In my capacity as Chief Investment Strategist, I read newsfeeds from more than 100 sources every day. That helps me keep tabs on the Unstoppable Trends we follow at Total Wealth, what's going on around the world, and, more importantly, discover opportunities for you that others don't yet understand or even recognize.
Given everything going on – ISIS, Russia, Washington, fabricated economic numbers, earnings… you name it – it takes a lot to surprise me. I'm pretty jaded.
But a headline I recently came across stopped me in my tracks. Cold.
It was, by far, the single most dangerous story I've seen since the 2008 Crisis. Worse, it merited only a passing mention on Bloomberg. Not a single major U.S. network I'm aware of paid it any meaningful attention.
They should have.
What I am about to tell you is proof positive that big banks are not the bastions of stability and financial prowess many believe them to be at this stage of the "recovery."
This Small German Bank Just Put Up a Huge Red Flag
More to the point, big banks may harbor hidden risks and are not, as many analysts believe, the bright spot in this otherwise potentially disappointing earnings season.
Here's that headline… and what it means for four bank stocks you may own.
Last month, according to Bloomberg, the Association of German Banks (BdB for short) had to bail out Germany-based Düsseldorfer Hypothekenbank AG (DuessHyp).
Never heard of it? I hadn't either… but here's what you need to know.
Like many banks around the world that have made questionable investments, DuessHyp was facing write-downs on debt it held. In this case, some 348 million euros (approximately $375 million) issued by Austria's Heta Asset Resolution AG, which "blew up" – a banking term meaning "failed" – because of bad loans.
Theoretically, this isn't a big deal. Every bank maintains reserves sufficient to deal with this kind of situation. Or at least they're supposed to.
But, also like many banks, DuessHyp had been trading highly leveraged swaps, and that meant the Heta failure caused a hit to the bank's reserves. Consequently, DuessHyp would have to post additional margin to maintain the highly leveraged trading positions on Eurex, Europe's largest derivatives markets.
Only DuessHyp didn't have it. So DuessHyp was forced to seek a rescue, lest the damage caused by Heta's failure cause the bank to fail and the damage to spread throughout the European banking system.
I realize that all this can be hard to follow, so let me cut right to the chase:
A bank almost nobody's ever heard of before with a total capitalization of under 15 billion euros in assets and just 52 employees is suddenly deemed "too big to fail" and has to be rescued when it's unable to post additional collateral on a mere 348 million euros in bad debt.
The total notional value of derivatives exposure by U.S. banks was $240 trillion according to the Office of the Comptroller of the Currency (OCC) as of Q4/2014.
Contrary to what Wall Street wants you to believe, derivatives are not investments… in anything. Not stocks, not bonds, not currencies.
They are nothing more than legalized gambling, because they are wagers on the expected outcomes of specific events like the failure of Greece to secure sovereign financing and what happens to its national debt when that comes to pass.
It was the same thing for Ireland, Portugal, Italy, and several other countries during the depths of the Financial Crisis – bad debt and a lack of collateral to cover it when it went bad caused regulators and central banks to "rescue the system."
So this begs the question: Why? Big banks make big bucks from trading this schlock. Meanwhile, everybody pretends like everything is okay.
Here's where it matters to you and your money.
Derivatives Trading Is Not Only Still Happening… It's Growing
Many analysts are expecting the "undervalued" financial sector to post positive profits this earnings season at a time when there will be otherwise disappointing earnings ahead.
Much of that will come from a "surprisingly robust mortgage business that bolsters earnings," notes Paul Vigna of The Wall Street Journal. John Butters of FactSet observes that the financials may report positive earnings results reflecting as much as 8.4% growth.
At the same time, banks are planning billions in stock buybacks and raising dividends as a means of enticing skittish investors.
I think they ought to have their heads examined because the highly leveraged derivatives trading that got them into this mess is still out there… and growing.
Goldman Sachs, JPMorgan Chase, and Morgan Stanley had to alter their dividend payouts to pass the Fed's (questionable) "stress tests." Bank of America passed only provisionally.
Any big bank, no matter how tempting, is truly a case of "buyer beware." Especially now.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.