"Most if not all derivatives contracts are
predicated on interest rates because derivatives, to a great extent, are
Interest rates set a valuation on derivatives products as
they measure oppor- tunity cost, i.e. the profit foregone by putting money into
product A when money could also theoretically be made by investing in product
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
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 Goldstone
"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.
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 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
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
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 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.
Larry Summers' Debt Swap
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. Raynes2006
Wall Street 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.
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
What is the difference between exchange-traded funds and mutual
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
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
"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, one
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
the financial system by the end of the year if officials start cooperating
and stop the "vilification" of
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