Monday, January 30, 2012

US Bank Exposure To Toxic European Debt

Excellent graphic below showing the total debt exposure each of the "Too Big Too Fail" United States banks have to the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), all of which are currently insolvent and on life support from the IMF, ECB, and other European nations.

It labels the exposure in two parts:

1. Gross (meaning the total exposure)
2. Exposure after hedging

Click on graphic for larger image:



The second one, "exposure after hedging," I find interesting because this is the only exposure banks discuss when talking about their balance sheets. It means that Bank of America may have $14.4 billion in total sovereign debt on their balance sheet.  As a hedge, they have bought insurance (CDS) against the possibility of default on the debt or they have purchased another derivative type such as a put option.  Both of these tools are beyond the scope of this conversation to explain, but the important part of the "hedge" (which is never discussed) is that the payment of the hedge or insurance must be made by another entity - most likely another bank.  

If Italy were to default and Bank of America purchased their insurance through a French bank (French banks hold the lion's share of Italian debt), then that bank will have closed its doors long before Bank of America has the chance to collect on the insurance payout (think Lehman).

Can you see how the financial system is interconnected?  This is why no one is allowed to fail and we continue to move through a series of rolling bailouts backstopped by the global central banks.  Do you think their printing has slowed since you have not heard news of quantitative easing recently in the news?  Not a chance.  The following graph shows the total growth of the balance sheets for the largest central banks around the world.


The last man holding paper currency loses when the music stops.


For more on the "next" sovereign crisis see Shorting Japanese Government Debt: The Trade Of The Century.

9 comments:

  1. These charts are are great! can you provide me with the source?

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    1. First chart comes from the New York Times. Second comes from a blog called the Big Picture which I have listed on the blogroll to the right and one that I strongly recommend.

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  2. Love the article - it's so simple. Hopefully more people will read articles like this instead of listening to CNBC, CNN, and their nonsensical claims. Economics is purposefully made perplexing by mainstream media so that the elites can continue to fleece the sheeple.

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    1. I agree. I think 3 solid Austrian economic books will put a student further ahead than 4 years of economics in college, and it will save them about 100 grand.

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  3. This is just the sovereign debt. What if BofA loaned a French bank $1B, and it goes under when Italy defaults? No worries, they have it backstopped with a CDS with .... and Italian bank that just went belly up, too. The real exposure is anyone with money loaned to PIIGS, or loaned to anyone with a lot of money loaned to PIIGS, or loaned to anyone with a lot of money loaned to someone else with a lot of money loaned to ........ loaned to PIIGS. Time to find out if Dodd-Frank really means no bailouts to too-big-to-fail.

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    1. Yes, both Dodd and Frank will soon find out that Net has met Gross. Although we enter the next crisis with their ability to market their books to myth. We'll see how long that firewall holds.

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  4. Your blog is very well written. Congratulations!

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  5. Great article. The graph that you have used to explain is perfect. Good work.

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