The Shocking Secret Your Bank Does Not Want You To Know

Banks are back at it. Actually, they never left the table.

The derivatives table, that is. It turns out that not only are banks still very much engaged in the same shenanigans that had such a big hand in creating the turmoil we often call the Great Recession of 2008, their exposure today���which, in turn, means your exposure today���to the inherent and substantial risks of derivatives is greater than it was when it seemed as though the global financial infrastructure was going to completely collapse eight years ago.

Before we talk about the present threat, it���s probably a good idea to break down what actually happened in 2008. While there were a lot of components in play, let���s keep things (relatively) simple. Overall, it was what has been termed the housing crisis that led the way down, and the housing crisis unfolded in two, sequential steps that moved in quick succession. The first step, broadly speaking, was that a lot of people who had mortgages that outsized their ability to pay���all reached the point of failure at about the same time. The second step, which turned something bad into something catastrophic, was that the derivative securities that had been created on the backs of these mortgage loans, and that had come to represent an enormous portion of many banks��� portfolios, went under as a result of the underlying loans becoming ���non-performing,��� putting the entire financial system on the precipice.

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Let me stop here for a moment, because I want to be sure you understand what a derivative security is. A thorough treatment of derivatives would fall well outside of the scope of this piece, and I don���t want to bog you down with technical details that may quickly become confusing without such a thorough treatment, but it���s important that you understand what these are, at least generally. A derivative security is, at its most basic, an investment created from���or derived from���an underlying asset. In the case of the housing industry, and using nothing more than mortgage-backed securities (MBS���s) for our example of a derivative, the actual mortgage loans represent the underlying asset, while the securities created from those pools of mortgage loans���again, the mortgage-backed securities���are the derivatives. To reiterate, this is a greatly simplified explanation, but one that is accurate enough for our purposes here.
Moving on���

With respect to real estate, two ���main��� types of derivatives became particularly relevant to the 2008 collapse: mortgage-backed securities, including those commonly known as collateralized debt obligations (CDO���s), and something else���.something called a credit default swap.

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To explain a credit default swap, let���s revisit the mortgage-backed security/CDO, for just a moment (I will use those terms somewhat interchangeably for the discussion at hand; they are not necessarily the same thing, but, again, treating them as though they are works for what we���re doing here). What makes the MBS a derivative that sort of���and I mean sort of���makes sense to most people, is that if you start with the MBS and begin peeling back the layers, eventually you end up at the underlying asset, the mortgage (to some, the real property to which the mortgage is attached is the ���real��� underlying asset of an MBS, but, either way, the point is that once you start digging down into a MBS/CDO to look at the guts, you eventually end up at the mortgage loans themselves, as well as the properties).

This is not the case for a credit default swap. It���s such a derivative of the underlying asset (mortgage loan or property, take your pick), that you might say it���s a derivative of a derivative. The credit default swap is basically an insurance contract, and it is sold by insurance companies (of course) to investors���often hedge funds���that aren���t sold on the future greatness of the CDOs; if a collateralized debt obligation is wiped out, the credit default swap pays out.

So, this is, in very much of a nutshell, what happened in 2008: the banks, trying to make a bunch of money on the higher interest payments paid by CDO���s created from risky sub-prime mortgages (because the tradeoff with lower quality borrowers is that they pay higher interest rates, right?), owned a bunch of these derivatives in their portfolios, and when those failed, the failures, in turn, triggered massive claims by those entities that had purchased the credit default swaps against the insurance companies that issued them, companies like AIG; remember hearing about them every day on the news? The problem that the AIGs and Credit Suisses of the insurance world had in paying out the ���claims��� is that they had gone into this so confident that mortgage-backed securities were going to be just fine, that they did not bother to set aside any reserve capital in case things went bad (there were reasons for this confidence that went beyond simply cheery optimism, but, again, we���ll let that go for this discussion). We know what happened next.
Anyway���

The bottom line is that some of the biggest financial institutions in the world���banks, insurance companies, and those that are some of each���were either completely, or mostly, in ruins, and those that were still breathing were the recipients of your tax dollars, to a degree that is still practically unfathomable.

Now, let me jump to the not-so-funny punch line, one that I guess I gave away at the outset of this piece: not only are the biggest financial institutions in the world still knee-deep in derivatives, despite supposed financial reforms, their exposure is even greater than it was back in 2008. How���s that for ominous?

As for the actual amount of exposure, presently, let���s put some numbers to it. Estimates have the total dollar value of derivatives at the 25 largest U.S. banks to be around a staggering $247 trillion. By comparison, these banks have ���only��� around $14 trillion in assets. For your added consideration, let���s note that the current gross domestic product (GDP) of the United States is about $18 trillion. In other words, the derivatives at the largest financial institutions in the world dwarf���by a LOT���anything resembling real assets.

Adding to the worry is that the government (and you can include the governments of other countries in this, as well) is now so poorly capitalized after the last disaster that even if everyone was on board with a bailout the next time around, there is really no dough to throw at it. That raises the specter of a bail-in (talk about ominous), where banks don���t receive taxpayer money in order to survive, but must, instead, use their own assets���including your money on deposit���to get straight.
As you can see, banks and other financial institutions with a lot of derivative exposure create a bunch of risk, at a variety of levels, for you.

I wanted to pass along this information in part from the standpoint of awareness and education, but also with a suggestion that you look into ways that you can protect yourself from what is coming. On that note, you might be interested in a comprehensive ebook called Surviving the Final Bubble. It contains a ton of great information on how to get through what happens when the ���second coming��� of the derivatives crisis actually arrives. The manual is basically divided into two sections: the first one-third of the book addresses wealth protection and economic survival; the assumption there is that while the derivatives implosion will be a mess, that society will still find a way to minimally function for a time, before more normal conditions eventually resume.

The rest of the book deals with what to do if ���normal conditions��� do not return, and you are left facing the challenges associated with trying to survive in what become bona fide distressed conditions.

Highlights from the section on wealth protection in Surviving the Final Bubble include:

Disclosure of the three assets that do not have to be reported to the U.S. government;
Information as to why, exactly, silver may be the single best place to store your wealth;
Currency alternatives to the U.S. dollar that many believe will thrive following a collapse;���and much, much more.

As for the rest of the book that addresses comprehensive survival, topics include:

How to have consistent, nutritious and long lasting food stores in a crisis, by storing food and water without alerting anyone;
Twelve vital skills you should know in order to weather a total collapse;
Tips to ensure the safety and well-being of children and senior citizens in a distressed environment;
Secrets on how to build strong links within the community and how to become its leader. Forget the ���lone wolf��� survivalist image; that plays well in motion pictures, but your true ���best bet��� in persisting through societal collapse will be forming alliances with others dedicated to making it out the other end of the survival tunnel.

There���s a ton of information here, for sure. Oh, and before I forget to mention it, The Final Bubble comes with a 60-day, money-back guarantee; if you decide you don���t like it, for any reason, even after you have completely digested the material���you have up to two months following purchase to get your money back. How great is that?

To learn more about The Final Bubble, or to pick up your copy directly, Click Here.

By Robert G. Yetman, Jr.

(Disclaimer: The Final Bubble package contains, in part, references to various financial strategies. Although this article presents The Final Bubble as a suggested resource for survival preparedness, Bob Yetman, Jim Paris, ChristianMoney.com, and any related entities disclaim responsibility for any liability or loss incurred as a consequence of the use or application, either directly or indirectly, of any information presented therein. You should always seek the advice of a qualified professional before making any changes to your personal financial profile.)