"Most if not all
derivatives contracts are predicated
on interest rates because
derivatives, to a great extent, are time-based.
Interest rates set a valuation on
derivatives products as they measure opportunity cost, i.e. the profit foregone
by putting money into product A when money could also theoretically be made by
investing in product B.
these rates, particularly in the interest of protecting derivatives
investment, does indeed gum up the "immense and recondite" financial machinery
of the world.
The interest rate derivatives market (in which the
underlying asset is the right to pay or to receive a notional amount of money
at a given interest rate) is the world's single largest derivatives market.
The Bank for International
Settlements (BIS) estimated that in June 2012 the value for
over-the-counter interest rate derivatives
contracts (in notational terms) totaled $835 trillion; 90 percent of the
world's top 500 companies now use them to control their cash flows." - Patricia
"Between 1973 and 1985, US financial sector
accounted for about 16% of domestic corporate profits.
1990s, it ranged from 21% to 30%.
After 2000 it soared to
41%." - David Brooks
Finance and insurance together
account for less than 4% of G.D.P.
"After 1980, in
the deregulation minded Reagan era,
old-fashioned banking was increasingly replaced by wheeling and dealing on a
Banks used securitization to increase their risk. In the
process they made the economy more vulnerable to financial disruption." -
Paul Krugman 03/26/09
Dow Jones Industrial Average contains not
a single financial corporation.
"The sudden failure or abrupt withdrawal from
trading of any of these large US dealers could cause
liquidity problems in the markets and could
pose risks to federally insured banks and the
financial system as a whole.
In some cases intervention has and could result in a financial bailout paid for or
guaranteed by taxpayers."- Charles A. Bowsher, Comptroller General,
Government Accountability Office 1994
Scholes, the "father" of financial derivatives, wins
the Riksbank Prize in Economics for inventing
the model that has led to financial derivatives.
Myron Scholes later
declares derivatives and
credit default swaps have
gotten so dangerously out of hand that authorities should shut down the market
and start over with regulation in place to begin with.
Born, Commodity Futures
Trading Commission chairwoman, is concerned that unfettered, opaque
trading could "threaten our regulated markets or, indeed, our economy without
any federal agency knowing about it," calls for greater disclosure of trades
and reserves to cushion against losses and seeks to extend the Commodity Futures Trading
Commission regulatory reach into derivatives.
Born's opinions incited fierce opposition from top officials of the
Treasury Department, Federal
Reserve and the Securities and Exchange
Commission including Alan Greenspan*
and Robert Rubin* who claim traders
would take their business overseas.
OTC derivatives serve
important economic functions, these products, like any complex financial
instrument, can present significant risks if misused or misunderstood.
A number of large, well-publicized financial losses over the last few
years have focused the
attention of the financial services industry, its regulators, derivatives
end-users and the general public on potential problems and abuses in the
OTC derivatives market." -
Commodity Futures Trading Commission, May 1998
is a 'Derivative'?
What is an 'Economic Derivative'?
insight into OTC Derivatives
Larry Summers, deputy secretary of the
Treasury, Robert Rubin, secretary of
the Treasury, and Alan Greenspan, the
chairman of the Federal Reserve work overtime to insure that derivatives are
testifies before Congress that "the shadow of regulatory
uncertainty over an
otherwise thriving market - raised risks for the stability and competitiveness
of American derivative trading."
Larry Summers blasted the Commodity
Futures Trading Commission for having raised" the possibility of regulation
over this market."
Even "small regulatory changes," Larry Summers
cautioned, could throw the whole system out of whack.
and Robert E. Rubin
recommend that Congress permanently strip the Commodity Futures
Trading Commission of regulatory authority over derivatives.
Larry Summers' Debt Swap
development of "electronic" mortgages managed by MERS went hand in hand with
the "securitization" of mortgage loans chopping them into pieces and selling
them off to investors.
In the heyday of
before investors got wise, lenders would slice up loans, bundle them into
"financial products" called "collateralized debt
obligations" (CDOs), ostensibly
insure them against default by
wrapping them in derivatives called "credit default swaps," and sell them
to pension funds, municipal funds and foreign investment funds.
were many secured parties, and the
pieces kept changing hands; but MERS supposedly kept track of all these changes
MERS would register and record mortgage loans in its
name, and it would bring foreclosure actions in its name.
MERS facilitated the rapid turnover of mortgages
and mortgage-backed securities while
serving as a "corporate shield" that protects loan originators from claims by
borrowers of predatory lending
practices." - Ellen Brown
"MERS has reduced transparency in the
mortgage market in two ways.
First, consumers and their counsel can no
longer turn to the public recording systems to learn the identity of the holder
of their note.
Today, county recording systems are increasingly full of
one meaningless name, MERS, repeated over and over again.
importantly, all across the country, MERS now brings foreclosure proceedings in
its name even though it is not the financial party of interest.
problematic because MERS is not equipped to provide responses to consumers'
discovery requests with respect to
In effect, the securitization conduit attempts to use
a faceless and seemingly
innocent proxy with no knowledge of
predatory origination or servicing behavior to do
the dirty work of seizing the consumer's
MERS actually succeeds in foreclosing without producing the
original note "the legal sine qua non of foreclosure" much less documentation
that could support predatory lending defenses." - Timothy McCandless
"MERS as straw man lacks standing to foreclose, but so does
original lender, although it was a signatory to the deal.
lacks standing because title had to pass to the secured parties for the
arrangement to legally qualify as a "security."
The lender, paid in
full, has no further legal interest in the claim.
Only the securities
holders have skin in the game;
but they have no standing to foreclose, because they were not signatories to
the original agreement.
They cannot satisfy the
basic requirement of
contract law that
a plaintiff suing on
a written contract must produce a signed contract proving he is
relief." - Ellen Brown
"The simultaneous selling of securities to customers and
short selling them because they
believed they were going to default is the most cynical use of credit
information that I have ever seen." - Sylvain R. Raynes2006
Wall Street brokers
introduces a new index, the ABX, that becomes a way to 'bet' on the value of
mortgage backed securities.
index, modeled on the Enron Trading Desk,
allows traders to bet on or against pools of mortgages with different risk
characteristics using variable stock indexes enabling traders to bet on whether
the overall stock market, or technology stocks or bank stocks, will go up or
Goldman Sachs did quite well on the
collapse using the ABX to bet against the housing market.
with Goldman Sachs leading, inflated
through deception a credit bubble that burst and cost tens of millions of
Americans their jobs, incomes, savings and home equity.
"I continue to be
concerned about the
influence of pooled vehicles in the
marketplace. I see it as
a ticking time bomb that is going to blow at some point." - Securities and
Exchange Commission Chairman William H. Donaldson, May 24, 2007
What is the difference between exchange-traded funds and mutual
JP Morgan Chase generates $5.6 billion
Matt Zames, a Long-Term Capital Management
veteran, runs the JP Morgan Chase
derivatives trading desk.
JP Morgan Chase
profits from the collapse of Lehman
Brothers and the takeover of Bear
JP Morgan Chase
dominates derivatives trading - $87.7 trillion worth of outstanding derivatives
contracts as of September 30, 2008.
"In the last quarter of a
century the whole American economic system has lived off the
by the financial sector - sometimes given the acronym FIRE (for finance,
insurance and real estate). FIRE has grown exponentially while, in the
country's industrial heartland in particular, much of the rest of the economy
has withered away. FIRE carries enormous weight and the capacity to do great
harm." - Steve Fraser 01/08
"The banks are trying to win back their losses by
arbitrage operations, borrowing from the Federal Reserve at a low interest
rate and lending at a higher one, and gambling on options.
Options and derivatives are
a zero-sum game: one losses,
So the banks
collectively are simply painting themselves into a deeper
They hope they can tell the Federal Reserve and Treasury to keep bailing
them out or else they'll fail and cost the FDIC even more money to make good on
insuring the "bad savings" that have been steered into these bad debts and bad
The Federal Reserve and Treasury certainly seem more willing to
bailout the big financial
institutions than to bailout savers, pensioners, Social Security recipients
and other small fry.
They thus follow the traditional
"Big fish eat little fish" principle of
favoring the vested interests." - Michael Hudson 06/08
March 11, 2009
Jamie Dimon, chief
executive officer of JP Morgan Chase, said the US government can
rescue the financial system
by the end of the year if officials start cooperating and
stop the "vilification" of
"Giant corporations arose early in the last century
followed by wars, depression, and more wars.
and monopolies resulted competing not on price but mainly in the areas of
cost-cutting and the sales effort.
Beginning in the late 1960s and
1970s, financialization came to the rescue, and "to some extent (shifted)
control over the economy from corporate boardrooms to the financial markets.
Corporations were increasingly seen as bundles of assets, the more
liquid the better.
Financialization produced new outlets for surplus in the
FIRE sector (finance,
real estate), mostly for
speculation, not capital goods
investments in plant and equipment, transportation, and
public utilities that earlier
fueled business cycle expansions.
the 1970s, it was about one-and-a-half times GDP.
The 1980s saw an
unprecedented upsurge of debt in the economy.
By 1985, it was double,
and by 2005 it was three-and-a-times GDP, rising, and approaching the $44
trillion (level) for the entire world.
Ever since, the way was open for
a proliferation of financial
instruments and markets, which (until the
present) proved to be literally unlimited.
Keynes warned about "enterprise becoming the bubble
on a whirlpool of speculation" like in the 1920s, the price being the
Bubbles grow until they
Minor by comparison, the 1997-98 Asian crisis showed how fast
contagion can spread.
Today it's global and out-of-control.
No one's sure how to contain
it, so bankers are printing trillions in a desperate attempt to
socialize losses, privatize
profits, and pump life
back into a corpse through a sort of shell game or
grandest of grand theft
process of sucking wealth from the public.
Speculation and debt need more of it to
prosper, but in the end it's a losing game." - Stephen Lendman
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