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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.

 

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

 

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

 

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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.

 

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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 - 12:33 | 2467225 disabledvet
disabledvet's picture

Fine. Is the term "corruption" better then? How about "wet job"? Sweaty wads of dough? Green mail? Extortion? Gray Poupon? May poop-on? We're really just getting started with the fun here...

Sat, 05/26/2012 - 15:11 | 2465797 God Bless The V...
God Bless The Virtuous's picture

Please....

Anything with that bombastic asshole Ratigan is putrid lame street media garbage!

Sat, 05/26/2012 - 13:31 | 2465618 Sudden Debt
Sudden Debt's picture

Nothing to do with JPM... Nop... Coincidence....

Sun, 05/27/2012 - 12:35 | 2467227 disabledvet
disabledvet's picture

For King Leopold! Attaaaaaccccckkkkkkkkkkkkk

Sat, 05/26/2012 - 13:31 | 2465617 spinone
spinone's picture

They know that the clearinghouses will need a bailout so they are making preparations

Sat, 05/26/2012 - 13:25 | 2465599 williambanzai7
williambanzai7's picture

FWMD WATCH

Sat, 05/26/2012 - 14:08 | 2465713 Careless Whisper
Careless Whisper's picture

Your geography is off a little BillyBanzai. The real culprit is the "City Of London Corporation", which is one square mile located in what is commonly referred to as London, England. But, of great significance, the City Of London Corporation is a sovereign nation. That's right, and I'm not talking Disneyworld type sovereignity, I'm talking Vatican type sovereignty. They make their own laws, none of which, to my knowledge deal with banking or accounting fraud, except to perhaps make them perfectly legal. Hence the infamous Repo105 was performed there and was perfectly legal and well researched by Ernst & Young. Most banksters and central banksters have their offices there.

You may notice that the City Of London Corporation is not land locked, it has waterfront that makes for a quick escape route to the English Channel, should the need arise.

http://www.thesquaremilewalk.com/images/citymap.jpg

Sun, 05/27/2012 - 08:40 | 2466928 Winston Churchill
Winston Churchill's picture

I am not sure where all this BS comes from about the City of London.

Yes it is a corporation,the shareholders being the old medievel trade

Guilds.Haberdashers etc etc.

As to the Queen asking permission to enter,that is a polite  formality

held over from the Magna Carta.Just as she has to 'ask' for permission

to enter paliamiment.

English law applies in the City,though seldom applied,just as WS ignores

US law.

Sun, 05/27/2012 - 12:39 | 2467235 disabledvet
disabledvet's picture

So the Queen really can just walk inthere! Can she then say "I'm taking over this town, pluckers" too and order the immediate arrest of all the MP's "Saddam Hussein style"? That would be cool to watch!

Sun, 05/27/2012 - 05:38 | 2466837 Disenchanted
Disenchanted's picture

 

 

Bonus question - What other city in the world is like the City of London and Vatican City(re: sovereignty)?

 

Search "Trinity of Global Empire"

 

Sun, 05/27/2012 - 21:59 | 2468269 Bringin It
Bringin It's picture

Singhapure - SinghaPura - ORI, does that by any chance mean Lion Temple?

Sun, 05/27/2012 - 08:00 | 2466898 Ranger4564
Ranger4564's picture

I know, very easy question, but i suck at Jeopardy so allow me this small victory: Washington, District of Columbia.

Mon, 05/28/2012 - 07:30 | 2468736 Disenchanted
Disenchanted's picture

 

 

 

You are the winner.

 

Singapore is also a nation itself so not really comparable to the other three in question.

Sun, 05/27/2012 - 12:44 | 2467240 disabledvet
disabledvet's picture

I was gonna say the Moon myself. Once this particular "turd" hits the fan I think you'll be surprised how many will pay for passage "full fare to the Zero G due to the Zero H" as they say. Don't worry "it'll start raining gold" once that happens!

Sun, 05/27/2012 - 00:19 | 2466680 logically possible
logically possible's picture

The waterfront that you speak of is The River Thames, which flows East, to the south end of the North Sea.

Sun, 05/27/2012 - 03:03 | 2466776 CompassionateFascist
CompassionateFascist's picture

In Turtle Bay...there are no turtles.

Sun, 05/27/2012 - 12:46 | 2467245 disabledvet
disabledvet's picture

But is there a bay? Even a whinny will do at this point. WTF are we paying for here people????!!!!!

Sat, 05/26/2012 - 21:38 | 2466456 williambanzai7
williambanzai7's picture

I believe you are referring to financial services Liberia.

But the reactor that is going to blow everythng to pieces is JPM No 4

Sat, 05/26/2012 - 13:22 | 2465589 Zero Govt
Zero Govt's picture

I'm less worried about drug dealers and their fun-seeking customers (the free/black market works much better than Big Govt/Big Pharma and causes considerably less damage) than i am about politicians wrecking every nation in the Western world

Priorities GW, priorities

Sun, 05/27/2012 - 11:52 | 2467136 john39
john39's picture

the politicians are just mindless puppets.  the real issue is the "people" pulling the strings from behind the scenes...  and I use the term people loosely, for they are defective and should not be considered human.  they have infiltrated and corrupted the world entirely.

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