Today’s show is probably going to go down in history as one of the most important shows ever published on this podcast. That sounds like a bold statement. But the more I look at our global financial system, and out global monetary system, I’m increasingly convinced that there are so many time bombs out there, another financial crisis is inevitable. The only thing I can’t tell you is which pin will actually pop the balloon.

On today’s show we are talking about how the Fed, the all powerful Fed, is actually a minor player in the global financial system. In fact, the Fed is so far behind what’s happening in the financial world, that they are relegated to the role of janitor cleaning up the mess. When you’re at the grocery store and you hear the announcement calling for a cleanup in aisle 4, that’s the Fed. The jar of pickles has already smashed and the only thing to do is to clean up the mess.

Last week we reported on a story that came to light in the quarterly report of the Bank of International Settlements.

If you remember, the BIS reported 97T in off-balance sheet foreign exchange, currency exchange and Forward derivatives.

Because these are derivatives, they represent a contingent liability that theoretically have a low probability of triggering. According to GAAP, low probability contingent liabilities are not to be disclosed in the financial statements on the balance sheet.

We did experience a problem in 2007 and 2008 with another bunch of derivatives that were similarly off balance sheet.

We’re going to look at off-balance sheet practices because, just like 2007, just like Enron, these practices can be used to hide liabilities. Sometimes this obfuscation is legitimate, and in other cases like Enron, it’s outright fraud. Then there is a whole bunch that are in the grey zone.

I’m going to go out on a limb and state categorically that the next financial bomb to go off will come from an off-balance sheet derivative exploding.


Host: Victor Menasce