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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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Sun, 05/27/2012 - 22:46 | 2468339 Vendetta
Vendetta's picture

It is impossible to cover.  I guess the massive military buildup these past 30 years was really just to provide violent cover on multiple fronts even domestically while the money power criminals flee to various points of the earth in their gulfstream's and ill-gotten wealth.

Sun, 05/27/2012 - 08:59 | 2466949 Ranger4564
Ranger4564's picture

We cannot, and that is precisely why derivatives were invented.  Indefinite debt slaves in Indefinite detention.  Notice a pattern?

Sat, 05/26/2012 - 16:54 | 2465951 mjcOH1
mjcOH1'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...."

How much you can cover just depends on how many 0s you put on the printing plates.

Sat, 05/26/2012 - 17:16 | 2466005 WmMcK
WmMcK's picture

Arithmetic (bit) shifting is cheaper yet.

"Not worth the paper it's not printed on." - G. Celente

Sat, 05/26/2012 - 16:14 | 2465905 nah
nah's picture

the government made you a citizen stop bitching about it

Sat, 05/26/2012 - 16:19 | 2465911 FinalCollapse
FinalCollapse's picture

I thought it is the other way around: the citizens make a government. Oh well - I must be getting old...

Sat, 05/26/2012 - 15:47 | 2465855 blindman
blindman's picture

the future is so bright i have to wear shades." ?
now that there will be backing of the fraudulent
derivative market just imagine how this market will
grow. 1.2 quad whatever is just the start. soon
we will be talking about real money. oh my.
makes my personal financial concerns seem rather
childish. hmm.

Sat, 05/26/2012 - 16:02 | 2465888 HungrySeagull
HungrySeagull's picture

That bright light you see is simply a advance warning of the thermal wave that is a second or two from cremating you so thoroughly that only your shadow remains.

All that paper piled will burn nicely indeed. What a firestorm that will be... the kind big enough to generate and control it's own weather with tornadoes made of fire.

One word can stop all that.

"Jubilee"

Sat, 05/26/2012 - 21:48 | 2466476 nawerdenn
nawerdenn's picture

No, this will stop the fecal wave.

Sat, 05/26/2012 - 15:44 | 2465847 sabra1
sabra1's picture

up here in Quebec, students have taken to the streets for over 100 days now, protesting over increases to university fees! i can't imagine americans protesting over less important subjects like your constitution getting ripped apart, agenda 21, cops stealing money from citizens, chem trails, re-education centers, fema camps, getting groped at airports by the TSA, which now has check-points on the streets. gotta go rest now, protesting up here in Quebec about to start again!  

Sun, 05/27/2012 - 12:12 | 2467176 disabledvet
disabledvet's picture

From Babble On to Babylon..."just like that." Move along!

Sun, 05/27/2012 - 09:32 | 2466991 GMadScientist
GMadScientist's picture

"students have taken to the streets for over 100 days now"

How many of them are registered to vote in Kay-Beck?

Sun, 05/27/2012 - 08:56 | 2466944 Ranger4564
Ranger4564's picture

Haha, well said... i wrote basically the same thing in a video on Youtube... keep up the good fight... see you in the multinational Streets... I do Occupy.

http://www.youtube.com/watch?v=zIO4FgXN1CY

 

Sun, 05/27/2012 - 00:12 | 2466675 Dingleberry
Dingleberry's picture

are the protests working? Are fees coming down or something?

Mon, 05/28/2012 - 18:23 | 2470248 MeelionDollerBogus
MeelionDollerBogus's picture

The idiots in charge added a new giant fee for protesting without a road-map & police permission. Now more protesters come out just to protest that one action by the corrupt leaders and it's going to get insanely violent very quickly if police try to enforce this. It may cause a near-civil-war.

Sat, 05/26/2012 - 17:00 | 2465962 VelvetHog
VelvetHog's picture

Americans don't protest because when they do the "media" labels them as dirty, stinkin' hippies who are clueless and want free stuff.  Besides there so much fun TV on each night.  Why protest?

Sat, 05/26/2012 - 17:23 | 2466023 bunnyswanson
bunnyswanson's picture

http://www.facebook.com/#!/OccupyWallSt

 

381 thousand members of OWS.  The pictures say a thousand words.  People are out there, including baby boomers.  This site is filled with dates and times, causes, solutions.  But it seems to fizzle out due to a lack of compelling motivators.  Assemblies should be planned a few weeks in advance, not days before, so people can arrange their schdule and get to the location.  The more baby boomers in this crowd, the less likely the batons will batter the masses.  Tax paying citizens are not going to take assault as lightly as young kids who are watching their dreams die before they are even realized.

Sun, 05/27/2012 - 01:53 | 2466745 Al Gorerhythm
Al Gorerhythm's picture

Shouldn't that be "Tracebook"?

Sun, 05/27/2012 - 22:50 | 2468341 Vendetta
Vendetta's picture

who cares, we're all 'on the list' by now.

Sat, 05/26/2012 - 16:52 | 2465950 mjcOH1
mjcOH1's picture

My wife and I saw some of those protests while honeymooning in Quebec City in 2010.    Either the protests have been going on for more than 100 days, or we're confusing the official provincial sport with a sudden oncet of student protests.

Sat, 05/26/2012 - 15:59 | 2465836 FinalCollapse
FinalCollapse's picture

GW - the number reported by BIS (say $1.2Q) is not the net number. It contains huge number of duplicates. Nearly 100% of bloggers make the same error and quote this number or $600T - whatever. It is like bad fart being circulated through the AC system. Max Keiser was the first one to make this mistake and it is being cirlulated through the blogosphere with no end in sight.

For example if the same car is being sold for $10K twenty times, the BIS would report $200K. However it is the same car being sold between the parties. Got it?

There is no perfect rule how to sort it out, but many a good and smart folk attempted, including our Tyler. I have mentioned on ZH 2% rule for the net unique exposure and shortly later Tyler did very detailed calculation and came up with a similiar ratio. I have seen various folks to come up with somewhere between 1% and 4%, however the 2% ratio seems to be the most common conclusion.

I wish people would stop making this mistake. GW - for your own sake do little Google-ing on this topic.

GW - taking your number of $1.2Q and applying 2% rule we have $24T net unique derivative exposure worldwide. I will make a wild guess that the US exposure is somewhere between 25% and 50% of this number (although we could take the BIS data for each of US banks and summarize it, but I got other things to do today). This will give us around  $6T and $12T net US exposure to derivatives. How about we make a guess that our derivatives exposure is equal to 100% of our GDP?

This does not change your conclusions, George. $12T is huge exposure and 10% drop in value most likely will wipe out most of the TBTF banks. 10% drop will hit our banks with $1.2T loss wiping most of them out, unless our muppets will bail them out.

Mon, 05/28/2012 - 18:25 | 2470252 MeelionDollerBogus
MeelionDollerBogus's picture

According to re-hypothecation especially out of London it's valid to re-sell the same asset 1000x times (or infinite) on everyone's balance sheets.

Sat, 05/26/2012 - 15:59 | 2465885 George Washington
George Washington's picture

I refrained using that number for years ... Until Paul Wilmott - one of the top derivatives experts - confirmed it. http://www.washingtonsblog.com/2012/05/top-derivatives-expert-finally-gi...

Sat, 05/26/2012 - 17:16 | 2466006 George Washington
George Washington's picture

It's obviously gross notional, but it is still likely the overall number. and as Tyler has previously explained,the ability of the netting mechanism may break down.

Sun, 05/27/2012 - 01:41 | 2466737 Al Gorerhythm
Al Gorerhythm's picture

Same hat checked in 100 times. Lots of angry, hatless patrons, na?

Who's driving and paying for the car? The last guy or the first?

Ahhhh, the smell of world financial derivitives. I love the smell of napalm in the morning.

Sat, 05/26/2012 - 15:16 | 2465807 Absalon
Absalon's picture

It would have made more sense to guarantee the liabilities of Bernie Madoff or the Mafia - fucking criminals and thieves but this one could bring down the whole house of cards.  Most derivatives should be banned.

Sun, 05/27/2012 - 03:12 | 2466783 CompassionateFascist
CompassionateFascist's picture

Well, the original derivative is money itself. Now, fiat currency. The paper dollar. Which is about to collapse, taking all the higher-order derivatives with it. Good riddance, and back to reality: invest in lead.

Sun, 05/27/2012 - 12:17 | 2467188 disabledvet
disabledvet's picture

"back to the original derivative" it would appear. "there can be only one" as Hollywood said so well.

Sat, 05/26/2012 - 15:27 | 2465751 blindman
blindman's picture

the death of the dollar is the aim here.
this is the instrument that will bring
the "united states of america" to the
dust bin of history, wipe out the constitution,
the bill of rights, etc., once and for all
so the international power brokers can get
on with their one world monetary system and
new world order legal and financial control
system.
it is all just so stupid and fraudulent and insane.
so, nothing new?
.
here is the thing, total capitulation on the part of the "government". the
funeral and burial of the "united states of america".
( greece 2.0 )
from here on out everything transacts under the auspices of open and over reaching global
fraud, aka total darkness,
which is not the end , just a phase change or a sea change or a new paradigm and also
opportunity. a miserable
opportunity, but an opportunity. i fear the species
is proven to be wanting in nearly all respects and on every level.
it seems there are times when the worst of the lot
rise to the heights and the best get pushed aside and
or crushed?
"take heart, don't let the evil bastards get you down."
...

Sun, 05/27/2012 - 08:44 | 2466934 Ranger4564
Ranger4564's picture

What qualities would you glorify and which would you denigrate? I don't know you, so i'm guessing based on general sentiment in this (mis)place... I suspect you'd not praise the artisans / philosophers of the world... no, you'd probably celebrate the wannabe oligarchs, the so called risk takers. Note to everyone reading... there is a word in that sentence that's very telling... takers. You see friend, the problem is that the risk takers are takers... taking advantage, taking other people.

The world's problems are not that the poets and philosophers are unproductive slobs... it's that we need to develop a mechanism / system where we can all be poets / philosophers. So don't hate on the artists, real self awareness comes from such activities... and nothing good comes from taking advantage of others.  If you don't believe me, ask Ilene or Cognitive Dissonance...

Mon, 05/28/2012 - 19:09 | 2470301 MeelionDollerBogus
MeelionDollerBogus's picture

the SPECIES can't produce a 100% appreciation of art by all who try, or 100% skill in any form of art by those who try it. No more that we can all be engineers or biologists.

A good market with sound money, however, gives people the chance to make art for money, or to make money to save to have free time to try making art without a monetary gain.

Tue, 05/29/2012 - 08:21 | 2471098 Ranger4564
Ranger4564's picture

So where do you place technology and automation which produces goods with little human input required, and what do you do with all those people who no longer can participate in your vainglorious economy?

What many of you willfully ignore is that most of the systemic crises arise from this employment dislocation, but you guys insist everyone earn a wage.  It's impossible, and the capitalists have an incentive to continue on this path of dislocation.

The reason i want society to pursue arts is not just because they are more fulfilling... it's because the economic system has drastically reduced the need for human labor, and clinging to the employment model forces society to fabricate more and more meaningless, and simultaneously more and more callous / brutal "jobs"... enter most jobs that shuffle paper labeled risk... insurance / traders / politicians / military / business people , profiteers, pilferers.

We have to change course, people are being destabilized and demoralized, and all of it is unnecessary unless you're a sociopath.

Sat, 05/26/2012 - 16:05 | 2465894 God Bless The V...
God Bless The Virtuous's picture

Blindman

I think you see some things, others who chose to,

do not see or want to see!

The communist / progressive minions of this administration are legion!

The Soros funded, "Open Society Institute" ,

U.N. administered "Global Economy", is the battle of evil against the virtuous!

The founding of this mighty republic was ,and to the chagrin of all scuzball progressives,

still based on the "Law's of God",

at least for the time being!

 

The progressives in the late 19 th century had to kill off God and religion,

then came the "Revisionist History" that has moved into hyperdrive under Obama and the most dangerous man in this country, Cass Sunstein!

Good old Cass and his succubus Samantha Powers, each deadly in their own vile way.

Cass has the brand spanking new dept. (Office of Information and Regulation), O.I.A.R....

Sam has been hard at work for Soros funded nightmares and has come up with the "Responsibility to protect" garbage over at the U.N.

The list of vile , putrid and evil coming out of the likes of France Fox Piven / Stephen Lerner and the O.W.S. fascist movement is troubling, to say the least!

The fact that the "Lame Street Media" refuses to report any of this,

and is ACTIVE in covering up this treason and anarchy is down right criminal!

 

The good lord watches over this country and the republic for which it stands!

 Just look at George Washington and the Battles we were vastly out numbered against,

and the sudden hand of a benevolent God, making sure we were victorious;

Crossing the Delaware, Ticonderoga, etc...

 

The stain on the republic was horrific in 2008,

the freedom loving / morally virtuous men and women of this great country will not allow a second coming of another four years worth of unbridled evil to be loosed on the republic!

Enough has been enough!

 

As the Japanese said at Pearl Harbor,

"We have awakened a sleeping giant",

so has the "Transformation" of evil begun in 2008 has awakened a sleeping populace!

 

2012, WE THE PEOPLE,

send a clear and unequivocal message,

our voices will be heard!

Let us not fail for sitting down!

The stain of 2008 will be rejected with the help of divine providence!

 

"May the good lord watch over the republic,

the freedom of man, and his self rule.

No tyrant will reign,

nor rule.

Rebellion to tyranny is obedience to God!"

 

Bless the fallen and their families over this Memorial day weekend,

as we celebrate their ultimate sacrifice!

A simple,

"Thank You",

is all that is required.

Jerry

Sun, 05/27/2012 - 22:55 | 2468352 Vendetta
Vendetta's picture

Pavlov did experiments so he could understand you.  Did someone ring the bell again?

Sun, 05/27/2012 - 20:47 | 2468140 taeonu
taeonu's picture

OWS = Fascist?!!?

"Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power."  - Benito Mussolini

That word.  I do not think it means what you think it means.

Sun, 05/27/2012 - 09:59 | 2467017 GMadScientist
GMadScientist's picture

Jingoistic suckers make the war profiteers smile, jackass.

"The good lord" knows you're a mindless shit but loves you anyway somehow.

Sun, 05/27/2012 - 03:34 | 2466794 Colonial Intent
Colonial Intent's picture

"The good lord watches over this country and the republic for which it stands!"

Seems to me he's asleep at the switch, ever wonder why?

American Exceptinihlism at its best

Mon, 05/28/2012 - 19:11 | 2470304 MeelionDollerBogus
MeelionDollerBogus's picture

LOL

Schizophrenecitizenism!

Sat, 05/26/2012 - 17:05 | 2465978 blindman
blindman's picture

we will walk the razors edge and be
unharmed, all of us.
god's law is reality, science unadulterated,
found by experience, observation and experimentation,
known to the old, the young and the honest
thinking sovereign people.
i think the world is in on this big party of
truth, coming up. we have the understanding
of the truth and time on our side or we have
nothing and might as well just follow someone
who does. ( but they would never allow it or
lead it )
i say thank you to the truth tellers of all
persuasions and times, they are what make us
human and show the way for the future as much as we might be threatened, challenged or disgusted with what they have to say.
..
or something like that.
we are going to need a bigger tent !

Sat, 05/26/2012 - 14:14 | 2465724 tony bonn
tony bonn's picture

the dodd bill was institutionalized fascism  - a system for those with corrupt and absolutely incompetent criminals running the banks and government....the intersection of drug lords and financials lords is no accident - it is to be expected....

however, the criminality is ultimately doomed and will eat itself....all of which is further proof of obama's outrageous crimes...

www.obamacrimes.com

 

 

Sat, 05/26/2012 - 14:13 | 2465723 Kastorsky
Kastorsky's picture

they probably know something that we don't...

no, wait...

they probably know something that we DO!

It's all a ponzi!

Sat, 05/26/2012 - 15:50 | 2465859 Normalcy Bias
Normalcy Bias's picture

Yep. I think we'll soon see an increasing number of Madoffs and Corzines stealing everything they can get their hands on, in order to better prepare themselves to ride out a global economic and political meltdown.

Sun, 05/27/2012 - 10:26 | 2467040 DaveyJones
DaveyJones's picture

but that would be wrong...

Sat, 05/26/2012 - 14:08 | 2465711 The Alarmist
The Alarmist's picture

We have clearinghouses for futures ... isn't that enough?

The big boys already know that they have to bear or manage the risk in the forward and other derivatives markets where the vast majority of the traffic is between two parties. The only reason to stick a clearing house into that mix is to destroy one of the prime benefits of that private traffic, namely that it is largely unregulated.

From the perspective of a regulator, the potential costs of a bailout are a small price to pay for the tremendous increase in power gained through this added control.

Sun, 05/27/2012 - 12:27 | 2467216 disabledvet
disabledvet's picture

But that's the problem. "the private sector cannot manage the risk." I'm sure there some "scary term" for that as well that "those in the know" speak of and "those suddenly in the know" respond. My guess is the word "blurf" but I'm only guessing here. It goes like this: "Mr. President we have had what we feared would happen actually happen." And the President would say "what's that?" And the response from the NSC Chairman and Housing Speculator Extraordinaire would be "Blurf, Sir." And the President would exclaim "Dear God! Not Blurf! You told me Blurf was contained!" and then...

Sun, 05/27/2012 - 13:57 | 2467351 The Alarmist
The Alarmist's picture

That's why a capitalist system, which has not really existed in my lifetime, would allow those that failed to control and manage risk to fail.

As for "speculators," right or wrong, they bring liquidity to the markets. The fact that 90% of them lose and yet they still bring more capital to the system is a testament to the human spirit to succeed.

It certainly does not help that the answer to institutions posing risk to the society at large because their risks are so large is to make them even bigger, but TD had been all over that in these pages. The question that really needs to be asked, but is totally missing in the MSM, is,"Why can't the freaking super geniuses who want to run every aspect of our lives figure this one simple truth out and act on it?"

America was a better, more stable place when it had 13,000 more localised banks than the 6,000 or so that we have today. It also was a better place when the average law was less than ten pages versus the two-thousand page behemoths that are passed lately in the name of saving us.

Sun, 05/27/2012 - 12:29 | 2467214 disabledvet
disabledvet's picture

And then Mr NSC guy would say "well we told it was but in fact we lied. Did I ever tell you about my day job? Did I ever tell you abou YOUR day job?

Sat, 05/26/2012 - 15:46 | 2465851 banksterhater
banksterhater's picture

I think 99% here don't realize this potential benefit. Read the comments under the original WSJ story, other's feel this is added regulation also.

Sat, 05/26/2012 - 17:25 | 2466028 blindman
blindman's picture

@".added regulation".
the words "regulatory capture" come to mind;
there is a track record to consider regarding
this speculation and imminent development.
it might take all of five minutes to pull the
drafted "regulations" from the drawer where they
have been waiting so patiently for just this
occasion.

Sat, 05/26/2012 - 19:45 | 2466252 The Alarmist
The Alarmist's picture

"Regulatory capture" is too clinical ... almost too nice, and somewhat misleading given the revolving door between regulators and the industry. How about "parasite-host" relationship, and I'll let you draw your own conclusions as to who plays what role and under what circumstances that might reverse.

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