Martin D. Weiss: Do you believe what government officials and experts are saying about the debt crisis? If so, you’re taking your financial life into your hands. Just consider how many times they’ve been wrong, issued deliberately misleading statements, or simply lied:
In 2007, they swore on a stack of Bibles that the debt crisis was limited to subprime mortgages.
But the crisis promptly spread to all kinds of mortgages, ripping through giant mortgage lenders like Countrywide, Fannie Mae, and Freddie Mac.
In 2008, they admitted it had spread, but swore that it was strictly contained to the housing and mortgage sector.
But in a few short months, it had enveloped commercial paper, money markets, and nearly all of Wall Street. Nearly every one of America’s largest banks either failed or came within a hair of insolvency.
In late 2009, they rescued the bankrupt banks and mortgage lenders using the $700 billion in emergency capital approved under the Trouble Asset Relief Program (TARP). Then, they ran deliberately lenient “stress tests” on the biggest banks to “prove” to the public that the emergency had passed.
But with the government now assuming liability for trillions of mortgages and other bank obligations, they transformed a Wall Street debt disaster into an even larger Washington debt disaster: The federal deficit ballooned to four times its pre-crisis size. And in the euro zone, where governments had also pumped massive sums into bankrupt banks, the weakest countries like Greece began to collapse.
In 2010, the European Union and the International Monetary Fund put together a sovereign debt rescue package that was even larger than TARP. They pulled Greece from the precipice and vowed never to let the contagion reel out of control.
But within a few short months, the contagion toppled Ireland and Portugal … threatened a similar fate for Spain, Italy, and Belgium … and even raised serious questions about the financial fate of the two largest economies in the euro zone — France and Germany.
Clearly, each outbreak of the contagion, each government rescue, and each new happy-talk pronouncement has merely spawned a bigger disaster, impacting bigger institutions … gutting the portfolios of more investors … and ruining the lives of millions more Americans.
Now, here we are halfway into 2011 and they’re at it again — this time with a complete package of misleading statements and lies that make all previous ones seem candid by comparison.
Lie #1. They’re again saying that the debt crisis of 2008-09 is “history.”
The truth: The core cause of the crisis — the gigantic pyramid of high-risk derivatives — has never gone away.
Quite the contrary, the pile-up of derivatives on the books of major U.S. banks is now much larger — $244 trillion, compared to less than $200 trillion before the debt crisis, according to the U.S. Comptroller of the Currency (OCC).
Lie #2. They say that America’s largest banks have virtually no exposure to a Greek debt default or a broader European sovereign debt crisis.
The truth: All major European and U.S. banks are linked through an even larger global network of derivatives, now representing more than $600 trillion, according to the Bank of International Settlements.
Therefore, even though U.S. banks may not hold large amounts of European debts themselves, they are directly exposed to European banks that do hold large amounts of loans to Greece, Ireland, Portugal, and others in jeopardy.
Lie #3. They insist that America’s largest banks are safe.
The truth: The largest U.S. banks continue to hold nearly all of the derivatives in the country.
Goldman Sachs (NYSE:GS) has $44.9 trillion in derivatives.
Bank of America (NYSE:BAC) has $52.5 trillion.
Citibank (NYSE:C) has $54.1 trillion.
And JPMorgan Chase (NYSE:JPM) towers over all others with $79.5 trillion of these potentially dangerous investments.
In total, JPMorgan, Goldman, Citibank, and the BofA alone are exposed to $234.7 trillion in derivatives. In contrast, among the thousands of other U.S. banks, the grand total of derivatives is a meager $9.3 trillion. In other words, these four banks are exposed to more than 25 times the sum total of all derivatives held by every other bank in the United States.
Never before has so much financial power — and risk — been concentrated in the hands of so few!
Yes, these numbers, reflecting the “notional” value of the financial instruments at play, are far larger than the actual amounts invested. But still, the risks are huge …
- The derivatives held by Bank of America are 36 times larger than TOTAL assets;
- At JPMorgan Chase, they’re 46.1 times larger than the assets;
- At Citibank, 46.6 times larger; and
- At Goldman Sachs Bank, a shocking 533 times larger!
Yes, in recent months, some banks have reduced somewhat their exposure to defaults by their counterparties. But here again, the exposure remains massive: According to the OCC, for each dollar of capital …
- Bank of America has $1.82 in credit exposure to derivatives;
- Citibank also has $1.82;
- JPMorgan Chase has $2.75; and
- Goldman Sachs is, again, at the greatest risk of all — with $7.81 in credit exposure for each dollar of capital.
That means that if JPMorgan’s counterparties defaulted on 36% of their derivatives, every last dime of the company’s capital would be wiped out. And at Goldman Sachs, defaults on just 13% of its derivatives would wipe out its capital.
Lie #4. Misinformation about the government’s supersized debts is equally egregious. They want you to believe that, although large, the government’s debts are far below the danger zone — thought to be around 100% of GDP.
The truth: According to the Fed’s latest Flow of Funds report, the U.S. Treasury owes a total of $9.6 trillion, 64% of GDP, which isn’t too bad. But the U.S. government is also responsible for $7.6 trillion in debts owed by government agencies, such as Fannie Mae and Freddie Mac.
The U.S. government’s total debt burden: $17.2 trillion or 115% of GDP — similar or WORSE than that of countries like Greece, Ireland, Portugal, and Spain!
Lie #5. They argue that America is special because it controls the world’s dominant reserve currency.
The truth: Yes, that gives Washington the ability to print money with impunity … press other rich countries to accept its debts … and borrow huge amounts abroad to finance its deficits. But it’s more of a curse than a blessing!
It means that, more so than any other major nation, the U.S. government is beholden to investors overseas — often the same investors who have repeatedly attacked countries like Greece and Ireland. Ultimately, that could make the U.S. even more vulnerable than Europe.
What to Do
First, needless to say, don’t believe government officials. Follow the hard facts and protect yourself accordingly.
Second, if you haven’t done so already, check the Weiss Financial Strength Rating of your bank, credit union, or insurance company. Simply go to http://www.weisswatchdog.com/, sign up, add your institution to your watchlist, and you’ll get our Weiss Financial Strength rating immediately.
(Just be sure to enter strictly the first word of your institution’s name. Our search function will do the rest.)
If your institution has a Weiss Financial Strength Rating of D+ or lower, seriously consider shifting all — or almost all — your money elsewhere. And if you have a choice, stick with institutions that are rated B+ or higher.
Third, join me on my Facebook page, where I post comments and answers to questions almost daily.
Related ETFs: Financial Select Sector SPDR ETF (NYSE:XLF), ProShares Ultra Financials (NYSE:UYG), Direxion Daily Financial Bull 3X Shares (NYSE:FAS), Direxion Daily Financial Bear 3X Shares (NYSE:FAZ), ProShares UltraShort Financials (NYSE:SKF).
Good luck and God bless!
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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