Goldman Sachs Federally-Insured Bank Loses $1.2 Billion in Interest Rate Derivative Bets

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by Pam Martens and Russ Martens, Wall St On Parade:

A week before Christmas when Americans were focused on either the impeachment proceedings or holiday preparations, the Office of the Comptroller of the Currency (OCC) quietly released its quarterly report on the trading and derivative activities of Wall Street’s casino banks. It contained a humdinger in, literally, red ink. The report showed that Goldman Sachs Bank USA, which is, insanely, a federally-insured bank backstopped by the U.S. taxpayer that is part of the Goldman trading colossus, had lost $1.24 billion trading interest rate derivatives during the third quarter of this year. According to the Federal Deposit Insurance Corporation, the bank only holds $149.8 billion in deposits while the OCC reports it has $49 trillion in notional derivatives (face amount). (See Table 7 in the Appendix at this link.)

Profits in other derivative trading areas, like the $1.14 billion Goldman Sachs Bank USA made trading foreign exchange derivatives, allowed the federally-insured unit of Goldman Sachs to eke out a $71 million net trading profit on the derivative bets it had made during the quarter, according to the OCC report.

If you want to understand the relevant history on why the New York Fed is currently throwing hundreds of billions of dollars each week at Wall Street’s trading houses, here’s a quick tutorial on the rapid financial collapse on Wall Street in 2008. Wall Street banks were very much aware in 2008 that they had created a house of cards by placing trillions of dollars of their derivative bets with weak counterparties. But they didn’t know just how much exposure each bank had or which counterparties would collapse first because the derivative bets were mostly private contracts between two counterparties. (That situation remains today.) So the Wall Street banks simply stopped lending to each other and credit markets froze.

That forced the Federal Reserve to throw a cumulative $29 trillion in all directions to bail out not just U.S. banks on Wall Street but the foreign banks that were on the other side of these reckless and irresponsible derivative trades.

This chart from the Financial Crisis Inquiry Commission shows just how much of a derivatives casino Goldman Sachs and the other major Wall Street banks had become by June of 2008.

Phil Angelides, the Chair of the Financial Crisis Inquiry Commission (FCIC) stated the following on June 30, 2010, at a hearing convened to examine “The Role of Derivatives in the Financial Crisis.”

“I must say that despite 30 years in housing, finance, and investment — in both the public and private sectors — I had little appreciation of the tremendous leverage, risk, and speculation that was growing in the dark world of derivatives. Neither, apparently, did the captains of finance nor our leaders in Washington.

“The sheer size of the derivatives market is as stunning as its growth. The notional value of over the-counter derivatives grew from $88 trillion in 1999 to $684 trillion in 2008. That’s more than ten times the size of the Gross Domestic Product of all nations. Credit derivatives grew from less than a trillion dollars at the beginning of this decade to a peak of $58 trillion in 2007. These derivatives multiplied throughout our financial markets, unseen and unregulated. As I’ve explored this world, I feel like I have walked into a bank, opened a door, and seen a casino as big as New York, New York. Unlike Claude Rains in Casablanca we should be ‘shocked, shocked’ that gambling is going on.

“As the financial crisis came to a head in the fall of 2008, no one knew what kind of derivative related liabilities the other guys had. Our free markets work when participants have good information. When clarity mattered most, Wall Street and Washington were flying blind…

“In June 2008, Goldman’s derivative book had a stunning notional value of $53 trillion.”

After a decade of so-called financial reform, Wall Street and Washington are still flying blind and Goldman now has a federally-insured bank to gamble in derivatives as federal regulators yawn, Congress de-regulates further and the New York Fed relaunches its multi-trillion-dollar bailout funnel.

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