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There is a massive and potentially fatal economic bubble forming in the Over-The-Counter (OTC) derivatives market, which has been taking place the past few years. If you are ignorant to what this market is, you have plenty of company. The majority of investors are completely obtuse to the goings on of the decision makers behind closed board rooms, major brokerage houses, banks and fortune 500's.
But take heed reader, derivatives have been the engine that has driven the majority of economic crises since the mid-1980's. The collapse of the Argentinean economy, Orange County filing for chapter 9 bankruptcy, the LTCM hedge fund debacle, Black Monday, Enron... derivatives have played the critical role in all of these disasters.
In the not too distant future these events will pale in comparison to the economic catastrophe derivatives have yet to unleash. One needs look only to the alarming growth of these infamous financial tools. This rise of growth has given way to an entire subterranean economy, an economy so massive and complicated, even the world's greatest financial minds can not hope to fully comprehend it. One thing which has been made abundantly clear however this colossal secret economy is harbors the menace to topple and lay waste to the entire American financial system.
Broken down in its simplest form a derivative is basically a bet. A bet that can be made on practically anything; stocks, interest rates, commodities, even natural disasters. For example, you could wager on the amount of hurricanes the state of Florida will experience in 2008. If someone is willing to bet against you, you will have effectively created a derivative. Often times you need only place a tiny fraction of the amount. Let's say you were interested in betting on these hurricanes in Florida, your bets total is one million dollars, you need only put down $10,000...just one one-hundredth of the total sum.
This is exactly why derivatives are so treacherous and controversial. Derivatives are mainly used to fence against risk, but in the same breath can be used to make exceptionally leveraged and exceedingly precarious bets.
England's Barings Investment Bank, an institution that had proudly been established almost forty years before Queen Victoria's reign, was single-handedly brought down by one rouge trader and one flippant bet.
But it gets worse; in 1998 one solitary hedge fund almost caused the cataclysmic breakdown of the entire global financial system. A hedge fund largely unknown to the majority of public investors at the time. Long-Term Capital Management operated in a relative seclusion, that is until it's secret derivatives bets threatened to buckle the world's economy. The only thing which prevented this from happening was a highly calculated emergency bailout by the Fed.
Future Rogue Traders That
Threaten To Ruin Your Financial Future
Numerous attempts have been made to curb the bank bubble developing in the derivatives trade, former Chairman of the Federal Reserve Alan Greenspan belayed all attempts, choosing instead a path of total deregulation. His rationale being the idea derivatives fostered spectacular growth and stability, and in the long run made possible a more dynamic and sound economy. The question however is this: Was Alan Greenspan being totally candid with the American public?
In an address on May 4th, 2000 to bankers of Chicago, Mr. Greenspan said "The rapid growth and increasing importance of derivative instruments in the risk profile of many large banks has been a particular concern."
And even more troublesome on November 19, 2002 in a speech to the Council of Foreign Relations, Mr. Greenspan relented that there was indeed a "remote possibility" derivatives could cause a chain reaction that would ultimately result in the entire meltdown of our financial systems.
Yet despite this transparent danger Mr. Greenspan continued the status quo of deregulation, deciding instead to pass the buck off to his successor, all while the bubble continued it's unfettered growth.
Unfortunately the new head of the Fed Ben Bernanke has taken up the mantle for his old mentor saying "certainly, derivatives instruments pose challenges to risk managers and to supervisors, but these risks are manageable and thus far have been managed quite well." Incredibly Mr. Bernanke says derivatives are actually beneficial to the economy, making the American economy flexile to risk.
Amazingly Mr. Bernanke looks to be completely unperturbed with the fact that risk hedgers create more risk with every derivatives trade made. Also it appears like his predecessor, regulation is no where on the horizon, instead Mr. Bernanke makes gushing statements such as this when speaking of derivatives "...have contributed to our understanding of the measurement and management of risk."
Just 22 years ago, the global derivatives market was barely over $1 trillion. At the end of 2007 that market had grown to the absurd amount of $596 trillion. More troublesome is the fact that these derivative holdings are concentrated in just a few large banks: Citigroup, JP Morgan Chase, and Bank of America being amongst the largest…as of September 30th 2007, these 3 banks accounted for the astronomical figure of $157 trillion in the global derivatives market.
Again as if this were not bad enough, derivative trades are made in secret, behind closed doors, away from the public investors eye, by a select few powerful men, who are performing a high wire act with your future on the line, as they struggle to balance a convoluted portfolio of derivative bets, the substance of which few if any know of. What's more, there is absolutely no oversight, these traders have been afforded carte blanche treatment, and they are not even required to report any dealings to shareholders.
And still they continue to create these mountains of derivatives portfolios, investors and bank depositors completely oblivious to the avalanche that could be set off at any moment. A single misstep, a single premature collapse, and the entire financial system we know today could fall like dominos as those precariously juggled derivatives portfolios come crashing down, and our economy implodes.
This is a subject banks shy away from, they cringe at it's very invocation but in the not too distant future it will be a subject no one let alone the banks can afford to ignore.
The Greatest Financial Risk
No One Talks About
Ask yourself this question, exactly how much of your financial future are you ready to put at stake by allowing these select few titans of derivatives trading access to your money? Does history have nothing to teach us? On the contrary it most certainly does on the topic of derivatives trading. Going by their track record one can justifiably surmise they do not have the average investors interest any where near their top priority. In actuality you or someone you know may have already been victimized by these traders when they used derivatives to cook the books at Enron and other energy and telecommunication companies. Where will they strike next, and where do you fit into it?
The Approaching Catastrophe
A financial storm is gathering of which we have never seen the like, when it makes landfall the devastation wrecked will collapse our financial systems one atop the other. By failing to act immediately any hope you had for a nest egg could be swept away by this storm.
The largest banks in this country are carrying risks of which the vast majority of investors are being actively kept in the dark about. The risks are intertwined in the total holdings by these banks of derivatives.
The quandary faced by all but a select few investors is this, with the majority of derivative bets one needs to put up cash collateral so an opposing body will accept the bet. The amount of cash collateral one needs to put up depends on the credit rating of this establishment. If this establishment one day finds itself in hardship its credit rating will plummet, as a result it will need to provide more cash collateral to satisfy this opposing body. This is where the real risk comes into play, by putting up more cash collateral one could inadvertently cause a liquidity crisis, which can then lead to a further plunge in credit, prompting a vicious cycle. If just a single one of these major banks were to fold, they'd all likely topple as a result, like a giant house of cards.
Incredibly this worst case scenario has already be set in motion. Steps are already being taken by some of the worlds foremost leading investors to guard themselves against this impending disaster, later I will show you how they are doing it, and the methods they have employed to reap a fortune using tactics that make available these "forbidden" opportunities and investments which have tallied profits of 39%, 43%, 50%, 60%, 82% and 215%. And these numbers are just the tip of the iceberg to the height they are expected to ascend to once the collapse begins.
J.P. Morgan’s Downfall
Imagine for a moment that American banks are all tethered together by rope crossing the Antarctic on an expedition. J.P. Morgan is the largest and leads the way when suddenly the ice cracks and it falls through, being that it is so large it quickly pulls the next directly behind it down before it can react, and the process continues until all have been sucked in along with the American economy.
These ramifications could be like nothing we have seen before.
On September 2000 Chase Manhattan acquired J.P. Morgan for the sum of $33 billion, since that time the bank has been on a seemingly downward death spiral. The promise of anticipatory deals with old Chase corporate customers running to Morgan to pay big money for securities issues, and takeover deals has simply failed to materialize. Thus the basic premise behind the acquisition, the promise of new growth and profits, has been a total failure. In fact the one thing the deal seems to have struck on is an endless supply of deficits. Its private equity holdings have atrophied; they have laid off thousands of workers, and shut down hundreds of branches.
All the while doling out billions in bad loans to the likes of Enron, Tyco, K-Mart, Global Crossing... J.P. Morgans derivative holding are now at a breath taking $92 trillion, that is close to 74 times the amount of Morgans own assets, and roughly 7 times the size of the GDP of the United States of America.
What Wall Street Dreads Most
Has Already Begun
The future of J.P. Morgan looks bleak; its dwindling profits are being placed under an immense strain and as with the current state of our economy the prospects of a swift turn around is all but impossible. The United States is slowly suffocating under a mountain of debt loads which can not be paid for. Mortgage delinquencies hit 23-year highs in March 2008, and are quickly approaching all-time highs. Bankruptcies are skyrocketing, and data suggests this trend will continue at least for the remainder of the decade. To top it all off the national debt is approaching $10 trillion. All of these trends and figures point to very bad news for J.P. Morgan and its peers.
Gryphon Financial believes J.P. Morgan's risk profile has been severely understated, and its distressing practice of refusing to speak with anyone but its largest investors concerning its derivative holdings raises giant red flags.
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