The Federal Deposit Insurance Corporation (FDIC) thinks banks are playing with fire.

Years ago, the derivatives market didn’t seem like much of a threat.

That was then…

Here’s how it’s going now:

When I was at the Capitalism and Morality conference in Vancouver a few weeks ago, I met several traders aimlessly sipping coffee and chatting up attendees with that blank stare in their eyes.

Many of them had been trading spreads for years.

All they ever saw in their work was a bunch of fiat money figuratively moving up and down on their monitors.

The work was as meaningless as the money they sought…

It produced no lasting value.

Everything began and ended with an imaginary printing press, but…

Since the American economy has been slowing down, there’s been less liquidity in the markets.

So, stocks have not been moving as much as they used to.

As a result, those who’ve made their living trading the spread are finding it tougher to make a profit.

Now, here’s something to ponder.

If individual traders are struggling to make a profit, what about all the traders under the employment of the banks, private equity firms, and financial advisors?

The result is that, like individual traders, some lose work.

Another result is that the remaining traders and money managers must use other “tools” to make their client money.

So they buy futures contracts in the rising commodities market, Place calls and puts, or manage currency swaps.

All those are examples of derivatives, which place the person you are betting against in a position of risk…

If you win, and the win is too big, the person you bet against will either not be able to pay or, go bankrupt paying what they owe you.

In this case, the big banks, the biggest backers are at risk.

Now the bets have become so overwhelming the FDIC wants to ensure the losses won’t come back to them.

Reuters reports:

US regulators chide four big-bank living wills, FDIC escalates Citi concerns

“U.S. bank regulators ordered Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase on Friday to bolster plans for how they could be safely resolved in bankruptcy, and FDIC escalated its concerns about Citi’s blueprint.

Specifically, the Federal Reserve and Federal Deposit Insurance Corporation said the banks need to refine their so-called living wills to show how they could safely unwind their derivatives portfolios when they next submit plans to regulators in 2025.

Big banks hold derivatives worth trillions of dollars in notional value and potential changes to how they manage the risk, liquidity or contingent liabilities on those portfolios could be extremely expensive.

The banks will be required to detail how they will address those shortcomings, which had not been previously flagged, in September. 

Bank of America (BAC.N), did not provide immediate comment.

JPMorgan (JPM.N), and Goldman Sachs (GS.N), declined to comment.”

Even the FDIC is saying the quiet part out loud.

Banks are over-leveraged.

And that means, if we are to find some benefit, we ought to see where they’re putting the leverage.

Everyone expects the value of the dollar to rise…

Check out the amount of speculative positions(derivatives) placed.

Historically, there’s also a big difference between the actual price of the dollar and net speculative positions.

Anyone who’s ever read a bubble before can take a look at this data point and take a guess at where the majority of people might put their money if the dollar goes down.

Commodities…

Gold and silver. You got it!

As for the banks, you can bet regulators will continue driving a hard line on “planning” efforts…

Just in case there’s a fire.

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