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Derivatives Spread the Panic

Feb. 10, 2016 (EIRNS)—Behind the smokescreen of a flurry of attempts by trans-Atlantic central banks to halt the financial mudslide, the news is emerging over the past 48 hours that a blowout of the $700 trillion to $1 quadrillion derivatives market is coming up. Derivatives exposure did not start the financial collapse, but it will surely "end" it if Wall Street and London are not shut down fast, with Glass-Steagall measures.

Japan’s Nikkei News, in an article entitled "Touchy derivatives market spreading Deutsche Bank waves," said the derivatives market is now acting as a "fire accelerator" within the growing fire of bank panic. The Financial Times, "Investors flock to CDS amid fear over banks’ bonds," reported a huge pile-in to credit defaults swaps (CDS), insurance derivatives against defaults by Deutsche Bank, UBS, and a number of London banks, even as the price of these CDS is zooming up, showing the loss of confidence in those banks’ credit. Despite the neutral word choice, "investors," by the Financial Times, these derivatives all involve a couple of handfuls of London and Wall Street banks as counterparties. The rising risk of each others’ bad loans and declining credit is spreading among these banks: Contagion to Citibank, in particular, is reported. It is no accident that Deutsche and Citi are hugely invested in the so-called "high-yield energy" sector of the bond market, which is falling of a cliff.

Recent central bank moves have had no effect, or in the Bank of Japan’s case, worse than no effect. Fed chair Janet Yellen’s Congressional testimony today, which seemed to assure that the next few months would see no more rate increases, couldn’t prop up the Wall Street markets for even a day. A leak from Mario Draghi’s European Central Bank that it might start buying up bank stocks directly—prohibited by its charter—temporarily sent up Deutsche Bank’s stock. Nonetheless, the CDS "risk cost" of Deutsche Bank debt rose again, to 240 (240,000 euros to insure 10 million in debt), it is now equal with Unicredit and MPS as the riskiest major banks in Europe.

A sign of that panic within that bank, was a letter sent out by its senior credit analysis, one Dominic Konstam. Calling for bail-in to be put aside so that bail-outs can be resumed, the letter is desperate for central banks to provide more liquidity, fast. So much so, that it proposes letting banks charge their depositors negative interest on their savings, as well as deposit and withdrawal fees to confiscate those savings. Basel III requirements should be postponed; let the banks raise their leverage ratios; "open the refi spigot and ease liquidity."

Wall Street’s stock broadcaster Jim Cramer got no more hysterical than during his infamous 2008 on-air scream for Bernanke to bail out everything.

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