From an article in Bloomberg, big banks may be in worst condition than it appears. It is very apparent that the banks are swamped with debt but the degree it is camouflaged with accounting tricks is not apparent.
Lehman Brothers tried to covered their highly leveraged position using repos and in 2008 they went belly up, but with Lehman their financial position was not as heavily tied to derivatives.
Repos otherwise known as repurchase agreements are utilized to bring down the bank’s assets as reporting dates approach. Repos are a slight of hand maneuver where a bank sells an instrument like a bond short term and buys them back. The bank can borrow using this instrument as collateral. With fractional lending the money is multiplied as the banking rules only requires them to retain a percentage of the money taken in, the rest may be loaned out. So the money is multiplied on the books but in actuality it is like printing money.
The money derived from the additional loans is used to cover the money that was received from the sale of the short term bond. It’s better than the old shell game or three card monte because it involves much larger sums but the swindle is the same.
The game always ends the same. The banker’s greed pushes them to play the game till a timing error is made and the payments out come due before the payments in are received, this results in a default.
This is the same game that is being played on the COMEX. They maintain that they have a store of physical precious metals and the issue out loans of these through vehicles like GLD and SLV or short contracts. In reality, there is only a percentage of actual physical metals backing the multiples of paper agreements so if all the investors holding the paper shorts were to insist on redemption in physical metal, the scheme would collapse. Most of the holders of the paper contracts would be settled in fiat as per the rules of COMEX.
The unfortunate thing is no one can forecast when the default will occur but it is certain that it will occur. So everything will appear like business as usual till it isn’t, just like Lehman Brothers.