"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
"The sudden 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
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
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 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
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.
Born's opinions incited fierce opposition from top officials of the
Federal Reserve and the Securities and
Exchange Commission including Alan
Greenspan* and Robert E.
Rubin* who claim traders would take their business
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
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
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.
"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,
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
JP Morgan Chase
dominates derivatives trading - $87.7 trillion worth of outstanding contracts
as of September 30, 2008.
"In the 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.
derivatives are a zero-sum game: one
losses, one gains.
So the banks collectively are simply painting
themselves into a deeper corner.
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
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.
follow the traditional "Big fish eat little fish"
principle of favoring the vested interests." - Michael Hudson
"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
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% 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 03/26/09
Dow Jones Industrial Average
contained not a single financial incorporation.
Jamie Dimon, chief
executive officer of JP Morgan
Chase, said the US government can
the financial system by the end of the year if officials start cooperating
and stop the "vilification" of
securities and exchange
Securities 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.
is the use of various financial instruments or borrowed capital, such as
margin, to increase the potential return of an investment.
33-to-1 leverage, a mere 3% decline in asset values wipes out a financial
"The Madoff* scandal
finally revealed the SEC for
what it has become.
forged to protect investors from
financial predators, the
commission has evolved into a mechanism for protecting
financial predators with
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
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
back to stacks
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