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There is a section at the end of today's report about the serious systemic exposure the global financial system still has to derivatives, now estimated to have well over $1 quadrillion nominal value, more than 20% larger than in 2008 when the Great Financial Crisis occurred.
Articles about events, conflicts and disease around the world
Banking for Pot Industry Hits a Roadblock (The New York Times) Banking regulators just said no to a financial institution that aims to be the first to serve the expanding marijuana industry in Colorado. The Fourth Corner Credit Union in Denver applied in November to theFederal Reserve for a “master account,” which would allow it to interact with other financial institutions and open its doors to some of the hundreds of state-licensed marijuana businesses in Colorado. The Fed branch in Kansas City has denied the application. The credit union, which has the backing of Colorado’s governor, fired back on Thursday night by filing a lawsuit in federal court in Denver against the Fed, demanding “equal access” to the financial system.
Turkish troops killed in 'Kurdish PKK suicide blast' (BBC News) Two Turkish soldiers have been killed and 31 wounded in a suicide attack by Kurdish PKK militants, the Turkish military says. A tractor laden with explosives was driven at a military police station, a statement said. The attack happened early on Sunday near the town of Dogubayezit in Agri province, near the border with Iran. Attack isbelieved to be in retaliation for Turkey bombing of Kurds in northern Iraq.
Call to widen MH370 debris hunt (BBC News) Malaysia is asking other Indian Ocean islands near French-owned Reunion to be on the lookout for more possible debris after a wing part suspected of being from missing flight MH370 came ashore. The Malaysia Airlines plane, carrying 239 people, vanished in March 2014.
Other Economics and Business Items of Note and Miscellanea
Debt, Taxes, and Confusing Economics (Asbarez) The author discusses the difficulties facing countries with high debt/GDP ratios when the debt is owed in foreign currency(ies). He is most focused on Armenia, but that is not of as much interest to many readers as is the following about the tax/GDP ratio:
This ratio (as a percentage) lies in the mid-30s in the developed world. The U.S. is an outlier at around 25% over the course of the last half century (it is considered a tax haven!).
How can Puerto Rico get out of this 'mess'? (CNBC) Some Puerto Rican debt default is expected over the weekend. Why doesn't the U.S. allow Chapter 9 bankruptcy as it does for U.S. municipalities? This article says even without Capter 9 PR may still be able to "get by".
Silver Supply Crunch To Push Prices Higher - Capital Economics (Kitco News) One U.K.-based research firm expected silver prices to recover over the next couple of years due to a supply crunch; however, given the recent decline in metals prices, they now say this recovery might come sooner. Oversupply remains one of the key factors depressing silver prices and, since silver is mostly produced as a byproduct of mining other metals, the decline in commoditiy prices is drying up supply as miners of many netals cut back.
The Top-Paying STEM Jobs For Recent College Graduates (Forbes) Hat tip to Alun Hill. STEM (science, technology, engineering and math) degrees have some the highest salaries for those recently graduated. The highest two median pay jobs are both in petroleum: Reservoir Engineer ($101,000) and Petroleum Engineer ($96,000). If the price of oil remains depressed for a long time this may not be true in coming years. Number 20 on the list is Biomedical Engineer, median pay $56,400.
Global Derivatives: The $1.5 Quadrillion Ticking Timebomb (Emerging Equity) When investing becomes gambling, bad endings follow. The next credit crunch could make 2008-09 look mild by comparison. Bank of International Settlements (BIS) data show around $700 trillion in global derivatives. Along with credit default swaps and other exotic instruments, the total notional derivatives value is about $1.5 quadrillion – about 20% more than in 2008, beyond what anyone can conceive, let alone control if unexpected turmoil strikes.
Econintersect: Some argue that the notional value of derivatives has no meaning because most derivatives have offsetting positions so there is very little net exposure. With notional values of $1.5 quadrillion, if 99.9% have offsetting positions then the net "at risk" is $1.5 trillion, an amount that could be survived in a global economy with more than $75 trillion GDP. But is there a catch? We think not only a catch but catastrophic oversimplification of risk. If bankruptcy or similar collapse destroys just a tiny portion if the counterparty network, the entire financial system can experience a liquidity freeze because suddenly nobody is sure who may have been affected by loss of offsets. An example is the way that the Lehman bankruptcy triggered the panic crash in September 2008. The firm had a net derivatives exposure of approximately $75 billion at the end of 2007 (see next article). But the notional value of its derivatives holdings were $35 trillion, almost 500x the net value shown on their books. That was about 4-5% of the notional value of all global derivatives. Do you now understand how the rest of the world didn't know who would be losing counterparties after the dominos all fell? And the dominos didn't all fall for years - see articles below.
Big Banks and Derivatives: Why Another Financial Crisis Is Inevitable (Forbes) Not only are the problems with banking not fixed, they are now worse than in 2008, according to this article. The supposed transparency for derivatives markets resulting from Dodd-Frank is insufficient to resolve the liquidity freeze that will occur when one significant player goes belly up.
What’s Inside America’s Banks? (The Atlantic) This 2012 classic found that trust in banks was lower than ever. Authors are academic financial law professor Frank Portnoy and award winning investigative journalist Jesse Eisinger. Both have contributed to GEI. The bank investigated by these authors was JP Morgan Chase.
Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records uncovers the reason for these fears—and points the way toward urgent reforms.
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