Tuesday, January 6, 2015

And So History Repeats

"When you see corruption being rewarded and honesty becoming a self-sacrifice, then you may know that your society is doomed."

There's been scant reporting of the fact that Citibank is now the largest holder of derivatives in the U.S., with $70.3 trillion in holdings (AKA exposure to weapons of mass financial destruction). 

Where history is potentially repeating is in the interesting relationship between Citi and Goldman Sachs. Recall that back in 2008 Goldman Sachs was AIG's largest counter-party to the mortgage-derived credit default swaps that blew up and sparked the 2008 financial meltdown. Goldman would have gone belly up along with AIG had the Government and the Fed, with close to a trillion dollars in taxpayer money, not bailed out AIG and the other big banks. At that time, Henry Paulson was Treasury Secretary. Paulson was the former CEO of Goldman and had been appointed Treasury Secretary in July 2006. Paulson was conveniently placed in position to save his former employer and source of all of his own personal wealth. 

Fast forward to today, and who is the Treasury Secretary? Jack Lew. Jack Lew worked at Citibank up until late 2010, when he was moved into Government "service" as Director of the OMB. After that he was appointed Obama's Chief of Staff. In 2013, Obama appointed him to be Treasury Secretary. Although there is a long tradition of top executives from the big banks gaining choice Federal political appointments, it is interesting that a former Citi executive is now Treasury Secretary at a time when Citi is now the largest derivatives owner in the U.S. and second largest in the world (Deutsche Bank is #1). 

Additionally, Citibank was the primary force behind the legislation passed late last year by the lame duck Congress - legislation that was buried into the controversial budget bill - which allows banks to move their derivatives into their FDIC insured subsidiaries. This legislation is the de facto bailout-in-advance for the Too Big To Fail Banks for the approaching time when the derivatives market, which is larger than it was in 2008, once again implodes. This legislation is what created the odd alliance of opposition between Senators Elizabeth Warren and Ted Cruz. Although approaching it from opposite corners, Warren and Cruz both had it right.  Once again, the establishment Democrats (ie., Obama/Reid, Pelosi) and the establishment Republicans (ie., their Congressional leadership) have aligned with the monied Wall Street interests to the detriment of the the U.S. taxpayer. 

Now it may be just a mere coincidence that Paulson was appointed to Treasury Secretary about two years before Goldman blew up on derivatives and Lew was appointed Treasury Secretary, well, about two years before Citi might blow up on derivatives. You have to ask yourself, why would Citi aggressively push for FDIC coverage of its derivatives exposures if it were not worried about the fermenting risks? By the way, Citi has now moved all of its derivatives into its FDIC-covered subsidiary.

Mere coincidence?

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