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Guest Post: Counterfeit Value Derivatives: Follow The Bouncing Ball
Submitted by Zeus Yiamouyiannis from Of Two Minds
Counterfeit Value Derivatives: Follow The Bouncing Ball
Here is how the counterfeit value derivative con works. It’s a game of “I pretend, you pretend, we all pretend, and the taxpayer will pay in the end”.
1) I’ll create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain “notional” value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount.)
2) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDS’s value is based in nothing more than my promise to pay. I don’t have to have adequate capital reserves on hand, but I can pretend as if I do perhaps with some mini-reserves based on objective-seeming risk ratios calculated by my mathematical models. (credit default swap.)
3) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDS’s. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.
4) As buyer and seller of CDS’s either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces. This allows us to retain even less reserve capital and spend freed-up funds on more high-risk, high-(pseudo) return speculation. (The monster that ate Wall Street.)
5) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.
According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are not transparent or regulated.
With regulated economic markets, when an underlying real asset is impaired (i.e. the company in question is bankrupt, the mortgage has defaulted, etc.), market value is assessed, default insurance is paid up to replacement or full value, bond holders and stock holders make claims on remaining value and the account is closed. There is no need for bailouts because order and proportion of compensation has been established and everything is attached to the value of the underlying asset.
When the unreal, counterfeit economy intrudes, you now have a situation where a person can put in an unregulated, but recognized, claim to be paid a thousand times over in case of impairment. Say market participants have negotiated for a bankrupt company a 70% payback for bondholders and (36% payback for insurance claims), and I come with not one but rather 1,000 CDS claims demanding to be paid for each CDS.
Where does that money come from? Well if it were regulated insurance, I would have to be invested in the company in some way, my bond or stock payout would be limited by the actual asset value of the company, and my insurance payout would be limited as well. However, since I am unregulated and unrestrained, the money due me has to come from the CDS seller and my contractual agreements with that company (say AIG).
AIG could easily have sold 1,000 different unregulated insurance policies to the same person or a million CDS’s to a hedge fund, and when AIG could not pay up, it was threatened with insolvency, under which both its regulated and unregulated insurance policies and investments would become impaired. In fact there is abundant evidence that hedge funds (i.e. Magnetar) did in fact multi-insure certain portfolios while simultaneously pressuring the portfolio managers to select risky investments to ensure that the portfolios would crash. This is the opposite of a traditional “stake,” and this is the disease that modern derivatives bring—profit from intentional market destruction.
This chaotic state of affairs and its cascading implications for other interlinked parties and counterparties (read “too big to fail banks”), essentially resulted in economic extortion to force a huge public bailout of the whole crooked mess (totaling somewhere in the neighborhood of 10 – 14 trillion dollars in giveaways, loans and guarantees starting in 2008 in the U.S. alone.) Instead of agreeing to the extortion temporarily to prevent collapse and then aggressively pursuing orderly investigation, prosecution, and receivership, regulators and world leaders have simply covered up the events and even rewarded the perpetrators.
No wonder the market goes up dramatically when there is talk about another quantitative easing (Fed bailout) or emergency rescue (government/taxpayer bailout). These financial game players already know that an open public spigot is on its way, pouring real capital directly into their pockets.
In regulatory actions and legal courts, unregulated insurance claims should simply be declared null and void when applied to real assets and real compensation. “You have no stake, therefore you have no claim. Your agreement was with a third party that did not have adequate capital to pay for a contract with you. Take them to court.” Or “You have an imaginary claim for imaginary damage. Here’s your imaginary money. Your deal was private and unregulated, then it should be settled in private between companies without public intervention or support.”
Did that happen? No, because AIG had collapsed its unregulated private and regulated public functions and Congress had allowed it to do so with the repeal of the Glass-Steagall Act. Because the wall came down between regulated and unregulated activity, transparent and “shadow” markets, traditional and investment banking, this private fiat virus broke quarantine and the resulting contagion cannot be put back in the lab.
Because world leaders and their regulators blinked and did nothing, counterfeit private fiat (backed by nothing) has metastasized and infiltrated “genuine” public fiat (backed by country’s productivity if not by gold), and more and more actual money and productivity in the form of austerity is being thrown at a gargantuan and unrecoverable sea of counterfeit obligation.
How can you exceed 700 trillion dollars in unregulated derivatives alone? This is easy when market players are buying and selling from each other and when people can buy an infinite number of claims, insurances, and guarantees on credit events rather than assets. When banks are allowed to mark-to-model and then claim somehow that their back-and-forth trading and abstract multiplication of asset value is real, then all bets are off (or “on” depending upon which side of the fence your sitting).
Is it any wonder that the market for derivatives has grown another 100 trillion over the last two years? “We’ll concoct value and you’ll pay us real money for it? Of course we are going to keep doing it! Why not another 100 trillion!”
This probably is not going to stop until there is massive world-wide outcry and political change, a “black swan event,” or both. Let’s hope the first gains steam along with some long-overdue accountability for fraudsters before these nefarious banks destroy the body politic with their hubris and greed.
by Zeus Yiamouyiannis, copyright 2012
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STFU & BTFD Chucky!
No dip?! Buy anyway.
The Derivative time bomb is still ticking. Look out when it blows up.
http://jimrickards.blogspot.com/
Sorry to hijack the thread, but this may brighten up your friday, winter blues.
http://www.shtfplan.com/wp-content/uploads/2012/01/Concealed-Carry.jpg
LOL Go Gramma!
Since there is a picture, the article is certainly fake, but maybe it's based on a true story?
*runs off to snopes*
Nope, it's just legend.
http://www.snopes.com/crime/justice/carrypermit.asp
How much is the total wealth in the world?
It is $120trillion between the US and Europe,
so what $400trillion in total maybe?
so basically including sovereign debt and notional derivatives the world is levered out at less than three times.
can't wait for this obvious bubble to explode!
Well, the world isn't levered; just certain foolish sellers of cds.
Might be a myth for grannie, but it would be true in my case...
"Ruffcut"
Right O!...brightened up my day!
YEAH, BABY!!
Pretty cool video of MT4 trading platform active on LMAX. "... I'm a different person ...." Oh, jaaa ....
Its time for some Friday night fun!
http://www.youtube.com/watch?v=7d-6XfiZRmo&feature=youtu.be
Original Music Video Da Dip
http://www.youtube.com/watch?v=dZPQdZLyHYE (3:59)
Bingo Players - When I Dip (Original Mix)
http://www.youtube.com/watch?v=fyeojFLQLNY&ob=av3e (4:21)
this article has scared me. I will now click off the page. Ignorance is bliss. 700 trillion... All in a days work for this guy.
The Zimbabwean dollar appreciate's against the American dollar ...
How about they increase the derivates to a Quadrillion, there is a room for 300 trillion more, the economy can recover
As noted by ZH numerous times, the previous totals were well north of $1 Quad but "new math" allowed the BIS to drop it to $712 Trillion. Something about humans cannot conceive of amounts over $1 Quad. Our poor ole brains are limited to numbers not exceeding 999,999,999,999,999.
Cossack, you are fucking genius man!
Ill invent new calculators that supports "Quads""
thanks for the idea
a few quadrillion here, a few quadrillion there... Pretty soon you're talking real (fake) money...
+1
what comes after a quadrillion?
Seashells and beads
Fucking brilliant!!! You owe me a keyboard. +1 green dorito.
Quintillion, like in "100 quintillion Pengo": http://www.cnbc.com/id/41532451/The_Worst_Hyperinflation_Situations_of_All_Time?slide=10
BONUS: CNBC article mentioning that the Weimar Hyperinflation began in 1914 when they went off the gold standard and raised war funds through printing rather than taxation.
Gold... Or lead.
Derivatives:
"EVERY LITTLE BIT IS BULL SHIT"
i like em' Näked" & scantily claded
It's actually a rather clever hustle. The financial institutions point out to the regulators that the net exposure is only a small fraction of the total and the regulators leave them alone thinking all is fine. Selectively fail a few institutions from time to time that are not properly hedged and you can create money at will due to naive government bailouts.
Naive. HAHAHAHAHAHAHA
O/T but some guy fell into a nuclear reactor pool in San Onofre
http://latimesblogs.latimes.com/lanow/2012/02/worker-falls-into-reactor-pool-at-san-onofre-nuclear-plant-.html
Sucks to be that guy (yes, Rick Perry...proper time for "oops")
I'm just swimming, doing the neutron dance! :>D
No worry, he was aprivate contractor.
good news:
The worker at the San Diego County power plant did not suffer significant radiation exposure, the North County Times reported.
I wonder what the local newspaper's qualifications are for determining safe levels of radiation dosage.
If the notional amount of derivatives is 700 trillion bucks then what is the multiple that they are actually insured for? The dollar will be shunned before this bottomless pit ever gets filled.
Here's a new derivative I thought of...
I hold a gun to your head and tell you to pay me or I'll pull the trigger... Your 'notional' value lies in how much you value my word & the itchyness of my finger...
Counter parties on that $707 Tr ? Not to worry. It all nets out to zero, so that's why it's not on the balance sheets. Yep. All nets out by careful internal risk management and very tight regulatory controls. Yep, has nothing to do with AIG and PIGS and contagion. Good entry level on BAC. Time for my buy and hold nap. ZZZZZZZZZZZZZZZZAhZZZZZZZZ.....
James Rickards has stated in Currency Wars that in complex systems the risk of these instruments does not 'net out'. In other words if I have a CDS and a bond, the risk of holding each instrument needs to be considered in total and not netted to zero. The unknown counter-party risk and the likelihood that when everything comes crashing down all at once no one will be paying out anything to anyone is part of the reason. In spite of claims that we should not consider the entire gabillion in derivatives.....we should. The system is hiding and grossly underestimating the risk it is undertaking. If bankers were paid by a formula that discounted their bonuses based on risk they would maybe make a tad less...yes? Maybe they would not place the world in peril if they were not highly rewarded for doing so.
IOW~
"Turn those machines back on Mortimer!"
Sounds like they created a monster... Dodd Frankenstein
http://tradewithdave.com/?p=9220
...why are people still showing up to work in darkness? Oh yeah, they are blind and stupid.
also... that's where the catfood is...
I still really don't know what a derivative is. I just know it's bad. LOL.
A derivative is like you going to a bookie and making a bet that Jessica Alba WON'T be at my doorstep in 5 minutes to give me a blowjob...
Have no fear... bernanke 7 friends UNDERWRITE this kind of stuff every day... & the day that Jessica Alba DOES actually arrive (at the predetermined time & gives me head)... The... well... Then...
You get your taxes raised to pay for the loss...
Any more questions?
If n when that day arrives, will she come back for seconds?
derivative
I'm no fan of regulation, but isn't obvious the concept of "insurable interest" needs to be introduced? It's illegal to insure someone else's life without their permission, as you would have the incentive to end their life to get paid out. Yet we allow financial institutions to take out insurance - in the form of CDSs - on entities they don't own. Of course they're hoping those insured entities fail!
It's absurd.
I take it that you are not aware of Dead Peasant Ins. that most large compannies take out on their employies without their knowledge???Believe it!!!
It's illegal to insure someone else's life without their permission, as you would have the incentive to end their life to get paid out.
True in the UK (maybe Singapore too?) but perfectly legal in the US. It's probably because of Hollywood, without this there would be far fewer films/reality based on offing somebody for the insurance.
... and the banksters get off scot free
Employing more lazy, corrupt, government regulators isn't the solution. It's removing the spigot, freeing up the markets, and letting people bear all their risk and keep all their losses. Just enforce contracts that exist between consensual parties and punish fraud. That's market regulation, not government regulation.
Fuck!
I'm getting so sick and tired of seeing these articles that add to the confusion surrounding derivatives.
62% ($442T) of the "$700T" boogeyman headlines are interest rate swaps. Imagine this: you've got a $1mm fixed mortgage and I've got a $1mm variable. We make an arangement to "swap" interest rates. In effect, I pay the fixed rate and you now have the variable risk. Our payments to each other net out at close to zero (until rates change). The NOTIONAL amount of our arrangement is One Million dollars. The million never changes hands, get it? We're swapping INTEREST RATES for a pre-defined period, THAT'S ALL!!! The gross market value of these arrangements is less than 2.5% notional.
If you buy an options contract for 1000 ounces of gold with a strike price of $5000/oz., The NOTIONAL VALUE of the contract is $5 million, That doen't mean the contract is worht 5 mill (depending on when the contract expires, it could very well be completely worthless).
Notional value means very different things for different derivative instruments.
In CDS, notional matters very, very much. It's the amount of money the CDS seller has insured against loss, and yes the CDS market alone can blow up the world. Global financial seismic events are still measure in Billions.
I just wish these authors would display some understanding of these concepts. It's hard to continue reading articles that whiff on the background info in the first paragraph.
Hey, we got a market practitioner here...systemic risk exists, surely, but this article is bush league.
Indeed. I'm not a systemic risk denier. It's the "Attack of the 50ft. Killer Bees!" histrionics I can do without.
Interest rate swaps is the reason that Jefferson County, Alabama went bankrupt November 9, 2011. The most expensive municipal bankruptcy in US history.
Wrong. Head-up-your-ass decisions is what did in JC.
That's the definition of sophistry, man. Human error is responsible for everything. That doesn't mean drivers should be allowed to drive drunk in school zones at 100mph, or firing ranges should be placed next to malls. Head-up-your-ass decisions led to the collapse of Orange County, California, not inverse floaters. Human error led to collapse of Mexico, Russia, Argentina, Asia, LTCM, AIG, Barings, Mettelgesellshaft, and on and on. You want to smack people for not knowing their shit, why don't you learn some?Start by studying some history. There is no such thing as a benign swap in an OTC market. There should not be such a thing as an OTC market. Interest rate swaps are only attractive because they are traded in the dark. If this was all out in the open it would no longer be profitable.
Look jerk-off, I never said OTC derivatives were a good idea and you're flat-out wrong when you say, "There is no such thing as a benign swap in an OTC market."
Maybe you should go back and re-study some of the history you speak. It wasn't "human error." It was varying mixtures arrogance, greed, naivety, incompetance and corruption in every single case.
I guess I shouldn't be surprised that someone who can't differentiate "human error" from abberated human behavior isn't going to differentiate credit default swaps from plain vanilla interest rate swaps, or understand the significance of notional value.
Party on, doucheninny
Mix derivatives with arrogance, greed, naivety, incompetence and corruption, and you get JC. Then its simple, outlaw derivatives, and let them find some other scam to go bankrupt on. Since the people selling derivatives have information assymmetry and like all good business people are stacking the deck, then there is no derivative that is fiduciarily sound. If a private party wants to duke derivatives fine, but no public entity, no tax sheltered pension plan, no non profit should every buy a derivative. If that means no more MBS then so much the better. MBS been the stinkiest piece of hopium foisted on the US in years. And dont tell me my mortgage rate was lower because of them, the bank that had my mortgage never securitized it.
The first google hit on interest rate swaps hospitals non profits should give the newbs a clue to the current direction. Millions of dollars of interest rate swaps sold blew up in the buyers faces when all they were going to save best case was a tenth of a percent.
http://www.wsws.org/articles/2009/apr2009/deri-a06.shtml
You make many good points, but let's not gloss over the fact that the so-called fiduciaries simply didn't understand the arrangements (a crime in and of itself). It's also true that the big banks were downright predatory in their dealings. But we don't put anybody in jail, or hold bankers accountable, or let them go out of business. Hell, they don't even lose their jobs; they get bonuses.
My problem here is everybody wants to paint derivatives with a very broad a brush when the much bigger problem is that this society that constantly wails how "education is the key!!!" doesn't actually understand how anything works.
Let me try to explain my angst on this thread with an anecdote. A company I worked at grew to the point that they decided they needed an employee handbook. They put together the most plain-vanilla, boiler plate handbook I've ever seen. There was nothing remotely controversial in it. They handed it out to everyone and told us there would be a company meeting to discuss it in a week or something. It wound up being an absolutely torturous three-hour meeting. Know why?
Cause the Nimrods who didn't read the document wanted to chime in on all the stuff they thought might be in it. So every question started out, "I didn't read the handbook, but...." Now, if it had been my company I'd have stopped them and said, "Then shut the fuck up!"
Anybody spewing the "$700 TRILLION!!!" meme obviously didn't read the handbook and should probably not be discussing the subject. That's really all I wanted to say.
doucheninny, no one in this thread said there wasn't a difference between plain vanilla interest rate swaps and cds, don't be silly and learn how to read. study your own rhetoric. you are implying that incompetence (spelling, tsk, tsk) is not an example of human error. you are being disingenuous, and you know it. my point, clearly, is that it is impossible to discertain the safety of trading activity that reaches these levels and that grows this rapidly if that activity is conducted in secret.
I need help here - not disagreeing because I can't say I really understand. I thought the the AIG bailout was needed because they couldn't pony up when the SHTF. if net, they were covered (ie insured their risk) why the need for a bailout? If the net position is as you state why do the TBTF banks exist?
Also, when the Greek bonds turned to shit, guess what.... No credit event so no insurance payout. If the institutions who sell the derivatives can just decide not to pay out then there is no 'net' position, just a shitload of risk.
I think I will call shenanigans on derivatives cos when the chips are down they ain't worth crap.....
IMHO of course
K@
I don't necessarily disagree with your conclusions.
Insuring the uninsurable has become big business. Not only do we not know who's on the hook for Greek CDS, we really don't know how much was actually sold. It's possible that it exceeds the outstanding debt many times over (that's what happens in unregulated markets).
What's bothering me is the way equity options get lumped together with things like CDS and Total return swaps. They're not the same. It's like confusing a microwave ovens with nuclear bombs. Both can be dangerous and should therefore be regulated to some extent, but I get agitated when people fail to distinguish between the two. Hysteria does little to promote intelligent discussion IMO.
good point Mark, but one thing could not have escaped you : all the money placed on leveraged bets (naked) and hedges (swaps/puts/calls) is feeding a system that is navel gazing into murky bubblenomics and neglecting the real economy.
Our banks are all tied down to protecting bets on bets, whatever the real spreads, not the notional amounts, and using rehypothecation abuse as mash potatoed phony collateral, in OTC deals that nobody can regulate or even see. It a sea of sin and its not win-win. Its lose-lose and there is no end to it, so the real economy is gridlocked in asymmetrical trade and debt cul de sac. That's the real tragedy of it.
Billions of real risk is still big enough to tilt the Titanic. Ask the Greeks; 11 million burnt at the stake today, and the next bunch will be ten times more as the fire spreads.
This seemingly incredibly tall house of cards withstood the financial panic of '08, and I suspect that it will survive the upcoming PIIGS defaults as well. The winning lottery tickets will just fail to get paid, that is all. The winner is only out the small amount he paid for the ticket when he gets stiffed. Sure, he's mad and disappointed as hell, but his financial position has hardly changed.
cds must be killed. I've been referring to the BIS bi-annual reports since 2006. What has to be remembered is that reporting OTC activity to the BIS is voluntary, meaning that the actual notional amount is most certainly higher. Reporting is also anonymous, meaning that included in those figures are the cumulative positions of accounts held by drug kingpins and criminal cartels of all kinds. The most dangerous numbers in the report right now are the rise in interest rate swaps by 30% since June, 2009, to $441 trillion and the fact that currency swaps have risen by 47.4% in the last 2 years. Those numbers point to a massive consensus that the end game is upon us and that the monetary system will inevitably collapse.
What is not true is that this private fiat virus broke quarantine and the resulting contagion cannot be put back in the lab. It can be put back in the lab. Every terminally ill player in this toxic casino could die and the world would be better off. Marc Haber said recently that he saw the entire OTC derivatives market crashing down to 0. That's what needs to happen. Horrifying, disasterous cannibalism will cause the virus to self-destruct.
Here!
Use this Needle!
to POP! the Derivatives Bubble!!\
Wikileaks exposes Zionist Treachery
http://www.youtube.com/watch?v=vgI1aph7AsE
http://www.davidduke.com No profanity, epithets or threatening language allowed in comments! You will be blocked! -- This video concerns some of the Wikileaks documents and specifically refers to references to the Zionist State. It shows how Mossad Chief Dagan is trying to effect regime change by increasing ethnic identities of minorities in Iran. That is the Zionist divide and conquer strategy in a nutshell and it has already in place in America as a means of Zionist divide and conquer politics and influence.
the funny thing is.. DR Duke was a KOOK! when he said this back in 2010.. but now that Panetta says its true.. OOPS!
http://www.reuters.com/article/2012/02/03/us-nuclear-iran-usa-israel-idUSTRE81202Z20120203
Panetta believes Israel may strike Iran this spring: reports
(Reuters) - Defense Secretary Leon Panetta believes there is a growing possibility Israel will attack Iran as early as April to stop Tehran from building a nuclear bomb, U.S. media reported on Thursday.
David Duke is the man! too bad they would never let him win the Presidency if he were to run.
In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset.
Really?...no jewelry -for instance- is ever insured for an amount above replacement value? This certainly can't be true for say, life insurance....
And Obama (and Glenn Hubbard, Romney's economic advisor) want everyone to refi their mortgage.
Let's see. According to SIFMA, there was about $8.54 trillion in Agency MBS outstanding at the end of Q3 2011 (plus some other mortgage-related securities). And Fannie, Freddie, Ginnie MBS are all trading at aroud 109 22/32.
So, if everyone refinanced, that would be a 10% haircut to MBS investors.
10% of $8.54 trillion in MBS is ... $854 billion in losses to MBS investors like banks, hedge funds, pension funds, etc.
So, Congress better HOPE that not everyone refis. This would be a staggering loss in MBS markets.
http://confoundedinterest.wordpress.com/2012/02/03/obamas-fha-refi-plan-would-cost-investors-about-10-sounds-like-greece/
Kinda interesting, old man repeats himself a lot but still:
http://www.youtube.com/watch?v=9802NwSSS6U
The banksters have created a financial system that pays them huge trading fees on $707 trillion dollars of OTC derivatives, which have zero chance of being paid off in a financial crisis. That is why the extortion works. The longer the banksters can keep this going, by bribing the politicians to not dismantle this cancerous system, the richer the banksters get. If the financial system were cleaned up in 2008, it would have cost us X dollars, Today, it would cost 4X dollars, and is increasing exponentially the longer we wait.
When the derivative based financial system finally collapses, and it will, it happened in financial panic of 1907 and stock market crash of 1929. Rich banksters will be in their offshore retirement villas, counting their gold and laughing at all the rubes they sucked and conned. This is what an Ivy League education produces, too smart-by-half psychopaths.
I wrote this description of the world’s biggest financial problem so people could understand "in layman’s terms" why we are fucked ! Please chime in if you can add to the understanding here. I use the dollar in the description of Credit Default swaps for a basis as they could be denominated in any fiat currency.
Understand that the dollar is the defacto “Reserve currency – Petrodollar” that the world uses to transact business. As that dollar becomes more encumbered with "leverage" its ability to be a store of value has less conviction and faith. The "only" value that a fiat paper currency can retain "is" that conviction and faith.
So, let's look at the reason all faith will be lost in that currency at some point in the future. Since the creation of the FED in 1913 the currency (Dollar) value has been controlled through inflation/deflation. In 1944 the U.S. Dollar through the Brenton Woods agreement was granted “exclusive reserve currency status”.(that status meant that any country wanting to buy oil, food or commodities would have to buy dollars “first” and then they could go into the world market to make their purchase “on” the world market (with those reserve currency notes) also it meant that "If" any country lost faith or trust (through debasement or any other reason) in that currency they could go to "any" central bank in the world and trade that paper currency for physical Gold of equal value.
(Good as Gold) In 1971 Nixon suspended Brenton Woods and took us off the Gold Standard telling other nations that they could not "now" exchange the dollar for Gold as previously promised.
Here is the key to it's downfall:
The U.S. dollar (debt) from 1971 through around 1995 was able to be removed from a balance sheet with little implication through accounting techniques claiming (debt) as a loss and could be written off and that was the end of it.
Here (around 1995) comes Blythe Masters from JP morgan and she creates what is called a "Credit Default Swap" This is essentially an insurance policy on a default to pay back a debt or loan. So, let’s say for shins and giggles Greece is lent 1 trillion dollars by another country. They promise to pay that money back at a set interest rate over time. The CDS (Credit Default Swap) enables financial institutions to purchase a put (Default insurance or a bet against the underlying asset (loaned debt or CDO – Collateralized Debt Obligations) never being paid back. This would be OK if only "ONE PUT" (CDS) was taken out against the chance of that debt not being paid back. The problem "of the whole planet situation right now" is that this debt can be leveraged by 100 "PUTS" or in layman’s terms (for each dollar that was lent to Greece there are $100 betting against "each" one of the dollars lent, that it will default and not be paid back) So, now you have 100 Trillion dollars leveraged against the default of a 1 Trillion dollar loan. So, now Greece cannot pay back the loan (CDO-debt) triggering the CDS from the default on the CDO and now everyone that bought a "PUT" wants’ to get paid on their bet. The next problem is that those financial institutions that sold those "PUTS" are only required to have a 6% reserve (Money held in escrow to pay claims) So, in reality those institutions only have .06 cents per dollar to pay those claims and not the “whole” dollar "required or needed" to pay those claims.
This is why all of these bailouts are created so "NO ONE" is allowed to fail "Triggering" these Credit Default Swaps. The original debt is maintained through interest payments from "newly created" debt (bailouts) because the money to pay those claims does not even exist.........Yet.
So, you say why can’t they just unwind them ?
Answer, is that you can't because everyone that purchased these "PUTS" on “CDO’s” wants’ to get paid because they are classified as an asset on "their" balance sheets.
When the discussion turns to CDS/CDO's at parties or anywhere for that matter, I ask if anyone can explain them so that we can have an educated discussion. No one can, so I give this analogy and everyone sees a little better what the problem is. I know it's not a perfect description but convay's the basis.
Previously posted on ZH;
So, GK wants to buy a house, so GK goes to Joe banker and says hey Joe can you lend me a 100K to buy this house. Joe says sure GK here is your 100K you can pay me back over time with interest.
Then Joe gets back from the closing and says to himself, Hey "what if GK doesn't pay me back, I will be out a 100K. So, Joe calls Allstate and talks to Al the broker and says, "Hey Al I want to buy a 100K insurance policy incase GK doesn't pay me back. Al says sure Joe here is your 100K default insurance policy (CDS). Then after Al gets off the phone with Joe, Al says to himself "wait a minute" "what if Joe doesn't pay me back" and Al quickly calls jerry at AIG and says hey jerry I need an insurance policy for 100K incase Joe doesn't pay me back. Jerry says sure Al here is you CDS for 100K incase Joe the banker doesn't pay you. Then Jerry gets off the phone with Al and says "wait a minute" "What if Al doesn't pay me back and then he quickly calls Zurich and talks to Chad and says "hey Chad" "I need to purchase a 100K policy against Al not paying incase GK defaults on his mortgage. Chad says here you go Jerry a 100K CDS for you and the Chad says to himself...............................................................you see were this is going.
So, let’s say this goes 20 CDS contracts deep. So what we have is 2,000,000 dollars worth of credit default swaps written on a (CDO) 100K depreciating asset that is now only worth 60K. Now the leverage went from 20 to 33 because of the deflation in the housing prices. (That’s why there is no mark-to-market)
Now GK's employer just called and is laying GK off "permanently".
The problem is now that the financial institutions that wrote all these CDS's (a ton of American banks) were only required to have a 6% reserve on this 100K worth of exposure (each). So, you see the money does not even exist-yet (our anti deflationary kryptonite backstop and tribute to JS for the saying "QE to infinity") to pay these claims and all these entities must be bailed out to stop the contagion before wiping out everybody.
I used a house as an example and it actually is a physical asset. Most of the CDO's are written against debt (paper, but classified as an asset on balance sheets with "no" underlying physical nothing) Here is where the problems lay. The “DEAL” that they are trying to close is a perfect "orderly" transaction with a 70% haircut (what is perfect and orderly in a panic once these start triggering). It's the reserve of 6% that is the problem. Let’s take our old friend JPM that has a leveraged balance sheet of 44 to 1. If they are in the wrong chain position on the CDS loop and let's say that they have to pay out 5x of that leverage but only receive 2x of the leverage back. ???????????????????
Where does the money come from to pay that net 3x's exposure? (it does not exist...yet, remember the 44 to 1 leverage) hence the bailouts to keep this thing from going full balls out.
There it is, and it's called "Contagion"
So the deflation will trip the balance sheets into default causing the printing of currencies to try and save the system. This can be proven by the labeling of the 70% haircut on Greece’s debt not being classified as a default, hence delaying the massive printing of money to honor them.
Hyper-Inflation Bitchez !
"Oh... A wise guy eh?"
thanks for that
Frankly, maybe its time to let it fail. The corruption alone makes me want to vomit. This shit has to end.....
the brilliance of ponzi schemes : since the first tulip bubble; the bigger the scam the bigger the pay out. So think big!!!...but the bigger the potential fall, only that's the unthinkable as its heresy when the world is bright eyed and bushy tailed... on Titanic, on Costa Concordia, on Zeppelin Hindenburg...floating on clouds of irrational exuberance.
And this CDS sister to CDO and SIV is the biggest noose that the banking industry has created in an incestuous relationship called OTC, unregulated par excellence, amongst themselves, like cardinals of Papal Rome wearing purple; above the realm of political and government control. Dictatus Papae resurrected! Wow, the ISDA is the Pope of banking deals amongst the bankers themselves; Pope talking to anti-Pope or Orthodox Pope, all sanctified as God's own Vicars or sub-Vicars in banking controlled Jerusalem of God's own money, the greenback!
Nobody can dare doubt that. And the sums are mind boggling, we are now at 700 T, where O'bammy juggles with 15T alike Ben B and his lousy FED BS.
A country's GDP is 15T, the biggest nation on earth. THe banking Pope juggles 700T, do you see why Pope is bigger than Emperor of temporal realm?
We are in Dicatutus Papae days of old...these guys do run the world. And its a bubble...it can go pop and the 15 T of real economy can go up in smoke with it!
That's the bottom line today. WHat more is thar to say...Hail MAry,...
This article should be poured in stone and presented to both FED and Congress.
organized crime scene ongoing.
they have criminalized justice.
"THE TUMULT AND TRAUMA NEWS" 2011-12d-14
Listen:
http://thatradio.podhoster.com/index.php?sid=1617
This is the most succinct, best written artice I have ever seen on derivatives; should be re-printed on the editorial page of sheeple newspapers, across the country. The end is near.... Thank you Zeus.
it refers to unfunded liabilities in the black hole...
"Because world leaders and their regulators blinked and did nothing, counterfeit private fiat (backed by nothing) has metastasized and infiltrated “genuine” public fiat (backed by country’s productivity if not by gold), and more and more actual money and productivity in the form of austerity is being thrown at a gargantuan and unrecoverable sea of counterfeit obligation."
What choice does the ponzi broker have? Insanely, he is almost happy to see his children multiply...
Agree, good article. Wall Street risk management = Insurance Fraud.
New Age of Risk management : Appointing your boys to run the government to avoid default.
A good article except for this bullshit. It is just this "genuine" "public" fiat that is the root of the problem.
http://money.cnn.com/2012/02/03/pf/states_currencies/index.htm?iid=HP_LN
Folks just want their prejudices confirmed, particularly if it's by some guy who writes in green ink and can't spell and comes over as a bit hysterical. Greek CDS are a small fraction like 1% of outstanding ggb's.
Folks just want their prejudices confirmed, particularly if it's by some guy who writes in green ink and can't spell and comes over as a bit hysterical. Greek CDS are a small fraction like 1% of outstanding ggb's.
You didn't explain how the repeal of glass steagall was necessary to allow what actually did happen. It is not so relevant what could have happened in theory. It sounds like your only argument was that government had to bail out all of AIG because of the reapeal of Glass Steagall. Please explain why the government couldn't have bailed out everything EXCEPT the CDS purchases. After you have tried to explain all of that, then please explain why the government should bail out ANY part of AIG. Thanks.
the author mentions a few factors that contribute to the derivative head explody,
while on the surface they seem disconnected they are in fact all tightly coupled
and causal to the issue at hand.
the problems with derivatives concern specifically infinite or counterfeit leverage,
deceitful risk and dilligence, and fraudulent transactions and regulatory workarounds.
the repeal of glass steagall firstly brough all FDIC insured deposit banks on the playing
field of investment banks. this allowed the comingling and confounding of insured funds
into high risk, thus increasing the amount of capital at risk with the use of leverage.
now there are limits to how much exposure a bank can engage in, and all derivatives
need to be hedged. But the AIG CDS was used universally as a workaround for these
limits. banks engaged in riskier products using the CDS as a captcha hedge for anything,
and AIG, being an insurer/re-insurrer, was not regulated and watched for limits like a bank.
further deregulation moved away from an oversight model toward one of counterparty
dilligence, and most importantly failed to control limits on lucrative OTC derivatives.
now OTCs are not on exchanges and do not post volumes, so market pricing is wholly
obscure and arbitrary. this asymmetry of information is a big part of the huge spreads,
disproportionate with the notional at risk, that the dealers fleece you from these trades.
this lack of posted volumes is what alowed AIG to expose astronomically more than its
market cap in CDS.
despite the CDS being prone to insurance fraud, in the sense that one does need skin
in the game and can issue as much protection as one wishes, many claim it's just a bet
between consenting adult parties, say like a bet on the weather or an intrade prediciton.
perhaps, but primo there should not be more insurance purchased than the total market
cap of the company or sovereign at stake. secundo, a fair bet on the weather or intrade
assumes both parties have access to the same public info and no one party has a means
of influencing the outcome. this brings us to the nuclear weapon of derivatives fraud: the
naked short in all its guises including failure-to-delivery. hedge funds (or GS/MS through
their prime brokerage hitmen) use the infinite leverage to short the CDS without posting
up front and without any skin in the game, whoch drives down the value enough to trigger
a credit event which further accelerates the downgrade in positive feedback loop.
none of this would happen if we had stuck to glass steagall, enforced regulations on the
nature of any all transactions instead of on the nature of the entities involved in the trade,
banned naked shorting and enforced massive penalties on failures-to-delivery, and ensured
that all derivatives go through listed centrally cleared exchanges with calls for collateral,
margins, daily netting stellement, and the posting of volumes and limits.
well that was in theory. until the MF global collapsed, which now means that even central
depositors, clearers, dealers, brokers, and custodians can no longer be trusted.
it's now a market of obscurity and arbitrary pricing.
which is no market at all.
Yes, we all know that Glass-Steagall prevented the comingling of depositors' capital and investment capital, so in theory, deposit institutions could now invest deposits far more foolishly than would have been allowed under Glass-Steagall, but:
1. Did deposit institutions actually and significantly begin to comingle depositors' capital with investment capital?
2. Would it have been necessary for deposit institutions to comingle depositors' capital with investment capital in order to cause the problems we have experienced thus far?
Consider that Glass-Steagall would not have prevented:
1. artificially low interest rates.
2. ridiculously fractional reserve banking.
3. Fannie Mae and Freddie Mac from creating and sustaining the subprime CDO market.
4. subprime CDO's from being rated AAA.
5. the investment in AAA rated subprime CDO's.
6. banks from giving subprime loans to those whom they knew could not pay them back.
7. risky decisions by professional investors.
8. the switch from mark-to-model to mark-to-market, which precipitated the crash of 2008.
9. the government from paying hundreds of billions to bailout all those who purchased credit default swaps.
10. Quantitative easing
I don't know the risk, so I don't play the game, and if Glass-Steagall were restored, I would not feel one iota safer. I have never taken out loans that I couldn't pay back, and I have never voted for politicians who would give bailouts to purchasers of CDS's.
I do agree that it seems like the repeal of Glass-Steagall may have been signed by Bill Clinton in order to make it easier to perpetrate the whole scam, but then it turned out to be completely unecessary.
It sounds like you really want to blame the repeal of Glass-Steagall as a way to strengthen support for your real stated goal, which is "enforced regulations on the nature of any and all transactions." I'll assume that in spite of your lack of respect for individuals, you want to help us all, so how is it that your goal of controlling our transactions is also the goal of those who perpetrated this whole scam? At best, you are what they consider to be a useful idiot.
"You don't play the game"? I've had it with hacks who don't actually work in banking
and profess to have an informed opinion on the subject. It's not a game. Commerce
and economics are the essence of human agency. We have a duty to make it better.
Please, Glass Steagall is only one of the causes mentioned in the article.
The threat of major banks going bust is based on implicit comingling.
(unless you believe in a structured default where seniority is respected).
The 10 items mentioned above are all symptoms of a lack of orderly market,
and I'm well aware of all of them having preached about these since day 1.
This in no way invalidates the article, and I fail to see what your point is.
Are you claiming that anarchic deregulation would avert these violations?
by all transactions, that would be all financial derivative transactions.
"my goal", since you make this presumption, is the *rule of law for markets*.
the abolition of all OTC products, ratings agencies, brokers, dealers and all
middlemen preying on asymmetric information. the end of offshore fiscal
paradises and secrery jurisdictions. the end of tax on profits and income
in favour of a tax to paliate the opportunity cost and risk on the commons.
the end of repos and stock loans and any off-balance sheet shenanigans.
a transaction tax to cover derivatives risk through an FDIC style insurance.
lack of respect appears to be your domain.
Use the stawman fallacy much? Appealing to authority? Obfuscation? Denial? Evasiveness? Sheesh!
I am asking for compelling evidence of the degree to which the repeal of Glass-Steagall contrbuted to the Crash of 2008 or any other problems.
Seriously? I worked for a European bank that had more than twice its market cap of exposure in CDS alone back in 2007.
Most people think the crisis was all CDO back then, but it was CDS in late 2008 that pushed the limit on systemic risk.
Now on the other side of the trade was AIG, which acted as a CDS liquidity provider, meaning they had identical mirror
swaps with big American banks and supras - some from Midtown IB like Meryll lynch who incidentally created the CDO
and which played a big part in the crisis, but a lot from Wall Street CB like Citi Group, which thanks to glass steagall
was way out of the band of it capital ratio requirements. Note that Meryll, Lehman Brothers, and Bear and Sterns were
allowed to fail, and that the CDS/naked short nuclear weapon was both the catalyst and trigger for this. It's when
contagion spread to major FDIC-backed banks through AIG that we started talking about Too Big To Fail and bailouts.
The first series of bailouts were necessary to backstop losses that FDIC could not cover should AIG, which had more
exposure than capital, go down in flames, and these major banks were exposed because of the repeal of glass steagall.
Future Jim, Archduke is making some very intelligent statements, why don't you just read more carefully?
Put it this way: Glass-Steagall was about protecting commercial/retail banking (and insurance) from investment banking products.
This derivative crap has no place in the balance sheets of retail banking or insurance.
Actually, it should be just forbidden again, period.
Excellent article, excellent comments by Archduke.
dup. see reply to archduke.
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