As An Encore to Bailing Out the Big Banks, Government to Backstop Derivativees Clearinghouses … In the U.S. and Abroad

George Washington's picture

The government has been bailing out the giant, insolvent banks for years. (Many of the bailed out banks are foreign.)

That is preventing the economy from recovering … like countries that have grabbed the bull by the horns.

The government has allowed the amount of derivatives to reach 1.2 quadrillion dollars.

That is feeding the parasite of casino gambling … which is preventing the real economy from recovering and is killing the host of actual productivity.

What is the government doing for an encore?  Bailing out the derivatives clearinghouses.

As the Wall Street Journal reported Thursday:

Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading — not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.




The authority for this regulatory achievement was inserted into Congress’s pending financial reform bill by then-Senator Chris Dodd.




Specifically, the law authorizes the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies.




To get help, they only needed to be deemed “systemically important” by the new Financial Stability Oversight Council chaired by the Treasury Secretary.


Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club. After further review, regulators will make final designations, probably later this year, and will announce publicly the names of institutions deemed systemically important.


We’re told that the clearinghouses of Chicago’s CME Group and Atlanta-based Intercontinental Exchange were voted systemic this week, and rumor has it that the council may even designate London-based LCH.Clearnet as critical to the U.S. financial system.


U.S. taxpayers thinking that they couldn’t possibly be forced to stand behind overseas derivatives trading will not be comforted by remarks from Commodity Futures Trading Commission Chairman Gary Gensler. On Monday he emphasized his determination to extend Dodd-Frank derivatives regulation to overseas markets when subsidiaries of U.S. firms are involved.




If there’s one truth we’ve learned about government financial backstops, it’s that sooner or later they will be used. So eventually taxpayers will have to bail out one derivatives clearinghouse or another. It promises to be quite a mess.

(The government has actually been backstopping derivatives for some time).

Indeed, Nobel prize-winning economist George Akerlof demonstrated that if big companies aren’t held responsible for their actions, the government ends up bailing them out. So failure to prosecute directly leads to a bailout.  Bailing them out- in turn – creates incentives for more economic crimes and further destruction of the economy in the future.

As financial incentive expert William Black notes, we’ve known of this dynamic for “hundreds of years”.

Note: It’s not just banks.   The government has bailed out hedge funds and companies like McDonald’s and Harley-Davidson.  

Indeed, drug dealers kept the banking system afloat during the depths of the 2008 financial crisis.  So are the biggest drug cartels “systemically important” and “too big to fail”?  Will the U.S. government backstop the Colombian drug lords?

Sure, their actions don’t help society, and instead harm a lot of people.  But so do those of the giant banks speculating in derivatives.

And there may be more overlap than admitted in polite company.

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tradewithdave's picture

Since the CLS Bank is not subject to all requirements of Dodd-Frank, with the eventual full backstopping of LCH Clearnet and the U. S. Treasuries direct marketing relationship with the Chinese, you have what are essentially two separate global financial systems operating concurrently.


q99x2's picture

Once this system fails people everywhere are going to be looking for Bernank and company. 

orangegeek's picture

Primary wave 3 down continues.   What a mess.

MeelionDollerBogus's picture

wave 3 is fiction. Elliot wave theory doesn't work

Mark123's picture

So the crooks create derivatives that can only be honored if there is no great volatility...then when there is great volatility the taxpayers are forced to protect the system and transfer wealth to the crooks.  These fuzzy massive derivatives are like AIG "insurance" on steroids.  Gonna get interesting.


The system makes perfect sense to me.  Keep shopping and watching TV.

delacroix's picture

when the house can no longer make money, they blow up the casino, and collect the insurance.  and now we are the underwriters of the insurance. they used to just change the rules, but now the bets are too big

sgt_doom's picture

Outstanding blog post, GW!

The Great Masquerade:  Propaganda as news, and who owns Big Oil?

This morning I heard a highly contrived, highly disinformational brief newsy bite on NPR by Yuki Noguchi, with her artificially attenuated voice, sometimes lapsing into her natural California Valley Girl --- and annoyingly cloying --- cadence.

The newsy bite falsely explained the employment and unemployment situation in America:  first interviewing a stooge from the Peterson Institute (PIIE), whose main agenda since its inception can be listed in three points:

(1)   The offshoring of as many American jobs as possible;


(2)   The destruction of any and all social net; and,


(3)   Fully embracing the WTO and its financial services agreement.

(The Peterson Institute was founded by Peter G. Peterson and David Rockefeller.)

Next, and to bolster the drivel from that Peterson Institute stooge, was an MIT pseudo-economist, who was only capable of handling one variable at a time, to the exclusion of a multitude of variables.  (Guess who endowed the pseudo-economist’s chair, or position?)

Suffice to say, neither one was either honest enough, or mentally capable enough, to describe economics as a system, only as a one-way pipeline to enrich themselves and their paymasters.

I’ve read a dozen books on oil companies and the energy industry recently and found, strangely enough, that it didn’t occur to a single author to wonder as to the actual ownership of any of those oil companies?

How very remarkable!

Here is how it works:  one book was written on ExxonMobil, its author being a senior member of the New America Foundation, which is funded by the Peterson Foundation (there’s that darn Peterson name again!), which is steered by Peter G. Peterson, the eternal protégé and lackey of David Rockefeller.

Now historically, the Rockefeller family is the majority owner of ExxonMobil --- and I’ve yet to see anything to alter this factoid.

Mystery solved!

Adam Smith (D-Wa.), the representative from Washington state, added an amendment to the NDAA making it now legal for the American government to lie to its citizenry (so it was once illegal???) which recalls a fictional talking point from the Business Round Table:  that all presidents going back to President Kennedy, fudged on employment numbers.

Actually, what President Kennedy did, as a service to military personnel, was to begin counting military people as employed, thereby bringing them legally in line with existing employment laws so they would qualify for unemployment insurance upon separation of service --- real fudging of unemployment numbers and data began under Ronald Reagan and continues to this day!

Today in the Czech Republic they are celebrating the assassination of a Nazi monster (and a major architect of the Holocaust) who once ruled their conquered country for Hitler’s brutal Third Reich.

British trained and armed Czech assassins parachuted into Prague and killed Hitler’s vile Reichsmarschall.

In response, many thousands of Czechs were put to death.

Evidently, we can acknowledge the monsters of yesteryear but must remain ignorant of those monsters among us today?


jmc8888's picture

Dodd-Frank the 'biggest regulation on wall street eva' that just happens to be a conduit for hyperinflation.

Dodd-Frank the opposite of regulation regulation for TBTF's, and crushing regulation if you aren't. 


rwe2late's picture

 G.W., you must be joking.

Will the U.S. government backstop the Colombian drug lords?


(The U.S. backs every drug lord, from Afghanistan to Miami, as well as the banking-prison-military industry with its hypocritical global drug “prohibition “ racket).

The U.S.-backed Colombian narco-state.     


 Colombia, Pentagon's "Military Launchpad"  

U.S. Backs “Operation Colombia” for Mexico  

I am on to you's picture

The never ending story:The pseudo war on drugs,amazing to hear these people telling the truth,and after being slamed,only Oliver North made the big.

Well aint it what its all about,money dos not smell,they stink like hell!


rwe2late's picture

and more:

Based on 2003 figures, drug trafficking constitutes "the third biggest global commodity in cash terms after oil and the arms trade." (The Independent, 29 February 2004).

The IMF estimated global money laundering to be between 590 billion and 1.5 trillion dollars a year, representing 2-5 percent of global GDP. (Asian Banker, 15 August 2003).

Afghanistan and Colombia are the two largest drug producing economies in the world, which feed a global criminal economy. These countries are heavily militarized. The drug trade is protected. The CIA has played a central role in the development of both the Latin American and Asian drug triangles.

CPL's picture


You really think Cocaine is the reason?  Have a look see at the one drug the area produces and only in that area and it's effects.  If you sometimes feel like you are hungry/thristy for something I you aren't sure why?  Here you go.  It's in practically anything in a box.

MeelionDollerBogus's picture


Price to acquire vs price to sell. It's cocaine. It's sure not sugar or paper or anything else in a box. It's in baggies.

Bringin It's picture

-11 Have to sign in to see the video.  Not gonna happen.

CPL's picture

Then use video caching/proxy.  Dozens of good one kicking around that will allow you to download the video for free without leaving a "fingerprint".

disabledvet's picture

Well thank God Federal spending is under control then given all the money going to Intelligence Agencies and...ahem..."homeland security".

batterycharged's picture

"Fool me once, shame on you

Fool me twice...we can't be foold again"

-George Bush Jernuir



Tsukato's picture

Online I found a list of "bad words" which red flag emails, texts, etc. by the authorities. I thought to myself " most people are too afraid to ever rise up against the man, but perhaps there is some passive-aggressive action that most people could be bothered to do, and could keep the g-men busy/overloaded". This list of words should be spread to everyone, and attached at the end of every message we all write online, during chat, emails, etc. Please take this list, and pass it along to everyone you know. Thanks and vaya con Dios.

Here is where to find the list:


Bringin It's picture

Bollocks!  Total bollocks!

CPL's picture

Considering that the derivatives market is roughly 1.4 Quadrillion dollars as estimated 5 years ago.  That back stop would require five dollars for every dollars in the pool.  Since I haven't seen the real number, nor has anyone else in the recent half decade I have my suspicions it's closer to 3 Quadrillion dollars.


That's a lot of printing and conjuring.  If they go anywhere near the derivative market, that's a million dollar egg.


Nobodies, salary would remotely touch basic costs of life at that point.  you could be Bill Gates and be poorer than a 3 year old peasant child in India.  My money is on the 3 year old, he'll drink dirty ditch water and will understand how to forage.  Bill Gates and his kind would just starve to death the first month. 


Weak...old...corrupt will be first to go.


So let's print more money, let's play the end game and be done with it.  This pussy footing is accomplishing nothing.



disabledvet's picture

I have it on good authority that it's closer to 3.74 Bazillion actually.

CPL's picture

After a trillion people should be shocked.

mcguire's picture

the endgame.. it is painfully slow in coming, isnt it???

WallowaMountainMan's picture

as if it makes a difference. everybody knows any part goes, so go they all.

its free to add gov' guarantees. what the heck, we ain't got the money to bail out the little fish (aka jpm).




ol' brankentein was on the other side of the jpm bet.  now has to give jpm time to unwind or induce a chain reaction self-destruct. just a guess.

lolmao500's picture


Coldfire's picture

Troubling, if all that financial innovation did not net out to zero. /sarc. On the other hand, this should materially hasten the bankruptcy of the US government and its primary stealers. So, good.

Buck Johnson's picture

This most certainly will hasten the US bankruptcy, because whoever is behind this doesn't know the full derivative exposure.

EscapeKey's picture

The US taxpayer will find out soon enough.

Coldfire's picture

Bear in mind that only a fraction of the quadrillion+ in existing OTC contracts are even remotely capable of being moved onto clearinghouses. The "industry" is currently up to the axles in the OTC standardization bottleneck for new instruments required as part of Dodd-Frank and EMIR. The existing instruments are the ticking bomb. Ask Jamie Dimon how tractable these beasts are...

blindman's picture

26 May 2012
Highly Resolve That These Dead Shall Not Have Died In Vain
"Change does not roll in on the wheels of inevitability, but comes through continuous struggle. And so we must straighten our backs and work for our freedom. A man can't ride you unless your back is bent."

Martin Luther King, Jr.

Judge of Nations, spare us yet,
Lest we forget—lest we forget.

Rudyard Kipling

"Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged ...."

kedi's picture

And yet 350 million tax paying people still can't seem to come up with more than two mirror image political parties to support. Somehow they still believe that their party brings up independent people's representatives. What is truly sad to me is that here in Canada we seem to be devolving into a two party federal system as well. If the people don't make a big swing to the left next election, our neocons are going to have enough time to really screw this country. More. I just don't see the U.S. getting back on track until it goes completely off the rails for some time. Being your next door neighbour that is scary indeed. The two parties have solidified their bases to the very bedrock of the country, their corruption growing up throughout it. That foundation is going to have to be shattered in order for anything else to take root and have a chance to grow. In the meantime it is going to get ugly. I am in my mid fifties now and it seems the only reason I have for hanging around is to witness this bizarre slow motion train wreck. I used to enjoy witnessing the progress the world made, now I am fascinated to see it collapsing.

I actually believe the Europeans will do better through this mess. They still remember the horrors that occur when things go too for off the rails. They are attached grographically and historically to others who have suffered similarly. They are all more likely to take some pain to avoid chaos and where that leads. They are also far more likely to finally dump those that feed off of others work and expect to be saved when they fail to do so.

Vendetta's picture

I was in Canada last year for a little while for work and heard political advertisements with the same corrupt language I hear in the US all the time.  I thought before I got there I would hear refreshing and honest news, I found the opposite.

MeelionDollerBogus's picture

About 5 years too late. Our transition to police-state now has strong momentum

sgt_doom's picture

In 2012, Americans --- should they no longer wish to be considered nothing but Ameritards --- will act French, and vote....

Dr. Jill Stein, Green Party, to be the president.


Dr. Jill Stein in 2012 !

sgt_doom's picture

In 2012, Americans --- should they no longer wish to be considered nothing but Ameritards --- will act French, and vote....

Dr. Jill Stein, Green Party, to be the president.


Dr. Jill Stein in 2012 !

lamont cranston's picture

Neocon.Shemocon. Who cares. The outcome will be no different financially. Current occupant is out, new dude will be rendered immobile on assumption. The beat will go on for another 2-3 years, then go hopelessly boom within a week. 

JustObserving's picture

More and more it appears that the big banks and the exchanges are just extensions of the Fed.  The Fed wants precious metals prices low so confidence stays high in the dollar.  And inflation perceptions stay subdued.

Last year, the Crimex increased margin for silver 5 times in 7 days breaking the surge in silver prices.  Now this free insurance from the Fed is the payback. 

Hey, Bennie, can I get free insurance too if I sell my silver?

Andy Lewis's picture

Maybe if you sell your liver.

world_debt_slave's picture

it will stop when the taxpayers are turned into Soylent Green

blueridgeviews's picture

You don't use  "Nobel Prize winning" if you are trying to describe excellence.  That went out the door when Al Gore and Our POOTUS got their prize.

Yen Cross's picture

 No " Pink Slime" here!  Next?

Westcoastliberal's picture

These people (illuminati, Bilderbergers, whatever name you use for them) are absolutely, positively, fucking nuts!

This is just another excuse for the transfer of taxpayer money to the 1/100th of 1%.

I don't have an answer to this other than to demand a Jubilee, a grand "reset" that would wipe the books clean and start fresh.

Of course TPTB wouldn't go along, so they might need "convincing".

Vendetta's picture

a debt jubiless is the only viable solution.  Trying schemes of monetizing the debt has always failed except for small perturbances in 'the force' (monetary that is).... evidence: Greece.  But they'll drag the suffering out as long as possible like they always have throughout history.

MeelionDollerBogus's picture

To keep stable a debt jubilee must be complete and regular. Total wipe-out, very much a frequent affair. Every 5 years to wipe out all debts more than 10k, every 10 years more than 100k and every 20 years to wipe out ALL DEBT PERIOD, END OF STORY.

That will keep lenders and borrowers more honest!

Coldfire's picture

The solution is bankruptcy, if it were only given a chance.

my puppy for prez's picture

This is the sign that the feds know the derivatives are gettin' ready to blow!  The question is:  How could the federal govt (you and I) possibility cover all of their derivative-asses?  It seems quantitatively impossible.  Sigh....