Derivative death spiral

By Michael Gray
If we look at Citigroup, JPMorgan and Bank of America in the context of credit derivatives the pitcher is very bleak.

Cit had an unfathomable $37T with a T exposure to credit derivatives in June of ’08. Most of these credit derivatives were not dollar denominated, but in less liquid denominations that were hit hard during the last two quarters of last year.

There is not a bad bank on the globe that can house this paper. Global GDP for 2007 was $65T as a basis of comparison.

This fact alone tells me that the feds will sequester all this toxic paper in the Yucca Mountains for a long half-life when they finish selling off the assets of Citi.

So we move on to the “more secure” banks, which seem to have been picked as the winners of the Uncle Sam TARP largess, JPMorgan and BofA.

Each has been handpicked to bailout other troubled banks. JPM picked up Bear Stearns on the cheap and JPM plucked Merrill from the weekend garbage heap.

Both banks had the government backstop these purchases with taxpayer funds.

So how do these two banks stock up to the toxic avenger known as Citi?

Horribly is the only word to use. JPM has credit derivatives exposure of $91T and BofA has $40T. All figures are notional

As these credit derivatives erode, the bank needs additional capital injections to prop up its balance sheet. And where do they go to for that? Not Wall St. but Washington.

So look for these two banks in the near future to be moving in the Citi direction of nationalization and the Government’s bad bank to be the only entity growing.

For more on Wall and Washington and the cratering economy see:


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