derivatives + american brokers

  1. 3,685 Posts.
    lightbulb Created with Sketch. 13

    - Warren Buffett

    When the US General Accounting Office first issued a dire warning about the
    danger of derivatives to the world's financial system, no one batted an

    When the US Comptroller of the Currency first released figures regarding the
    extremely high exposure to derivatives by the nation's largest banks, the
    response was also muted.

    Now, however, there is a growing realization that derivatives are "financial
    weapons of mass destruction," as Warren Buffett pointed out in his annual
    letter to Berskshire-Hathaway investors.

    Right now the three largest banks in America actually have more dollars at
    risk in derivatives than they have in capital (after adjusting for some risk

    Bank of America has 205% more derivatives risk than capital ... Citibank has
    201% more ... and J.P. Morgan Chase has a shocking 655% more.

    I'm not talking about the bloated "notional" value of derivatives. I'm
    referring strictly to the actual risk that is associated with the
    derivatives positions, according to the regulators.

    Even in normal times, that's an unconscionable risk level. In today's shaky
    geopolitical and financial environment, the risk is even greater.

    "The macro picture is dangerous and getting more so," Buffett says. "Large
    amounts of risk, particularly credit risk, have become concentrated in the
    hands of relatively few derivatives dealers, who in addition trade
    extensively with one another."

    My view: Derivatives are a form of debt that have been building up for

    So far, the blow-ups have been increasingly shocking but survivable -
    Barrings Bank, a 223-year old pillar of British banking that was obliterated
    by $1.3 billion in derivatives losses ... Orange County, California, which
    lost $1.7 billion ... Long-Term Capital Management, which was killed by
    Russia's default and ... most recently, Enron!

    Now, however, the blow-ups may not be survivable. Unpredictable geopolitical
    events and corporate bankruptcies are more likely than ever to catch big
    banks flat-footed. Recent bankruptcies by major airlines - with more on the
    way - are just one example. Other, even larger blow-ups are inevitable.

    Your action: Stay away from banks that have a high exposure to derivatives,
    such as J.P Morgan, CitiGroup, and Bank of America. Just say no!

    To find out if your bank has a large derivative exposure, go to:

    66% Of Brokerage Firms Continue To Recommend Bankrupt Companies

    According to a new report by Weiss Ratings, the publicly available ratings
    from a staggering 66% of MAJOR Wall Street firm continue to recommend that
    investors buy or hold shares in failing companies ... right up to the day
    the companies file for Chapter 11 bankruptcy protection!

    The study examined publicly available ratings for 30 brokerage firms
    covering companies filing for bankruptcy between September 1 and December
    31, 2002.

    This actually represented a modest improvement compared to earlier studies.
    Of the brokerage firms examined between May 1 and August 31, 2002, the
    ratings from 74% recommended failing companies. And in the six months before
    that, between January 1 and April 30, 2002, the ratings from 94% recommended
    failing companies.

    My view: We're talking about bankrupt companies on the very day they are
    filing for Chapter 11! Heck, even one buy or hold rating is an egregious
    affront to investors.

    Given the widespread public outcry and investigations into Wall Street
    practices, you'd think all of these firms would have changed their ways by
    now. The fact that the majority of firms are still playing the same games
    boggles the mind.

    Proposals have been sent to the SEC for fixing this (The new rules they've
    proposed just don't cut it).

    Your action: Use your broker strictly for executing transactions - NEVER for
    advice. No matter how much you may like him or her personally, always get
    your advice from an objective, third-party source.

    The market is set for a major crash starting around May 20 then an
    upswing followed by a really big one about end September.

    Be warned.

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.