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Yet Another Reason To Break Up The Big Banks
Many of us have pointed out that the economy will not stabilize until the too big to fails are broken up.
We have also pointed out that derivatives are still very dangerous for the economy (in their current, opaque form) that the derivatives "reform" legislation previously passed has probably actually weakened existing regulations, and the legislation was "probably written by JP Morgan and Goldman Sachs".
As I noted earlier this month:
Harold Bradley - who oversees almost $2 billion in assets as chief investment officer at the Kauffman Foundation - told the Reuters Global Exchanges and Trading Summit in New York that a cabal is preventing swap derivatives from being forced onto clearing exchanges: There is no incentive from the moneyed interests in either Washington or New York to change it... I That's bad enough.
believe we are in a cabal. There are five or six players only who are
engaged and dominant in this marketplace and apparently they own the
regulatory apparatus. Everybody is afraid to regulate them.
But last week, Bob Litan of the Brookings Institute wrote a paper (here's a summary) showing that - even if real derivatives legislation is ever passed - the 5 big derivatives players will still prevent any real change. James Kwak notes that Litan is no radical, but has previously written in defense in financial "innovation".
Here's a good summary from Rortybomb, showing that this is yet another reason to break up the too big to fails:
Litan
is worried about the “Dealer’s Club” of the major derivatives players.
I particularly like this paper as the best introduction to the current
oligarchy that takes place in the very profitable over-the-counter
derivatives trading market and credit default swap market. [Litton
says]:I have written this essay primarily to
call attention to the main impediments to meaningful reform: the
private actors who now control the trading of derivatives and all key
elements of the infrastructure of derivatives trading, the major dealer
banks. The importance of this “Derivatives Dealers’ Club” cannot be
overstated. All end-users who want derivatives products, CDS in
particular, must transact with dealer banks…I will argue that the major
dealer banks have strong financial incentives and the ability to delay
or impede changes from the status quo — even if the legislative reforms that are now being widely discussed are adopted — that would make the CDS and eventually other derivatives markets safer and more transparent for all concerned…
Here,
of course, I refer to the major derivatives dealers – the top 5
dealer-banks that control virtually all of the dealer-to-dealer trades
in CDS, together with a few others that participate with the top 5 in
other institutions important to the derivatives market. Collectively,
these institutions have the ability and incentive, if not counteracted
by policy intervention, to delay, distort or impede clearing, exchange
trading and transparency…
Market-makers make the most
profit, however, as long as they can operate as much in the dark as is
possible – so that customers don’t know the true going prices, only the
dealers do. This opacity allows the dealers to keep spreads high…
In
combination, these various market institutions – relating to
standardization, clearing and pricing – have incentives not to rock the
boat, and not to accelerate the kinds of changes that would make the
derivatives market safer and more transparent. The common element among all of these institutions is strong participation, if not significant ownership, by the major dealers.So
Bob Litan is waving a giant red flag that the top dealer-banks that
control the CDS market can more or less, through a variety of means he
lays out convincingly in the paper, derail or significantly slow down
CDS reform after the fact if it passes.
***
If you
thought we’d at least get our arms around credit default swap reform
from a financial reform bill, you should read this report from Litan as
a giant warning flag. In case you weren’t sure if you’ve heard anyone
directly lay out the case on how the market and political concentration
in the United States banking sector hurts consumers and increases
systemic risk through both political pressures and anticompetitive
levels of control of the institutions of the market, now you have. It’s
not Matt Taibbi, but it’s much further away from a “everything is
actually fine and the Treasury is in control of reform” reassurance.
Which should scare you, and give you yet another good reason for size
caps for the major banks.
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we must break up the big banks
you go first mister ,, lol
Yeah, exactly. You have to be really careful with this electronic comms. nowadays. And with that in mind; I'd just like to say that I love Big Banks; I have no bad feelings towards Big Banks, I know Big Banks are my friend, cause the Gummint tole me so.
no shit sherlock... you only have to look at how mobil delayed, avoided, watered down, ignored and bribed to get out of the $$$$ fines imposed from the exxon valdez oil spill - and they dont have half the clout of this bigboyz club
Piling on more reasons is just gilding the lilly.
What's needed, demanded by the proletariat, is a Nike moment.
Pile them on for sure, to keep it in the pubic eye, but that's not going to do a damned thing.
The derivatives cow is so far gone from the barn, it will need to be slaughtered and brought back to the farm in pieces. Sovereign default will be the killing floor for this out-of-control back alley racket.
It now has politicians and the rest of us firmly by the balls. The electeds already know it. Derivatives reform is a hoax.
...and the Federal Reserve will have oversight of any exchange. Let's talk about foxes and hen houses.
Anything to big to fail is a sovereign state.
What did Buffett call them, "Financial weapons of mass destruction?"
END OF THE AMERICAN DREAM:
http://williambanzai7.blogspot.com/2010/04/derivative-hogwash.html