The Beginning Of The End Of The Derivatives Market

BofA, Goldman Among Banks Cutting Jobs as Trading Slows

Bank of America Corp. (BAC) and Goldman Sachs Group Inc. (GS) are among financial firms cutting more than 1,300 workers in an effort to trim expenses and match revenue as equity and bond trading slows.

Bank of America, the biggest U.S. bank, cut about 60 positions in its equity-sales and trading division this month, said two people with knowledge of the decision. Goldman Sachs, the fifth-biggest U.S. bank by assets, plans to eliminate 230 jobs in New York starting in September, according to a filing the firm submitted to the state’s Department of Labor.

The firms join Barclays Plc (BARC) and Credit Suisse Group AG (CSGN), which are cutting investment-banking workers as they grapple with reduced revenue from buying and selling securities. Fixed- income trading revenue at U.S. banks probably dropped 30 percent in the second quarter from the previous three-month period, while equities trading fell 15 percent, Keith Horowitz, a Citigroup Inc. analyst, wrote in a report last week.

Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, said today it will cut 15,000 jobs and reduce costs by an additional 1.5 billion pounds ($2.4 billion) by 2014. HSBC Holdings Plc (HSBA), Europe’s largest bank, will also cut about 700 employees who offer advice on financial products in branches, a person briefed on the talks said today.

Reuters says (6/24):
"A Greek default would roil the $2.7 trillion money market mutual fund industry, which Federal Reserve Chairman Ben Bernanke highlighted...when he described the funds' exposure to European banks as 'very substantial.'"

From CNBC (6/24):
"If you look at the largest money market funds in the United States, they still have an exposure of 40 to 50 percent in some fashion to Greek debt...if you follow the trail back it's a contagion problem. The French banks and Spanish banks -- they're holding tons of Greek debt and that's where the problem lies."

From Bloomberg (6/27):

"U.S. managers have been reducing their European bank holdings and shortening the average maturities of those remaining."

Consider these two charts courtesy of the Daily Reckoning:

And two of my own charts based on John Exter's Inverse Liquidity Pyramid:

This is our present situation.

The following is my estimate of the post adjustment pyramid:

The highly leveraged derivatives market is on borrowed time, in my view.

The over-leveraged real estate and banking sectors are also vulnerable.

We are on the cusp of the next wave down.

What does this mean?

All hell is about to break loose.


  1. Took a short position today PW.

    Enjoy your 4th my friend and be safe


  2. That is probably a wise move Bill.

    Happy Fourth of July to you and yours and God Bless America (we'll need it).

  3. Case and point PW.

    Wealth Manager Cuts Stocks Exposure to Zero From 60%

    The mirage never ceases to amaze me.

  4. Bill, I had to watch the video and read the article to believe that this was on CNBC. Their censors must have been asleep at the switch!
    Zero percent stock exposure story on CNBC - unbelievable!

  5. OK, no trading blog post, here goes a Quiz on the First Amendment to the Constitution of the United States of America.

    Take the Quiz Here, can you get 20 for 20?


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