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The
U.S. Treasury Department's Office of the Comptroller of the Currency (OCC)
has just released the Quarter 4 2009 bank derivatives report, which can be
found here:
http://www.occ.treas.gov/ftp/release/2010-33a.pdf
This
report contains shocking new evidence that can be interpreted only as blatant
manipulation of the silver market. Before looking at that evidence
specifically, consider some other important points in the report:
"Executive
Summary.
"--
The notional value of derivatives held by U.S. commercial banks increased
$8.5 trillion in the fourth quarter, or 4.2 percent, to $212.8 trillion.
"--
U.S. commercial banks reported trading revenues of $1.9 billion in the fourth
quarter, down 66 percent from $5.7 billion in the third quarter. For the
year, banks reported record trading revenues of $22.6 billion, compared to a
loss of $836 million in 2008.
"--
In the fourth quarter, net current credit exposure decreased 18 percent, or
$86 billion, to $398 billion. Net current credit exposure dropped 50 percent
during 2009.
"--
Derivative contracts remain concentrated in interest rate products, which
comprise 84 percent of total derivative notional values. The notional value
of credit derivative contracts, at $14 trillion, represents 7 percent of
total notionals. Credit derivatives notional totals increased by 8 percent
during the quarter."
Imagine:
an increase of $8.5 trillion in notional value of derivatives in just three
months.
It
sure looks like the banks are working hard to reduce risk and avoid a
recurrence of the financial meltdown of 2008 that was caused by the failure
of Lehman Bros. and its monstrously oversized derivatives book.
It
also looks like the regulators are working hard to make sure that the risks
are not concentrated in a few banks that are "too big to fail." The
comments in parentheses are mine, not those of the OCC, although you could
probably have worked that out for yourself:
"A
total of 1,030 insured U.S. commercial banks reported derivatives activities
at the end of the fourth quarter, a decrease of 35 banks from the prior
quarter.
"Derivatives
activity in the U.S. banking system continues to be dominated by a small
group of large financial institutions. Five large commercial banks represent 97
percent of the total banking industry notional amounts and 88 percent of
industry net current credit exposure. While market or product
concentrations are normally a concern for bank supervisors, there are three
important mitigating factors with respect to derivatives activities.
"First,
because this report focuses on U.S. commercial banking companies, there are a
number of other providers of derivatives products whose activity is not
reflected in the data in this report."
(Do
you seriously expect us to believe that these other providers significantly
dilute a 97 percent monopoly?)
"Second,
because the highly specialized business of structuring, trading, and managing
derivatives transactions requires sophisticated tools and expertise,
derivatives activity is concentrated in those banking companies that have the
resources needed to be able to operate this business in a safe and sound
manner."
(You
have to be kidding me! Where have you guys at the Treasury been the last two
years?)
"Third,
the OCC and other supervisors have examiners on-site at the largest banks to
continuously evaluate the credit, market, operation, reputation, and
compliance risks of derivatives activities."
(And
how did that work out for you in 2008?)
"In
addition to the OCC's on-site supervisory activities, the OCC continues to
work with other financial supervisors and major market participants to
address infrastructure issues in OTC derivatives, including development of
objectives and milestones for stronger trade processing and improved market
transparency across all OTC derivatives categories."
(How
much more "transparency" do you need to "see" that $206
trillion of derivatives in five banks with combined assets of a measly $5.4
trillion is a "daisy-cutter" bomb big enough to wipe out all things
paper on the planet?)
You
have to love those "mitigating factors" that the regulators offer
as to why five banks owning 97 percent of $213 trillion of derivatives is not
a problem. The increase in notional value of all derivatives in just three
months is equal to 75 percent of the U.S. gross domestic product. Do the
"sophisticated tools" that these bankers require to write
derivative contracts include bongs and the strongest hallucinatory drugs on
the planet?
Let's
have a look at the gold and precious metals derivatives and compare Q3 to Q4
2009.
The
gold derivatives of all maturities declined 1.3 percent to $99.9 billion,
which was due to a decline in JPMorgan Chase (JPM) holdings of 1 percent to
$82.1 billion and a decline in HSBC holdings of 11.2 percent to $16.2
billion.
But
the real shocker is in silver. The precious metals (silver) derivatives of
all maturities increased by a mind-boggling 37 percent, from $9.29 billion to
$12.8 billion. This came principally from increases in the less-than-one-year
maturities where the JPM holdings increased 34 percent to $6.76 billion and
HSBC holdings increased 58 percent to $4.7 billion. (Despite the radically
different percentage increases, interestingly the increases at JPM and HSBC
were identical in dollar amounts at $1.7 billion.)
This
increase in notional value of silver derivatives represents approximately 220
million ounces, which is 125 percent of the global production of silver
during the quarter -- and that is only the increase. The entire notional
value represents 106 percent of annual global production.
What
possible legitimate purpose could such a monstrous derivative position be
serving with a maturity of less than one year?
The
only purpose I can think of is for manipulation of the silver market. I am
not a regulator but I can't think of any "mitigating factors" for
that.
Adrian Douglas
Marketforceanalys.com
Adrian
Douglas is proprietor of the Market Force Analysis newsletter (www.marketforceanalysis.com) and a member of GATA's Board of Directors.
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