Tags: too big to fail | tbtf | glencore | banks

How Large Is the Exposure of TBTF Banks to Glencore?

Image: How Large Is the Exposure of TBTF Banks to Glencore?

By    |   Thursday, 08 Oct 2015 07:08 AM

On Wednesday the Dow registered a gain of 120 points, which is commonplace under the new volatility paradigm. This is consistent with the possibility that a year-end rally could take place without any intervention from the Fed.

However, another possible motivation for Fed intervention could be to respond to the collapse of one or more institutions that could threaten the fragile recovery.

When this writer predicted such an event for the coming year, the prediction was not based on any specific information but rather by a sense that the circumstance resembles those of 1988 and 2008 when large, in the first case, and massive, in the second, bailouts took place.

In the first, the outgoing Reagan administration was able to postpone the collapse of the S&L industry by doing the so-called ’88 deals, but in the second, the Bush-43 administration bungled the collapse of the entire US financial system so badly that it enabled the bailout of AIG, several Wall Street securities firms, and all of the TBTF banks, engineered by former Goldman Sachs CEO Henry Paulson, with Goldman itself receiving a bailout, as this writer cynically predicted on the day Paulson was appointed Treasury Secretary.

Yet another historic bailout occurred in 1998 when a firm with the ironic name Long-Term Capital Management, located offshore and not supervised even remotely by any US regulator, but with extremely well-connected leadership, was bailed out.

This writer predicted that the object of the next round of bailouts could be a company not on anyone’s radar screen. And then along came Glencore, a huge Anglo-Swiss commodities trader reminiscent of Enron that is domiciled in Jersey – no, not New Jersey – and trades primarily in London.

To add spice to the tale, Glencore was founded by someone once referred to as “fugitive investor Marc Rich,” and a director is John Mack, formerly CEO of Morgan Stanley, one of the bailout recipients of 2008.

The potential for this firm to trigger a big intervention led this writer to wonder what the exposure of TBTF US banks might be, even as the regulators have been touting how much better capital and supervision have become under what this writer refers to as the “limplementation” of the Dodd-Frank Act.

Now comes CNBC’s Katie Kelly with some information to enlighten readers and viewers so they can better discern whether Glencore might be the poster firm for whatever is coming. Independently, Peter Schiff has predicted that far from unwinding its $4.5 trillion balance sheet, the Fed will end up doubling it to the neighborhood of $10 trillion.

Ms. Kelly referred to a report from Credit Sights as estimating “the exposure of the major US banks, at least as it pertains to their $15 billion revolving credit facility, at about $350 million for each of four TBTF banks – Citi (C), Bank of America (BAC), JP Morgan (JPM), and Morgan Stanley (MS).”

The quote is from Kelly’s report, and she added that two significant banks not on the list at all are Goldman Sachs (GS) and Wells Fargo (WFC). This report, as Kelly said, puts some numbers on an issue markets have worried about as bank earnings season approaches. Melissa Lee responded that the overall exposure is “probably much greater, and therefore the exposure could be more squarely on the European banks.”

Kelly added that Glencore has “a lot of other debt,” and this writer would note that it also claims to have a lot of other financing.

The conclusion should be that it is early to draw conclusions, but this situation bears watching, especially since the Fed, as the “global central bank,” is not above bailing out European banks.

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Robert-Feinberg
On Wednesday the Dow registered a gain of 120 points, which is commonplace under the new volatility paradigm. This is consistent with the possibility that a year-end rally could take place without any intervention from the Fed.
too big to fail, tbtf, glencore, banks
609
2015-08-08
Thursday, 08 Oct 2015 07:08 AM
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