(By Nathan Parkin)  By Dave Granlund

Citigroup’s change to Dodd Frank Legislation leaves the taxpayer holding the ‘derivatives’ bag.  

Low oil prices have major banks nervous of significant default in the oil patch, notably fracking companies that were bleeding cash at $100 oil. What better way to hedge yourself than to craft a change to derivative law and push it through the congress…..

This article does a good job of outlining the issue:


The derivatives market is a basically a giant casino attached to the global economy. It MAGNIFIES risk by allowing ‘infinite’ leveraging on real assets to facilitate bets on top of bets without any need for underlying real collateral. Although derivatives are technically zero-sum, meaning every loss has an offsetting gain. The derivatives market is one massive daisy chain of trust. Each participant assumes that no one will default on a contract. Once one link does fail (Lehman bros), the books of ALL related parties are compromised and so is the entire chain of trust.

The current size of the derivatives market is somewhere between 700 and 1,000 Trillion (with a T!).  That is about 50-60 times the annual U.S GDP.

Major banks are the main players (http://www.ibanknet.com/scripts/callreports/filist.aspx?type=derivatives).

Persistent low oil prices are likely to cause major financial pain to the fracking industry that was already swimming in red ink at $100 oil.  The fracking industry is and has been reliant on low interest loans (credit) to fund operations. This fracking credit is a large part of what is known as the high yield bond market or ‘junk bonds’.  This ongoing credit, which in large part has fueled the bubble, will dry up as repayment will look increasing unlikely to lenders. Ultimately this dynamic will result in default on many of the ‘junk’ bonds triggering the the execution of credit default swaps (CDS or derivatives tied to defaults). This would be the toppling of the first domino, breaking the daisy chain of trust and likely causing a derivative ‘blood bath’ on all associated contracts and beyond.

The legislation change  or “The bill that Citigroup helped draft that passed in Dec. 2014 allows the final domino to fall into the lap of the tax payer and appears to be a premeditated move by the Banking Cartel to hedge against oil price risk.