Four years after a financial crisis nearly ruined the U.S. economy, “experts”  acknowledge there are $600 Trillion to “$1.2 Quadrillion” Derivatives still in the market.

These  Derivatives are a ticking hydrogen bomb of unimaginable financial risk.  And while the Fed worries about financial instability in Europe – Congress should ban derivatives here!

Derivatives: The $600 Trillion Time Bomb That’s Set to Explode  —…/derivatives-the-600-trillion-time-bomb-thats-…Cached    Oct 12, 2011 – This has been in part caused by the markets play on derivatives, mortgage backed securities and many more shady dealings. Now what we

Big Risk: $1.2 Quadrillion Derivatives Market Dwarfs World GDP…/risk-quadrillion-derivatives-market-gdp/Cached  — Jun 9, 2010 – But traders rule the roost — and as much as risk managers and Yet according to one of the world’s leading derivatives experts, Paul Wilmott,

Top Derivatives Expert Estimates Size of the Global Derivatives  –…/top-derivatives-expert-finally-gives-a…Cached — May 18, 2012 – The numbers are Credit Default Swaps, not the whole derivative market. Endo. Definitely a much higher number than $1.2 Quadrillion…

What if just $700 trillion of “structured investments,” got out of control, there would be far more worldwide tragedy than what we fear from Al-Qaida.

Structured investments are defined under SEC Rule 434 as: “Securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates of cash flows.

No wonder structured investments are hard to control – nobody really understands them, or is willing to explain their fundamental lack of substance. But that has not stopped JP Morgan’s Jamie Dimon, MF Global’s Jon Corzine, or Lehman’s Dick Fuld. Lloyd Blankfein. And it won’t stop the Street from making markets in and trading geometrically leveraged derivatives that do not have any foundational value.  For the inside scoop have a heart to heart with  the untouchable – Blankfein, the latest Goldman Godfather from a long line of distinguished Goldman government infiltrators including: Henry Paulsen, Robert Ruben, John Thain, Stephen Friedman, Wm. Dudley, Gary Gensler – and Michael Pease, Barney Frank’s chief of staff.

Jefferson, in a letter to Albert Gallatin, Treasury Secretary in 1802, said:  “I believe that banking institutions are more dangerous to our liberties than standing armies.”

When JP Morgan’s “synthetic portfolio” of derivatives used to hedge JPs investments – meaning they were designed to reduce risk – according to Jamie Dimon, lost “$2 billion” – the CEO of JP, who is also on the board of the New York Federal Reserve, told David Gregory, at the beginning of June, on Meet the Press that he could not explain the synthetic derivatives.  By the end of June the announced loss was up to $9 Billion, does anyone know the real ceiling?

No one can logically explain that the foundational value of Swaps is anything but virtual!  Has this been disclosed?

So why is this accepted when SEC regulations require proper, adequate and full disclosure of significant information?

As of June 2012, there were 1,847 pages of federal bank holding company regulations. One regulation stipulates it is “unlawful to securitize and sell any complex security that cannot be explained well enough to be understood.”  So why has this not been enforced?  Is it because hedging reduces exposure to risk and derivatives are the tools of financial risk managers?  Or because the Fed’s policy is to not enforce?  And Justice recently announced Goldman did nothing illegal and will not prosecute.

Is it true, the more often a lie is repeated the closer the lie is to being accepted as truth?

Alan Greenspan was the greatest 21st century promoter of financial innovation, i.e. derivatives:

By far the most significant event in finance during the past decade had been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it – a process that has undoubtedly improved national productivity growth and standards of living.’’ –Alan Greenspan, Chairman, Board of Governors of the US Federal Reserve System, April 2005,

Unfortunately, we are living in a financial environment that no longer pays much attention to the economic distinction between financial investment and real investment (which creates capital formation).  Why?  Because financial investment leverage – which only produces fees and net worth for Wall Street Godfathers — is the most powerful way to maximize profits for Wall Street Banks.  And derivatives are the purest form of financial leverage ever dreamed up – outside of a pure Ponzi scheme.

The Republican economic plan, the economic plan of the “job creators,” is to have less Wall Street regulation, restore “supply side economics, and allow the free markets, based on the fallacious notion that markets are rational, to correct whatever in the market needs correcting.  “Let Detroit go bankrupt, and let all the houses underwater go into foreclosure.”  (Mitt Romney)

Free is a sacred word in America, so it is important to always equate freedom with whatever outrage the job creators deem necessary to continue the ability to add to their already enormous piles of wealth. Freedom is a Wall Street ruse to maintain the return to the robber baron economic theories of Social Darwinism. For the past 22 years I have called this return – Financial Darwinism.  My new book is about how Social Darwinism has metastasized into Financial Darwinism and why this is the root cause of what Paul Krugman and Arthur Laffer call a depression. And why 20% of kids in America are hungry!

The return of laissez faire, maximize profits (no matter what) from the robber baron era of Social Darwinism is the root cause of our current depression and vast chasm of economic inequality, and the underlying problem behind so much of what is wrong with our political arena, financial world and socio-economic concerns.

Yet Nobel Prize economists, like Greenspan, from the Chicago School, at the end of the 70s and beginning of the 80s, led the charge against Glass-Steagall and the 1956 Bank Holding Company Act to get rid of regulations that for decades had effectively controlled the sociopathic greed that had caused the Great Depression.  The Chicago School economists became leading advocates of supply-side Economics, which held that reducing taxes and barriers to any economic activity would create more jobs and a stronger economy.  Today the Chicago School has denounced supply-side economics as well as the deregulation that allowed sociopathic greed out of the carefully constructed cage provided by Glass-Steagall and the 1956 Bank Holding Company Act.

The supply-side arguments that were promoted by Romney and Ryan, represent Republican contemporary thought; and are contrary to the empirical realities clearly manifested by our current depression.  Supply side is a large part of the cause of this depression.  However, our Fourth Estate either does not fully understand this or is not courageous enough to rebut those Republicans who continue to argue that the world is still flat.

Why does the media not relentlessly focus on the incredible danger of returning to economic theories that caused the economic and social tragedy of the Great Depression and this one?  Why does the media not focus on the macro danger of derivatives that are always on the edge of slipping out of control?  There should be a new war: The War Against Derivatives.

Sadly, even if we get reform, there is no reason to believe the SEC will be any better administering it than we have seen from the past. The Dodd-Frank legislation has created a cottage industry for Wall Street lobbyists to furnish enough comments to clog up the final format for over two years.

Dodd-Frank is supposed to make the implausible transparent.  And the Volker Rule provides the assurance that risk measurement will be tightened and compliance will be strengthened.  If the past is prologue we still will be on a path of macro systemic financial risk – risk which is not manageable.

Dodd-Frank will not be simple, which makes it more difficult to administer, notwithstanding the lack of logic behind continuing to allow Wall Street to contrive structured investments that add nothing to the capital formation process. Derivatives are as far from real investment as you can get.

It does not take more than a year out of college, even if you are fortunate to have landed a job with Goldman Sachs, to know you are assisting in the operation of a rigged casino.  To participate in contriving derivatives, selling them or in assurances of risk management and risk minimization is to be a party to contributory negligence.  There is no way to think it makes sense to have helped create $700 trillion of egregiously leveraged systemic risk. A bubonic sized financial plague.

Derivatives need to be banned.  They caused a financial disaster that lingers some four years later.  If Congress does not act, we will be cursing derivatives again.

Share this
  1. moxy

    yet more idiocy, subject to bribes and fraud, and of course always the threat of violence which no barbarian can live without.
    Has it occurred to the author that money, like religion, is NOT a province of the State and its aristocracy?
    .. but that would require liberal thinking, not the tired, conservative statist mind set that has plagued society for millennia

    Instead of using more laws to fix a problem laws caused, why not abandon the pretense of controlling people’s wealth, and let us flounder in our own dilemma?
    .. but that would require liberal thinking, not the tired, conservative statist mind set that has plagued society for millennia.

    • Hester Dickinson

      Glass Stegal was gutted setting the foundation for wall street marrying banks. When you give a man a bank, he will rob the world. There is no significant regulation of derivatives and thus NO REGULATION. If there’s a significant interest rate shift, your retirement and the money in your wallet will become worthless overnight.