Courtesy of Pam Martens
Stock Chart for Citigroup, Morgan Stanley, Lincoln National and Prudential Financial for Past Six Months
Citigroup Stock Chart (Green) Since 2001 Versus Wells Fargo (Orange)
By Pam Martens and Russ Martens
Allow us to set the stage for what happened in yesterday’s market rout which saw the Dow Jones Industrial Average shed 617 points. The easy answer is that the market is unnerved by the ongoing trade war between the Trump administration and China. And, clearly, that’s part of the problem. But the market is also keenly aware that there are a handful of mega banks on Wall Street that have monster exposure to derivatives and are systemically interconnected to the counterparties on the other side of those trades. The problem is that nobody, including the regulators, has clarity on which counterparty is in over their head and may have failed to reserve adequate capital if it has to pay out on too many losing derivative trades.
That’s what happened in 2008 when a unit of the giant insurer, AIG, had quietly become the derivatives counterparty on credit default derivatives to many of the major Wall Street and global banks. AIG had also tangled itself up in securities lending to Wall Street and that blew up as well. AIG collapsed and received a government bailout of $185 billion in order to pay off the debts it owed to the mega banks.
One would have thought that Congress would have surely written its Dodd-Frank financial reform legislation of 2010 to stop Federally insured banks from having exposure to tens of trillions of dollars of opaque derivatives. One would have thought that Congress would have prevented U.S. life insurers, which are issuing critical death benefit policies and annuities to provide retirement income to seniors, from playing with derivatives in the Wall Street casino. Unfortunately, Congress did not have the guts to stand up to Wall Street and do either.
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