Posted on 04/02/2009 11:34:05 AM PDT by lewisglad
The "dirty little secret" that Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks that are the source of the toxic poison causing such dislocation in the world financial system. The heart of the present problem, and the reason ordinary loan losses are not the problem as in prior bank crises, is a variety of exotic financial derivatives, most especially credit default swaps.
What Geithner does not want the public to understand, his "dirty little secret", is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global "off-balance sheet" or OTC derivatives issuance.
Today, five US banks, according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.
The top three are, in declining order of importance: JPMorgan Chase, which holds a staggering $88 trillion in derivatives; Bank of America with $38 trillion, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs, with a mere $30 trillion in derivatives; number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain's HSBC Bank USA, has $3.7 trillion.
The government bailout of AIG, at more than $180 billion so far, has primarily gone to pay off AIG's credit default swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase and Bank of America, the banks who believe they are "too big to fail".
(Excerpt) Read more at atimes.com ...
Bookmark for later.
Damn, I have just about forgot how many times I have posted that here. Those two acts by the republicans have caused all of this mess.
Bookmark for later
The Republican politicians could step in and call for reforms, real reforms, including bringing back old protections, but that would undercut their “deregulation” ideology. What else have they got? Nothing.
Obama has clear sailing to bail out Gold man Sachs at top dollar, and there is no, none, nada, Republican opposition.
It is time we demand that legislative action help make our capitalistic institutions strong. I would first examine the 2000 Commodity Futures Modernization Act. I would bring back the 1933 Glass-Steagall Act and take a close look at the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.
These and other necessary reforms would stop what has stalled out the economy. And tax breaks would stimulate the economy immediately.
This is where I first read about Bucket shops. This activity was allowed in a rider to the 2000 Commodity Futures Modernization Act. It shows up on page 262 of the 11,000 page bill. I believe that one provision opened the way to the disaster we are experiencing today.
I see it as the Achilles heel to The hedge fund and derivatives trade market. We know from history that it caused a similar world economic collapse in the Panic of 1907.
A bucket shop is a brokerage firm that books retail customer orders without actually having them executed on an exchange. Basically they were places where people could place bets on the performance of Wall Street. It is said that Joseph Kennedy has a role in a Bucket Shop operation. Since then, Bucket Shop laws were passed essentially prohibiting the making or offering of a purchase or sale of security, commodity, debt, property, options, bonds, etc., upon credit or margin, without intending a bona fide purchase or sale of the security, commodity, debt, property, options, bonds, etc. If you think that sounds exactly like a naked credit default swap, you are right. New York State Insurance Commissioner Eric Dinallo’s testimony, put a shock into the Senate Agriculture committee October 14, 2008 when he called the credit default swap markets Bucket Shops.
What this tells us is that back in 1909, 100 years ago, people understood the risks and potential instability that comes from gambling on securities prices. And that is what page 262 allowed once again.
Wall Street firms like Bear Stearns, Lehman Brothers, Merrill Lynch, etc. started selling what they called derivatives, which were bets on how the market would do. Would it go up or down? A new type of derivative was created which would bet on whether mortgage owners would pay or default. So, when the mortgage crises hit, the credit markets went upside down because there were a huge number of derivatives that bet on mortgage payments. The people who bet on mortgages would not get paid. These were people who were supposed to be paid off when a default occurred. Many of these people were banks who had huge amounts of money betting on these derivatives. But the folks who invented these derivatives had not set aside enough money to do that, and so it all came crumbling down like a house of cards.
My question is who put forth the rider that made the Bucket Shop activity legal?
Also, there was another action by the Clinton Administration that one could look into that also had the effect of repealing Bucket Shop laws. It was the passage of the Gramm-Leach-Bliley Financial Services Modernization Act which repealed parts of the 1933 Glass-Steagall act. This bill was signed November 12, 1999 by Bill Clinton. Economists Robert Ekelund and Mark Thornton have criticized the Act as contributing to the 2007 subprime mortgage financial crisis.
It is interesting that Republican Phil Gramm had his hands in both bills.
The less time they are working, the less time they have to get into mischief.
Great post.
and it looks like AIG will get 50-80 billion more before this is all over
These appear to be new lower numbers, than I have seen elsewhere.
ping
[Those two acts by the republicans have caused all of this mess.]
Glass-Steagall was repealed with a vote of 90-8 in a Republican controlled Senate and signed by a Democrat President, Bill Clinton.
Senators voting “Nay” on repeal
Republicans(1): Shelby
Democrats(7): Boxer, Bryan, Dorgan, Feingold, Harkin, Mikulski and Wellstone
Not voting (2) Republicans: Fitzgerald voted present, Mccain absent
Those two acts by the republicans have caused all of this mess.”
Are you being sarcastic?
Bill Clinton repealed the Glass-Steigel Act in Dec 1999.
Clinton also signed the executive order called the Equal Credit Opportunity Act in Dec 1999.
Hey, after all it was the republicans turn for power and for collecting major league contributions from Wall Street. Dems had taken their turn some years before and are back in the saddle once again. Our DC political criminals belly up to the Walls Street trough as a matter of routine, with the partys taking turns bilking the public. I mean, why do you think these people go into politics...their health??
Everybody needs to open their eyes here. Both parties are pretty much bear equal responsibility for bringing us to this point. Neither party has been fiscally conservative. Both parties allowed their selected special interests to rip the middle class (the backbone of our economy).They all need to go. Let’s figure out how to vote them out. Anything else is a waste of time.
“that would undercut their “deregulation” ideology”
Every game need’s minimal rules, and these worked quite well until the gambler’s moved in and paid for changes.
ROFLOL, the bill was written and passed by republicans,"The Gramm-Leach-Bliley Act effectivley repealed repealed the Glass-Steagall Act", the CRA was attacked to the bill on a deal with the democrats. The credit modernization act was slipped into an omnibus bill in the middle of the night, in 2000.
And, then there is this...
http://market-ticker.denninger.net/archives/925-Ticking-Financial-Nukes-OTC-Derivatives.html
And so goes the republican party, I will never ever vote for another one until they man up and say they were wrong and fix the problem.
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