Exposure to Toxic Derivatives Threatens to Unleash “Financial Weapons of Mass Destruction“

by | Oct 8, 2015 | Commodities, Headline News | 34 comments

Do you LOVE America?



    This article was written by Michael Snyder and originally published at his Economic Collapse blog.

    Editor’s Note: The derivatives markets dwarfs the already death-defying levels of debt and bad credit that surround markets. With a few more firms like Glencore coming unhinged and threatening to explode, the world could indeed see a domino effect that would bring everyone down. The only question is: will they ever call it, or will the deck just be reshuffled, and the mess swept under the rug. If Wiley Coyote is already over the cliff, how long will it be until he looks down and gravity kicks in?

    Global Financial Meltdown Coming? Clear Signs That The Great Derivatives Crisis Has Now Begun

    by Michael Snyder

    Warren Buffett once referred to derivatives as “financial weapons of mass destruction“, and it was inevitable that they would begin to wreak havoc on our financial system at some point.  While things may seem somewhat calm on Wall Street at the moment, the truth is that a great deal of trouble is bubbling just under the surface.  As you will see below, something happened in mid-September that required an unprecedented 405 billion dollar surge of Treasury collateral into the repo market.  I know – that sounds very complicated, so I will try to break it down more simply for you.  It appears that some very large institutions have started to get into a significant amount of trouble because of all the reckless betting that they have been doing.  This is something that I have warned would happen over and over again.  In fact, I have written about it so much that my regular readers are probably sick of hearing about it.  But this is what is going to cause the meltdown of our financial system.

    Many out there get upset when I compare derivatives trading to gambling, and perhaps it would be more accurate to describe most derivatives as a form of insurance.  The big financial institutions assure us that they have passed off most of the risk on these contracts to others and so there is no reason to worry according to them.

    Well, personally I don’t buy their explanations, and a lot of others don’t either.  On a very basic, primitive level, derivatives trading is gambling.  This is a point that Jeff Nielson made very eloquently in a piece that he recently published

    No one “understands” derivatives. How many times have readers heard that thought expressed (please round-off to the nearest thousand)? Why does no one understand derivatives? For many; the answer to that question is that they have simply been thinking too hard. For others; the answer is that they don’t “think” at all.

    Derivatives are bets. This is not a metaphor, or analogy, or generalization. Derivatives are bets. Period. That’s all they ever were. That’s all they ever can be.

    One very large financial institution that appears to be in serious trouble with these financial weapons of mass destruction is Glencore.  At one time Glencore was considered to be the 10th largest company on the entire planet, but now it appears to be coming apart at the seams, and a great deal of their trouble seems to be tied to derivatives.  The following comes from Zero Hedge

    Of particular concern, they said, was Glencore’s use of financial instruments such as derivatives to hedge its trading of physical goods against price swings. The company had $9.8 billion in gross derivatives in June 2015, down from $19 billion in such positions at the end of 2014, causing investors to query the company about the swing.

    Glencore told investors the number went down so drastically because of changes in market volatility this year, according to people briefed by Glencore. When prices vary significantly, it can increase the value of hedging positions.

    Last year, there were extreme price moves, particularly in the crude-oil market, which slid from about $114 a barrel in June to less than $60 a barrel by the end of December.

    That response wasn’t satisfying, said Michael Leithead, a bond fund portfolio manager at EFG Asset Management, which managed $12 billion as of the end of March and has invested in Glencore’s debt.

    According to Bank of America, the global financial system has about 100 billion dollars of exposure overall to Glencore.  So if Glencore goes bankrupt that is going to be a major event.  At this point, Glencore is probably the most likely candidate to be “the next Lehman Brothers”.

    And it isn’t just Glencore that is in trouble.  Other financial giants such as Trafigura are in deep distress as well.  Collectively, the global financial system has approximately half a trillion dollars of exposure to these firms…

    Worse, since it is not just Glencore that the banks are exposed to but very likely the rest of the commodity trading space, their gross exposure blows up to a simply stunning number:

    For the banks, of course, Glencore may not be their only exposure in the commodity trading space. We consider that other vehicles such as Trafigura, Vitol and Gunvor may feature on bank balance sheets as well ($100 bn x 4?)

    Call it half a trillion dollars in very highly levered exposure to commodities: an asset class that has been crushed in the past year.

    The mainstream media is not talking much about any of this yet, and that is probably a good thing.  But behind the scenes, unprecedented moves are already taking place.

    When I came across the information that I am about to share with you, I was absolutely stunned.  It comes from Investment Research Dynamics, and it shows very clearly that everything is not “okay” in the financial world…

    Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market.   Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate.   However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008:

    Reverse Repo Operation

    What in the world could possibly cause a spike of that magnitude?

    Well, that same article that I just quoted links the troubles at Glencore with this unprecedented intervention…

    What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period.  You’ll note that this is around the same time that a crash in Glencore stock and bonds began.   It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.

    The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates.  However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out sight in the general liquidity functions of the global banking system.

    Back in 2008, Lehman Brothers was not “perfectly fine” one day and then suddenly collapsed the next.  There were problems brewing under the surface well in advance.

    Well, the same thing is happening now at banking giants such as Deutsche Bank, and at commodity trading firms such as Glencore, Trafigura and The Noble Group.

    And of course a lot of smaller fish are starting to implode as well.  I found this example posted on Business Insider earlier today

    On September 11, Spruce Alpha, a small hedge fund which is part of a bigger investment group, sent a short report to investors.

    The letter said that the $80 million fund had lost 48% in a month, according the performance report seen by Business Insider.

    There was no commentary included in the note. No explanation. Just cold hard numbers.

    Wow – how do you possibly lose 48 percent in a single month?

    It would be hard to do that even if you were actually trying to lose money on purpose.

    Sadly, this kind of scenario is going to be repeated over and over as we get even deeper into this crisis.

    Meanwhile, our “leaders” continue to tell us that there is nothing to worry about.  For example, just consider what former Fed Chairman Ben Bernanke is saying

    Former Federal Reserve chairman Ben Bernanke doesn’t see any bubbles forming in global markets right right now.

    But he doesn’t think you should take his word for it.

    And even if you did, that isn’t the right question to ask anyway.

    Speaking at a Wall Street Journal event on Wednesday morning, Bernanke said, “I don’t see any obvious major mispricings. Nothing that looks like the housing bubble before the crisis, for example. But you shouldn’t trust me.”

    I certainly agree with that last sentence.  Bernanke was the one telling us that there was not going to be a recession back in 2008 even after one had already started.  He was clueless back then and he is clueless today.

    Most of our “leaders” either don’t understand what is happening or they are not willing to tell us.

    So that means that we have to try to figure things out for ourselves the best that we can.  And right now there are signs all around us that another 2008-style crisis has begun.

    Personally, I am hoping that there will be a lot more days like today when the markets were relatively quiet and not much major news happened around the world.

    Unfortunately for all of us, these days of relative peace and tranquility are about to come to a very abrupt end.

    beginning-of-the-end-snyderMichael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years.

    Today, Michael is best known for his work as the publisher of The Economic Collapse Blog and The American Dream

    If you want to know what things in America are going to look like in a few years read his new book The Beginning of the End.


    This article was written by Michael Snyder and originally published at his Economic Collapse blog.


    It Took 22 Years to Get to This Point

    Gold has been the right asset with which to save your funds in this millennium that began 23 years ago.

    Free Exclusive Report
    The inevitable Breakout – The two w’s

      Related Articles


      Join the conversation!

      It’s 100% free and your personal information will never be sold or shared online.



        • eppe.

          Gambling is for losers.

        • Cool-Hand Luke.

          I BET you it isn’t!

        • No we can’t win but 1%’s do and they have jack asses like Snyder to help them by creating fear factors every month to continue the looting by the parasites.

        • Everything is not as it seems….

      2. Back in 2007/2008, the politicians and the Central Banks were completely caught off guard. They were an entire generation of people who were totally clueless as to what financial innovation had taken place since deregulation under Clinton. When the system came apart and then imploded, they could only think of one thing to do: throw everything they can at the markets to get liquidity flowing again. This was done in a thoughtless and panicked way. These individuals neither took responsibility for their failures to grasp what was going on, nor did they make any of the changes they claimed they would do to prevent such an event again. Most retired or were fired; a parade of losers such as the UK’s Gordon Brown.

        Now, we have a giant black hole of global debt that can never be repaid because it is mathematically impossible to do so: there are not enough people on the planet, enough working days, or enough resources. This black hole just sucks up any money that is printed, manufactured or conjured out of thin air. This is why all the stimulus has been no better than a rabbit farting in a hurricane. Banks just park the cash, or use it to speculate or make payments on legacy debt. No investment in things that create jobs.

        What keeps the system going is derivatives. Think of them as a mechanism to avoid risk or heavy losses. People will place bets on every eventuality so, when something goes this way or that way, they collect and avoid bankruptcy. It is a tidy solution to life as long as it can be hypothecated into infinity. In order to do so, you need big machines. This is why we have high-frequency trading with massive computing power. Think of the world’s economy now as just a black screen with ones and zeros flying around. Increase the computing power and the velocity, and you can increase the ones and zeros. Quantum computing – already in play – takes this to multidimensions. Think of it like this: one dimension can go into crisis – the world ‘we’ live in – and another dimension can be opened up as a new frontier, thus absorbing the loss and maintaining growth and prosperity. This will become more and more how the economy will function. So, just as the ‘real world’ goes into crisis and a running stop, they will throw the switch on another dimension, and launch a cashless, digital virtual world that will keep the economy going.

        There will be winners and losers in this but it will work.

        • Good post but I feel digital is too fragile to replace physical currency and it will never replace money. I think we should stick to EMP proof, corrosion proof, mold proof with a newly enriched banker proof form of trade. When the digits crash, and they will from anything from a failed air conditioner to a natural or man made EMP all you have or could be will be gone in an evaporating cloud. Going cashless would be handing over full control of your destiny to someone else because only if you hold it do you truly own it. That stash is control you have that they want. It would be cashless for the commoner and metals for the elite. “Your preciousss, yes they wants it” If you have it, hang on tight to it. Because it is what they do to a dead tree of Liberty, they shake it, the merciless bastards.

        • Michael, in that picture of the bomb with the lit fuse, might wanna make that fuse a little longer. Probably be awhile before it goes off. JM2CW.

          • Snyder called it for last month. Two years from now he will still be saying next month. I guess that’s the best he can do since he doesn’t have anything but fear to peddle.

        • You already see this with the google commercials showing you using a image of a credit card on your cell phone

      3. Hmmmm….,we all know financial reckoning coming,and my response,”Nuke the nazi/gay/baby whales!”

      4. Don’t worry the Federal Reserve will print over it. All the talking heads have been given orders not to talk about Glencore besides the average Joe with a pension fund or 401K never heard of Glencore.

        When the average Joe realizes that their safe money, 401K and Pension fund or so they thought has evaporated all hell will break loose. The only problem is by the time they find out their funds are using hedge funds and derivatives it will be too late…

        The Hedge fund owners I know are making very large personal real estate purchases and other hard assets purchases. These moves can’t be good for the average Joe!!!

      5. Someone please tell me what a “reverse repurchase agreement” is and what the hell it does/means in layman’s terms please. I see the charts and on the surface they look scary, but just not sure what I am looking at.

        • lol…Don’t worry, the meaning isn’t important. It is just psyop mumbo jumbo like the terms Operation Twist or Quantitative Easing that they use to give themselves an air of legitimacy.

          In reality it is just money printing by the Fed to buy back Treasuries that they sold to the bankers at a discount in the first place. Sloshing garbage to and fro to prevent a liquidity crisis. They aren’t even trying to hide their insolvency anymore.

          The system only works if debt continues to expand. Those limits are close…real close. Deflation is consuming all the available capital.

          According to that chart, things look to be real bad in the ivory towers.


        • Go to:

          ht tp://www.freerepublic.com/focus/bloggers/2958062/posts

          and watch the linked videos. Ann Barnhardt does a good job explaining repos and other financial terms.

      6. I love this site.

        Thank you Mac.

      7. When I was a kid and a young adult, I tried several business ventures that went caput. I however was “stuck” with product. Which I had purchased wholesale. One product was an enormous amount of laundry soap. My mother was beside herself but she took the stuff off my hands. Ten years later she remarked to me that she had just finished the last of my soap. She said it was a wonderful thing that in all those years, she never needed to spend money on laundry soap. We realized together that a substantial purchase of an essential necessity if purchased wholesale is a financial investment that beats the stock market and one that will help you to sleep better rather than staying up worrying which way the wind blows on Wall Street.

        • But then storage space becomes a problem.

      8. Oh maaan… I’ve just heard that one of the BRAVE servicemen who stopped that vile Islamic train terrorist has bean stabbed.

        Hope you’ll be ok mister.

        My best wishes to you sir.

      9. And it was a long time before my sisters bought perfume, lipstick, or eye shadow either. Talk about one happy family. Nobody was happier about my business ineptitude than those teen aged beauties.

      10. Seriously I do not know how much more fear porn I can take. If you do a search on Snyders website for Derivatives you will see over 20 articles with these same fear predictions.

        Here are just some of the titles – all with pictures to invoke major doom, gloom and fear.

        1. The 441 TRILLION Dollar Interest Rate Derivatives Time Bomb (June 24, 2013)

        2. The Coming Derivatives Panic That Will Destroy Global Financial Markets (December 4, 2012).

        3. When The Derivatives Market Crashes (And It Will) U.S. Taxpayers Will Be On The Hook (May 24, 2012).

        4. The 2 Billion Dollar Loss By JP Morgan Is Just A Preview Of The Coming Collapse Of The Derivatives Market (May 11, 2012).

        5. The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System (October 19, 2011).

        6. The Horrific Derivatives Bubble That Could One Day Destroy The Entire World Financial System (August 8, 2010).

        and I could go on and on. If I had time I would read through the articles and probably see that they are pretty much the same thing recycled year after friggin year.

        Why would Michael keep archives easily accessible on his own website, verifying his predictions are based on nothing but fear? Because he knows that most people will not bother to see what other articles he has written about this same subject.

        It boggles the mind how year after year this man can continue to write the same damn things over and over and people just keep lapping it up like pigs to the trough.

        I understand fear porn is addictive. But c’mon people. When you don’t bother to research what these fools write, you are the one who is a sheep and Michael and his merry band of doomsday prophets the wolves who shear you with every article they write.

      11. How the TPP could lead to worldwide Internet censorship


      12. There is nothing new being manufactured unless it deals with killing machines and weapons technology being upgraded. That and spying systems to closer watch potential and existing dissidents. No more advancement beneficial to the average people because entrenched interests won’t allow the competition. It’s a dead end for improving the lives of humanity on planet Earth. The plan all along obviously, but now a direct response to 9-11 truth becoming more widespread threatening the cover up and those who carried it out. The American people should be demanding the truth and that justice be served. The entire police state and military have been enlisted to defend the 9-11 lies, that is the crackdown now being played out. I’ve read Putin knows the truth of 9-11and has threatened to reveal it, that he hasn’t seems odd. This 9-11 lie is the big event in our lifetime, failing to push the truth is not acceptable. They are hoping we forget while the vise tightens.

        • The American people can’t handle the truth.

          If they were told the truth about everything, most would probably have their minds blown and the only solution for recovery would be to forget the truth and continue believing the lie.

          Kind of like we do now in this country with all the fake patriotic lingo, war on terror rhetoric, Israel needs our protection chanting, etc.

      13. The economy is the rich man’s Big Business dependency that keeps the compliant masses running his treadmill and eating what’s made in it, which necessitates more be made and bought by the masses, pouring more money and power into the rich man’s pockets. For it all the fall is not a worry, it’s the blessing of liberty for all who are not dependent on it. It’s the fall of the enemy’s quartermaster corps which he has used to keep the masses under siege.

      14. Let’s thank the money changers as Jesus called them the children of satan they controlled the media to crusify him and they control the media now see what Washington Jefferson Franklin. Said about the children of satan this must be stopped how can they live with themselves are they so inbred or just the children of satan.

      15. They cycle us every so often bubble up the economy lure everyone in house prices up up up then pop they bubble and buy it all back for pennies on the dollar now when they reset they’ll get everything for next to nothing if you can’t pay your property tax because your savings has been wiped out they get it for nothing just like after the civil war

      16. It’s all part of the plan and who’s going to be the first king of the whole world there probably at each others throats they got sadams gold they got gadafis gold now they want assads gold just can’t have enough of that yellow stuff if not they won’t be able to keep this pons I scream going much longer who’s gold will they go after next probably yours don’t forget near the new beginning they will throw there silver and gold in the streets we who have probably never missed a meal in our lives are in for a big surprise gold fever is a disease bean rice and flour will be the new gold l wouldn’t trade a can of beans for a bar of gold even today it’s one of satans tools

      17. Snyder is a hack. He doesn’t offer any good advise. He just writes the same tired articles day after day. At least other sites have helpful information on preparedness. Snyder has been writing the same articles since AFTER the first crash. First it’s a red alert for September, now it’s October, how much you wanna bet he will be cashing in on the same crap in 2016 too.

      18. But I guess there’s no alternative to gold and silver for trade . We’re pretty much screwed no matter what. Electronic money paper money all can be currupted. Our civilization depends on our morals period . Otherwise everything can be twisted by the ones that inherited the most money. If there currupt were doomed and they seem to be curupt.

      19. During the Roman siege of Jerusalem a bare donkey skull to make soup went for the equivalent of 1000 dollars . I wonder what a can of beans would go for. Food is gold you can eat.

      Commenting Policy:

      Some comments on this web site are automatically moderated through our Spam protection systems. Please be patient if your comment isn’t immediately available. We’re not trying to censor you, the system just wants to make sure you’re not a robot posting random spam.

      This website thrives because of its community. While we support lively debates and understand that people get excited, frustrated or angry at times, we ask that the conversation remain civil. Racism, to include any religious affiliation, will not be tolerated on this site, including the disparagement of people in the comments section.