Posted by Ann Barnhardt - September 26, AD 2011 9:09 PM MSTHere is a piece from ZeroHedge.com that hopefully will make you all understand, once and for all, that this ain't the 1930's, and that there is absolutely no way in hell that this Republic is going to make it to November 2012.
HERE IT IS.
Summary: The five largest banks in the U.S. (JP Morgan Chase, Citibank, Bank of America, Goldman Sachs and HSBC) are carrying $238 TRILLION dollars in derivative exposure. JP Morgan alone is carrying $78 TRILLION in derivative exposure BY ITSELF.
Okay, what the hell is derivative exposure? What this is referring to are over-the-counter non-exchange traded forward delivery (or "futures") contracts of various kinds. I am a futures broker, but I only execute futures contracts on the futures exchanges, namely the Chicago Mercantile Exchange and the New York Mercantile Exchange. About ten years ago a new "novelty" emerged in the futures business - the so-called "over-the-counter" contracts. There was a kid in the office I worked in who got wind of this and had all kinds of stars in his eyes about making a killing off of these "OTC" contracts because the brokers' commissions were not a flat fee but a percent of the contract value. Here's the problem with OTC contracts: there is no exchange standing between the buyer and seller as a guarantor.
In my business, when a customer executes a trade on a futures or options contract, it makes no difference who the other guy is on the other side of the trade, be it executed electronically or in the pit. None of us have to worry for a second about the counterparty on our executions because the EXCHANGE ITSELF stands between ALL transactions as the ultimate guarantor. The exchange then enforces the financial requirement rules with the Clearing Houses, the Clearing Houses enforce the financial requirement rules with the brokers, and the brokers enforce the financial requirement rules with the customers. That is the chain of financial responsibility. So, even if a customer bugs out and fails to financially perform on a contract, the contract WILL BE MADE GOOD by extracting the money from the broker, then the Clearing House and finally the Exchange. This massive enforcement buffering is what gives the system integrity.
OTC contracts have no exchange. They are a flipping free-for-all. If someone bugs out on a contract, the poop hits the fan. The counterparty has their pants around their ankles and the broker is caught in the middle. That's why when that kid in my office years ago got all starry-eyed, I thought to myself, "I wouldn't do that OTC crap if you put a gun to my head - no matter what the commissions were. It would be Russian Roulette. Eventually someone would default and it would financially destroy the broker instantly, and perhaps the counterparty as well."
Let's take my business - cattle futures. One contract is 40,000 pounds of live cattle. The spot contract settled at $119.725 per hundred pounds today. So, 40,000 pounds X $1.19725 (shift the decimal) = $47,890 total value of the contract. Since this is an exchange traded instrument, the customer doesn't really don't have to worry about default and can go ahead and book that $47,890 today, and it will be offset at a later time, and the net of the entry and exit will be the P&L. The contract isn't going to default, so the derivative exposure is limited.
Okay. These banks are carrying these OTC futures contracts with NO exchange to guarantee anything. And they are carrying these contracts largely WITH EACH OTHER. So JP Morgan might be the long and Goldman Sachs, or some insolvent bank in Europe is the short on the other side. If these banks default, which is now a mathematical certainty because they are not only insolvent, but insolvent multiple times over and there isn't enough money in the world to bail them out, there is going to be a cascading default on all of these OTC contracts.
Now look at the value and exposure of these OTC derivatives again: the top 5 banks in the US alone have exposure of $238 TRILLION dollars.
The total GDP of the United States is $14.5 Trillion.
The total GDP of China is $6 Trillion.
The total land mass on earth is 36.8 billion acres. If every acre of land on earth was "sold" for $6467 per acre, that would total $238 Trillion.
JP Morgan BY ITSELF has derivative exposure equal to over FIVE TIMES the value of the entire US GDP.
And no, there will not be a 1:1 offsetting in a collapse, because the collapse will be asymmetrical, and the bankrupt party will first pursue FULL payment on its "longs" (think of these as accounts receivables) while its "shorts" (accounts payable) will only pay out 20 cents on the dollar OR LESS. In other words, these entities will tear each other apart in a mad dogfight and this dogfight will take the entire world down with it.
TWO HUNDRED AND THIRTY-EIGHT TRILLION DOLLARS.
AND THAT IS JUST FIVE BANKS.
AND THE MASSIVELY CORRUPT AND INCOMPETENT SECURITIES REGULATORS, BOTH GOVERNMENTAL AND PRIVATE, SAT BY AND WATCHED THIS HAPPEN. That is what happens when you let a group of criminals run a bureaucracy of affirmative action hires to "audit" the financial industry. Scroll down and read my post titled "There Must Be A Reckoning."
It's over. There is no coming back from this. The only thing that can happen is a total and complete collapse of EVERYTHING we now know, and humanity starts from scratch. And if you think that this collapse is going to play out without one hell of a big hot war, you are sadly, sadly mistaken.
Here is an intellectually honest trader who was interviewed this morning by the BBC. As much as you may not want to believe it, what this guy says is correct. This iteration of human civilization is approaching an end.