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Larry Summers is the Latest Sign That Fall Will Bring Joy to Fatcats, Pain to the Rest of Us

Between the White House, the Fed, the debt, the inequality and Larry Summers, we've got a rocky road ahead.

Outgoing Director of the National Economic Council Lawrence H. Summers speaks during an address to the Economic Policy Institute December 13, 2010 in Washington, DC.


It’s going to be an explosive fall, financially speaking, regardless of what transpires in the Middle East. The culmination of faux regulation, debt ceiling debates, derivatives growth and the ever-expanding Federal Reserve books will provide lots of volatility- for which the White House will be caught unprepared.

In the wake of the Great Crash of 1929, FDR and Congress passed an act to isolate people’s deposits from the speculative pursuits of financiers. The Glass-Steagall or Banking Act of 1933, was even promoted by some of the biggest bankers of the time, as I will explain in greater detail in All the Presidents’ Bankers.

Their reasons were self-serving, yet they also helped the population. They wanted a safer banking structure, they wanted citizens to feel more confident in the financial system that they dominated, and they were willing to forego their trading and securities creation operations to achieve this goal. They were willing to become smaller and substantively less risky in accordance with the Act that FDR signed on June 16, 1933.

We got nothing like that legislation this time around, just a lot of talk about ‘sweeping reform.’ President Obama signed the Dodd-Frank Act in July, 2010 to supposedly protect consumers from Wall Street. But it did not make big banks smaller. It did not separate their speculative / securities creation ability from their FDIC backed deposit and lending business. It did not require banks to dramatically reduce their derivatives positions, the leverage imbedded in complicated assets, or the dangerous chains of inter-dependent exposures to other firms.

Despite billion of dollars of fines, which mean little in the scheme of their bottom lines, the biggest banks are bigger and more complex than ever, and thus, their leaders more sheltered by Washington. Unnecessary global risk remains in the system. We need banking reform ala Glass-Steagall. Anything less is an exercise in political posturing and regulatory futility, no matter how many back-pats accompany the procedure.

Derivatives Take over the World

Last quarter, the total notional value of US banks’ derivatives positions increased by $8.5 trillion to $232 trillion, still mostly concentrated in interest rate products. Credit derivatives, 6% of the total, increased 5.4% to $13.9 trillion. The four largest banks account for 93% of that amount, and 81% of industry credit exposure, 36% of it below investment grade.

The total assets of JPM are $1.95 trillion and total derivatives notional $70.3 trillion, or more than 35 times its asset amount. Citigroup has $1.3 trillion in assets and  $58 trillion in derivatives notional. Bank of America has $1.4 trillion in assets and $44 trillion in derivatives, and Goldman has $133 billion in assets and $42 trillion in derivatives. Banks will say they are hedged, notional volume does not equate to the total potential loss, but that just doesn’t matter. In the event that one area of the market or one firm goes belly up, the rest follow. No mega-bank is isolated from the others, though some are more politically connected, have more lobbyists, or are better subsidized than others.

Before the fall of 2008, US banks’ notional derivatives exposure was $180 trillion.  Then, five banks held 97% of that notional, and 85% of the industry’s net credit exposure. The concentration of risk and amount of derivatives has increased, since before the government orchestrated bank bailout and subsidization, and Dodd-Frank.

There are $564 trillion worth of notional over-the-counter derivatives that the Bank of International Settlements (BIS) knows about, as of June 2013. America’s global derivatives presence, has now eclipsed its comparative military expenditures; the US is responsible for 39% of the world total of $1.7 trillion of such expenditures, but US banks account for a whopping 41%, and JPM for 12.4%, of the world’s derivatives.