"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.
Manipulating 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.
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 grand scale.
Banks used securitization to
increase their risk. In the process they made the economy more vulnerable to
financial disruption." - Paul Krugman 03/26/09
Industrial Average contains not a single financial
"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
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
Myron Scholes later declares
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.
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
Treasury Department, Federal
Reserve and the Securities and Exchange
Commission including Alan Greenspan*
and Robert Rubin* who claim traders
would take their business overseas.
derivatives serve important economic functions, these products, like any
complex financial instrument, can present significant risks if misused or
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
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.
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 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
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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