The former chairman of BMPS, the worlds oldest bank resigned yesterday after Bloomberg reported on the derivatives they undertook back in 2008 to “hide” losses. You see, these derivatives are now “coming due” and the losses must finally be booked. Ooops! How could this be? I thought that the central banks had fixed everything by flooding the market with liquidity and we were saved? Well, I guess we were until the “clock” started to run out which I guess is somewhere around now! It makes sense because we are now 5 years+ out from the onset of the train wreck and many deals were done with 5 year maturities. Back then I am sure that 5 years seemed like an eternity and allowed the losers to breath a sigh of relief but… it wasn’t long enough.
The problem as I originally wrote back in 2007 is that “liquidity” buys time and time only, it cannot make bad loans or bad derivatives “good.” Basically nothing has changed over the last 5 years with the exception that balance sheets up and down the ladder are that much more leveraged and the “problem” that much bigger. Forget that this is the world’s oldest bank and that according to them “they didn’t break any laws” (even if they did, no one would go to jail), just remember that there are over $1 quadrillion worth of derivatives out there. Yes, there are winners as well as losers but if the losers can’t pay then the “winners” also become losers.
That’s the problem with the wonderful derivatives market, they can never perform; they never could from day 1. The only thing derivatives had the power to do was make it “look” like everything was well and merely kicked the can down the road (sound familiar?). Kicking the can down the road has been the MO since 2007, hide the reality that you are busted and broke until “good times” return and no one will be the wiser. In fact, the MO (method of operation) of kicking the can goes all the way back (in reality to 1971 when we went off the Gold standard) to the magician Robert Rubin. He has actually come out and publicly said that ANYTHING is justified and the consequence be damned if you are forced to do something that buys as little as 6 months time. Yes, the former Sec. of the U.S. Treasury said this!
No matter what you hear or read, no matter how high the goosed Dow or S+P 500 go, just remember that 1,000’s upon 1,000’s of these ticking time bombs are spread throughout the banking and finance system. Any one of these can be the “one” that causes, starts, a domino collapse of the entire system. There are far more derivatives outstanding than there is money to settle these. There are far more derivatives out there than there is “stuff” to back them. This is the most obvious no brainer of all of them currently, derivatives which “pumped” the system up and were used to cover and hide the reality of a busted system will be the detonator that blows the entire system from the inside out.
THIS type of news which was hidden and buried can surface on any day at any time of the day which is why you cannot any longer trade. You can only accumulate more ounces to better your position. The phrase “counting ounces” will take on a new and very real meaning when the financial cascade finally takes hold!