Four Largest Banks Are Now Almost As Big As US GDP: Accounting Hides Risks - Taleb on Fragility

This is what happens when one allows the Banks to write their own reform rules in the aftermath of a financial crisis that was spiced with ideology, campaign contributions, and fraud.

JP Morgan, Wells Fargo, Citigroup, and Bank of America, and massively interlocked derivatives positions that are 'netted out' for accounting purposes, but which collapse in chain reaction effect when they encounter counter-party failure, frame this unhappy picture. That is the heart of 'too big to fail.'

And this does not include foreign based banks doing substantial business in the States, that also had to be supported by the Fed during the financial crisis. Or related firms like brokerages, faux banks like Goldman, and camp followers such as AIG and other non-bank financial sector corporations.

To Big To Fail still represents a serious risk to the financial system, and the failure to reform is clear policy error that is owned by the Fed, the Congress, and the Administration.

There will be no sustainable recovery until the Banks are restrained, the financial system is reformed, and balance is restored to the economy.

Bloomberg
U.S. Banks Bigger Than GDP as Accounting Rift Masks Risk
By Yalman Onaran
Feb 19, 2013 7:01 PM ET

Warning: Banks in the U.S. are bigger than they appear.

That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are -- or about the size of the U.S. economy -- according to data compiled by Bloomberg.

“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”

U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.

Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.

JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show. Total assets of the country’s banking system would be 170 percent of economic output, still lower than 326 percent for Germany.

U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.

Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles. The government had to rescue American International Group Inc. with a bailout that ballooned to $182 billion after the insurer couldn’t pay banks on derivatives tied to those bonds....

Read the rest here.

Gold Daily And Silver Weekly Charts - Gold Target Price Reached Intraday

See the intrady commentary on the metals here.

See comments on the Fed's minutes, which shook the equity markets here.

I think those remarks and the subsequent price declines were more indicative of the overbought condition of stocks than any serious convictions on the part of the Fed to actually prematurely end their QE before the conditions in the real economy which they have cited are met.

If they taper the QE purchases, it will because they choose to do something else to stimulate the economy, rather than just prop up the banking sector's bad debts.

I am beginning to consider adding to long term metals positions since the price has hit the targets I set out last week.  I will give it another day to think about it. 

Copper took a pounding today on rumours that a fund was liquidating longs.

The precious metals, both gold and silver, are rather oversold, and the managed funds are holding what appear to be untenably large short position. 

SP 500 and NDX Futures Daily Charts - Fed Say What?

"Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy.

A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.

Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred.

A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability; they also stressed the importance of communicating the Committee’s commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions.

In this regard, a number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles, either as a supplement to, or a replacement for, asset purchases...

Similarly, one member raised a question about whether the statement language adequately captured the importance of the Committee’s assessment of the likely efficacy and costs in its asset purchase decisions, but the Committee decided to
maintain the current language pending a review, planned for the March meeting, of its asset purchases...

Ms. George [Kansas City Fed] dissented out of concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in inflation expectations.

In her view, the potential costs and risks posed by the Committee’s asset purchases outweighed their uncertain benefits. Although she noted that monetary policy needed to remain supportive of the economy, Ms. George believed that policy had become too accommodative and that possible unintended side effects of ongoing asset purchases, posing risks to financial stability and complicating future monetary policy, argued against continuing on the Committee’s current path."

FOMC, Fed Minutes, January 2013

Stocks dropped hard today, albeit from a lofty height reached with few corrections. The trend is not yet broken.

The cause was said to be the release of the January Fed minutes, which suggested that QE will not be everlasting.

I think the correction was as much concerned about the lack of serious work being done in Washington about the sequester, and in particular to address a broken economy.

But in reality the stock market was reaching into bubble territory, with complacency at an extreme.  And the economy has simply not caught up with pricing.  And it may not for some time.

Forecasters keep reaching for the ever receding recovery. And I think it will keep receding, because of the policy error of the Federal Reserve and the Treasury in supplying stimulus to rescue bankers and traders from their own mismanagement and speculation, without performing their most imporatant obligations to the public and the real economy.

The cynical nature of Washington these days is hard for most people to understand.  Those political denizens of the Beltway just do not care, judging by their servile attention to special interests, and preoccupation with personal enrichments and power.  It is probably the tail end of a long running trend, culminating in the rise of a generation which has suckled on the gospel of greed.

SP 500 Futures Intraday

In all our quest of greatness,
like wanton boys, whose pastime is their care,
we follow after bubbles,
blown in the air.

John Webster

Stocks took a serious turn lower after the January Fed minutes release caused some concern that the Fed would begin to diminish their QE strategy.

Well, they might switch it to some other more effective method of providing relief for the monetary mismanagement of the financial system, but the idea that they would do so because the economy is recovering or the banking system is healthy is ludicrous.

Forecasters Keep Seeing a Recovery Just Around the Corner

I attribute this to jawboning, perhaps wishful thinking, and certainly more perception management.

Bernanke and the boys are caught in a box of their own construction, and they do not see a clear way out.  Or perhaps they do, but they are too servile to the monied interests to take it.