Why Is Citi Gobbling Derivatives?
By Daily Bell Staff - August 19, 2016

This U.S. Bank Is About to Relive the 2008 Derivatives Nightmare … Deutsche Bank AG (NYSE: DB) – with its stock now trading at a 30-year low – was recently called the world’s riskiest financial institution by the International Monetary Fun … In a last-ditch effort to save itself, DB is trying to dump a bucket load of credit derivatives … You would think no one would buy these weapons of financial mass destruction… but you’d be wrong. – Money Morning (here)

The bank in talks to buy the Deutsche Bank derivatives is Citigroup Inc. according to this article. Well written and focused, it asks why Citi would buy more derivatives when last year Citi purchased $250 billion from Deutsche Bank.

The idea is that Wall Street is simply too greedy for its own good and that this greed can rob bankers of perspective.

Citi is making deals because it can make money and damn the consequences. We’re not quite sure this interpretation is the correct one, as we’ll show in a moment.

Certainly, Citi’s actions don’t make much sense from a longer-term perspective. Most banks are trying to downsize. For instance, Credit Suisse Group AG just sold $380 billion of derivatives to … Citigroup! And this does seem strange, as Citi “nearly destroyed itself” with derivatives in 2008.

The US government had to guarantee up to $300 billion or more to ensure that Citi stayed solvent and now, given all the derivatives that Citi is buying, the US government might have to step in again if the market sours.


Bizarrely, this is a strategy that Citi has been pursuing for some time.  Three years ago, the bank separated its derivatives and cash traders and created dedicated derivatives teams – including a “risk optimization” team led by Vikram Prasad, who explains, “You can’t have every trader obsessing over every capital measure. By giving that responsibility to a dedicated team, we’re using our resources in a more efficient way.” Right.

… “We consider single-name CDSs to be an integral part of our overall credit business,” says Brian Archer, Citi’s New York head of global credit trading. “A large number of our biggest clients still want to trade the product and use it to move risk. We have the appropriate resources in place to service that demand.”  In other words, Citi is playing with explosives – and it’s proud of it.

The article goes on to inform us that the derivatives “monster” is about $650 trillion, which is a lower estimate than the one we’re familiar with, which is well over $1,000 trillion.

But even at $650 trillion, the market is “36 times the size of the U.S. GDP and over eight times larger than the world GDP – the entire global output of the entire world in a year.”

From Global Research in 2015:

Five Banks Account For 96% of $250 Trillion in Outstanding US Derivative Exposure  … A mere 5 banks (and really 4) account for 95.9% of all derivative exposure … The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure.

This is a sizable part of the total derivatives market, however large it may be. And within a larger context these banks are in some sense an extension of the US government, and certainly of the Federal Reserve.

Is it possible the US government and the Fed are using Citi as a stalking horse to gather derivatives contracts?

If these derivative relationships are jeopardized by a market event, or even by a serious crash, could the Fed can step in and print the money necessary to stem the proverbial tide?  The dollar remains the world’s reserve currency, after all.

And isn’t this in a sense what Ben Bernanke did when he sent $16 trillion around the world in 2008-2009 to ensure there was no larger collapse of the entire financial system (here).

The more derivatives owned by US banks, the more control presumably that the Fed has over the market. Perhaps it can create solvency for some participants while leaving others out, as it did during the throes of the financial crisis when it salvaged Merrill Lynch but sank Lehman Brothers.

The Fed’s power over market meltdowns has been suggested before. Here is an article at Newsmax entitled, ‘Aftershock’ Author Wiedemer: “Fed Can Stop Stock Meltdown by Printing More Money.”

The Federal Reserve can stop the nation’s stock market meltdown just by printing more money in yet another round of quantitative easing, Robert Wiedemer, co-author of “Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown,” told Newsmax TV.

Many knowledgeable observers would deny vehemently that the Fed could stabilize the market in the face of a significant derivatives crash – and we’ve accepted this conclusion in the past. Yet Citi is certainly not acting like a bank that fears the almost inevitable consequences of its actions.

Perhaps there have been private assurances given that the Fed intends to do what is necessary to ensure Citicorp’s continued existence – and that of other Wall Street firms and significant overseas banks as well. In doing so, perhaps Fed officials believe they can select additional winners and losers while aiming the larger market in a desired direction.

Conclusion: This would be quite an arrogant series of assumptions, yet arrogance is not in short supply at the top end of American institutions. Of course, consider the corollary: What if they’re wrong?


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