been created to prevent another financial crisis.
Although Wall Street’s lobbyists and the banks’ global public relations flacks have worked hard at keeping the word “derivatives” out of today’s headlines and out of any historical narrative about what caused the 2008 financial collapse to be as severe as it was, the evidence is clear: opaque over-the-counter derivatives played a major role in what became the worst financial collapse in the U.S. since the Great Depression.
…
