Russian Roulette: Taxpayers Could Be on the Hook for Trillions in Oil Derivatives

[eridani]

http://www.nationofchange.org/2014/12/21/russian-roulette-taxpayers-hook-trillions-oil-derivatives/

What was and was not included in the exemption was explained by Steve Shaefer in a June 2012 article in Forbes. According to Fitch Ratings, interest rate, currency, gold/silver, credit derivatives referencing investment-grade securities, and hedges were permissible activities within an insured depositary institution. Those not permitted included “equity, some credit and most commodity derivatives.” Schaefer wrote:

For Goldman Sachs and Morgan Stanley, the rule is almost a non-event, as they already conduct derivatives activity outside of their bank subsidiaries. (Which makes sense, since neither actually had commercial banking operations of any significant substance until converting into bank holding companies during the 2008 crisis).

The impact on Bank of America, Citigroup, JPMorgan Chase, and to a lesser extent, Wells Fargo, would be greater, but still rather middling, as the size and scope of the restricted activities is but a fraction of these firms’ overall derivative operations.

A fraction, but a critical fraction, as it included the banks’ bets on commodities. Five percent of $280 trillion is $14 trillion in derivatives exposure – close to the size of the existing federal debt. And as financial blogger Michael Snyder points out, $3.9 trillion of this speculation is on the price of commodities.

Among the banks’ most important commodities bets are oil derivatives. An oil derivative typically involves an oil producer who wants to lock in the price at a future date, and a counterparty – typically a bank – willing to pay that price in exchange for the opportunity to earn additional profits if the price goes above the contract rate. The downside is that the bank has to make up the loss if the price drops.

As Snyder observes, the recent drop in the price of oil by over $50 a barrel – a drop of nearly 50% since June – was completely unanticipated and outside the predictions covered by the banks’ computer models. The drop could cost the big banks trillions of dollars in losses. And with the repeal of the Lincoln Amendment, taxpayers could be picking up the bill.

[marym625]

1. a whole new meaning

To the house always wins

K&R

[Warpy]

2. When the amount is in the trillions, taxpayers can no longer be on the hook

because there aren't enough assets in the whole country to cover the derivatives casino. If oil bets are what bring the casino down, well it wouldn't have lasted much longer, anyway.

Expect money to disappear overnight like it did in 1929. Expect the banks to close their doors until Uncle Sugar passes laws to restrict how much can be taken out at a time.

Don't expect small banks and credit unions to be immune. Everything is all cobbled together and if one goes, they all will.

I know it's coming. The banks know it's coming. Unfortunately, there is no way to prepare for a thing like this since it happens very quickly once a few big traders get cold feet and try to pull out. No one will know what was the right thing to do until a few years later when we count up who still has what.

Taxpayers won't be on the hook for it because taxpayers won't have that kind of money after 40 years of wage depression.

I just hope the oil bust doesn't do it. I want to be pushing up daisies when it all goes "poof."

[Demeter]

3. A Joke for the Occasion

Eleven people were hanging on a rope, under a helicopter. 10 men and 1 woman. The rope was not strong enough to carry them all, so they decided that one had to leave, Because otherwise they were all going to fall. They weren't able to choose that person, until the woman gave a very touching speech. She said that she would voluntarily let go of the rope, because, as a woman, she was used to giving up everything for her husband and kids or for men in general, and was used to always making sacrifices with little in return.

As soon as she finished her speech, all the men started clapping . . .. . . .

[golfguru]

4. Good one Demeter...

but do keep your day job!