by Pam Martens and Russ Martens, Wall St On Parade:
We have noticed throughout this past year that when the Standard and Poor’s 500 index of stocks sold off, big banks’ share prices sold off by dramatically more on a percentage basis. Yesterday, notwithstanding the big rally bank stocks have enjoyed since Donald Trump’s win on November 8, the big banks once again dramatically outpaced the S&P 500 on the downside. The S&P lost 0.03 percent while the major Wall Street banks like Citigroup, Goldman Sachs, Morgan Stanley and Bank of America lost over 1 percent. It was a worthwhile reminder that the hurdles the big banks have experienced this year have not diminished – by any means.
As 2016 began, the big, globally-interconnected Wall Street banks were facing serious headwinds. The Fed had just hiked rates and oil prices could not find a floor and neither could the share prices of these banks, which had heavy loan exposure to the energy sector. By January 20, Citigroup, Morgan Stanley, Goldman Sachs and Bank of America were trading at new 12-month lows.
As oil prices recovered from the $30 range to the $50 range in the Spring, bank stocks rallied as well. Then came the Brexit vote shocker in the U.K. on June 23. In New York trading the day after the vote, bank stocks were pummeled. While the Dow Jones Industrial Average lost only 3.39 percent, Morgan Stanley shed 10.15 percent; Citigroup slumped 9.36 percent; Bank of America was down 7.41 percent while Goldman closed with a loss of 7.07 percent.
Wall Street On Parade also paid close attention to the trading action of MetLife, the large insurer, on the Friday after the Brexit vote. The company is battling its designation as a Systemically Important Financial Institution (SIFI) at the Appellate Court level after winning against the U.S. government at the District Court. In a single trading session on Friday after the Brexit vote, MetLife lost even more than Morgan Stanley, shaving 10.71 percent off its market value.
What all of these bank stocks and MetLife have in common are large exposures to derivatives. (While JPMorgan Chase typically sells off less than the other bank stocks, it also has a massive derivatives book.)
On December 18, 2014, when the Financial Stability Oversight Council (F-SOC) released its report on why it was designating MetLife a SIFI, it pointed out the following:
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