a globally systemic bank with huge derivatives exposure just went into crisis mode noting chukin Bank saying that he plans to sell around $63 billion in US and European Sovereign bonds to halt the bleeding from wrong-way bets on interest rates. So this begs the question, is this the beginning of The Big Short 2.0? I'm going to answer that question for you in three simple, fast steps. Step number one, let's go over what's at the core of this specific problem. We have a bank called Norinchukin in Japan. It's about $800 billion on its balance sheet. Now, before you say, Well, George, that's not really a huge bank, ah, but you forget the global monetary system is simply a network of banks' balance sheets. More on that in Step number two. But they are a huge player in the CLO market in these derivatives that were at the root of the problem during the GFC. So it starts with, we'll just call it J Bank for the ease. That's kind of a hard name to pronounce.

so J Bank, we're looking at their balance sheet. Assets on the left, liabilities on the right. Now what they did is they went out and borrowed a lot of dollars when that was cheap because remember way back in, let's say, 2020 or 2021 before the FED started to raise rates, rates. They had interest rates at zero, and the yield curve was steep, meaning the longer-term interest rates were actually higher than the shorter-term interest rates, what you would expect. So a bank makes money by borrowing short-term and lending long-term. Well, this works fantastic when the yield curve is steep, but when it inverts, now all of a sudden you got a problem. So quick summary of what took this bank and possibly a lot of other globally systemic Banks into crisis mode is they went out and bought low yielding assets, that would be the asset side of their balance sheet, and the ones that are high yielding have massive amounts of risk. More on that in just a moment. They're borrowing short, lending long. So they

have to roll over that debt on the liability side of their balance sheet constantly. But what happens when your funding costs go up? This is the predicament that this J Bank, along with probably quite a few other globally systemic banks in Japan, is facing right now. It's a similar problem to what Silicon Valley Bank, Credit Suisse, First Republic—I could go on and on and on about these banks that have had a lot of issues over the past year. So let's get back to the way the balance sheet was set up so you guys can get a visual. Like I was saying, we've got the liability side of the balance sheet. Let's just assume for a moment they were borrowing dollars at 2%. I don't know if that's the exact number; we're just using it for the sake of this example. So they are going out and buying treasuries at 3%, so a low-risk asset. Okay, fine. But they wanted to juice the return a little bit, so with the other portion of the balance.

sheet on the asset side. Let's assume they went out and bought, well, we don't have to assume that, that's pretty much exactly what they did. So they were getting a higher interest rate here. So combined the 7% and the 3%, let's say their average rate of return on the asset side of their balance sheet right around 5%. Okay, well, this is fine because remember they're paying 2%, so they're pocketing a 3% spread. But then what happens is the Federal Reserve comes in and they have to fight inflation, the inflation that was caused by all the economic distortions the government imposed during the surva sickness. So they take interest rates at the front end of the curve, the short-term interest rates from 0% up to 5%. Okay, well, let's think this through. Let's assume for a moment that J bank is having to roll over the debt on the liability side of their balance sheet, in other words, the dollars they owe every month, but the assets that they own have

a maturity of 10 years. You see how this poses a problem, so if these assets that you bought, let's say the treasuries, yield 3% for 10 years, but then the FED takes rates at the front end of the Curve. Your short-term borrowing costs, they call them the funding costs, up to 5%. Now all of a sudden this 2% turns into, let's just say, 6%. Okay, well, you can see how that dog don't hunt because now what you're doing is you're paying out 6% to collect 5%. We would call that a negative carry or in real estate terms, this is having negative cash flow. So basically J bank is hemorrhaging money every single month. So what do they have to do? They have to sell those low yielding assets on their balance sheet. Okay, well, interest rates now are at 5%, not 3%, so you guys know that there's an inverse relationship between the price and the interest rate. So the rate goes up, what happens with the price? The

price goes down, they liquidate these treasuries, 63 billion of them, and they have to take a massive, massive loss. But unfortunately, although this may stop the bleeding temporarily, this makes the overall problem much, much bigger. More on that in Step number three. Step number two, now let's go over how the global monetary system is set up, this network of bank balance sheets, and then you'll understand why even though this J Bank, we'll call it, is $800 billion, there's still quite a bit of systemic risk, especially when you include the derivatives. So this is an oversimplified diagram of how some of these transactions work, and what you see is that if one of these Banks goes bust, it's just like those old school Christmas tree lights. I don't know if any of you had those growing up, but remember you'd have this long string of lights, and if one bulb went out, the entire string wouldn't work. And it's very similar in the global monetary system. Here's why we've got Bank of Russia, Grand Cayman, Singapore

Montreal, Bahamas, Switzerland, and then we have euro dollar Enterprise, so a private entity, one of these multinational Mega corporations. So Bank of Russia, let's just say, lends a million dollars to the Grand Cayman bank. So that's represented by this orange shaded area. Okay, well, they lend the million dollars, they've got a million dollar liability because they owe that money to the Bank of Russia, but then that gives them a million dollar asset. So then what happens is Singapore Bank goes to Grand Cayman and says, Hey, we need to borrow a million dollars. They said, Great, we've got those million dollars. So they send them down to the Singapore bank. And of course, the million dollars of cash on their balance sheet is replaced by that loan that they just made to the Singapore Bank. The Singapore bank doesn't have very good credit, so, or they're a credit risk, let's say. So the Grand Cayman Bank says, We'll do the loan, but we need some collateral. Unfortunately, the Singapore bank doesn't have any good collateral, but they need

us treasuries to execute the transaction. So they take some of this garbage collateral. I think Jeff is this gray shaded arrows calling it, uh, junk collateral. Okay, so they take the junk collateral that they have on their balance sheet and they pledge it to the global first dealer Bank who they have a relationship with. And so the glob mob first dealer Bank charges them an interest rate. And then they take the junk collateral onto their balance sheet and then they give them the us treasuries that they need to post as collateral to the Grand Cayman bank. Then what happens is Montreal goes to Singapore and says, hey, we need a million dollar loan. And Singapore says, sure, we've got the million dollars. They send it down to the Bank of Montreal. And keep in mind these million dollars that we're talking about, they're not green pieces of paper, they're not Bank Reserves, it's just credit, it's just dollars that were created by lending them into existence. So we go through the same routine here with Montreal.

take the million dollars and then the million dollars of cash leaves the Singaporean Bank side of their balance sheet or the asset side of their balance sheet. That's replaced with the loan but then the Bahamas Bank does the exact same thing Montreal lends to them uh but they like the Singaporean Bank need to post collateral so they don't have a relationship with global first dealer bank but they do have a relationship with BSD Global dealer bank and it's the exact same thing. They pledge them some junk collateral and the BSD Global dealer Bank charges them a little bit of a higher interest rate give them the treasuries they post the collateral to Montreal Montreal gives them a loan for the million dollars and they go ahead and lend the million dollar to the bank of Switzerland who finally finally lends the million dollars to euro dollar Enterprises the only entity in this entire diagram that's actually part of the real economy the only entity that is a nonbank let's say so looking at this let's just say that uh I don't

know the uh Bank of Switzerland is a smaller Bank. Let's say ' got 800 billion of assets and liabilities so you'd say, oh well George, that's not a globally systemic Bank. Really, what happens if they go bust? Then you've got this daisy chain that blows a hole in the balance sheet of Bahamas, Montreal, Singapore, gr Cayman, and Russia. Now you see what I'm saying, this is like a string of those old-school Christmas lights. And of course, there's some banks that are more important to the network and some banks that are less important, but the main idea is that even if the Bank of Switzerland went bust and the other Banks could handle that hit to their balance sheet, it still increases the counterparty risk within the system because now all these other Banks say, wow, Switzerland went bust yesterday, I wasn't expecting that, maybe I'm next, maybe it was because they had all those Clos on their balance sheet and well, I have Clos on my balance sheet, or maybe it's because their dollar.

funding costs shot up to 5% but wait a minute that's happening to me as well so I'm going to lend a lot less out into the real economy. So what happens if those banks are lending a lot less because the counterparty risk or perceived risk in the system skyrockets? It makes it much harder for the system to get the liquidity it needs to pay off the existing debt which takes you into a deflationary bust because we live in a debt-based monetary system. And it's just like the deflationary bust in the financial system we saw during the GFC that was highlighted in the movie The Big Short. Step number three. So what's their solution to the problem which as you can probably guess will just make it much much worse in the future? All right well we go back to remembering in Step number one they've got this negative carry so every single month they're hemorrhaging money so they've got to sell those treasuries but then the question becomes okay they're going to take that 10

billion dollar loss, at the very least. But then, what are they going to buy? How are they going to shore up their balance sheet to where they're not losing money every single month? In other words, what are they going to buy to create enough yield over here to compensate for their increased funding costs on the liability side of their balance sheet? Well, what the J Bank representatives are telling us in the media is that, Hey, this is actually pretty easy. You guys are making this seem a lot harder than it really is. You see, remember we are getting the 3% on the treasuries, but we're getting 7% on the Clos. And that's 7%. Yes, it's higher than the 6% our funding cost on the liability side of our balance sheet. So, all we really have to do is just sell the treasuries and buy more Clos. Problem solved, then we've got nothing to worry about. But what they're not telling you is by increasing the amount of interest they're receiving on the asset side of

their balance sheet. How much risk are they having to take? Well, let's go over to this simple chart that I just drew up, just so you can get the visual. And what we have on the left-hand side are interest rates, the interest that you would receive by making XYZ investment or in this case speculation or gamble. And the bottom, we go from low risk to insanely high risk. In fact, it's so high, I put RR, which stands for Russian Roulette. You were playing financial Russian roulette with your balance sheet. So at 3%, the risk is relatively low with treasuries. And you say, Well, George, they were high risk because the interest rates went up, therefore they had to sell them at a loss, right? But if they weren't making idiotic bets with their balance sheet capacity, they could have held those treasuries to maturity and they wouldn't have lost a dime. So getting back to their predicament, they have got to reach, they've got to go as far out that risk curve to get as much yield as possible.

so that takes us to the CLOs. What are CLOs? This is where I hope you're sitting down because it is officially stiff drink time like we say on this channel. So CLOs are pools of loans, but they're not pools of treasuries loans to the government. Oh no, in fact, they're not even loans to mega-corporations like Apple or Nvidia or Tesla. They're actually very high-risk loans to midsize, maybe even small corporations or business entities in the United States that really couldn't get funding from a normal bank. So you've got this high-risk corporation that goes to the bank and says, Hey, we need a $100 million for XYZ project, and the bank looks at them and says, Yeah, not even close because the probability of you paying me back is almost zero. So then what this high-risk corporation does is they go over to this guy right here. We've been using him for the last couple of months here because he is the guy that sets up this CLO. I believe officially they call him a

sponsor. Maybe he sponsors other people in his AA classes, but his name is Slick Rick, and he is all about the benjamins. You can tell by his glasses; they have dollar signs on them, and he is keeping his pimp game strong here with his cane. So, Slick Rick says, Hey, High-Risk Corporation, I've got some money for you that, oh, by the way, I just borrowed, likely from J Bank or one of J Bank's counterparts. So they go ahead and lend them the money. They take the loan and they put it into a pool of other loans that are separated by what they call tranches. So the bottom tranche is paying you 5%, which is pretty good, but the risk is very high. And that's at the lower level. As you go higher and higher and higher, yeah, yes, you get more interest, but it gets to the point where you're taking insane amounts of risk. But let's not forget the yield curve is inverted, and it's been inverted for about 2 years. And this usually tells us that the

economy is very unhealthy. Fundamentally, it's unsound. Okay, well, let's think about this. So you're going into an economy that's likely deteriorating, and you're taking the riskiest bet possible. Well, usually that doesn't end well. And I'd also like to mention that the data is becoming weaker and weaker and weaker. In fact, if we look at the P rule, which we have to because the unemployment rate just went up to 4%. So what the PM rule says is pretty much every single time going back to the 1950s that the unemployment rate increases by a half a percent or 50 basis points over the span of a year, you are in or very near a session. Well, right now over the last 12 months, we've gone from 3.4% up to 4%, so an increase of not half a percent or 50 basis points but 60 basis points. 6%. Now, if we want to get technical about it, the S rule is actually a moving average, so assuming

the next couple months, we stay at around 4% unemployment or actually increase. That will trigger the Som rule, which has 100% accuracy again going back to the 1950s. In fact, the creator of the Som rule just came out on CNBC and said that right now. I'm quoting her, I'm not making this up, this not George Gamon speaking. She said the FED is playing with fire because the underlying economy is so weak, deteriorating quickly, and the FED isn't dropping rates, they're keeping them at 5.25%. So when you dive into the details, you see a lot of these banks are in a lose-lose situation, and a lot of these banks are definitely globally systemic where the only move they have, the only option, is to take on so much risk that it increases the probabilities exponentially that they blow up in the future, just like we saw during 2008-2009 during the GFC. It was great for a movie but terrible for the overall economy and society at large. So what is my base

case, how do I think this is going to play out? Well, again, there are no certainties, there are only probabilities. But I think we're just in the middle endings of a banking crisis that started March of 20123. And when we get into the eighth and ninth inning, we'll likely see a lot more bank failures. A lot of them could be these globally systemic Banks. But this time, I think the central planners will come in and try to paper over the problem almost immediately by increasing the size of the Fed's balance sheet or a lot of the central bank's balance sheets and the government's spending money like we have never seen. Something that exceeds the rate of deficit spending we saw during March, April, May, or throughout 2020 and 2021. And while they may be able to paper over the financial problem, as you guys know from watching my videos, this will create massive economic distortions in the real economy that will lower the standard of living for society at large. For more content that'll help you build wealth.

and thrive in a world of out-of-control central banks and big governments. Check out this playlist right here, and I will see you in the next video.

This Globally Systemic Bank Just Went Into Crisis Mode (Derivatives)

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