The Financial Crisis: Nowhere Near Over

Earlier this month, I detailed 25 US commercial banks that had trillions (with a “T”) of dollars’ worth of exposure to derivatives on their balance sheets. At the time, I stated that even if 4% of the notional value of these derivatives was “at risk” and only 10% of that 4% went bad, that you would wipe out the total equity at the five large US banks.

Given how mortgage-backed securities turned out (and those securities were regulated, unlike derivatives), I believe that most, if not all major banks in this country are insolvent or would be recognized as such if you marked the assets on their balance sheets at anything resembling market values.

As a review, here’s the chart I presented revealing the banks and their derivative exposure:

Paints quite a picture, doesn’t it?

This alone explains in no uncertain terms that the financial crisis is anything but over. Sure, the Federal Reserve may have pumped $800+ billion into the financial system; yes, the Fed is buying some $1.2 trillion in mortgage-backed securities; and, of course, there are the Fed’s off balance sheet arrangements, which we cannot even begin to quantify.

But all of these efforts amount to diddily-squat in the face of trillion and trillion in potential losses in the derivatives market.

Sure, the banks may not publicly state how much of their derivatives are “at risk,” but when you’re talking about $200+ trillion (an amount equal to four times global GDP) it doesn’t really matter how much is “at risk.” As I said before, if even 4% of this is “at risk” and 10% of that 4% goes bad, you’re talking $800 billion in equity wiped out (that’s the entire equity of the five largest commercial banks).

I know this... as does anyone who does a little homework on the banking industry. Including… the banks themselves.

Goldman Sachs (GS) recently published its 13F, a quarterly filing in which all asset managers reveal their largest holdings. In it, Goldman’s asset management group reveals their largest long positions and their largest short positions.

Now, Goldie is widely held to be the “smartest” guys on Wall Street (not my opinion) so its net shorts (the stocks or companies they’re betting against) were particularly interesting to me:

The above positions combine Goldman’s long and shorts (stock and option based positions) for the net short positions. In simple terms, Goldman may be long these companies, but because the bank is also shorting them (and shorting more shares than it is going long) it has net short positions. Put another way, these are the companies or positions that Goldman is betting the most money on falling in the future.

For starters, four of the top 10 are financial companies. The largest financial short is Wells Fargo (WFC), which Goldman has committed $289 million to betting against. After that it’s Mastercard (MA) ($266 million), then PNC (PNC) ($202 million) and finally AIG (AIG) ($152 million).

Looking at Goldman’s positions, it’s plain as day that Wall Street’s “finest” do not believe the financial crisis is over (why would they be betting against the banks if they did?). It’s also clear that Goldman’s analysts have noted, as I have, that both Wells Fargo and PNC both have massive exposure to the derivatives market (the fact that Goldman also has massive derivative exposure is beyond ironic).

However, where things get absolutely absurd is Goldman’s short position of AIG. Goldman, as has been widely documented, was one of the largest benefactors of AIG’s bailout (the then investment bank had massive counter party exposure to AIG’s toxic balance sheet). To see Goldman now betting against AIG after receiving $13 billion in tax payer money to ensure that the former didn’t go under along with the latter is outrageous (if not infuriating) to say the least.

On a final note, I wanted to point out Goldman is also shorting a Euro index (betting against that currency) as well as two gold mining companies (Barrick (ABX) and Agnico Eagle Mines(AEM)). This indicates that Goldie is bearish on both the euro and gold. which hints that Wall Street’s finest are likely betting on a US Dollar rally (that would, after all, be the most obvious catalyst for a correction in gold and the euro).

To be blunt, it’s clear that Goldman (like me) believes the financial crisis is nowhere near over: four of its top ten largest shorts are financial companies. It’s also worth noting that Goldman is betting against gold and the euro. Given Goldman’s incredible access to and close relationship with the regulators and federal government, I see this as further proof that we may be seeing another stock crisis triggered by a Dollar rally in the near future.

Comments

[j-dub:]

So the bank rally built on 3 parts fantasy, 4 parts accounting fraud, 2 parts hope and 1 part greater fool theory operating like I have never seen has been a hoax?
NO WAY

Well, on the small chance it has been, I'm sure our fed, treasury and executive branch has a plan B.

On the plus side, at least GM only lost 1.2 billion dollars during the cash for clunkers quarter and "that's a good thing."

THIS IS ONE HELL OF A BEAR MARKET RALLY

Nov 16 07:36 PM

[JS Partners:]

We all know how much Goldman Sachs likes to speculate but arbitrage and hedging is still a big use of the derivatives market. Could this account for some of the big figures mentioned?

For instance, if AIG was to go out of business then Goldman would have a serious problem as it acts as counter party to many of the insurance contracts written by that company. Makes sense to hedge some risk by going short using derivatives? No?

Nov 17 08:17 AM

[TeresaE:]

"...Given how mortgage-backed securities turned out (and those securities were regulated, unlike derivatives), I believe that most, if not all major banks in this country are insolvent or would be recognized as such if you marked the assets on their balance sheets at anything resembling market values..."

Funny, if we apply the SAME exact lending standards to banks, that they are currently applying to conforming/ current commercial loans, it is obvious that the companies need their debts called and closed down.

The farce continues on in full force.

Lollipops and sunshine, lollipops and sunshine.

Nov 17 10:30 AM

[PDT:]

Nice article - thanks!

Nov 17 11:33 AM

[iceberg17:]

Thank you for your post, though it is frightening to think that all has been for naught and a Great Depression could be lurking around the next corner..

A simplistic question regarding GS shorts. Why is GS only targeting Wells Fargo when the other banks listed have much greater exposure in the (000s), such as Citi, Bank of America and HSBC?

Is there something GS knows that the rest of us don't?

Nov 17 02:57 PM

[basehitz:]

“This indicates that Goldie is bearish on both the euro and gold. which hints that Wall Street’s finest are likely betting on a US Dollar rally”

The trade has been dollar up, stocks and commodities down, and vice versa. The inverse correlation was shown clearly by Karl Denninger in a chart here:
“The dollar and S&P 500 correlation . . . in July it became nearly-perfect”
market-ticker.org/arch...

And if Goldie is right on financials bearish bet, the market won’t fight that. Since Goldie’s results last 2 Qs shows they almost never have a losing day trading, you gonna bet against them?

I need to rephrase the author’s following statement:
“Given Goldman’s incredible access to and close relationship with the regulators and federal government”

That should read:
“Given Goldie’s directives to it’s wholly owned subsidiaries, the Federal Reserve and the US Treasury. . . “

Nov 17 04:20 PM

[Northern Da...:]

I wouldn't conclude that this indicates that GS is bearish on gold. But they're bearish on Barrick. There's a world of difference. Barrick is in bed with GS and has been a huge player in their manipulations of the gold market. As such, it's reported that Barrick has so much derivative exposure themselves that any gold Barrick produces for the next period of time has already been sold off dirt cheap in the manipulation game... which has blown up in their face.

Has anybody bothered to ask Barrick why the share price of the biggest gold mining company in the world are flat since Jan. 08 while gold is up 38%. Never mind, we know why.

www.marketoracle.co.uk...

GS is not bearish on gold. In fact, they wish they could afford some. But first they have to buy back the billions of dollars worth that they've shorted. It's blown up in their faces too.

.

Nov 19 12:39 AM

[50CAL:]

"Sure, the banks may not publicly state how much of their derivatives are “at risk,” but when you’re talking about $200+ trillion (an amount equal to four times global GDP) it doesn’t really matter how much is “at risk.”

????????????????
Not to argue with your premise, but without doing any analysis of the nature of the derivatives involved this generally falls under the category of worthless supposition. Why not guestimate that 9% is "at risk" and 25% will go bad - you'll get a much bigger number and and an even more shocking conclusion.

As every loan by every bank, insurance, or financial institution is "at risk", just add them all up and make your same scientific calculation. Yikes!

Finally, if Goldman is all-knowing in their investments and short positions, how did the firm get into such terrible financial trouble?

Nov 19 01:39 PM