Forum Post: The derivative problem
Posted 12 years ago on Nov. 24, 2011, 6:48 p.m. EST by FormerWS
(11)
This content is user submitted and not an official statement
I am a former consultant for a few major wall street companies that worked on speculative trading. I left in disgust because of there complete antipathy towards humanity. If you knew anything about whats going on right now in the markets as a conservative you would be in the streets protesting.
The american government is backing a considerable portion of the derivates market liabilities through the FDIC. To put it into perspective Bank of America alone has bout 70 trillion in Derivative liabilities its trying to push onto the FDIC. If a derivates failure occurs due to the dependent investments go sour. For example the Europe debt crisis or political instability in the middle east, or the money market funds. We would face a major devaluation of the dollar. As well as the risk for losing our position as the reserve currency.
While OWS is a eclectic group. The general sentiment is fundamentally correct. Republicans and democrats. Conservatives and Liberals needs to stop bickering. The level of speculative trading being done with peoples 401k's, pension funds, bank accounts and investments is being leveraged in the upwards values of 100 to 1. Meaning they will NEVER be able to pay off those liabilities.
The problem is severe, it is deeply rooted in lobbying and deregulation. It will affect the poor, middle and the upper class. This means if your not in the top .0001% you will be lose the majority of your savings, investments and value of your capital.
This is not 99% vs the 1%, this is a 99.999% vs .0001%. The only ones that will be immune to a derivative and speculative trading collapse are those insulated with alternative currencies and massive commodity investments.
If people do not come together you will all fall separately .
+1
Also, Bank of America (BAC) has ALREADY shifted about $22 trillion worth of derivative obligations from Merrill Lynch and the BAC holding company to the FDIC insured retail deposit division. Along with this information came the revelation that the FDIC insured unit was already stuffed with $53 trillion worth of these potentially toxic obligations, making a total of $75 trillion. The FDIC was reluctant in insuring the deal but guess who pushed it through? The Federal Reserve...
http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
http://spiritofjubilee.com/debt/recipe-for-armageddon-fdic-to-back-75-trillion-of-bank-of-as-derivatives-trades
Restore the Glass-Steagall Act!
Thanks for these great insights jeywell1:
[-] jeyowell1 2 points 2 weeks ago
Repeal the 879-page Dodd-Frank act of 2011. Reinstate the 37-page Glass-Stegall act of 1933. G-S worked for 60 years. Despite its length, D-F is still not complete with 243 rules yet to be defined by regulators. The regulators have asked the financial industry to fill in those blanks. Essentially the foxes have been asked to not only guard the henhouse but to build it too. Right now the banks derive only 30% of their income from lending and 70% from gambling, euphemistically referred to as “trading”. One by-product of this is that all the monetary benefit from productivity gains in the last decade accrued exclusively to the “financial sector”. The imperative of a functional financial system is simple: efficient allocation of capital to productive enterprise, because the financial system should support economic activity, not the other way around. Clearly, the titans of finance have failed miserably at this, yet they not only still have jobs, they continue to be richly rewarded for their incompetence.
Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999
http://occupywallst.org/forum/the-day-the-gramm-leach-bliley-act-of-1999-came-up/
November 4, 1999, the day our current Financial Nightmare began: The Senate Approves the controversial Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999 http://banking.senate.gov/prel99/1104grm.htm --One that Wall Street reportedly spent over 5 Billion to make sure it past!
And hat's off to Senator Byron Dorgan for standing-up against its passage by trying to SAVE the Glass-Steagall Act for US!--especially since the knew his odds were 8 to 90! http://www.govtrack.us/congress/vote.xpd?vote=s1999-354 (also thanks to the other Senators who voted Nay). Either way, Byron did predict what was to come; which before 1999 was called something like a Corporate Meltdown; and is now commonly referred to as "Too Big Too Fail."
Right on. That's the day our second financal nightmare began, about year after Congres Shattered the Glass-Steagall Act: "Shattering The Glass-Steagall Act" http://www.counterpunch.org/2008/09/19/shattering-the-glass-steagall-act
Concur
Roast them! You might like this one, someone who puts it in plain engliish...
Former Head of U.S. Commodity Futures Trading Commission, Professor Michael Greenberger, speaks to Congress in 2008 on the high price of oil--and he's not happy about Energy Deregulations, especially The Loopholes:
http://www.youtube.com/watch?v=Bmj_FhyEpxo&feature=related
http://www.youtube.com/watch?v=zbdtTGYQBMU&feature=related
I like
Cool. WDC is my hometown, what's up with the Skins? No need to answer, we need Jack Kent Cooke back! Happy Thanksgiving! I'll be there soon for my Mom's 93rd! Still kicking my ass hard--lol. cheers!
Here is a history lesson:
http://thrivemovement.com/the_problem-gda
You mean like a house of cards made of debt? Debt on the debt on the debt, how many layers have we got now? Whose pocket is it all going into? Somebody is out there buying up the planet with fake money before it all burns down, right?
What are Derivatives? Professor Michael Greenberger explains in 2009:
http://www.youtube.com/watch?v=f-kExdTgNZA&feature=channel
If you don't have the time to watch to whole C-SPAN show, fast forward to 22 minutes in, right before where a caller from NY asks a great question. The Professor, again, explains it in plain english...also love he's "Wild West" analogy 34 minutes into the interview.
Also realize that china is impolding right now. See china is an oprrssive place where their workers are mainly treated like slaves. Protest in china and they kill you. One example of total instability is this 1) china sells to the world, when the world is broke, which it is, china bubbles bursts (it is bursting now). The result is global instability across the board. 2) understand right now paper money is just paper but it is the symbolic representation of goods, services and commodities. If liquidity dries up for instance, I recommend that you figure out how to farm as stores will not have goods to sell you. 3) at the very least its 2008 all over again, just on a global scale. Banks are getting desparate with risker loans. No good scientist can scientifically predict markets. However, right now, to the tee the systems are aligning for 2008 in 2012. And the media ignores it. Are they that stupud?
At the very least good night stocks, while the rich get richer and your 401 k drops to. Zero 0
Left&Right will either help each-other bring charges against the criminals, or they will be crushed seperately under the heels of the .0001%.
$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months
http://www.zerohedge.com/news/707568901000000-how-and-why-banks-increased-total-outstanding-derivatives-record-107-trillion-6
by Tyler Durden on 11/26/2011
While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag... http://www.reuters.com/article/2011/11/27/us-eurozone-integration-ecb-idUSTRE7AQ00F20111127 ...notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." http://www.bis.org/publ/otc_hy1111.pdf ...Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments.
Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.
What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year....
::::::::Continue Reading this article Here::::::::
http://www.zerohedge.com/news/707568901000000-how-and-why-banks-increased-total-outstanding-derivatives-record-107-trillion-6
You sound like an intelligent guy who is not intimidated by big numbers. And yes, you are absolutely right, it's the .0001%. Please check IAEJ.org, and OneRedPill.com - you may want to join some of those workgroups.
Yup. It was a casino that was FDIC insured for the privlidged few who could pay the price of admission. Really scary, if you understand it. But, at this point, how does it get unwound without dragging everyone down? I think it is still a sword over the head of the economy, no?
I think the fear mongering about derivative is the fact the protect investor from the government using its power to force them to take losses in times of crisis. Think about it, if private investors didn't hedge themselves with CDS against Greek Bonds the EU would have forced investor to take haircuts and not thought twice about it. But the fact that bondholders have insurance they cannot use that threat without severe repercussions in the market. They lesson governments power to take private property, that's why their hated so much, but the cost of debt would be alot higher without them.
Hi FormerWs, Thank you for post. If collapse happens, would we be unable to withdraw money from a typical bank savings account? Best Regards, Nevada
Withdraw what? http://tinyurl.com/5rwqqdh#.jpg this?
Hi Hidden, So US$ would be worthless.
Together with Euro.
Yes not only is bac insured for 15 trillion and up to 75 trillions (the 15 likely containing exposure to bad euro debt with your tax dollars). You are also insured for up 100 000 and 250 000 dollars via the fdic. U can thank the great depression for that legislation. The first great depression that is.
Great Forum FormerWS! Have you seen this yet?
What are Derivatives? Professor Michael Greenberger explains in 2009 : http://www.youtube.com/watch?v=f-kExdTgNZA&feature=channel
If you don't have the time to watch to whole C-SPAN show, fast forward to 22 minutes in, right before where a caller from NY asks a great question. The Professor, again, explains it in plain english...also love he's "Wild West" analogy 34 minutes into the interview.
So how much time do we have left before the derivatives implode...
1 month
What makes you say 1 month?
O_O
What should we do?!
Dont get arrested. Buy water purification tablets and emergency blankets. Drop your stocks if u have any. Stay with credit unions. At least BAC, merril, morgan will fail quick. GS will cling on for a liitle while longer.
Derivatives are like insurance in that they typically do not get used and are meaningless. It's when something happens that enables them to get used that instability grows, because unlike insurance there is no monetary pool set aside to back them up, so although they are intended as instability dampeners, they instead actually become instability amplifiers. One of the things that I am surprised did not occur in the 2008 crisis is the derivative selling insurance companies like AIG trying to go through reinsurers and access the really big pools of money to cover the derivatives. In a way at least that didn't happen (hopefully). God help us if that did or ever does happen.
I have a book packed away in storage, possibly written in the late 1970's/early 1980's that demonstrates how the insurance industry is bigger than Wall Street..
This is exactly why upon my departure meeting with the real estate and mortgage broker/banker company preparing to shut it's doors I told the owners "No, this time is different, really different (and we were broker correspondents with some table funding through IndyMac who have been in the news within the last week) Instead of the markets (real estate and loans) this mess, exceeding anything we've been through since the S&L crisis-prepare for a longer downturn, not the return in 2009 or 2010 or 2011 but more like 2017 to 2020-the media as of today (which was April 12,2008) is lying to the general public,is misinformed or ignorant.Take your pick but it's time for most of us to consider some other means of making a living." This was the 3rd company I'd worked for since entering the field in a licensed capacity at age 19 in 1984.
Also, if there were some way to go back to the way we were prior to Nixon and Bretton Woods and/or end the privately owned Federal Reserve Bank and the fractional reserve banking system that has it's manacles on economies here and abroad it would be a step in the right direction.
We could lobby our state representatives to establish state banks like North Dakota, the only state to be in continuous budget surplus since the banking crisis of 2008. Its balance sheet is so strong that it recently reduced individual income taxes and property taxes by a combined $400 million, and is debating further cuts. It also has the lowest foreclosure rate and lowest credit card default rate in the country, and it has had NO bank failures in at least the last decade.
Oil is certainly a factor, but it is not what has put North Dakota over the top. Alaska has roughly the same population as North Dakota and produces nearly twice as much oil, yet unemployment in Alaska is running at 7.7 percent.
North Dakota has one thing that no other state has: its own state-owned bank.
Access to credit is the enabling factor that has fostered both a boom in oil and record profits from agriculture in North Dakota. The Bank of North Dakota (BND) does not compete with local banks but partners with them, helping with capital and liquidity requirements.
http://www.webofdebt.com/articles/north_dakota.php
Be scared. Shiz is about to get real.
The 1%'ers are prepared for the collapse, they are investing in monopolies, precious metals and land. So no matter what currency there will be and what level of inflation, they can cash in.
Its like the middle ages. And they already have their private armies. Think Xe a la black water and triple canopy. Who would have thought mercenaries would act legally for the last 15 years in America. What happened to the US. It went to crap somehow. Thomas Jeffetson is weeping.
They kno whats coming and their geared up to make profits while millions will go hungry. It makes me sick. I do ask ows to remain peaceful as much as possible. Violence will be used to drag the military into civil inrest, which is bad. People might turn on this. I would hate to see this positive momentum be lost and see ows spun as not legit.
If this is as grim as it sounds then I doubt that the police or the military will side with these people at all.
They wont side with ows. They will be happy to have jobs and do what their told just like me. Thus is human nature.
Killing fellow Americans for the special interests of some asshole is not human nature and if that's their plan then I can't wait for them to carry it out so it'll blow up on their faces.
I agree on some level. 5 days ago i would have resigned my commission if we went to martial law. Now i am too worried to be without a job. Maybe i am just as bad as the profeteering billionaires. Anyway - Stay safe. God speed. Righteouness will be on your side!
I wonder how much they are investing in security? I guarantee it won't be enough.
I would suggest that if the derivative market collapses, no one will be insulated from the effects of social instability . . .
The ultra rich will. They also quite fully or DONT totally understand what they're messing with like global thermal nuclear war. I predict defcon 2 for nato forces within a month.
the ultra rich will not insulate themselves in the wake of such collapse - starvation will be everywhere. Current monetary instruments will have no value.
There would be blood in the streets, rivers of it.
They would not find insulation.
As for defcon2, we'll see. It may perhaps be inevitable at some point that Iran will turn itself, with its global provocations, into a shimmering sea of glass.
http://rt.com/news/syria-intervention-us-warship-229/
The bush carrier is parked off of syria. How fitting. Russian war ships also in the area. Lets bring back the cold war. Ha
Its understandable why people don't understand why the government allows this to happen. But you have to look at the global picture over the last 20 years.
The united states has been pushing up its growth considerably using the financial sector as a source of leverage against any challenge against its position for the reserve currency. With the enormous loss in produced goods the U.S.A. depends almost completely on service jobs to bolster the value of the dollar. This is reflected in the massive trade deficit.
Our rate of consumption vastly exceeds our ability to grow our economy we are exporting wealth from this country at an astounding rate. "Consumerism" is also a major issue, to artificially inflate our currency we have had to rely on financial industries making exorbitant gains "betting" on foreign markets/debts ect..
However, the blame isn't just on one party. Outsourcing jobs is a multiplier of this issue and is key to dependence of our economy of artificial monetary growth. This was a legislative failing. Companies not willing to growth salaries with cost of living expenses is another issues.
I could go on for days explaining the 100's of different factors that have come together to create the perfect storm. But at the end its the derivatives market that will collapse everything.
It will only take a few sovereign nations defaulting, then they will force CD's to trigger. With or without Haircuts, the markets can not be creatively manipulated. We already see the results of higher yields on bonds in Europe markets with the "voluntary haircuts" in place. Investors now want to charge more because they feel their protections are being circumvented.
Europe is only the beginning, those markets will fall. Speculation will rise, the american markets are deeply entrenched in CD's in foreign debt. This is either CD's and other mechanisms.
The bottom line is that everyone will feel this. The governments will no longer will be able to borrow money, banks will collapse not if. There is no way of salvaging this situation unless we start doing something that no one wants to talk about.
Debt Destruction. The debt just needs to disappear. The multiplier on leverage is causing this issue. There is not enough wealth in the world to cover these bets. IF the ENTIRE speculative market falls. It would take almost 100 years of the entire worlds economy to cover those debts.
I hope that puts things into perspective.
Will the entire derivatives markets fail? There are derivatives based off of everything and I was under the impression that the government was buying up the mortgage backed securities.
But I find it hard to believe that the entire pool of 700t is going to go under.
This is a real smart write up. I am saving this. Original poster you are an asset to providing good info to ows. Debt is delevering. One solution is just get ride of it aka. Debt. Interest rates would drop to 0, but the problem still wouldnt be fixed. You raise strong points about out sourcing and the dangers of the service economy. Apparently the fed this week is moving fdic money into banks this weekend. Stress test? Try off the books start of bail out. Trouble is 88 billion isnt going to cover trillions. Patching holes in the sinking ship.
"Debt Destruction. The debt just needs to disappear. The multiplier on leverage is causing this issue. There is not enough wealth in the world to cover these bets. IF the ENTIRE speculative market falls. It would take almost 100 years of the entire worlds economy to cover those debts.
I hope that puts things into perspective."
Yes, it does. Thank you.
The real solution to the problem is a bitter medicine. The alternative that governments are trying will fail. There is not enough money to plug the holes. It just doesn't exist. You can not growth, spend, or cut your way out of it.
There is no way, none, to cover 100:1 leveraged bets. Policy makers just need to understand this simple concept.
Let the.01% taste the bitterness.
Everybody loses on this one guy.
I know. And there seems not to be a way out.
Because the only way is to the bottom and then back up.
Right on. Logic 101 dont gamble with 100s and 100s of trillions of dollars you dont have and stick the bill on Govt. Dont gamble with money you dont have. Isnt that what they tell you in Vegas :-)
And even if they could. The next recession would bring up things that the market should have fixed in a depression but wasn't allowed to because of government intervention.
Lets nix the multiplier. Concur
There are many whistle blowers out there. Problem is our politicians are bought. These companies are pouring money into our government at exorbitant rates. They aren't just ignorant they don't want to listen.
http://www.heraldtribune.com/article/20111126/ZNYT01/111263008/-1/news?p=2&tc=pg
Shawdow banking at its best. Yeah lobby money controls congress.
[Removed]
Is there anything that is practical that we can do about this ?
One of the things I don't hear as far as policy solutions go is a limit on leverage. I don't know of leverage limits on derivatives. There are limits on home loans but there were ways around it.
So you you had leveraged subprime loans that people were planning to flip and heavily leveraged mortgage backed securities that were derived off of bad loans. Everybody lost on this one once growth stalled.
Welcome to good night global markets. The local news tells me about black friday while the world is collapsing. My advice buy guns and water. Maybe when the dust settles we can start making reforms. Finally. Mind you the spin machine is already blaming govt. Ironically no one mentions what lobby money influeced reckless policy. Main stream brokerage houses are pushing US Banks as a way to off set the euro scare; ha the US banks are zombies carrying billions in bad assest. All off the books. Many of that will impolede when the euro zone collapses. The sun will still rise. But, tough times are head. A few people will continue to make money while the rest of human civilization inches closer to feudalism. Be sacred, However, keep your head held high.
Good shall prevail over what ever the heck is going on. History proves that things will get better. Eventually.
Why would the government want this to happen? It makes no sense. The rich don't want to take everyone's money away because that would spell their doom. They already have more money than they can spend. They don't need a civil war.
I dont think theres any conspiracy, rather i just think what your seeing is a few isolated elite ultra rich individuals who have extreme concentrated power via multi national corporate organizations. Power corrupts. These people probably think they are so smart, but these fools are playing with global stability.
It wouldn't bother me if we just banned derivatives altogether. They may not be an evil thing by themselves, but they sure open the door to much mischief.
I'd like to know what the heck derivatives are and why they're worth trillions of dollars of fictional money.
Its a way off the books legally to hedge financial bets and gambel with money that one does not have. I actually suppotrt derivatives; however, i do not support the unregulated trading of them which is legal. Lobby money via the billionaires played out like this --when they win, they take the profits and when they loose the tax payer - pays up. What a shame. Morally bankrupt policies. The language of derivatives is also purposely hard to understand as such so the average person doesnt look too hard at them. Financial engineering at its best. The global securities markets including the US -banks right now its one giant ponzi scheme.
Derivatives are like if you had 200 mortgages from 200 customers with varying credit worthiness, different rates, different mortgage lengths, and you put them all in a box and sold them as a singe thing.
Ya, that's a great idea, right?
Totally genius. Ha