In an article titled "Still No End to 'Too Big to Fail,'" William Greider wrote in The Nation on February 15:
Financial market cynics have assumed all along that Dodd-Frank did not end "too big to fail" but instead created a charmed circle of protected banks labeled "systemically important" that will not be allowed to fail, no matter how badly they behave.
That may be, but there is one bit of bad behavior that Uncle Sam himself does not have the funds to underwrite: the $32 trillion market in credit default swaps (CDS). Thirty-two trillion dollars is more than twice the U.S. GDP and more than twice the national debt.
CDS are a form of derivative taken out by investors as insurance against default. According to the Comptroller of the Currency, nearly 95 percent of the banking industry's total exposure to derivatives contracts is held by the nation's five largest banks: JPMorgan Chase, Citigroup, Bank of America, HSBC, and Goldman Sachs. The CDS market is unregulated, and there is no requirement that the "insurer" actually have the funds to pay up. CDS are more like bets, and a massive loss at the casino could bring the house down.
It could, at least, unless the casino is rigged. Whether a "credit event" is a "default" triggering a payout is determined by the International Swaps and Derivatives Association (ISDA), and it seems that the ISDA is owned by the world's largest banks and hedge funds. That means the house determines whether the house has to pay.
The Houses of Morgan, Goldman and the other Big Five are justifiably worried right now, because an "event of default" declared on European sovereign debt could jeopardize their $32 trillion derivatives scheme. According to Rudy Avizius in an article on The Market Oracle (UK) on February 15, that explains what happened at MF Global, and why the 50 percent Greek bond write-down was not declared an event of default.
If you paid only 50 percent of your mortgage every month, these same banks would quickly declare you in default. But the rules are quite different when the banks are the insurers underwriting the deal.
MF Global was a major global financial derivatives broker until it met its unseemly demise on October 30, 2011, when it filed the eighth-largest U.S. bankruptcy after reporting a "material shortfall" of hundreds of millions of dollars in segregated customer funds. The brokerage used a large number of complex and controversial repurchase agreements, or "repos," for funding and for leveraging profit. Among its losing bets was something described as a wrong-way $6.3 billion trade the brokerage made on its own behalf on bonds of some of Europe's most indebted nations.
Avizius writes:
[A]n agreement was reached in Europe that investors would have to take a write-down of 50 percent on Greek Bond debt. Now MF Global was leveraged anywhere from 40 to 1, to 80 to 1 depending on whose figures you believe. Let's assume that MF Global was leveraged 40 to 1, this means that they could not even absorb a small 3 percent loss, so when the "haircut" of 50 percent was agreed to, MF Global was finished. It tried to stem its losses by criminally dipping into segregated client accounts, and we all know how that ended with clients losing their money...However, MF Global thought that they had risk-free speculation because they had bought these CDS from these big banks to protect themselves in case their bets on European Debt went bad. MF Global should have been protected by its CDS, but since the ISDA would not declare the Greek "credit event" to be a default, MF Global could not cover its losses, causing its collapse.
The house won because it was able to define what " winning" was. But what happens when Greece or another country simply walks away and refuses to pay? That is hardly a "haircut." It is a decapitation. The asset is in rigor mortis. By no dictionary definition could it not qualify as a "default."
That sort of definitive Greek default is thought by some analysts to be quite likely, and to be coming soon. Dr. Irwin Stelzer, a senior fellow and director of Hudson Institute's economic policy studies group, was quoted in Saturday's Yorkshire Post (UK) as saying:
It's only a matter of time before they go bankrupt. They are bankrupt now, it's only a question of how you recognise it and what you call it.
Certainly they will default... maybe as early as March. If I were them I'd get out [of the euro].
In an article in The Observer (UK) on February 11 titled "The Mathematical Equation That Caused the Banks to Crash," Ian Stewart wrote of the Black-Scholes equation that opened up the world of derivatives:
The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended.
As Aristotle told this ancient Greek tale, Midas died of hunger as a result of his vain prayer for the golden touch. Today, the Greek people are going hungry to protect a rigged $32 trillion Wall Street casino. Avizius writes:
The money made by selling these derivatives is directly responsible for the huge profits and bonuses we now see on Wall Street. The money masters have reaped obscene profits from this scheme, but now they live in fear that it will all unravel and the gravy train will end. What these banks have done is to leverage the system to such an extreme, that the entire house of cards is threatened by a small country of only 11 million people. Greece could bring the entire world economy down. If a default was declared, the resulting payouts would start a chain reaction that would cause widespread worldwide bank failures, making the Lehman collapse look small by comparison.
Some observers question whether a Greek default would be that bad. According to a comment on Forbes on October 10, 2011:
[T]he gross notional value of Greek CDS contracts as of last week was €54.34 billion, according to the latest report from data repository Depository Trust & Clearing Corporation (DTCC). DTCC is able to undertake internal netting analysis due to having data on essentially all of the CDS market. And it reported that the net losses would be an order of magnitude lower, with the maximum amount of funds that would move from one bank to another in connection with the settlement of CDS claims in a default being just €2.68 billion, total. If DTCC's analysis is correct, the CDS market for Greek debt would not much magnify the consequences of a Greek default -- unless it stimulated contagion that affected other European countries.It is the "contagion," however, that seems to be the concern. Players who have hedged their bets by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets. The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives "weapons of financial mass destruction." It is also why the banking system cannot let a major derivatives player -- such as Bear Stearns or Lehman Brothers -- go down. What is in jeopardy is the derivatives scheme itself. According to an article in the Wall Street Journal on January 20:
Hanging in the balance is the reputation of CDS as an instrument for hedgers and speculators -- a $32.4 trillion market as of June last year; the value that may be assigned to sovereign debt, and $2.9 trillion of sovereign CDS, if the protection isn't seen as reliable in eliciting payouts; as well as the impact a messy Greek default could have on the global banking system.
Players in the future may simply refuse to play. When the house is so obviously rigged, the legitimacy of the whole CDS scheme is called into question. As MF Global found out the hard way, there is no such thing as "risk-free speculation" protected with derivatives.
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MMMmmmmm. Fat chance here. This particular part of the public (ME) has been sick of paying big gambler's debts since I figured this crapola out in about '99. I wasn't paying attention before that. All it took for me to figure the big casino out was a little intro to business class along with a business math class at a community college, it don't take a genius to figure these guys out, I dunnno why these banksters think they are so brilliant? Your book and Greider's book on the Fed just confirmed my suspicions. The Game is rigged and I hope these dopes get what's coming to them.
Any bets on how long it takes the little people of the world to invest in a company that makes guillotines?
Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.
I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:
http://evans-experientialism.freewebspace.com/steinsvold.htm
John Steinsvold
“Insanity is doing the same thing over and over and expecting a different result."
~ Albert Einstein
what we need are the globalists out of the way and empowering the individual.
“[Mercantilism] was, in fact, a remarkably sophisticated attempt . . . to advance national economic development by means that would be familiar and congenial to the technocrats of 21st century Tokyo, Beijing, or Seoul. . . Mercantilists . . . championed the economic interests of the nation as a whole. . . at a time when special interests were an even bigger problem than today. . . they understood that nations rose economically by imitating the industries of already rich nations. . . Mercantilism, in fact, created the modern European economy, and thus made possible the colonial power that shaped much of the rest of the world. It is thus the foundation of modern capitalism itself.”
So mercantilism is the government in control, pursuing the national economic interest, against special interests. What we have now is the banks, which are special interests, controlling the economy for their own ends.
When Brooksley Born warned that derivatives needed to be regulated or they would spell disaster, Alan Greenspan and Robert Rubin balled her out and shut her up. They didn’t want anybody messing with their racket. (They were bank agents masquerading as government employees.)
I see a parallel with programmed trading. They are just skimming off the top, gaming the system. Could we have something like a Tobin tax for derivatives? Anyway, if the political will were there -- if the bankers didn’t have almost all the politicians in their back pockets -- this mess could be taken care of pretty easily.
Why was Greece forced to borrow from private banks anyway? Here’s a great little video https://www.youtube.com/watch?v=P8fDLyXXUxM&feature=player_embedded that shows how the EU enslaved all its member countries to the banks. Before the EU, countries just borrowed the money they needed from their own central banks. The Maastricht Treaty outlawed that and required governments to borrow from private banks and pay usury. But of course the private banks got to borrow from central banks (probably for virtually zero interest like the banks in the US borrow from the Fed). I think the best result from the Greek sovereign debt fiasco would be for the EU to break up. I hope the crisis spreads!
http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/regulatory-practice-letters/Documents/rpl-1013-otc-derivatives.pdf