Occupy Wall Street General Assembly--It is also about derivative trading

From Rortybomb.wordpress.com April 12, 2011

Bob Litan on Derivatives Reform 1: Failure even with a Win?

Posted on April 12, 2010 by Mike

Bob Litan of the Brookings Institute has a new paper out on derivatives reform (full pdf,summary). The paper is called “The Derivatives Dealers’ Club and Derivatives Markets Reform: A Guide for Policy Makers, Citizens and Other Interested Parties” and it’s a must read for two very important reasons.

Before we get there, I agree with his recommendations for regulating the over-the-counter derivatives market and especially the credit default swap market (CDS): create a strong presumption for over-the-counter derivatives to go through clearing, and to be traded on an exchange with pre-trade price transparency. Those that can’t should have margins posted and have post-trade price and volume transparency. This will be a major battle ground in the financial reform debate, and learning these terms will put you in a better spot to follow it. Litan walks you through each of the terms.

As his title states, Litan is worried about the “Dealer’s Club” of the major derivatives players. I particularly like this paper as the best introduction to the current oligarchy that takes place in the very profitable over-the-counter derivatives trading market and credit default swap market. I’m going to just give the high level overview of what he says (italics in original, my bold):

I have written this essay primarily to call attention to the main impediments to meaningful
reform: the private actors who now control the trading of derivatives and all key elements of the infrastructure of derivatives trading, the major dealer banks. The importance of this “Derivatives Dealers’ Club” cannot be overstated. All end-users who want derivatives products, CDS in particular, must transact with dealer banks…I will argue that the major dealer banks have strong financial incentives and the ability to delay or impede changes from the status quo — even if the legislative reforms that are now being
widely discussed are adopted — that would make the CDS and eventually other derivatives markets safer and more transparent for all concerned…

Here, of course, I refer to the major derivatives dealers – the top 5 dealer-banks that control virtually all of the dealer-to-dealer trades in CDS, together with a few others that participate with the top 5 in other institutions important to the derivatives market. Collectively, these institutions have the ability and incentive, if not counteracted by policy intervention, to delay, distort or impede clearing, exchange trading and transparency…

Market-makers make the most profit, however, as long as they can operate as much in the dark as is possible – so that customers don’t know the true going prices, only the dealers do. This opacity allows the dealers to keep spreads high…

In combination, these various market institutions – relating to standardization, clearing and pricing – have incentives not to rock the boat, and not to accelerate the kinds of changes that would make the derivatives market safer and more transparent. The common element among all of these institutions is strong participation, if not significant ownership, by the major dealers.

So Bob Litan is waving a giant red flag that the top dealer-banks that control the CDS market can more or less, through a variety of means he lays out convincingly in the paper, derail or significantly slow down CDS reform after the fact if it passes. Who are these dealer-banks?

Litan never names them, but footnote 39 refers to the top 5 banks/BHC at the OCC’s Quarterly Report on Bank Trading and Derivatives Activities controlling 96%-97% of the market for the top 25 BHCs. And from there, the top four are: 1. JPMorgan Chase (assets: $2,000bn) 2. Goldman Sachs ($850bn) 3. Bank of America ($2,200bn) 4. Citibank ($1,856bn). This doesn’t get at the entire market, as the OCC only can see US commercial bank data, but it gives you a sense of the players.

Litan never mentions this as part of a group of solutions, but It is worth noting that these four players, all TARP recipients, would be turned into 15 players with a size cap of around $500 billion dollars. There are good arguments against a size cap, but the two leading ones, (1) that there would be a cluster of banks around the cap and (2) the broken pieces would be perfect clones of the whole piece, aren’t at all relevant for the issue of an oligarchy capable of derailing credit default swap regulation and colluding to keep the margins high through market and institutional control.

If you thought we’d at least get our arms around credit default swap reform from a financial reform bill, you should read this report from Litan as a giant warning flag. In case you weren’t sure if you’ve heard anyone directly lay out the case on how the market and political concentration in the United States banking sector hurts consumers and increases systemic risk through both political pressures and anticompetitive levels of control of the institutions of the market, now you have. It’s not Matt Taibbi, but it’s much further away from a “everything is actually fine and the Treasury is in control of reform” reassurance. Which should scare you, and give you yet another good reason for size caps for the major banks.

The Corporate Multi-National Thieves Destroyed Christmas

As the corporate cannibals hover above the Wal-Marts and other such predators with a greed lusting Christmas twinkle in their eyes, cash strapped American shopaholics make their way through cart littered aisles checking the price tags for the cheapest foreign made items assembled by hungry Asian laborers earning 700 times less than the multi-national corporate cannibal sitting in the CEO’s leather-bound swivel, and vibrating executive’s throne.

This is America. This is today’s Christmas as November brought us another round of layoffs, this time numbering 533,000 newly unemployed. The numbers keep climbing. This time we reached a 15 year high, with the steepest slide in 34 years (non-farm payroll unemployment). When factoring in the unemployed, underemployed, and discouraged workers, the real unemployment rate is 13%. This will like reach, at least, 20% this time next year. According to Robert Reich, in order to keep up with population growth, employment needs to increase by 125,000 jobs per month. Not happening!!! Also, he says that the length of the work week for many has dropped to 33.5 hours. That does not help wages. The Department of Labor reported that this cut back of hours was the worst since 1964. November has been the 11th straight monthly decline of lost jobs. 2008 has been the Year of Jobs Losses. Consumer spending is at a 28 year low. This is the new America brought to us by the corporate cannibals and financial predators of our country.

Instead of the American worker cannibalized by the corporate predators making a stand against their diminished retirement fund, evaporating salaries and wages, underwater mortgages, and destabilizing future, and saying they will not submit to wasting their fragile wages on this Wal-Mart-style Christmas, they fill the parking lot lanes with their SUVs and minivans and proceed with their roboticized consumeristic bad habits as they willingly drown themselves even further into more and more debt pleasing the corporate cannibals as they make Wal-Mart the fattest predatory cat in the retail neighborhood.

What will it take for them to raise up the windows, lean out and yell, "I'm mad as hell and I'm not going to take this anymore.” No doubt, a soup kitchen voucher, might not wake up most.

General Motors corporatists continue to pump out SUVs and even roll out their newest versions which only get 16 miles per gallon!! The cannibals have no shame while sitting before Congress with their hands out for cash advances on corporate rebuilds. These predatory CEOs and top tier executives made billions of dollars over the last several years investing in the non-regulated securitized toxic derivative bubble, while their workers got blamed for receiving too much earned income with their supported benefits, as they drove around in their Bentleys motoring off to their 10-20,000 square foot palatial weekend ocean side estates in the Hamptons or a getaway mountain surround-sound 6,000 square foot townhome in the ski haven of Vail. Yet, they were the very people that destroyed their own companies, and now ask for their workers to give them their income checks back in the form of bailouts. Not the workers. Oh, the sweet smell of Reagan's regressive trickle-down economics keeps bubbling up like a virgin field of that delightful crude oil.

These corporate cannibals bask in their corporate trickle-down bailouts, while their displaced, or laid-off workers who now stand in the long lines of their local unemployment office. This is the 2008 Predatory Christmas. So, go out and shop!

In doing so, the Chinese will enjoy a 10% GDP, while the U.S. sees their GDP at 0.5%. Experts say that the real U.S. GDP is in the negative range. It will fall even more as valuable resources go to bailout the financial sector at a cost estimated to fall in the range of $7.7 TRILLION!!!! This does not buy jobs, wages and health care. This does not help the Wal-Mart shopper who is presently handing their wages over to Da' Man down in their corporate Arkansas headquarters, while he writes those checks to China.

So, call up Santa Claus on your cell phone and order up a new multi-function, high deluxe cell phone, and a giant wall-mounted, digital high-resolution T.V, along with a sweet Nintendo Wii. You can rationalize the Wii by telling yourself that this is a family gift. You and your kids will use it as an exercise device to work off those extra pounds.

Go ahead and rack up your credit card debt to new and spectacular heights with head spinning compounding interest rates, while paying down your interest-only mortgage. Step up your joy! Click those heels together. Toto says, Disney World is calling you! Ignore your state-of-mind. What else is there to do? The Chinese own you, your kids and me, as well as the Japanese, and the Taiwanese, and of course, our good friends in the UK. They hold the greatest amount of U.S. debt, which they will want back, with interest, once they decide to cash it in.

So, get ready to sit down to a wholesome Subway Hoagie Holiday Christmas dinner. You DO remember what that Thanksgiving one cost you; don't you? That killed your monthly budget.

Peter Morici, an economist at the University of Maryland, says that recessions are like stock markets, which correct themselves, and after a time, a down market rebounds without government intervention. This is not the case in 2008. He says that a depression is not self-correcting. I am saying that this market is not self-correcting. The rise in the equities market is based upon nothing—no good news. It is rebounding only because President-elect Obama is making statements that bring on the rallies. This does not make any sense. Another reason why this market is rebounding, and we can suspect with confidence that the Fed and the PPT (Plunge Protection Team) do not want to see the DOW below 8000. This would bring on more sell-offs and a jittery Wall-Street. It is a psychological downward benchmark. Bada Bing Bernanke does not want this. The market should really be under 8000 today, but he and the PPT are likely preventing it by intervening in the market through the buying of equity futures.

Some experts are saying that the bottom of the market will see the S & P hit 700 before it finally begins to level out. Today the S & P is at 909.

Rakesh Saxena of Seekingalpha.com, said that there will be a record number of European corporations on the verge of default due to deepening financial problems, and these are non-investment grade corporations. This has been happening in the U.S. for over a year. This crisis is now reverberating worldwide.

This is not only the new America, but what we are experiencing here may also be the new world. Will this be a Subway Hoagie Holiday Christmas dinner for many others around the world? It could easily fit right in the Christmas stocking for easy delivery. Pull out your hoagie and we will all sit down at the table and  join in together. 

Thanks for reading, Jerry

Toxic Banking Bailout- The September Surprise!

The political system is once again, creating a new quandary for our nation due to its failure to build a transparent government. Without appropriate supervision of its operations, and a necessary level of regulation to make sure the system responds to its own best interests and practices, and not for a select few, our democracy cannot work effectively.

This is how the derailment occurred under the direction of Alan Greenspan, the former chairman of the Federal Reserve, our nation's central bank dating back to 1913. Along with a capitulating series of presidents, who followed the prescribed philosophy of unbridled and secretive capitalism under a trickle-down theory through a pyramid-style economic methodology. Alan Greenspan, Ben Bernanke, Hank Paulson, Phil Gramm, and many within the Republican and Democratic Parties have presented us with the unbelievable meltdown we are all witnessing.

The late John Kenneth Galbreith, claimed that the trickle-down theory was responsible for the Panic of 1896. It was called by the elites of the time "The Horse and Sparrow Theory", meaning that if you fed the horse enough oats, the horse would pass on its good fortune to the sparrows hanging out along the road. No Sh*t! There is absolutely no example of trickle-down theory working anywhere in the world, as far as I have found, that would justify continuing it, beyond this point in time. It is only an idealistic, pie-in-the-sky theory.

I am no economist, but only a lay person intrigued by the crime story that has surrounded the privileged elite controlling the credit markets starting with the most powerful on top and moving on down to those who wanted to buy a piece of the wealth-accumulating dessert. 

This 30-year run has led us to where we are today. 30 years ago this crime story began establishing its foothold, building its operations and soldiers creating a cyber-wealth empire, which has amounted to somewhere between $450-500 trillion in worldwide toxic derivatives now woven throughout the fabric of foreign central banks, financial institutions, private equity funds, hedge funds, pension funds and sovereign wealth funds. Now this cyber-wealth is on the verge of melting down exposing deceptive, secretive, greedy, and extremely under-capitalized practices. 

What has been uncovered is that President Reagan's free market, trickle-down economic express-train policy, driven by his senior engineer Alan Greenspan, has finally hit the inevitable wall. Its theory was to let those at the top of the pyramid acquire all the wealth they could, and through its basic fundamentals trickle-down as a stimulus to those "sparrows" hanging along the roads of Main and Side Street. We just saw that it failed. Those 10% at the top have acquired massive amounts of wealth, while the economy has failed leaving the middle class to suffer with foreclosures and the shrinking of real wages. What we also witnessed was the top of the pyramid collapse, and and the top-tier wealth accumulators seeing their lending financial institutions fall into conservership, insolvency or bankruptcy because of their trickle-down principles. These institutions have ended up holding toxic debt that was virtually worth-less requiring them to activate their distress calls to congress and the White House. "Help, help. Save our wealth."

Now the Treasury, Fed, and President have decided to create a new Pyramid Scheme but not molded out of private free market theory, but from a socialistic, unitary executive model, which would allow the Federal Reserve, a private entity, to use taxpayer funds to buy private corporations, as they consolidate power over the private economy. 

By infusing the largest failing financial institutions with the previous recipients of the Fed's 2% open window, we will witness over one trillion dollars of taxpayer-treasury funds being given out to the Bush "Haves and Have-Mores". In addition, the Fed has provided foreign sovereign wealth funds, and foreign central banks with taxpayer-treasury funds because they're angry over their losses resulting from the Pyramid Scheme, since they ended up buying leveraged-out, AIG insured (through credit default swaps that are worth-less), and collateralized debt obligations made mostly out of mortgage debt. YIKES! Those countries took a major wealth-loss hit and want the U.S. government to bail them out, too. They seem to have forgotten that such investments are NOT safe, nor guaranteed by the U.S.  government, but risky. This has been the Great Unwinding for those at the top, or close to the top of the Pyramid Scheme. If you were not such a big player, you ended up drowning. As with the Titanic, only the elite and privileged got to the lifeboats in time leaving those in steerage to meet their fate. Remember, they all were told that the Titanic was unsinkable. That was what Greenspan and the financial institutions told their trickle-down investors, as well. SOL, as they say.

The new trickle-down fundamental is to privatize the earnings and socialize the losses. This is what McCain means when he says the fundamentals are good. They are good for the wealthiest 10% of Americans, not the many who have seen a $300 per year loss in real wages.

So how will it all unwrap over the next month, three months, 12 months? If I knew, I would be a rich guy, too. I'd be on Letterman, Oprah, Leno, and Larry King. O'Reilly would be begging me to go on his show, but I would refuse and call him a jerk on the phone. I'd be on a big-time tour, with Bono, and Krugman, and Roubini, giving out advice and selling my book and Internet newsletter. I'd have a cottage by the lake, and a loft in the city. I'd be sitting pretty during the Great Unwinding. There would be groupies wanting me to analyze their investment portfolios. You know the schtick.

But based upon my gut intuition, the Bush Bailout Plan is unsustainable. The Bush Crime Family Conspiratorial Mothership has one goal in mind, and that is to retain power for their constituents at the top of the Pyramid. The only way to do this is to get McCon elected. If and once elected, the Bush/Cheney crime bosses will hop off the White House grand cruise ship and onto their exiting water craft for safer ground. McCon and McPalin will be left to drift in the dangerous economic waters for 4 years as they so desperately campaigned for.

What the McCons don't realize is that the U.S. does not have any money of its own left to spend, therefore, they must print more for the Grand Infusion. They rely on foreigners to supply us with funds to shore up and patch up a leaking dyke. Will there be a time they will curtail their generosity toward a nation who has squandered it for "more wars, my friends", or the Halliburton/Blackwater/etc war machine, or the huge spying enterprise, or the aggression and hostility directed toward others? There is a strong possibility of it ended up backfiring into their faces affecting their own self-interests. Can the dollar improve under this new socialized economy? Or will we see that these emperors, in fact, have no clothes, as the credit market fails to loosen up out fear as cash-strapped consumers put up the duct tape and plastic around their lives waiting for the economic fallout to pass further freezing up the economy. Does this sound like 1931?

Deflation is not to be disregarded. Nor is inflation, for that matter, as it impacts upon many life-sustaining essentials. A value-less dollar is a possibility. Can banks go under while holding on to their government/taxpayer-paid-for and issued treasury life preservers? Yes! How can the U.S. repair and rebuild Iraq and Afghanistan while we, too, crumble under the tribulations of war right here at home? I don't see much time left.

The top-tier banksta gangstas wanted a guarantee that no "economic insurgents" would fire upon their financial institution's value, which remains weak, rotten, and vulnerable. Plus, these CEO administrators want to make a ton more money by wagering on themselves without the threat of the big, bad "economic insurgents" betting against them. This is how neo-fascism works. The government protects its own and, in this case, it's the big political party supporters and holders of the oligarchy's wealth. It all comes at a price! The Republicon Party and those making up the Demo-Con sub-party capitulators, such as Lieberman, will see bigger and fatter contributions fill their purses unless congress stands up to the Paulson/Bernanke/Bush/Banksta criminals.

The Bush administration responded to those he refers to as "my base" who wanted to protect themselves form the "economic insurgents", who are also known as "short sellers". These are investor/traders who bet that the stock price would fall because the company's fundamentals are not strong. Short selling has now been declared illegal for 800 chosen stocks, including G.E., allowing the "haves" to bet on themselves without the fear of the "insurgents" coming after their unbridled speculation.

Bush once said, "we fight them there, so we don't have to fight them here." But the war is right here in America and most people don't realize it, although it has been very clear to many more of us this week. The war in Iraq and Afghanistan was partly created as a distraction from the economic war right here in America brought to us by the Wall-Street Gangstas, and their crime bosses. There is a war between Wall-Street, and those living on Main and Side Street. Protect Wall-Street first. They get the U.S. backed Protection Service. March forward and manipulate the heck out of the markets. Give protection money to foreign central banks and sovereign wealth funds to keep them from dumping their U.S. Treasury bills and bonds, or dollars on the open market. By showering them with bailout funds, Hank "The Paulie" Paulson, and "Bada Bing" Bernanke, along with the White House crime bosses, have encouraged those international bankers to continue to fund our debt, USING OUR GOVERNMENT ISSUED BAILOUT MONEY. WOW! What a deal!

I believe if the government wants to socialize these financial institutions, then take them over. Cut the investors out. Let them take their hits. Replace the greedy CEOs. Remove their golden parachutes, bonuses, salaries, stock options and send them home. Raise taxes on the top-tier wage earners. Carve up these mega-financial institutions into smaller, more controllable, transparent and regulated entities. These corporate thieves, foot soldiers and "benefactors" must feel the pain and not the middle class who were victimized by their rise and fall.

In addition, we need to realize our hegemonic failure in the Middle East and shut the wars down. Leave the bases and stop the human and economic losses. Orchestrate a massive industrial rebuilding movement that would focus on alternative energy and re-engineer an alternative energy grid. And finally, provide single-payer health care allowing workers to move between employers, or start their own businesses without the fear of losing coverage,  and remove the heavy health care burden experienced by businesses, which drains valuable capital needed for expansion. 

You have just read my views from only one set of eyes and one mind.