Exposures at hedge funds now surge to over $28 trillion, leaving banks with massive risk according to the latest report.
According to a report from the U.S. Treasury’s Office of Financial Research (OFR), the Gross Notional Exposure at hedge funds has seen a significant increase over the past year.
Specifically, the data shows that this metric has surged by 24.5% — going from $22.946 trillion on March 31, 2023 to $28.579 trillion on March 31, 2024.
This dramatic growth in hedge fund exposures is notable, as it occurred despite the banking crisis that took place in the spring of 2023.
During that time, several major banks, including the second, third, and fourth largest institutions, experienced failures or severe distress.
The report provides a visual chart that allows users to observe this stunning increase in hedge fund exposures by simply running their cursor along the top green line on the graph.
This graphical representation helps illustrate the scale and rapidity of the growth in these risk exposures, even in the midst of the broader turmoil in the banking sector.
The OFR was created under the Dodd-Frank financial reform legislation of 2010 to keep bank and market regulators informed of growing risks, in the hope of preventing another financial crisis like that of 2007-2010 from occurring.
“Unfortunately, Wall Street’s lobbying, bullying and regulatory capture has exponentially outstripped the clout of the OFR,” reports Wall Street on Parade.
“As a result, all that the public can do is read about the potentially catastrophic risks inherent on Wall Street today at the OFR’s website and wonder when the next blowup and Fed bailout will occur.”
According to a report from the Bank for International Settlements (BIS) released on March 4th, the Prime Broker operations of three major U.S. financial institutions – Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase (JPM) – were each servicing more than 1,000 hedge funds as of 2022. This data is presented in a chart within the BIS report.
What makes this situation particularly concerning is that all three of these megabanks have a well-documented history of mismanaging risks in their relationships and dealings with hedge funds.
In other words, these same banks that own federally-insured deposit-taking institutions are also deeply embedded in providing prime brokerage services to a vast number of hedge funds, despite their prior track record of poor risk management in this area.
The combination of these systemically important banks having such extensive prime brokerage exposure to over 1,000 hedge funds each, coupled with their notorious history of mishandling these types of relationships, raises significant questions about the potential systemic risks and vulnerabilities present in the financial system.
This data point from the BIS report paints a picture of a highly interconnected web of relationships between the largest U.S. banks and the hedge fund industry, which could amplify the transmission of shocks and instability throughout the financial system if not properly monitored and controlled.
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Also Read: The US Treasury Direct is Now Freezing Customer Accounts
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Wells Fargo is now under federal investigation over issues in its anti-money laundering and sanctions programs, the bank said.
The company did not specify which government was inquiring about its practices, nor did it give details about the issues that were being probed, per Reuters.
“Government authorities have been conducting inquiries or investigations regarding issues related to the company’s [AML] and sanctions programs.”
However, Wells Fargo said it is in discussions with the U.S. Securities and Exchange Commission (SEC) to resolve an investigation into the cash sweep options that the bank provides to investment advisory clients, according to the filing.
The company revealed the probe in an SEC filing in November.
Wells Fargo added in its most recent disclosure that, “There can be no assurance as to the outcome of these discussions.”
The bank offered no further details about which agencies are conducting the investigations, or what the issues are.
A company spokesperson declined to comment beyond the filing, reports the outlet.
Since September 2016, WFC faced significant challenges with numerous penalties and sanctions, including a cap on the asset position by the Federal Reserve.
Last week, Wells Fargo faced a class action lawsuit alleging that it mismanaged its employee health insurance plan, forcing thousands of U.S.-based employees to overpay for prescription medications.
This lawsuit action seeks statutory fines and unspecified damages on behalf of a nationwide class of WFC health plan participants and beneficiaries, which may number in tens of thousands.
In June 2024, WFC faced a proposed class action lawsuit alleging the bank for taking part in a $300-million Ponzi scheme.
This scheme affected more than 1,000 investors, mainly senior citizens, and left them without substantial life savings.
The lawsuit filed stated that Wells Fargo knew about the fraudulent activities from 2011 to 2021, and the company provided substantial assistance to the perpetrators while reaping benefits from the scam.
Also Read: A Massive US Bank is Now Closing Credit Cards
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