By Pam Martens and Russ Martens: September 3, 2024 ~
The Office of Financial Research (OFR), the federal agency created after the 2008 financial collapse on Wall Street to defog the lenses of federal regulators to prevent a replay of that disaster, has posted frightening graphs on its website as part of its “Hedge Fund Monitor.”
Particularly alarming is the overall takeaway that the U.S. megabanks that are receiving federal deposit insurance that is backstopped by hardworking and law-abiding U.S. taxpayers, are using their lending ability to make massive loans to dodgy, giant hedge funds that are regularly found to be on the wrong side of the law and/or engaging in wildly risky behavior.
Equally concerning is whether megabank lending to giant hedge funds is sapping their ability to make loans to worthy U.S. businesses that are engaged in the real economy rather than the financial casino economy of hedge funds.
Take the chart at the top of the page as one example. It shows that just three megabanks provided a combined $1.832 trillion in credit to “Qualifying Hedge Funds” as of March 31, 2024. This represented 79 percent of all such loans, which had a total value of $2.31 trillion. (See chart at the bottom of the page.) “Qualifying Hedge Fund” is defined as follows:
“A Qualifying Hedge Fund is any hedge fund with net assets of at least $500 million that is advised by a Large Hedge Fund Adviser. Net assets are measured individually or in combination with any feeder funds, parallel funds, or dependent parallel managed accounts. Large Hedge Fund Advisers, according to SEC Form PF, have at least $1.5 billion in hedge fund assets under management across one or more funds.”
Megabanks always find some benign-sounding name for their most dangerous operations. In the case of their massive lending and red-carpet services to giant hedge funds, they call it “Prime Broker” operations.
The Office of Financial Research has not included the names of the three megabanks that have taken on this enormous, $1.8 trillion concentrated risk with hedge funds, but the chart to the right might offer a big clue as to those names. According to this March 4 report from the Bank for International Settlements, the Prime Broker operations of Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase (JPM) (all U.S. financial institutions which own federally-insured banks) were each servicing more than 1,000 hedge funds as of 2022.
The fact that the Office of Financial Research is simply “monitoring” this potentially explosive situation while the federal banking regulators for whom it conducts its research allow this dangerous and incestuous situation to grow, is simply more evidence of completely captured regulators.
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