"Between 1973 and 1985, US financial sector
accounted for about 16 percent of domestic corporate profits. In the
1990s, it ranged from 21 percent to 30 percent.
2000 it soared to 41 percent."
- David Brooks
failure or abrupt withdrawal from trading of any of these large US dealers
could cause liquidity problems in the
markets and could also pose risks to
others, including 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
Myron 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 declared that 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
Brooksley E. 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. Brooksley E. Born's opinions
incited fierce opposition from top officials of the
the Federal Reserve and the Securities and Exchange Commission including
Alan Greenspan and Robert E. Rubin* who
claim traders would take their business overseas.
"While 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
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 not regulated. Larry
Summers 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. Larry Summers,
Alan Greenspan and Robert E.
Rubin recommend that Congress permanently strip the Commodity Futures
Trading Commission of regulatory authority over derivatives.
|David X. Li's Gaussian
Li was born as Li Xianglin and raised in a rural part of
China during the 1960s.
His family was relocated during the Cultural
Revolution to a rural village in southern China for
and Exchange Commission allows financial institutions/securities dealers to
raise their leverage sharply from a typical leverage of 12-to-1 to around
33-to-1. Leverage is the use of various financial instruments or borrowed
capital, such as margin, to increase the potential return of an investment.
Under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a
financial institution/securities dealer.
"The simultaneous selling of securities to
customers and shorting them because they believed they were going to default is
the most cynical use of credit information that I have ever seen." - Sylvain R.
introduces a new index, the ABX, that becomes a way to 'bet' on the value of
mortgage backed securities.
This 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 enable 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
Wall Street, 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
JP Morgan Chase generates
$5.6 billion profit. 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
Stearns. JP Morgan
Chase dominates derivatives trading - $87.7 trillion worth of outstanding
contracts as of September 30, 2008.
last quarter of a century the whole American economic system has lived off the
speculations generated 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
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 party's gain is another's loss.
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 gambles.
The Federal Reserve and Treasury certainly seem more willing to
bail out the big financial institutions than to bail out 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
"Giant corporations arose early in the last century
followed by wars,
depression, and more wars.
Profit-making oligopolies and monopolies
resulted competing not on price but mainly in the areas of cost-cutting and the
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.
increasingly seen as bundles of assets, the more liquid the better.
Financialization produced new outlets for surplus in the FIRE sector
real estate), mostly for
speculation, not capital goods investments in plant and equipment,
transportation, and public utilities that earlier fueled business cycle
In 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
Ever since, the way was open for a proliferation of
financial instruments and markets, which (until the present) proved to be
warned about "enterprise
becoming the bubble on a whirlpool of speculation" like in the 1920s, the
price being the Great Depression.
Bubbles eventually grow and to
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
Finance and insurance together
account for less than 4 percent of G.D.P.
1980 "After 1980, in the deregulation-minded Reagan era,
old-fashioned banking was increasingly replaced by wheeling and dealing on a
grand scale. Banks used securitization to increase their risk and in the
process they made the economy more, not less, vulnerable to financial
disruption." - Paul Krugman
Dow Jones Industrial Average
contained not a single financial incorporation.
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 corporate
securities and exchange
"The Madoff* scandal finally
revealed the SEC for what it has
become. Created to protect investors from
financial predators, the
commission has evolved into a mechanism for protecting financial predators with political clout.
SEC seldom penalizes serious
corporate and management malfeasance - out of some misguided notion that to do
so would cause stock prices to fall, shareholders to suffer and
confidence to be
undermined. The commission's most recent director of enforcement is the
general counsel at JP Morgan Chase; the
enforcement chief before him became general counsel at
Deutsche Bank AG;
and one of his predecessors became a managing director for
Credit Suisse before
moving on to Morgan Stanley.
A casual observer could be
forgiven for thinking that the whole point of landing the job as the SEC's
director of enforcement is to position oneself for the better paying one on
Wall Street." - Michael Lewis & David Einhorn
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