By AATTP contributing author E. Henry Schoenberger
Americans have been lulled into a false sense of financial security because the stock market has gone up and our favorite economic shills for Wall Street banks have been out touting the magic of the growth in corporate earnings. But what would be the impact of an H-Bomb sized implosion of the virtual computer markets trading $700 trillion to $1.2 quadrillion swap derivatives – which admittedly have no underlying value? The Dallas Fed just reported our current financial crisis cost only $14 Trillion.
Has anyone yet explained the too complex to explain the arcane world of “virtual” markets specializing in maintaining liquidity for swap derivatives, or even more incomprehensible – explained investments “too complex to explain?”
What if just $700 trillion of “structured investments,” got out of control? There would be far more worldwide tragedy than what we fear from Al-Qaeda!
If $14 Trillion was bad what about $1.2 quadrillion swap derivatives created by sociopathic greedy Wall Street narcissists? Can this be solved by the new Brown-Vitter Senate Banking Committee proposal to increase net capital requirements? Their proposal to ostensibly make banks better able to withstand losses by holding a modicum of additional cash is tragically naïve, or just plain stupid.
The only way to reduce systemic bank risk is to separate banks from their investment side – which eliminates the risk for the U.S. Government to fund Wall Street Bank failures. And the only proposal on the table that does this is Elizabeth Warren and John McCain’s 21st Century Glass Steagall. The Huffington piece linked above regarding the Dallas Fed Study only pertained to our last meltdown. $14 Trillion led to the 2nd worst economy since 1776 – what about 50 times that amount at risk?
From more than 4 decades in the securities business; from the personal experience of owning an NASD Member Firm Broker Dealer (specializing only in real estate private placements) and on the SEC’s list of Broker Dealers to submit proposed rule changes to – I know why Dodd-Frank will not work and why Derivatives are unlawful. And I know why all the reasons for allowing derivatives of the Swap variety and continuing markets for Swap liquidity are hollow lies, and so should you.
The primary reason for disallowing swap derivatives (apart from the fact of Fed regulations which make them unlawful, and the fact that the risk of all the leverage has been shifted to the US Treasury) is that Derivatives do not provide real capital formation, certainly not jobs – contrary to all Greenspan’s lies to Congress – and contrary to why Lawrence Summers fought for deregulation. (Summers should not replace Bernanke as rumored!) From How We Got Swindled By Wall Street Godfathers, Greed & Financial Darwinism: The 30-Year War Against The American Dream:
chapter 10: “Too Complex to Explain” Financial Instruments: Derivatives, CDOs, CMOs, Swaps, and Rancid Tranches – Pools of Worse than Junk Bond Debt
“By far the most significant event in finance during the past decade had been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it – a process that has undoubtedly improved national productivity growth and standards of living.” Alan Greenspan, Chairman, Board of Governors of the US Federal Reserve System, April 2005, and Genius. Who was the recipient of lots of outside income as a consultant to Investment Banks and Mega Banks, and leader in the fight against regulations! Greenspan’s 2005 inscription in granite, like a commandment from God…”
Derivatives (Credit Default Swaps are the most lethal) are not a derivative of any known value; unless some shard of value existed prior to slathering on 50 times or whateverrrr leverage. For example: if you own a house for $100,000,000 and your down payment is $1,000 – if the house goes down .01% in the price it could be sold for – nothing but accelerated losses from all the leverage; but if it goes up .05% you make a killing if you can sell it. The key is to be able to match sellers to buyers immediately, which is called a market, and being able to sell by giving an order to sell is called liquidity – the ability to get out when you want….”
What will be the headline from the ashes of the next financial holocaust?
THE DALLAS FED BANK ALONG WITH ALL THE OTHER FED BANKS FIDDLED WHILE SOCIOPATHIC GREED MADE HUGE PILES OF FEES TRADING IN VIRTUAL MARKETS OF SWAP DERIVATIVES UNTIL THE HOT POTATOES CAME HOME TO ROOST.
Denial and avoidance mark America’s approach to dealing with the underlying root cause of our last meltdown, which has not gone away or resolved to normal. The ethic supporting and justifying all the greed is “survival of the richest.” And if you want to understand why, Swindled is the only book exposing the real root cause, which continues unabated.
Check out Henry’s brilliant book here: