Friday, December 16, 2011

Whitehouse Gray


That  $615,000,000,000,000 elephant is still in the room (and still too big to fail).



Derivatives in the marketplace have grown larger than the entire world's production; $600+ trillion.  Is that so bad?

Despite the worldwide crash which they caused, financial institutions continue without effective restraint or oversight. Brought to you by the President, Congress, JP Morgan Chase and other such business-wise folks, they've dragged us all blindfolded into the casino marketplace.

"Political leaders and financial regulators were asleep at the wheel in the 1990s and 2000s as the ‘shadow banking’ system established its hold on the global economy.”   (shadow as in unregulated and unmonitored)
In the absence of reasonable regulation, financial institutions ushered us down the collective drain.  Worthless investments were knowingly sold to victims and the risk was knowingly passed on to others.

We've made little progress against such practices since then.  Wall Street along with the rest of the financial industry, with their willingness to destroy the livelihood of nations, are now perhaps the greatest and most immediate threat humanity faces.

What happened?
 From the Wall Street Journal,  Sunday, Sept. 14, 2008. At that time, derivatives markets were forced to open for an extraordinary trading session to try to unwind billions of dollars in positions held by Lehman Brothers Holdings Inc. With Lehman on the brink of collapse, regulators and Wall Street executives wanted to ensure its failure didn't endanger the hedge funds, banks and companies that had derivatives contracts with the firm. The session quickly turned into chaos partly because of poor data on crucial details such as the maturities and terms of the derivatives as well as the identities of the major counterparties.

As one trader told The Wall Street Journal at the time: "People were screaming at each other over the phone, asking: 'How can this work?'" It didn't. Sunday passed without a meaningful reduction in Lehman's derivatives contracts, adding to the uncertainty, fear and confusion that haunted the markets the following Monday and for many months to come.
If you're curious what we've accomplished on the issue ...
Much has been made of Clinton's 1999 repeal of the act that had separated commercial from investment banking. 

In reality, the change was well underway.  "Gramm-Leach-Bliley was merely an official wedding for a couple that had already produced several bastard children."  
Before 2000, OTC derivatives were illegal gambling by definition.  Then Congress gave us CFMA which barred the regulation of derivatives.  CFMA ensured we couldn't know the value or risks of these things in the marketplace.  We were deliberately blindfolded by our lawmakers.  This was not Adam Smith's 'invisible hand of the market' but a deliberate gaming of the system that Smith had cautioned against.   

It's just gambling; did you know?  At least it was until lobbyists persuaded the government to declare it otherwise.
   
[Under state gaming laws the speculative use of OTC derivatives, such as naked CDS (similar to naked shorts) and synthetic CDOs, was illegal in the US.   At the urging of the financial district, the federal government overrode state gaming laws with the Commodity Futures Modernization Act of 2000 (CFMA).  It's now effectively a gambling table without known rules ....]

Why, we might ask, would anyone wish to repeal Glass-Steagall or hide the derivatives market from us? Is there a particular goal in keeping such things hidden from public review?  Why would anyone want to blindfold their customers?  Who did this to us?  

We'll shoulder the burden of such foolishness, you and I.  More distressingly, it appears that our children will too, and perhaps our grandchildren as well.

If you've read this far ... 
How's your tolerance for change and the upheaval that accompanies it?
Our hope is in more than the things the world holds dear.  A world crisis is no more to be feared than any other threat.  Thank you, Lord.

"Derivatives exist to help businesses manage risk. They can help airline companies protect against an unexpected rise in fuel prices and they can help farmers lock in a price for their produce.
But it's really shadow banking and hidden financial risk ...
But derivatives can also allow big financial firms make large, risky bets in the shadows. For example, because of a lack of transparency in the derivatives market, AIG was allowed to place hundreds of billions of dollars in bets without the money to back them up if the bets went bad. And in the end, AIG built up so much risk through derivatives that it put the entire financial system at risk."

UPDATE: JAN 2014 shows a larger derivatives marketplace with little reduction in the associated risks.  Attempts at regulatory oversight are impeded by the extraordinary complexity of the task and the inability or unwillingness of financial corporations to report their activity.

There are so many reasons ...
For fear.  For hopelessness.  For anxious worry.  For sleepless nights.

Or, there are so many opportunities to remember our Father's faithfulness through past times and to watch his work among us today!  We get to choose.