Skip to comments.How To Bring The Cancerous Derivatives Market Under Control
Posted on 01/25/2012 9:35:12 AM PST by SpaceBar
On March 9, Lyndon LaRouche intervened in the economic crisis to propose a plan that is as simple and direct, as it is potentially effective in its execution: a sales or transaction tax on the turnover of ``financial derivative'' securities or financial instruments. Each time such a security or instrument is traded, he said, it should be taxed at 0.1 percent of its face value, or, as it is called in the derivatives trade, its notional principal amount.
Talk to most people about ``derivatives'' and you pretty soon discover that they have no idea what they are. Still less do they have any comprehension that the financial practices which have developed, since especially 1981-82, represent one of the most serious threats to the very existence of their country and the human species.
The growth of derivatives went past the point of no return at the end of last summer, on Sept. 16, to be precise. That was the day when the European Monetary System was wrecked, the day for which people like George Soros, and Citibank, borrowed billions of dollars to blow out the currencies of Britain and Italy. They showed that day that the speculative cancer that had been unleashed had grown beyond the point that monetary authorities could control.
That's what derivatives do. They are purely speculative highly leveraged instruments, designed to capture spreads, or pricing differences between different interest rates, currencies, or commodities.
(lengthy article continues at link)
(Excerpt) Read more at american_almanac.tripod.com ...
Only a bunch of commies would want to bring the derivatives market under control.
I trade derivatives for a living - STAY AWAY FROM MY MONEY. If I smell class warfare on Freerepublic then where do I turn? Will I be forced to descend to the level of those who criticize my way of earning a living? Will I be forced to vindictively claim that carpenters, doctors, plumbers, etc. all require greater government oversight?
Did you read the article, or just defending your livlihood of buying and selling financial instruments created out of thin air?
“Did you read the article, or just defending your livlihood of buying and selling financial instruments created out of thin air?”
Why would I waste my time reading vile hate being spewed by those who hate?
“out of thin air.”
Derivatives are obligations to do to something based on something that happens. It is a contract. Are you opposed to contracts like many commies?
The problem with derivatives is not some guy trading Vanilla calls,its the over the counter deals which are very often naked. An un-hedged position is good and profitable if your bet is working out, however if it is not working out you might destroy your company, and your counter-party. The only way to stop that is to make sure that you have equity to cover all your liabilities on all your positions, NO MATTER where the underling asset goes. The only way to enforce that is through government regulation by SEC. Obviously this regulation should only kick in when the size of deals is large enough to have adverse effect on the US Economy, some small time hedge fund with 50Mil under management should not be bothered.
This is where capitalism fails: Financial Firms don’t care about risk management. Cause what’s the worst that can happen? If they are large enough they get bailed-out,if not it has catastrophic effect on the whole World economy. A small firm if it goes bankrupt - big deal the manager still gets his fees and bonuses. Risk management cost money,more risk you take more money potentially you can make. Thus you need an outside party to control the catastrophic risk for large firms and for economy as a whole.
So because Bush and Obama believe in bailouts my industry needs greater regulation? Whatever. You are using socialism as an excuse for more socialism. We know where that ends up.
So you actually believe the bailouts “saved” the global economy? That doesn’t sound like Freeper material to me.
And so what if an unhedged position destroys your company and your counterparty? Who cares? I frankly don’t care that businesses fail everyday. If you want a business to not fail then look to North Korea. Businesses never fail there.
“Are you opposed to contracts...? “
“Actually no. I understand them, including the notions of consideration by both parties, collateral, remedies for breach of, and the legality of the terms of said contract. It’s an extremely valuable legal instrument that has benefited the western world for centuries. However they were never meant to be the tool of trade for degenerate gamblers.”
I am livid. Degenerate gamblers? It is the speculator that PREVENTS the shortage of things. Without the speculator the hedger might have no counterparty. Look how shortages happened in the Soviet Union - 20 million people starved to death around 90 years ago due to grain shortages. How many millions starved in North Korea in the past 20 years due to food shortages. In capitalist societies the speculator (and I am a PROUD speculator) bids up the price on things when he thinks there will be a shortage of them. This allows people to make substitutions and begin to ration before it is too late. The price signal allows people to react.
The speculator makes a lot of money and you don’t like it. Are you experiencing envy?
That’s all good,when the failure of the given business only affects that business and damage doesn’t spread.
lets say all banks in US got pretty mortgage insurance from AIG, and now AIG is bankrupt — good they deserve it! Now every single bank is not-solvent, and has to be taken over by FDIC (yes it is extreme example) now do you think FDIC has ability to support every single bank in US at the same time,I don’t think so. Again a financial institution,is not just itself it is all counter parties,and counter-parties of those people,etc.. And the chain never ends if one big guy fails,it pulls down everybody with it, all Firms, ,clients,and employees. Yes its an extremely fragile and interconnected system,a very dangerous system, which doesn’t happen in any other industry it seems.
And no regulation is not communism of socialism unless you are Ron Paul supporter, financial institutions are regulated already FDIC,SEC,FTC,etc.. But non of those regulations really address catastrophic risk.
If every position is hedged,then if company like AIG goes broke you can liquidate its assets and pay to their counter-parties,without having GOV Bailout. I think that is the most capitalistic way to go,personal responsibility.
Would you care if an unhedged position destroyed your country?
“The notional value of the world’s derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position’s assets. This distinction is necessary because when you’re talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.
“The world’s gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.”
You like hyperbole and FDIC is socialism.
Do wild bears defecate in the forest?
Your industry has proven itself to be incapable of self-regulation. Strict limitations on leverage should be enforced. That's not socialism, that's just common sense.
And I don’t mean hedged with your awesome wiz-bang trading algorithms. It must be hedged with cash equivalents (T-Bills )for the maximum exposure possible. Yes its very expensive to keep that much cash on hand,but tough luck,its still better then waiting for Tax payer bailout — that’s capitalism.
You do not have to regulate derivatives, you just need to make it illegal for our government to bail out the companies that sell them.
How is the FDIC socialism? Member banks pay a fee in return for the FDIC guaranteeing their depositors' funds (up to $250K). Banks are not required to become FDIC member banks.
From those fees paid by banks, the FDIC maintains a Deposit Insurance Fund and pays its operating expenses. Not one taxpayer dollar is expended by the FDIC. It is an independent agency.
How is that socialism?
Sure FDIC is socialism! Like any insurance your Home Owners insurance its also socialism, if you have a firm,it will give you free money, that’s evil. Every bank client should do a financial audit of any bank he deposits his money to, I mean everybody is holding a CPA right? If you think a private company can do a service of FDIC, I say sure right after you can find private insurance company to cover you for risk from Acts of War or Nuclear Disaster. Good luck, private industry really suck at covering for massive catastrophic risk.
No more Treasury Secretaries from Wall Street firms...they just can't help themselves.
It is a GSE (government sponsored entity) created by FDR. That is why it is socialism. If FDIC fails the taxpayers bail it out.
The way to bring derivatives under control is to refuse to bail out those who get in trouble using them.
The problem is that profits are privatized, while risk and losses are socialized....that’s not market-based Capitalism, that’s State Capitalism.
Learn what a GSE is and the try to figure out why a Freeper might hate the concept.
Anyone who advocates taxation to control behavior belongs on the DUmp, not here.
In light of apparent systemic risks facing the banking system, the adequacy of FDIC’s financial backing has come into question. Beyond the funds in the Deposit Insurance Fund above and the FDIC’s power to charge insurance premia, FDIC insurance is additionally assured by the Federal government. According to the FDIC.gov website (as of January 2009), “FDIC deposit insurance is backed by the full faith and credit of the United States government”. This means that the resources of the United States government stand behind FDIC-insured depositors.” The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding “Sense of Congress” to that effect, but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
They didn’t get bailed out because the Gov decided to make it rain with newly printed FedReserve notes. They got Bailed out because there was a risk of massive pain to the countries especially to US, otherwise. Now, one can debate was that risk overblown or not. However its obvious that missive failures would not be good for all citizens of US. If a farmer bought a future from Goldman as CP to sell wheat for X amount of dollars per bushel. and Goldman goes bankrupt, then that Farmer is screwed,and goes bankrupt too,so you not getting a bread in the store. Thats how wall street affects main street,etc..
How about advocating laws like reinstating the GlassSteagall Act? Is that DU material too?
“And I dont mean hedged with your awesome wiz-bang trading algorithms. It must be hedged with cash equivalents (T-Bills )for the maximum exposure possible. Yes its very expensive to keep that much cash on hand,but tough luck,its still better then waiting for Tax payer bailout thats capitalism.”
I despise your mindset. I despise your fear and ignorance of derivatives. Your mindset is solidly in the mainstream for a Democrat. Your mind needs to be made right.
Yes if life gets really bad FDIC will print the money to cover withdraws,UNTIL it managed to liquidate the assets of the banks it took over. Again if you don’t want it happening,you should be pro Gov making sure that there is no major collapse.
BTW, the FDIC is not a GSE, like FNMA or Freddie Mac. It is an independent agency of the Federal Government. Yes, it does have the ability to borrow from the US Treasury.
The only way for the FDIC to fail is for its member banks to fail en masse, and wipe out the assets in the Deposit Insurance Fund. The FDIC has done a marvelous job of cleaning up the banking system.
OTOH, your industry (Wall Street) failed, and the taxpayers bailed you out. I haven't seen any tears of shame coming from the titans of Wall Street.
Then don’t bail them out - then losses won’t be socialized.
Precisely. Bail outs are a way to socialize losses. As are the GSEs Fanny and Freddie.
The GSEs were the reason the derivatives got out of control. They put the government behind liar loans, so the industry went hog-wild originating same, bundling them into derivatives and selling them to unwary investors. The easy credit drove the price of housing way above the value of housing, creating a giant bubble which finally burst in 2008. It was not too little regulation that caused the housing crash; it was too much.
I despise the lack of honesty and honor of the financial industry. You're Wesley Mouch in the flesh.
The only person who has ignorance of derivatives its YOU,since you don’t understand the risk of the tool with which you are trading. Just like if you go hunting you need to understand the risks and and dangers of your gun,and you have to manage those risks, that innocent by standers don’t get hurt.
Its not “fear” or “phobia” its risk management, derivatives are very useful tools,and speculation is good since it creates liquidity in the marked,however trading naked derivatives is very dangerous, if amounts are small its only danger to your job or to your firm if amounts are large its danger to whole country, I am not sure why its so hard to understand.
You need to learn about credit risk. If the farmer has an in-the-money hedge and the counterparty goes bankrupt - then too bad so sad for the farmer. It is a risk to hedge and it is a risk to not hedge. The farmer has to weigh his alternatives and choose his counterparty wisely.
The problem is that you think the farmer is too STUPID to decide for himself and needs nanny governemnt to protect him.
Are you saying all bundled mortgages were Freddie- or Fannie-backed? I'm pretty sure that's not the case.
We tried that with Lehman Brothers; it didn't work out well.
Not all, but enough.
By lowering lending standards, the GSEs helped the lenders comply with the Community Reinvestment Act, which allowed the government to lean on lenders who were not making enough loans to
deadbeats probable Democrat voters. The derivatives market helped the lenders get the toxic loans off their books as soon as they finished originating them. An efficient wealth-destruction mechanism evolved. And the Democrat Party successfully blocked GOP attempts to get it under control by reining in the GSEs.
How didn’t it work out well? What is wrong with Lehman going bankrupt?
According to Pelham:
"As the bubble progressed into the 2000s the private market rivals to Fannie & Freddie began eating their lunch, growing market share at a much faster rate than the GSEs. One reason is that the private market firms offered the really exotic loans, the OptionARMs, the NINJAs (no income, no job, no assets), the 120% loans. All that F&F could deal in was conforming paper, even if the loan was subprime." -
"Immediately following the bankruptcy filing, an already distressed financial market began a period of extreme volatility, during which the Dow experienced its largest one day point loss, largest intra-day range (more than 1,000 points) and largest daily point gain. [...] The Dow eventually closed at a new six-year low of 7,552.29 on November 20, followed by a further drop to 6626 by March of the next year.
"The fall of Lehman also had a strong effect on small private investors such as bond holders and holders of so-called Minibonds."
The Mortgage crash is just recent issue, the same could have happened with any other bubble that Finance Mangers decided to be profitable. (S&L from the 80’s0 In a few years Wall Street will start investing into sun spots or something like that,after a few quick guys make ton of money,everybody will jump on the bandwagon dumping all cash they have,and getting g 1 to 1000 leverage to buy the next sure thing,until the bubble bursts and if it is really bad the Gov will again bailout firms,otherwise we will have riots on a street. So if you don’t want bailout,riots,marshal law,etc.. much easier to make sure that firm can stand by their contracts with cash.
This article is a complete and utter joke: its analysis is embarassingly inaccurate and its recommendations are overtly Marxist. Lyndon F’in LaRouche? Really?
And to put “teeth” in that refusal, prohibit any company that gambles in derivatives markets from being insured by FDIC/SIPC/etc.
Nobody cares if people gamble with their own money.
But, IMHO, when “traders” try to gamble with the TAXPAYERS money by free-loading on FDIC/SIPC/etc., those “traders” should be stopped.
So do you trade your derivatives OTC or on an exchange?
He who would trade a little bit of liberty for a little bit of security deserves neither and will lose both.