Monday, May 14, 2012

The Slow Motion, Bank Ring-Fencing


The ever ticking derivatives shadow banking time-bomb is having an interesting effect these days. The way it works is that before each coming derivatives debacle, politicians must slow down and collaborate with the banks in order to make sure that the banks have time to scramble to cover their horrendous bets. Of course, they can't "cover" them but the can try to minimize the fallout. Basically, the politicians and bankers are attempting a slow motion ring-fencing of our global banking system. 

This can't work. This can't work because of what I am constantly harping about...The Black Swan Multiplier Effect. I've given lengthy explanations of why shadow banking can't be contained. However, what is interesting to watch is the manner in which technocrats are attempting to "solve" the banking debt supernova. This slowing down effect/intentional meandering creates some bizarre distortions in the markets. Bank bailouts have to get sneakier, more complicated and bigger in an ever compounding danse macabre.

Look at how long it's taken Greece to get to this point. Banks have had years to try to deal with their European sovereign debt exposure. The problem is that banks like JPM aren't efficient enough to do this. Their recent $2Bln  debacle shows how reckless they are. Also, and more importantly, the traders at these banks are using the slow motion process to gamble even bigger. They see that Greece won't default in a day. Therefore, they can milk the bonus pool while ignoring their bank's overall, notional derivatives exposure.

This causes more volatility and fragility. As ZIRP continues strangling bank's interest rate business, they are forced to incentivize their prop desks and global trading force to use ever riskier "hedges" in order to defend their last riskier "hedge." Really, there is nothing in this paradigm resembling actual risk hedging which has all but disappeared on a grand scale for the global banking system. They can't possibly "hedge" these positions. And that is what we are beginning to see. Hedging is now speculating as our topsy turvy, inside out, psychedelic horror house of a broken global marketplace has come full circle.