The dysfuntion of today's financial system

There are two news articles out today that provide a sort of through-the-looking-glass view into the world of big banks.


(AP) -- U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter, as the level of risk eased in the global market for the complex financial instruments, according to a government report released Friday.
Derivatives, traded in an unregulated $600 trillion market, were partly blamed for the financial crisis that ignited a year ago. The value of derivatives hinges on an underlying investment or commodity -- such as currency rates, oil futures or interest rates....A total of 1,110 U.S. commercial banks reported trading or holding derivatives at the end of the second quarter, up 47 from the first quarter, according to the Office of the Comptroller of the Currency, a Treasury Department agency. Still, five big banks -- JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. -- account for 97 percent of the total derivatives reported to be held by U.S. commercial banks.
The agency's second-quarter report found that the total value of derivatives held at U.S. commercial banks rose to $203.5 trillion, up by $1.5 trillion, or about 1 percent, from the first quarter.


(Reuters) - U.S. regulators say that the level of losses from syndicated loans facing banks and other financial institutions tripled to $53 billion in 2009, due to poor underwriting standards and the continuing weakness in economic conditions.
According to the Shared National Credit Program (SNC) 2009 Review, an annual inter-agency report released on Thursday, credit quality deteriorated to record levels with respect to large loans and loan commitments.
According to the report, criticized assets rated 'special mention', 'substandard', 'doubtful' and 'loss', touched $642 billion, representing 22.3 percent of the SNC portfolio, compared with 13.4 percent a year ago.
Classified assets rated 'substandard', 'doubtful', and 'loss,' rose to $447 billion from $163 billion in 2008.
The volume of SNCs rated 'doubtful' and 'loss' in 2009 rose almost 14-fold to $110 billion, while non-accrual loans touched $172 billion, up from $22 billion in 2008.

U.S. Financial sector loan losses were triple the previous record in 2002. Meanwhile, commercial banks are speculating, and making profits, on derivatives on ever increasing amounts.

This dysfunction is beyond insanity. Loans are real things. Derivatives aren't. Just like this so called "recovery", this situation is not based on reality.

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just incredible

but this is what happens when instead of corralling the animal farm back into the barn. Instead we give 'em lots of feed, tied the barn doors open and what a surprise they are all running wild and amok. (Zombie bank pig fest, catered by the U.S. taxpayer).

You saw The SIGTARP inspector video interview (in the Instapopulist?) He is saying the current financial situation is more dangerous now than 1 year ago.

Yippeee, great, doing it now with our money, awesome!

Regarding the first article.

Today in FT Gillian Tett wrote an article called: Ghost of AIG Refuses to Fade as CDS Data Remains Elusive. It talks about nothing has really changed in the CDS market and it refers to this European Union Report:

Credit Default Swaps and Counterparty Risk (pdf file) - Financial Information for the Rest of Us.

One minor correction

"JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. -- account for 97 percent of the total derivatives..."

One minor point: I believe they meant Morgan Stanley (instead of Wells Fargo & Co.).