Saturday, January 17, 2015

Russia Drastically Reduces Gas Supply – EU Warns “Completely Unacceptable”

Vladimir Putin has ordered the Russian state energy giant Gazprom to cut natural gas supplies to and through Ukraine to the EU in a little reported move. It took place late on Wednesday and was overshadowed by the Swiss National Bank market turmoil yesterday.
Russian Prime Minister Putin instructs Gazprom chairman Alexei Miller during a meeting yesterday
Russian Prime Minister Putin instructs Gazprom chairman Alexei Miller during a meeting yesterday
Russia has shut off gas supplies through Ukraine to six EU states, ostensibly due to Ukraine’s alleged illegal siphoning gas from the pipeline. The European Union warned that the sudden cut-off to some of its member countries was ‘completely unacceptable’. The move comes just as winter begins to bite across Europe.
The pipeline crossing Ukraine supplies over 60% of the entire EU’s natural gas. Six countries – Greece, Bulgaria, Macedonia, Croatia, Romania and Turkey – report a complete halt of gas coming in from Russia.
Yesterday, Ukraine confirmed that Russia had completely cut off their supply. Croatia said it was temporarily reducing supplies to industrial customers while Bulgaria said it had enough gas only ‘for a few days’ and was already in a ‘crisis situation’.
There is the risk of an energy crisis and it is worrying that the move comes about at a time of increased maneuverings and posturing by NATO and the Russian army and deepening conflict in Ukraine.
Ukraine lurched back toward full-scale conflict today as troops loyal to the new Ukraine government battled with pro-Russian forces for control of an eastern airport.
Ukraine said yesterday that cease fire violations have surged to a new record, while the nation’s security council warned the unrest may spark a “continental war” and German Chancellor Angela Merkel called for emergency talks.
goldcore_bloomberg_chart2_15-01-15
Russia is planning to divert it’s EU bound natural gas to a pipeline through Turkey opening at the Turkey-Greece border. Bloomberg quotes Valentin Zemlyansky of the Ukrainian gas company Naftogaz,  “They [the Russians] have reduced deliveries to 92 million cubic metres per 24 hours compared to the promised 221 million cubic metres without explanation,”
“We do not understand how we will deliver gas to Europe. This means that in a few hours problems with supplies to Europe will begin.”
Russian Energy Minister, Alexander Novak put it bluntly, “The decision has been made. We are diversifying and eliminating the risks of unreliable countries that caused problems in past years, including for European consumers.”
Bloomberg reports, “Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions.”
“We have informed our European partners, and now it is up to them to put in place the necessary infrastructure starting from the Turkish-Greek border,” Miller said.
Such a project would likely take months to implement. In the mean-time many Europeans may not have access to gas to warm their homes through winter and many industries will also be without gas – effecting production, employment in already struggling economies.
Whether or not Russia is calling Europe’s bluff in a bid to ease sanctions is unclear at this point. It appears that Turkey, an erstwhile NATO member, is warming to Russia, possibly due to the instability that western actions in the Middle East have brought to Turkey’s doorstep.
Earlier this week Turkish President Erdogan made the stunning accusation that “the West” staged the attacks in Paris last week.
The French, also, have been considering a foreign policy independent of the NATO status-quo. France is in the process of completing two battle ships for sale to Russia. Earlier this month President Hollande stated that sanctions against Russia should be lifted.
Tensions and suspicions are escalating even within the Western block. The EU does not have many cards left to play in dealing with Russia.
Tensions in the EU may arise as natural gas required for industry may have to be diverted to households to avoid social upheaval.
Geopolitical tensions are escalating across the world, concurrent with indications of an imminent and severe recession globally.
Gold has played an important role in protecting peoples wealth in uncertain times and will do so again in the coming years.
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Thursday, January 15, 2015

Mayhem Erupts on Trading Floors After Swiss Central Bank Removes Cap on Franc

At 9:30 a.m. today, trading floors across the City of London erupted.
Outbursts of obscenities and confusion followed the Swiss central bank’s surprise decision to abolish its three-year-old policy of capping the Swiss franc against the euro, according to traders in London’s financial district. The U-turn sent the franc as much as 41 percent up against the euro, the biggest gain on record, a move that one trader estimated may cause billions of dollars of losses for banks and their customers.
Dealers at banks including Deutsche Bank AG (DBK), UBS Group AG (UBSG) andGoldman Sachs (GS) Group Inc. battled to process orders amid a flood of customer calls and trade requests, according to people with direct knowledge of the events. At least one electronic currency-trading system temporarily halted transactions, adding to the mayhem.
“This is the biggest currency shocker in years and it’s likely to create more volatility in the short term,” said James Stanton, head of foreign exchange at deVere Group, a financial adviser that oversees about $10 billion. “Trading positions are extremely vulnerable and volume has gone through the roof.”
Deutsche Bank was among currency dealers to suffer disruptions to electronic trading, with its Autobahn platform temporarily ceasing to provide quotes, according to a dealer from outside the bank. The Frankfurt-based lender is among the four biggest dealers in the $5.3 trillion-a-day foreign-exchange market, along with Citigroup Inc.,Barclays Plc (BARC) and UBS, according to Euromoney Institutional Investor.

Market Tailspin

Spokesmen for Deutsche Bank, Zurich-based UBS and New York-based Goldman Sachs declined to comment. Some of the bankers interviewed for this story asked not to be identified as they weren’t authorized by their firms to speak publicly.
Sitting in front of their screens, dealers around the globe watched the franc hit 1.10 versus the euro, before surging to parity and reaching a record 0.8517 as the SNB dropped its commitment to defend the ceiling introduced in 2011. The Swiss currency jumped as much as 38 percent against the dollar while volatility climbed to the highest in more than a year.
“The move caught everyone off guard,” said David Madden, an analyst at IG Group Holdings Plc (IGG), which takes bets on financial markets under the IG Index name. “The Swiss central bank has sent the markets into a tailspin.”
As the franc spiked, investors said they found themselves unable to trade it amid a lack of price quotes.

‘No Liquidity’

“There was a good hour when euro-swiss was untradeable,” said Chris Morrison, London-based head of strategy at Omni Macro Fund, a hedge fund which oversees $550 million. “Clearly there was no liquidity.”
Forex.com, a currency-trading website, said it halted services briefly “until we get confirmation from our liquidity providers that we can get Swissie liquidity.” Dealing resumed at about 10:30 a.m. London time.
Spread-betters were also hit. IG Group said in a statement the SNB’s move will cost the firm as much as 30 million pounds ($46 million).
The turmoil forced top bankers to clear their diaries. At Citigroup Inc. (C), Steven Englander, global head of G-10 foreign-exchange strategy, had all his meetings canceled following today’s decision, according to a person with knowledge of the matter.

‘Red Faces’

With the franc largely frozen against the euro since the SNB introduced the ceiling, the turmoil may have left some investors with losses so large they could even be forced to close, according to a trader at one bank who asked not to be identified.
Anthony Peters, a broker at Swiss Investment Corp., said firms that were selling options tied to the Swiss franc may be among today’s losers. They would have lost money as volatility surged.
“Selling puts or vol on the franc was deemed to be SNB guaranteed money for old rope,” he wrote in a note to clients today. “There will be some very red faces around as it begins to transpire who should not have been playing that game.”

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Tuesday, January 13, 2015

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Thursday, January 8, 2015

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Wednesday, January 7, 2015

The First Shale Casualty: WBH Energy Files For Bankruptcy; Many More Coming

"There are too many ugly balance sheets," warns one energy industry analyst, adding simply that "the group is not positioned for this downturn." While the mainstream media continues to chant the happy-clappy side of lower oil prices, spewing various 'statistics' about how the down-side of low oil prices is 'contained' and the huge colossal massive tax cut means 'everything is awesome' for America, the data - and now actions - do not bear this out. Macro data has done nothing but disappoint and now, we have the first casualty of the shale oil leverage debacle as WSJ reports, on Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money. There are many more to come...

In December we illustrated the problem names (in the publicly traded markets) among the most-levered energy companies in America...


And now, as The Wall Street Journal reports, the bankruptcies have begun as financing costs are not just prohibitive, there is no liquiidty available at any price for many...
American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.

Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.

But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.

Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”

...

In 2010, U.S. companies focused on producing oil and gas had $128 billion in combined total debt, according to financial data collected by S&P Capital IQ.

As of their latest quarter, such companies had $199 billion of combined total debt.


Before crude prices began falling, U.S. oil and gas producers were able to acquire leases and drill wells even if that meant outspending their incomes. Debt was used to bridge the cash shortfall so that companies could develop oil fields in Texas, North Dakota and newer locations including Colorado.
Now that is coming back to bite.
The upshot of cash conservation and higher borrowing costs will be less money spent on producing oil and natural gas.Concho Resources Inc. said late Monday that it was cutting its capital spending budget by a third, to $2 billion.
*  *  *
And the credit market knows it...
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Fed's Evans "Catastrophe" Comment Sparks US, Japan Stock Surge; China Purge

Chicago Fed's Charlie Evans appears to have decided to flex his voting member status, Bullard-ness this evening. Speaking during a forum in Chicago, after The FOMC Minutes showed data-dependence was the thing... Evans exclaimed "raising rates would be a catastrophe," and that "housing hasn't shown the strength he'd like to see," prompting S&P futures - with the help of USDJPY - to suddenly surge 16 points (and drag WTI Crude futures above $49.50 for fun). Nikkei futures enjoyed the ride ramping 200 points as USDJPY hit 119.70. But, much to the chagrin of the millions of freshly minted retail investors there, Chinese stocks plunged 2.2%... "we love the smell of stability in the Asian morning"

Evans explains...
  • *FED'S EVANS SAYS RAISING RATES WOULD BE A CATASTROPHE
  • *EVANS SAYS OIL IMPACT ON INFLATION TO REQUIRE CLOSE MONITORING
  • *EVANS SAYS WAGE GROWTH CONSISTENT WITH GOAL WOULD BE 3.5%-4%
  • *EVANS: DROP IN LONG-TERM INTEREST RATES `EXTRAORDINARY' PAST YR
  • *EVANS SAYS HOUSING HASN'T SHOWN STRENGTH HE'D LIKE TO SEE
And thus the fun-durr-mentals kick in...

and in Japan...

But not so much in China...

So to summarize - a Dovish Dove said Dovish things that he has said a thousand times before, contradicting a modestly hawkish biased FOMC and markets explode in a fit of illiquid exuberance...? Okeydokey, let's just see what happens when Europe opens
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Will 2015 Be A Year Of Economic Disaster? 11 Perspectives

Will 2015 be a year of financial crashes, economic chaos and the start of the next great worldwide depression?  Over the past couple of years, we have all watched as global financial bubbles have gotten larger and larger.  Despite predictions that they could burst at any time, they have just continued to expand.  But just like we witnessed in 2001 and 2008, all financial bubbles come to an end at some point, and when they do implode the pain can be extreme.
Personally, I am entirely convinced that the financial markets are more primed for a financial collapse now than they have been at any other time since the last crisis happened nearly seven years ago.  And I am certainly not alone.  At this point, the warning cries have become a deafening roar as a whole host of prominent voices have stepped forward to sound the alarm.  The following are 11 predictions of economic disaster in 2015 from top experts all over the globe…
#1 Bill Fleckenstein: “They are trying to make the stock market go up and drag the economy along with it. It’s not going to work. There’s going to be a big accident. When people realize that it’s all a charade, the dollar will tank, the stock market will tank, and hopefully bond markets will tank. Gold will rally in that period of time because it’s done what it’s done because people have assumed complete infallibility on the part of the central bankers.”
#2 John Ficenec: “In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 is currently at 27.2, some 64pc above the historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.”
#3 Ambrose Evans-Pritchard, one of the most respected economic journalists on the entire planet: “The eurozone will be in deflation by February, forlornly trying to ignite its damp wood by rubbing stones. Real interest rates will ratchet higher. The debt load will continue to rise at a faster pace than nominal GDP across Club Med. The region will sink deeper into a compound interest trap.”
#4 The Jerome Levy Forecasting Center, which correctly predicted the bursting of the subprime mortgage bubble in 2007: “Clearly the direction of most of the recent global economic news suggests movement toward a 2015 downturn.”
#5 Paul Craig Roberts: “At any time the Western house of cards could collapse. It (the financial system) is a house of cards. There are no economic fundamentals that support stock prices — the Dow Jones. There are no economic fundamentals that support the strong dollar…”
#6 David Tice: “I have the same kind of feel in ’98 and ’99; also ’05 and ’06.  This is going to end badly. I have every confidence in the world.”
#7 Liz Capo McCormick and Susanne Walker: “Get ready for a disastrous year for U.S. government bonds. That’s the message forecasters on Wall Street are sending.”
#8 Phoenix Capital Research: “Just about everything will be hit as well. Most of the ‘recovery’ of the last five years has been fueled by cheap borrowed Dollars. Now that the US Dollar has broken out of a multi-year range, you’re going to see more and more ‘risk assets’ (read: projects or investments fueled by borrowed Dollars) blow up. Oil is just the beginning, not a standalone story.
If things really pick up steam, there’s over $9 TRILLION worth of potential explosions waiting in the wings. Imagine if the entire economies of both Germany and Japan exploded and you’ve got a decent idea of the size of the potential impact on the financial system.”
#9 Rob Kirby: “What this breakdown in the crude oil price is going to spawn another financial crisis.  It will be tied to the junk debt that has been issued to finance the shale oil plays in North America.  It is reported to be in the area of half a trillion dollars worth of junk debt that is held largely on the books of large financial institutions in the western world.  When these bonds start to fail, they will jeopardize the future of these financial institutions.  I do believe that will be the signal for the Fed to come riding to the rescue with QE4.  I also think QE4 is likely going to be accompanied by bank bail-ins because we all know all western world countries have adopted bail-in legislation in their most recent budgets.  The financial elites are engineering the excuse for their next round of money printing . . .  and they will be confiscating money out of savings accounts and pension accounts.  That’s what I think is coming in the very near future.”
#10 John Ing: “The 2008 collapse was just a dress rehearsal compared to what the world is going to face this time around. This time we have governments which are even more highly leveraged than the private sector was.
So this time the collapse will be on a scale that is many magnitudes greater than what the world witnessed in 2008.”
#11 Gerald Celente: “What does the word confidence mean? Break it down. In this case confidence = con men and con game. That’s all it is. So people will lose confidence in the con men because they have already shown their cards. It’s a Ponzi scheme. So the con game is running out and they don’t have any more cards to play.
What are they going to do? They can’t raise interest rates. We saw what happened in the beginning of December when the equity markets started to unravel. So it will be a loss of confidence in the con game and the con game is soon coming to an end. That is when you are going to see panic on Wall Street and around the world.”
If you have been following my website, you know that I have been pointing to 2015 for quite some time now.
For example, in my article entitled “The Seven Year Cycle Of Economic Crashes That Everyone Is Talking About“, I discussed the pattern of financial crashes that we have witnessed every seven years that goes all the way back to the Great Depression.  The last two major stock market crashes began in 2001 and 2008, and now here we are seven years later.
Will the same pattern hold up once again?
In addition, there are many other economic cycles that seem to indicate that we are due for a major economic downturn.  I discussed quite a few of these theories in my article entitled “If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Pure Hell For The United States“.
But just like in 2000 and 2007, there are a whole host of doubters that are fully convinced that the party can continue indefinitely.  Even though our economic fundamentals continue to get worse, our debt levels continue to grow and every objective measurement shows that Wall Street is more reckless and more vulnerable to collapse than ever before, they mock the idea that a financial collapse is imminent.
So let’s see what happens in 2015.
I have a feeling that it is going to be an extremely “interesting” year.

http://www.zerohedge.com/news/2015-01-06/will-2015-be-year-economic-disaster-11-perspectives
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Bild Warns German Govt Fears Greek Bank Runs, Financial System Collapse; Prepares For Grexit

It has been a busy few days for Germany. In the space of a week, they have warned Greece "there will be no blackmail," adding that a Greek exit from the euro was "manageable," only to hours later deny (clarify) these comments. This was then followed up with beggars-are-choosers Syriza demanding any ECB QE must buy Greek bonds (or else) - which Germany has flatly ruled out - only to see today that Syriza is practically guaranteed to win a "decisive victory" at the forthcoming snap election. So it with a wry smile that we note Bild reports tonight that the German government is preparing for a possible Greek exit, warning of financial system collapse, bank runs, and huge costs for the rest of the EU.

Germany has been flip-flopping (as Reuters notes)...
Der Spiegel magazine reported on Saturday that Berlin considers a Greek exit almost unavoidable if Syriza wins, but believes the euro zone would be able to cope.

Vice Chancellor Sigmar Gabriel said on Sunday that Germany wants Greece to stay and there are no contingency plans to the contrary, while noting the euro zone has become far more stable in recent years.

As the euro zone's paymaster, Germany is insisting that Greece stick to austerity and not backtrack on its bailout commitments, especially as it does not want to open the door for other struggling members to relax reform efforts.
But now the rhetoric is heating up...
Germany is making contingency plans for the possible departure of Greece from the euro zone, including the impact of any run on a bank, tabloid newspaper Bild reported, citing unnamed government sources.

The newspaper said the government was running scenarios for the Jan. 25 Greek election in case of a victory by the leftwing Syriza party, which wants to cancel austerity measures and a part of the Greek debt.

In a report in the Wednesday issue of the paper, Bild said government experts were concerned about a possible bank collapse if customers storm Greek institutions to secure euro deposits in the event that Greece leaves the zone.

The European Union banking union would then have to intervene with a bailout worth billions, the paper said.
We have always argued that a Grexit would be painful for both the Eurozone and Greece, but relatively more painful for the latter. As such, it has always seemed unlikely that Greece would unilaterally seek to exit the euro. This still seems to be the case, though there have been internal shifts. As we noted in Part 1, the economic and financial contagion from a Grexit could likely now be more easily contained. This allows the Eurozone to take a harder line with Greece, not least since giving into SYRIZA, will send the message to Podemos and others that fiscal discipline etc is fair game.

So the Eurozone may be less nervous about Grexit and feel it has more reason to stick to the rules as it has laid them out, which may harden its negotiating stance. Equally though, Greece may have more reason to think a Grexit could be economically manageable, which could encourage a SYRIZA-led government to stick to its guns more firmly. This to us suggests the clash could be bigger and the negotiations more difficult this time around. Ultimately, though – with hundreds of billions of euros and the political project of the euro at stake – it still seems likely someone will blink and a fudge will be on hand as is usually the way in Europe. Allowing Greece to remain inside the euro for now.
*  *  *
Greek stocks were closed on Tuesday (but ETFs in the US were notably lower) as Greek bond prices tumbled...


And if Germany is 'preparing' for Grexit, then maybe its 5Y Greek CDS they are buying?

As we concluded previously, the consensus can certainly forget the ECB announcing public QE at its next monetary policy meeting on January 22, which will be followed just 3 days later by the Greek national elections. In fact, things in the coming weeks and months may get very ugly, fast depending on how things in Greece play out.
So after 3 years of kicking the can and pretending it is fixed, suddenly everything that is broken in the Eurozone threatens to float right back to the surface, leading to another showdown when photos such as this one become a daily occurrence.
The only question is whether this time anyone will believe the rhetorical "whatever it takes" threats uttered by the one central bank which for the past 4 years has proven it is utterly incapable of acting, instead chosing to talk each and every day, a strategy that has worked brilliantly, until now.
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Monday, January 5, 2015

Behold The "Cheap Gas" Spending Surge: $1 More Per Day

For all the endless media buzz pitching the bullish spin of plunging gas prices, namely that while crude capex spending and energy company earnings are both crashing, high-paying shale jobs are about to suffer pervasive layoffs and energy HY bonds are entering mass default territory leading to who knows what unexpected downstream effects, the average US consumer will spend substantially more to offset all the adverse side-effects of the plunging oil price. Or rather, was supposed to spend more. Because as Gallup finds, this did not happen.
Here is what did happen:
U.S. consumers' average daily spending in December was $98, matching the upper reaches on this measure since 2008. While strong relative to the recent recessionary period, it is similar to the $95 found in November, as well as the $96 in December 2013.
So crude tumbles in half, as does a gallon of gas, and US consumers spend a whopping $2 more in 2014 compared to a year ago, lifting their all in megaspend to an unprecedented $98?
Actually, make that precedented:
Because of holiday shopping, December spending has usually been the highest of any month in Gallup's seven-year history of asking this question. That was not the case in 2014, given that December's $98 average matched the $98 from May, and was barely higher than November's average.
Why?
The lack of a more significant November-to-December increase, common in prior years, could be a sign that the Christmas retail season was less than robust.
Uhm... Say what?
Maybe this only refers to those uber-wealthy Americans for whom spending on gas is such a small piece of the piece that a price reduction there doesn't have much of an impact?  Well, there's certainly that: as the following chart shows Americans making more than $90,000 a year picked up their spending to $177 daily in December, but well below the $189 and $190 over the summer, suggesting that as expected, gas prices have no impact on the spending patterns of the wealthy.
So what about the poorer part of US society, those making $90K or less: surely they spent like crazy in December rejoicing in the "tax cut" low gas prices afforded them? Well, no. Because as the next chart shows, the poorer US households spent $85 daily in December.
How does this compare to a year ago? $84. A whopping one dollar increase!
Gallup's take:
Upper-income Americans, those whose household incomes are $90,000 or more a year, had daily spending reports averaging $177 in December, among the highest for this group in 2014, and over the years since the recession. The December average is similar to last December's level. Upper-income spending has shown steady gains since September.

Spending among middle- and lower-income Americans, those whose annual household incomes are less than $90,000, was also higher than that found in most other monthly readings Gallup has conducted in the past several years. However, their spending levels in December 2014 roughly matched those in December 2013. Although spending among upper-income Americans often drives the changes in Gallup's monthly estimate, middle- and lower-income Americans make up the bulk of U.S. consumers.
And it is also the middle- and lower-income Americans that benefited the most from lower gas prices. In other words, the direct impact from the plunging oil price: an unprecedented increase from $84 to $85 between December 2013 and December 2014.
This will boost US GDP by how much again?
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Is Citi The Next AIG?

Earlier today, when we were conducting a routine check with the Office of the Currency Comptroller's on the total notional amount of derivatives held at the Big 4 banks in the context of the "JPMorgan break up" story, we found something stunning: using the latest, just released Q3 OCC data, JPMorgan is no longer America's undisputed derivatives king. Well, it still is at the HoldCo level, where it is number one in terms of notional derivatives with $65.5 trillion, but when one steps a level lower, namely the FDIC-insured commercial bank (the National Association or N.A.) level, something quite disturbing emerges. This:
As the chart above, which references Table 1 in the Q3 OCC report, shows Citigroup, or rather its FDIC-insured Citibank National Association entity, just surpassed JPM and is now the biggest single holder of total derivatives in the US. Furthermore, as the charts below show, while every other bank was derisking its balance sheet, Citi not only increased its total derivative holdings by $1 trillion in Q2, but by a whopping, and perhaps even record, $9 trillion in the just concluded third quarter to $70.2 trillion!

Here is Citi in context:

What is the reason for the surge in total derivative exposure? was it futures, options, forward or CDS? Neither. The answer: OTC traded swaps...

... which soared by $5 trillion in Q2 and over $8 trillion - or a massive 20% in just one quarter - in Q3 to a whopping $49 trillion, $16 trillion more than the OTC swaps held by JPMorgan or Goldman Sachs, and more than double the swaps held by Bank of America!

And that's not all: perhaps what is most bizarre is that Citigroup is the one bank whose HoldCo holds less derivatives, or $64.8 trillion, than its FDIC-insured N.A. OpCo which has $70.3 trillion in derivative notional exposure. For those wondering: this was not the case in the second quarter when the HoldCo ($61.8 trillion) held more derivatives than Citi's FDIC-insured bank ($61.1 trillion).
Then we started thinking:
Citigroup... swaps... Citigroup... swaps...
and a lightbulb click, because we remembered that it was none other than Citigroup that crafted the legislation on the swaps push-out provision which passed Congress without nary a peep from either side of the aisle, and which put taxpayers on the hook for FDIC-insured derivative exposure- and in Citi's own case a soaring $70 trillion as of September 30, 2014:

Screen Shot 2014-12-05 at 3.32.12 PM
We also revealed that, not surprisingly, the main backer of the bill is notorious Wall Street puppet Jim Himes (D-Conn.) the man BusinessWeek branded "Wall Street's Favorite Democrat" who also happens to be a former Goldman Sachs employee.

And yet, despite all these critical recollections, many questions remains, such as:
  • Why does Citi's FDIC-insured bank suddenly have more derivative notional exposure than its HoldCo: something which is generally without precedent?
  • Why, when every other Big 4 bank is derisking its balance sheet and reducing its derivative exposure in light of far more stringent capital requirements, is Citigroup adding to its derivative notional and swap exposure at an unprecedented, feverish pace, which saw the bank boost its OTC Swaps holdings by 20% in just one quarter?
  • When Congress was voting for the swaps push-out legislation, the Q3 OCC data was not yet publicly available. Was anyone in Congress aware that some $9 trillion had been added to the tally of taxpayer insured derivatives held at Citibank NA as of September 30.
  • What is Citigroups and Citibank's total derivative and total swap exposure as of December 31, and has it continue to soar at a rate of roughly $10 trillion per quarter?
And perhaps most impotantly: what is the underlying trade that requires Citigroup to keep adding to its swap exposure at a time when increasing volatility is forcing all other banks to unwind swaps in order to minimize VaR and be in compliance with Fed capitalization requirements?
And then another lightbulb went over our heads: the last entity to do this was, drumroll, JPMorgan, in early 2013, just before its London whale trade imploded and when the bank's attempt to corner the IG9 market failed miserably but not before JPM's CIO trading desk doubled down, then doubled down again and doubled down some more taking their total derivative exposure to several hundred billion... before it all came crashing down.
Now, we are not saying Citigroup is in the same boat as JPM's infamous CIO which led to congressional hearings and what not - especially since $250 billion was manageable; $50 trillion will not be - but we do wonder: just what is going on behind the massivaly margined scenes if Citi is following every page in the London Whale book and on top of everything it also had to lobby and petition Congress to change the law just so whatever it is that Citigroup is doing, it could continue to do, and what's more: with explicit taxpayer-funded backing.
Which leads us to the final question:
  • Is Citigroup about to become the "New Normal" AIG?
Source: OCC
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