Deadly Parasitic Quadrillion Dollar Derivatives

The opening of a canal in 1848 led to the birth of modern financial derivatives, and the early demise of some of the men who traded them according to Michael Durbin, author of the article, Death by Deriviatives, a damned interesting read.

Ever since 1848, when speculators--or “plungers” as they were then known--at the Chicago Board of Trade, where traders negotiated contracts for the future sale of wheat and other such goods, derivative traders have been very busy creating an intricate web of deceit. Derivative trades have grown exponentially. The scale of today’s unregulated,  off-balance sheet derivatives market, now measured in quadrillions of dollars, is too vast to comprehend as it defies anything on a human scale. It is larger than the entire global economy! How can that be? Derivative traders, essentially gamblers, can bet as much as they want. They can bet money they don’t have.

It's not only almost impossible to wrap our heads around such meaningless numbers; it is impossible to understand the sophisticated software that makes the derivative market the boundless and incomprehensible behemoth, or  mountain of "financial weapons of mass destruction" that it is.
That's because high frequency trading software executes thousands of bets per second on the future prices of everything and/or anything you can possibly think of.  Thousands of bets per second? The human mind cannot do thousands of anything per second. Not to mention, the overly complicated financial instruments--investments in investments, bets about bets--that are so complex that the "quants," the alchemists of Wall Street, themselves, the ones who designed them in the first place, can't explain or even begin to unravel.

Make no mistake, buying derivatives is not investing in anything. Not only do derivatives create nothing, they only serve to enrich-parasites- NON-producers at the expense of the people who do create real goods and services. So thank you, Alan Greenspan, for obeying your puppet-masters and legitimizing and actively promoting a huge black hole that, as far as I'm concerned, ONLY exists-black holes, that is- as an evil construct to transfer the real wealth of the people to our ruling elite.

Please, keep in mind the derivatives bubble was at the heart of the financial crash in the 2008 and the only thing that's changed since 2008 is that this huge bubble had grown exponentially.  97% of derivatives are held by the five largest, too big to fail commercial banks: JPMorgan, Bank America, Citibank, Wachovia, and HSBC. In other words, the powers that be not only refuse to put out the proverbial fire that burns beneath the financial industry that crashed our economy in 2008 they're fueling it for all its worth.

 The bottom line: it's a misleading thing to pretend that this amount of money actually exists in anything but the ever-shifting virtual world of  bits and bytes. However, the all-powerful and ever-mysterious they know the mind-blowing numbers they throw at us will...well, blow our minds and isn't that the point?

Ironically something which was created to supposedly manage risk has instead risked our ability to manage anything at all.

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The Crash of 2016?

Is the response to the 2008 financial meltdown a band-aid fix that "punished none of the financial abusers, propped up the major culprits at the expense of consumers and taxpayers, and brought us closer to an even worse disaster?" That is the question radio host Thom Hartmann, author of “The Crash of 2016: The Plot to Destroy America and What We Can Do to Stop It,” answers on NPR's  show, The Takeaway..

Hartmann claims the crash of 2008, that really began in 2006 when housing started to collapse, is still ongoing, despite the over-the-top performance of the stock market.  Millions of people have fallen out of the middle class since the 1980s, including 700,000 in the last couple of years, driving wealth inequality to an all time high. These enormous concentrations of wealth are not being used productively in the economy as they are invested internationally and stored in Swiss bank accounts.

One of the main problems is that banking has replaced manufacturing as the fundamental impetus of our economy, yet it creates no wealth, not to mention, Glass-Steagall Act (1933) has never been replaced so the banks are still gambling with our deposits.  Then there is the the quantitative easing program that's devaluing our currency more and more every day.  Half of the program is buying toxic securities--junk--from the banks to the tune of $35-$40 billion per month.  That is they're  buying junk left on the books of the banks left over from the unregulated derivatives market that Phil Gramm created in 1999 and 2000 when the Gramm-Leach-Bliley (GLB) Act of 1999 was passed and even more importantly, the Commodities Futures Modernization Act (CFMA) a law that opened the door to unregulated trading of credit default swaps, the financial instruments blamed, for the 2008 economic meltdown.  The passing of this Act catapulted the derivatives market to $800 trillion in 2008! (Keep in mind, the GDP of the entire planet is $65 trillion.) Right after the crash in 2008, It fell to $500 trillion, but according to the Bank of International Settlements it's back up to $800 trillion!

Since the wheels of commerce started to spin, there's always been some sort of  commodities futures market in play, where farmers and merchants could lock in on actual physical things--pork bellies, wheat, oil, etc.--in advance at a fixed price. Up until 2000, the commodities futures market ran through the Chicago Board of Trade and has always been transparent.  For example, airlines could hedge their bets by buying futures in oil.  With the CFMA it became possible to make these kind of bets on the non-physical, and it became possible to make bets on bets on bets.  In other words, they've created an economy that has absolutely no value!

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Is Cyprus Paving the Way For a Global Currency?

Sure, right now, the clear winner from the Cyprus crisis is the US dollar, which stands to benefit from public and private flows after the euro's reserve currency takes another hit. Today, the euro fell to its lowest against the US dollar in four months and the dollar came in just below its 52 week high. However, don't get too complacent because Cyprus is the canary in the coal mine, a petri dish, but unlike a petri dish, it will not be contained. It will affect the European markets and extend into the U.S.becoming the new model for bank bailouts, where money is directly confiscated from our bank accounts, not to mention, the fundamental breach in the public trust on which money relies.

From Economic Collapse blog:

"As it stands now, nowhere in Cyprus accepts credit or debit cards anymore for fear of not being paid, it is CASH ONLY. Businesses have stopped functioning because they cannot pay employees OR pay for the stock they receive because the banks are closed. If the banks remain closed, the economy will be destroyed and STOP COMPLETELY. Looting, robberies and theft are already on the rise. If the banks open now, there will be a massive run on the bank, and the banks will FAIL loosing all of its deposits, also causing an economic crash. TONIGHT there are demonstrations at most street corners and especially at the parliament building (just 2 miles from me).

Many are thinking that the ECB and EU are allowing Cyprus to fail as a test ground for new financial standards.

Just wanted all you guys to know the real story of whats going on here. Prayers are appreciated (although this is very interesting to watch) many of my local friends have lots of money in the banks.

You see, the entire western banking model is built on the dollar. So with the crisis in Europe, the flight to the dollar and flight to U.S. treasuries, makes the dollar the last safe haven.  However, once everyone’s on board this “lifeboat” full of holes will be pushed out to sea and sunk. Then, what do we do? Why, bring on the global currency, of course.

What leads me and others far more knowledgeable than me to this dreadful conclusion?

Well, it's not just Cyprus, it's what lies beneath Cyprus, and practically every economy in the world: the toxicity of the $1.2 quadrillion derivatives market. Eventually,   the cascading domino destruction of global economies will occur largely due to this monstrosity that's rarely mentioned.  The Eurozone is over leveraged on a tremendous amount of American sub-prime mortgages, a ton of derivative debt – collateralized debt obligations (cdo), credit default swaps—sold throughout the world via Wall Street.

Keep in mind, the Bank for International Settlements in Europe acts as an umbrella for all the central banks world-wide. But beware, the BIS downplays the total notional value of the global derivatives market, although, even at $600 trillion, that's much larger than the global economy by far. Anyway, nobody really knows the real amount, but when this derivatives bubble finally bursts there is not going to be nearly enough money on the entire planet to fix things.

Links:

A Secretive Banking Elite Rules Trading in Derivatives

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US Government's Dual Accounting System and Their Enormous Hidden Surplus

Our nation was setup as a Republic supposedly governed by the "Rule of Law" in order to protect wealthy and powerful individuals and their property from the tyranny of government and the tyranny of the mob. It is not a democracy as we're so often told. But what they don't tell you is that our nation is a massive and all-powerful corporation, complete with a Dun and Bradstreet number(s). Not only that, every single agency, county, city, township, municipality, etc., is also a corporation, also complete with Dun and Bradstreet numbers.

While some may brush this aside as the government's need to act as a corporation in order to do business on a large scale--to purchase/to supply/invest--it does not explain the two sets of books the government keeps: public and "public".  The public budget, we're told, has such a severe deficit and that is used as justification for cutting basic human services to the 99% of taxpayers who have sacrificed a good portion of their paycheck to gain these services when most needed. However, what you're not told is that this public budget only records approximately only one-third of our tax money, which brings us to the "public" budget, where the other two-thirds is reported?

As I've posted about before: here, here, here, here, here, and here,  hidden in plain sight, silenced from public disclosure, it's called the Comprehensive Annual Financial Report, the CAFR. These CAFRs, various “investment funds,” “dedicated funds” and “pension funds” show the billions, possibly trillions of public dollars that are not available to us.

"The scam works something like this: Anything that was a cost or expense for public services (the traditional side of the Annual Service Budget, such as the Department of Transportation, health and welfare, etc.) was reported on the Budget where public taxes paid 100% of the bill for those services...

However, any governmental agency that was a profit center (the Port Authority for New Jersey, the New Jersey Turnpike, an investment account, etc.) that generated non-tax revenue was “restricted by statute” from being reported in the Annual Budget. Why? Because the state legislature passed laws to prevent reporting the income from profit centers on the Budget. Instead, income from these profit centers was disclosed only on the CAFR.

But that disclosure was not immediately apparent. For example, when Mr. Burien looked for New Jersey’s 1989 “gross cash receipts” in the CAFR, he found the figure buried on page 174, under the “Waste Water Treatment Trust Fund.” It showed the amount of the total cash receipts for 1989 from all 69 autonomous state agencies and departments was almost $87 billion. In other words, New Jersey was charging $87 billion to provide $17 billion in public services. New Jersey citizens were paying $5 for every $1 in services they received, and the state was pocketing the other $4 as “profit”.

The CAFR also reported the state owned $32 billion in common stocks – but this figure was footnoted. The footnote revealed that the stocks were valued according to their original purchase price, not current market value. In other words, if the state bought a stock in 1968 at $1.25 a share and it’s worth $3,000 a share now, they still report it on the CAFR as worth $1.25 a share. Burien determined that the true market value for the “$32 billion” in stocks reported on the New Jersey CAFR was actually about $70 billion.[...]

[As of 1998] “CAFR reports indicate that the composite totals for all government
(Federal, state, county and city) ownership of publicly traded stock exceeds $32 TRILLION (53% of the total ownership of all listed stocks), $8 TRILLION in insurance company equity (should we be surprised by high priced mandatory auto insurance or unaffordable health care?), and $5 TRILLION in Bond Surety Escrow Accounts for future liability of existing or potential debt."

So while our legislators cry poverty and bankruptcy, proclaiming "austerity for the masses" from every rooftop, the truth is our government has a surplus of billions, if not trillions, in very profitable investments, unaccounted for in the budgets that  are disclosed to a very uninformed, and all too trusting We-the-People. That's right. Our federal and state governments own at least 53% of the stock in all publicly traded companies. This, of course, allows our government, at all levels, to wield enormous power over the stock market, and our economy in general, all the while casting "We, the People" into an ever-growing black hole.

Take the state of Washington's fiscal crisis and their proposal to use state higher education funds to gamble in the derivatives markets that was on the ballot--Washington SJR 8223, which thankfully did not win--once again and may be coming to a state near you. Many of these government investments are in toxic investment instruments such as collateralized debt options (CDOs) set on unstable “trading platforms,”  set to collapse in the near future. These toxic investment instruments are based on the purchase of packaged debts, and constitute legalized gambling on the stock markets with billion/trillions of our money using the most irresponsible methods imaginable. (1)

Moreover, there is a little known agency of the Federal Reserve called the Depository Trust and Clearing Corporation (DTCC) or Cede, INC. Notice, the website link is .com, not .gov. It is a private, for profit corporation as are all the government agencies. What is the DTCC? Well, once you invest money, as an individual or institutional, and it's registered with a stock broker, which is required, that money or investment is ceded--property of--to the DTCC. In other words, according to corrupt corporate statutory law, you no longer own that stock, you are a beneficiary.

(1) Now is the Time -

Rebecca Campbell, who owns this website, filed a lawsuit on behalf of all of the peoples of the world so that they might hold their own governments accountable for the crimes that these governments have perpetrated in their names against other peoples, as well as against themselves.

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The Bankruptcy Law Changes of 2005, Rehypothecation, MF Global, and Crisis.

Did you know that the changes made to the bankruptcy laws reordered the subordination of creditors? It's true. Bondholders used to be the most senior of creditors in a bankruptcy. Now, derivative holders are the most senior. That means derivative counterparties gained a strong bankruptcy privilege, according to Prof. Dr. Enrico Perotti, professor of international finance at Amsterdam Business School.

The special bankruptcy treatment extended to mortgage-backed repos and derivative transactions in 2005 played a crucial role in the financial crisis of 2008. Because they were the two main sources of systemic risk in the financial crisis of 2008.

Professor Perotti outlined how over the 2002-2005 period, bankruptcy laws were changed in all EU countries and the US, and secured financial credit (repos) and derivative counterparties gained a strong bankruptcy privilege, amounting to de facto “superiority”, as counterparties could gain immediate repossession of collateral in default (so-called “safe harbor claims”, as opposed to having to accept the “automatic stay” which protects the debtor in Chapter 11 for example)..

With that in mind, consider that banks/ securities brokerage, rehypothecate assets, including 401k, IRA, and even general savings accounts allow the rehypothecation of their assets. Check the fine print of your account agreement.

What is rehypothecation?

It is the practice that allows collateral posted by, let's say, a hedge fund to its prime broker to be used again as collateral by that prime broker for its own funding. In other words, if a firm rehypothecates its assets with its client's assets - co-mingling client funds - and then uses these funds to buy derivatives, the derivative holder can lay claim to the brokerage assets if that firm declares bankruptcy. If this is allowed to continue, it will set a precedent that will enable creditor firms to raid and steal your assets.

This is part of the reason JP Morgan was able to seize MF Global's assets the moment they claimed bankruptcy.

So, it's possible that the next time a firm fails, whomever is the counterparty on the bankrupt organization's credit default swap, will have precedent to step in and steal client money to settle their claims.

For a  less alarmist view which goes into great detail, see:

Revisiting Rehypothecation: JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again)

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Longevity Swaps: Betting on How Long You Will Live

By 2007, the derivatives market had grown globally into a $516 trillion industry,  and, at the time, Warren Buffet warned of the "ticking time bomb".

Buffet wasn't the only one who warned about derivatives. "One month after Henry Paulson left Goldman Sachs as CEO with a net worth of over $500 million to become the new Treasury secretary, he spoke to the White House staff at Camp David: “Paulson held up over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street’s face and affect the whole economy.”

So, after the explosion of complex mortgage-backed securities brought down our financial system in 2008, and the speculators have been bailed out at our expense, they have the balls to speculate on our mortality. That's right, one of Wall Street's latest innovations is longevity swaps...waging in death futures.

What are longevity swaps? Well, it's the practice of hedging people's lives.  Some refer to them as death bonds.

Essentially, they are unconventional assets (little connection to more conventional stock and bond prices). Like mortgage backed securities, longevity swaps, ideally, would consist of policies from those who have diseases such as Leukemia, diabetes, cancer, heart disease, etc., in which investors buy into those life insurance policies and are paid when individuals die. Obviously, in this case, when cures are developed, the value of the life settlement plummets.

Remember, there are no profits in finding cures.



Another type of transaction involves "mortality catastrophe bonds," in which bond buyers contribute to pots of money that insurers can tap into if large numbers of people die in a disaster.

The bonds help insurers limit their exposure. If disaster doesn't strike, the investors get their money back with a preset return, typically a premium above some benchmark interest rate.

Goldman Sachs, of course, has already entered this market. When sick or elderly Americans need cash, they can sell their life insurance policies to companies that will pay them a fraction of the value.

Wall Street pursues profits in life bundles.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

Risks in Derivatives Markets

Systemic risk is the aggregation of default risks; since default risk has been exaggerated, so has systemic risk. Finally, this debate seems to have ignored what we call "agency risk." Features of widely used incentive contracts for derivatives traders can induce them to take very risky positions, unless they are carefully monitored.

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Credit-Default Swaps Solution For Too Big To Fail?

"Too Big to Fail" refers to the idea that our government cannot allow the large, highly interconnected financial institutions to fail because as one goes, so do the rest. This would result in economic disaster.

The most dangerous legacy of the financial crisis is the perception that some institutions are too big to fail. This perception distorts competition and the allocation of capital, favoring risk-taking and incubating the conditions for the next crisis. Ignoring the problem will only make it bigger. Intelligent regulation is essential. We have proposed a new market-based capital requirement system that we believe is superior to current regulatory proposals.

Well, what if the "tools for the fix" can be found inside the banks themselves? The following article, How the Tricks That Crashed Wall Street Can Save the World propose the following:

There is a way forward, beyond new regulators, new requirements, and new rules, for the banks to figure out how to skirt. An intervention mechanism centered within banks and reliant on market signals will work much better than a Washington edict. And we believe such a system is possible to create and put in place.

The way to do it, contrary though it might seem, lies in the much-maligned credit-default swaps (CDSs), which are like insurance policies against a loan defaulting and whose value rises as the chance of failure increases. When these contracts are traded on an exchange that ensures that they are properly collateralized, they provide a daily assessment of the risk of a loan's default. Our idea is to use this timely information to monitor banks.

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Betting On the Profit Potential of a Movie

Investments can kill you, or so says The Motley Fool, so beware. However, the following sounds fairly benign, or is it?

We know Wall Street can create an investment vehicle for just about anything and everything, and that includes the movies. That's right, futures trading on box office returns. Soon, betting on the profit potential of a movie will become reality as the second film business applied to US regulators to set up a “movie derivatives” exchange. The Commodity Futures Trading Commission (CFTC), began seeking comment on an application by privately-held Veriana Networks to operate Media Derivatives as an “electronic exchange for contracts based on box office movie revenues”.

Wait. What about Domestic Box Office Receipt Futures (DBOR Futures), from Cantor Exchange, a subsidiary of Cantor Fitzgerald, L.P.?

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Machiavellian Scheme or Stupidity?

Sixteen years ago, in 1992, Michael Stamenson, Merrill Lynch's number one salesman, worldwide, starred in the Merrill Lynch training video for brokers. He told recruits, that in order to become a successful broker, and "master of the universe", that they needed the "tenacity of a rattlesnake, the heart of a black widow spider and the hide of an alligator."

Stamenson went on to prove that that's not all you need to master the universe, as his star faded, after his client, Orange County, CA, sued Merrill Lynch for pushing the county into bankruptcy because of Stamenson's reckless investment advice. Orange County was Merrill's biggest account. They bought billions of dollars in exotic securities from Stamenson to fund almost 200 cities and school districts. Merrill Lynch made $100 million in fees. They ended up settling for $400 million, and an additional $30 million to prevent a grand jury investigation.

In addition, not only did Stamenson escape criminal charges, he remained on the payroll ($750,000/yr down from $3 million), retained his Merrill stock options and deferred compensation.

"You frequently see the person at the center of the storm continue to be well compensated by the corporate entity, while they are denying all wrongdoing,'' the lawyer added. "The company can cut someone off or embrace them. In the mix, they have to think about: 'What are the risks if I cut this person off? What happens if he starts saying things to others?"

All documents and testimony were sealed regarding this case, as is normally the case when Wall Street or any large corporation is involved in order to conceal their wrongdoing from public scrutiny.

The Merrill Lynch/Orange County example is just one of many that demonstrate the history of the credit derivatives' role in our current fiscal crisis. Fast forward sixteen years. Isn't it a little hard to believe that the former CEO of Goldman Sachs was blindsided by this economic disaster? Don't you think Enron, WorldCom, Global Crossing, Tyco, and McKesson-HBOC, not to mention, thousands of other warnings and signals that economic collapse was inevitable, should have clued him in? Despite Eliot Spitzer's lack of self-control, he saw this coming, as did many others without the credentials of Henry Paulson. Paulson's hysterics imploring us to approve a bailout were hardly believable. His three-page remedy, declaring himself omnipotent should have been the icing on the cake, so to speak.

So, what Paulson and Bush would like us to believe, that the current crisis is simply due to homeowners and mortgage loans is just one factor of many and the reality is that our government provided the credit derivatives market fertile ground to crash our economy. Structured Investment Vehicles (SIVs) and Special Purpose Entities (SPEs) served to hide enormous amounts of debt from public scrutiny, making companies appear more profitable and more solvent than they really were. No, this goes much further and its roots go much deeper, culminating in institutionalized criminality of which Paulson, Bush, the Supreme Court etc, wittingly, or unwittingly, are very much a part.

Since the Enron debacle, the Supreme Court has put big business' interests ahead of those of we, the people, loosening restrictions on corporate management and lightening the regulatory pressures. Here are just a few examples:

Wachovia v. Watters: The Supreme Court ruled that federal law trumps state consumer protection laws even when it involves an operating subsidiary of the national bank.

Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc : ("scheme liability") The court ruled to greatly limit the ability of shareholders to hold vendors, banks, accountants, law firms and others legally responsible for the securities fraud of another party. In an interview with the New York Times, J. Edward Ketz, called this ruling "a travesty of justice" and a "huge step backwards in the fight to prevent further accounting frauds from harming investors and the American economy."

Exxon Shipping Co. v. Baker: In June, 2008 the U.S. Supreme Court drastically reduced the punitive damages arising out of the 20-year old class action lawsuit, over the 1989 Alaskan oil spill. Since the jury awarded $2.5 billion in punitive damages in 1994, nearly 20% of the 33,000 fishermen, Native Alaskans, cannery workers and others who stood to benefit from the lawsuit have died.

Lilly Ledbetter Fair Pay Act of 2007 The Supreme Court held that the statute of limitations starts as soon as employment discrimination begins rather than when the employee first discovers it. How can you pursue a claim if you don't know that the claim even existed?

Binding Mandatory Arbitration: The Supreme Court's approval of mandatory pre-dispute arbitration has given banks and credit card companies their own system of "justice" where they act as judge and jury. Sen. Patrick Leahy, D-Vt sums it up as the Supreme Court's "blind devotion to corporation arbitration schemes".

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