May 6, 2014 - 12:34PM
Michael Pascoe
JPMorgan is in the $70 trillion gross derivatives class, together with Deutsche Bank and Barclays. Photo: Reuters
While Australians ponder the feathers used to discipline errant banks when their people grossly fail or defraud their customers, blowing hundreds of millions of other people’s dollars, the wider world has banksters operating on a scale larger than most imaginations can conceive.
Funds manager Mike Mangan of 2MG keeps a passing eye on some of the less salubrious aspects of banking in his newsletter for clients. His current missive deals with banks that are not just too big to fail, but “too big to jail”. More worryingly, he suggests some of them might also be “too big to save”.
Mangan’s quote of the day comes from New York prosecuting attorney Preet Bharara: “...financial institutions will do almost anything to avoid a tough enforcement action and therefore have a natural and powerful incentive to make prosecutors believe that death or dire consequences await. I have heard assertions made with great force and passion that if we take any criminal action, the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”
Mangan takes that as Bharara’s admission of why no banks had faced criminal charges post-GFC despite incurring more than $US230 billion in fines and other restitutions.
“The lack of criminal changes allowed banks to assure their cheerleaders that they had done nothing wrong but settled ‘to put these matters behind them’,” he writes.
Among the banks’ dirty deeds done expensively, we’ve seen everything from flogging products known to be toxic to rigging benchmark interest rate markets – effectively impacting every borrower on earth.
Mangan seems to be relishing the prospect of the “great bankster protection racket” finally being tested in a criminal action with the US about to charge Credit Suisse and/or BNP Paribas.
It is curious though that the only two banks to be facing criminal action from US prosecutors are not American banks. Correction – it’s not really curious.
Mangan suggests the “too big to jail” banks are in another league from the merely “too big to fail”, using one of his former employers as an example:
“Deutsche Bank (DB) has paid a relatively minor $US6 billion in penalties for a half dozen infractions. Mere mortals committing such acts would be off to jail of course. Many more market rigging actions are pending.”
Mangan demonstrates what a “tbtj” bank looks like with a series of charts featuring DB’s gross derivative position of $US74.3 trillion – yes, that’s trillion with a “T”. To put that in context, it’s almost five times the size of the United States annual gross domestic product and about 20 times larger than Germany’s GDP and more than twice the size of the economies of most of the western world combined.
DB is not alone. Barclays and JP Morgan are in the $70 trillion gross derivatives class as well. By comparison, Lehman had a gross derivatives position of less than $40 trillion when it went under in 2008.
“Not only are they “tbtj”, they’re also “too big too fail” or “tbtf”,” says Mangan. “But DB & JPs are of such a size relative to the known universe, that they might be part of a whole new category. If they get into trouble, they may be “tbts” - “too big to save”. That’s what Warren Buffett was referring to in 2002 when he described derivatives as ‘financial weapons of mass destruction’.”
It is important to note, as Mangan does, that the vast majority of those overwhelming gross derivative positions cancel each other out. DB’s gross position comes down to “only” US$29 billion with a “B”.
“Some comfort. Still you don’t need a lot to go wrong at the ‘gross level’ for big problems to arise at the ‘net level’. There is a further corollary here. ‘Tbtf/j/s’ banks ensure monetary authorities can never willingly give up the QE drug. Indeed any sign of trouble they will quickly resort to QE or some other variant of unorthodox monetary policies. No central banker wants to go down in history as the bloke/sheila that destroyed western civilisation – as we know it.”
Michael Pascoe is a BusinessDay contributing editor
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