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Forum Post: Obama protects derivatives market

Posted 5 years ago on May 26, 2012, 11:43 a.m. EST by arturo (3169) from Shanghai, Shanghai
This content is user submitted and not an official statement

The Dodd-Frank Act, a law passed to prevent the passage of Glass-Steagall and other necessary reforms, is now being used openly to protect the derivatives market! Earlier this week, the Financial Stability Oversight Council (FSOC) designated two giant derivatives exchanges as "systemically important financial institutions" (SIFIs), a designation which entitles them to borrow money from the Federal Reserve's discount window and other loan facilities during emergencies. The FSOC was created by Dodd-Frank, which also authorizes the Fed to lend money to SIFIs.

The FSOC is dominated by the Obama Administration. Treasury Secretary Tim Geithner is chairman of the Council, the members of which includes Ben Bernanke of the Fed, the heads of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and others.

Three institutions are known to have been granted SIFI status this week, according to Bloomberg:

The Intercontinental Exchange's ICE Clear Credit, the world's largest credit-default swap clearinghouse;
CME Inc., the clearinghouse owned by the Chicago Merc; and
Clearing House Payments Co., which operates both domestic and international financial wire-transfer systems.

With these moves, the Obama Administration is implicitly preparing to bail out the derivatives market and the international payments system. When derivatives are traded on exchanges, the clearinghouse acts as a middleman and guarantees payment, which means the clearinghouses are facing huge losses as the system dies.




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[-] 6 points by geo (2638) from Concord, NC 5 years ago

Repeal the Commodities and Futures Modernization Act of 2000

For starters, this legislation gave the loophole for derivatives to be legal to use and unregulated.

[-] 2 points by TrevorMnemonic (5827) 5 years ago

Repeal the Financial Modernization Act of 1999 too

and about 50 other bullshit bills.

[-] 1 points by April (3196) 5 years ago

How were derivatives illegal prior to this? I thought they were just a newly created product.

[-] 3 points by shadz66 (19985) 5 years ago

Specious and Pedantic ! The "illegality" is incidental !! The Immorality of Geometrically ever increasing, onerous, odious and usurious COMPOUND INTEREST BEARING DEBT AND the "Derivatives" 'derived' from IT ... is the matter for consideration, right ?!!!

fiat lux et ad iudicium ...

[-] 2 points by geo (2638) from Concord, NC 5 years ago

Derivatives have been in use for hundreds of years (some historians claim thousands of years), mostly in agriculture by farmers to protect themselves from any decline in the price of their crops due to delayed monsoon, or overproduction.

The modern derivative is also used as a risk management tool, but by investors who hold stocks. Agricultural derivatives were relatively simple contracts. Modern investment derivatives are based on highly complex computer algorithms that you need a PhD in Math to really understand, and the contracts describing them can be several inches thick.... they are way different animals with the same basic premise... to control risk.

Investment derivatives were used in finance in Europe, but were not legal in the US until the Commodities and Futures Modernization Act of 2000 was passed.

[-] 5 points by Middleaged (5140) 5 years ago

Yes, I use the term Derivatives as a catch all for many different finanical instruments. I don't know if one instrument is really riskier off hand. I think the growth of CDS (Credit Default Swaps) is cited by economists as the big risk. You pay money upfront, then hope the hedging agency is still in business, has a bunch of money and assets segregated in a separate account.

What I heard I think is that CDS were bought often without any disclosure of how much total exposure to CDS the seller had.

Which I think is what happened to AIG.

So maybe I need to pay closer attension to Credit Default Swaps.

ABS (Asset backed Securities) don't seem bad on the face. But recently there are questions about whether assets backing these are good assets. Maybe that is why many of these mortagage backed securities are being sold or shifted over to the Federal Reserve Books (Not sure which books exactly, the FED has different facilties).

Same thing I guess with CDO, Collateralized Debt obligations. Should be some assets behind the obligation.

But the price of Assets changes. Then maybe the value is high risk like sub-prime mortgages.

Thanks for the History above. I sort of have the idea that complex derivatives were marketed to people that would not understand them. This sounds more like a con game. The people that put them together were very smart, but it was always a lie to claim the sub-prime mortgages in tranches were AAA. That was Fraud. Those people should have been prosecuted with 5 years mandatory.

[-] 2 points by geo (2638) from Concord, NC 5 years ago

Well since the business was unregulated, there were no reserve requirements for the CDS sellers... which is really what caught AIG with their pants down. Once the contracts defaulted, face value was due immediately. The other problem is that it is assumed to be a zero sum deal, many times this is not the case the exposure is asymmetrical.

ABS's are risky for the mortgage buyers. Interest rates change with time and economic environment. Unless money has been tucked away for a rainy day to counter these changes the buyer is stuck. Many of the subprime loans were ABS's... so very high interest rates were involved... usury.

I agree, a great deal of outright fraud occurred and little has been done about it as far as criminal action... not just to the big guys buying CDO's that were graded wrong, but to the banks themselves who underwrote mortgages that had lies on the applications, and to the consumer who had mortgage brokers con them into loans they could never afford by lying on those applications and telling the consumers, 'don't worry about the high interest rates, in 6 months you can remortgage the loan again and all will be okay'.

[-] 1 points by Middleaged (5140) 5 years ago

Thanks. We are on the same page. I should probably try to read more about these online this week.

[-] 2 points by flip (7101) 5 years ago

to equate modern financial derivatives with corn futures is weak seems to me. this is incorrect - Investment derivatives were used in finance in Europe, but were not legal in the US until the Commodities and Futures Modernization Act of 2000 was passed. - check out the brooksly born fight - Born was appointed to the CFTC on April 15, 1994 by President Bill Clinton. Due to litigation against Bankers Trust Company by Procter and Gamble and other corporate clients, Born and her team at the CFTC sought comments on the regulation of over-the-counter derivatives,[4] a first step in the process of writing CFTC regulations to supplement the existing regulations of the Federal Reserve System, the OCC, and the National Association of Insurance Commissioners. Born was particularly concerned about swaps, financial instruments that are traded over the counter between banks, insurance companies or other funds or companies, and thus have no transparency except to the two counterparties and the counterparties' regulators, if any. CFTC regulation was strenuously opposed by Federal Reserve chairman Alan Greenspan, and by Treasury Secretaries Robert Rubin and Lawrence Summers.[5] On May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in objecting to the issuance of the CFTC’s concept release. Their response dismissed Born's analysis and focused on the hypothetical possibility that CFTC regulation of swaps and other OTC derivative instruments could create a "legal uncertainty" regarding such financial instruments, hypothetically reducing the value of the instruments. They argued that the imposition of regulatory costs would "stifle financial innovation" and encourage financial capital to transfer its transactions offshore.[10] The disagreement between Born and the Executive Office's top economic policy advisors has been described not only as a classic Washington turf war,[8] but also a war of ideologies,[11] insofar as it is possible to argue that Born's actions were consistent with Keynesian and neoclassical economics while Greenspan, Rubin, Levitt, and Summers consistently espoused neoliberal, and neoconservative policies.





[-] 1 points by Shule (2638) 5 years ago

Yes, people we have a problem.

I'm no fan of any Republican agenda, but when Democrats do things like support the Dodd Frank Act as described one really starts to wonder.

Who have the Democrats put up for election this year for a senate seat in my home state of Virginia? A wall street investment banker. What sense does that make with all this occupy movement going on against big finance?

I'll probably end up voting for Obama anyway, but certainly not for any investment banker. It should be painfully clear to all by now, that the solution to our political-economic issues lies outside the current political system.

[-] 1 points by Middleaged (5140) 5 years ago

Hey, I need help with this MIT Study I found. I have taken a lot of classes in college, but all of a sudden the computer monitor looks too small to read this information. Maybe you can get someone to help digest what it is saying...


[-] 1 points by Shule (2638) 5 years ago

Holy smokes! Your not kidding. Sorry, but I'm not retired and have a job to go to. My computer can't hold all that either.

[-] 1 points by Middleaged (5140) 5 years ago

I think I figured out that this is more of a discussion, background, with references to authors and previous studies. But the document proves they haven't really gotten started on anything up to the date of publication. Meaning the Study might have just started 12 January 2012.

[-] 1 points by jrhirsch (4714) from Sun City, CA 5 years ago

If the solution to our political-economic issues lies outside the current political system, why vote for Obama? Won't that prolong the agony?

[-] 1 points by Shule (2638) 5 years ago

It probably will, but Romney will pick up where Obama leaves off. So it doesn't matter. I'm just voting for Obama, because I know it will piss off all the bigots in this country should he be elected again.

[-] 1 points by jrhirsch (4714) from Sun City, CA 5 years ago

Why not vote for someone outside the two party system and bring that system to an end instead. Then you can piss off both groups of political bigots on both sides.

[-] 1 points by Shule (2638) 5 years ago

I might do that.

Got some viable somebody in mind?

[-] 1 points by jrhirsch (4714) from Sun City, CA 5 years ago
[-] 1 points by Middleaged (5140) 5 years ago

I tried to grasp the OTS, OCC, FED, and the FSOC on this thread.


[-] 0 points by betuadollar (-313) 5 years ago

It wasn't just banking, the act covers non-banking entities (insurance companies) also.