stacks
unique-design

derivatives,        

down the drain
churn financial instruments,    
  devil alan

Alan Greenspan,
log cabin Abraham Linciln grew up in  
      housing bubbles on bank fire
    FIRE !

"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.

After 2000 it soared to 41 percent." - David Brooks



1994

"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 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

1997

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 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. Brooksley E. Born's opinions incited fierce opposition from top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission including Alan Greenspan and Robert E. Rubin* who claim traders would take their business overseas.


1998

"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

November 1999

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.

2000

David X. Li's Gaussian copula function

David X. Li's Gaussian copula function

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 "re-education".


2004

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. 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.




Goldman Sacs

ABX

2006

Wall Street introduces a new index, the ABX, that becomes a way to 'bet' on the value of mortgage securities. This index, modeled on the Enron Trading Desk, allows traders to bet on or against pools of mortgages with different risk characteristics using David like stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.
Goldman Sachs did quite well on the collapse using the ABX to bet against the housing market.

"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. Raynes

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.



what you gonna do

2007

"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

2008

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.

"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. Its growth, moreover, has fed a proliferation of financial activities and assets so complex and arcane that even their designers don't fully understand how they operate. " - 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. But 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 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 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 Hudson 06/08

onerous debt

2009 On March 11, 2009 Jamie Dimon, chief executive officer of JP Morgan Chase, said the federal government can rescue the financial system by the end of the year if officials start cooperating and stop the "vilification" of corporate America.

"During the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. Until 1982 Dow Jones Industrial Average contained not a single financial company. After 1980, in the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. But the wizards were frauds and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization - that it would make the financial system more robust by spreading risk more widely - turned out to be a lie. 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

"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 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, insurance, and real estate), mostly for speculation, not capital goods investments in plant and equipment, transportation, and public utilities that earlier fueled business cycle expansions. The 1980s saw an unprecedented upsurge of debt in the economy. In the 1970s, it was about one-and-a-half times GDP. 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 Great Depression. Bubbles eventually grow and always burst. 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

In "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. The 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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