The hedge funds are attacking the world.
Derivatives are the Cause of the World Depression of Our Time
Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.
Asset-Backed Securities
Derivatives can be defined as any financial paper which is based on other financial paper. In other words, they are financial instruments whose value depends upon or is derived from the value of other financial instruments. Any kind of securitization results in the creation of derivatives. If individual mortgages are wrapped up and packaged together as a mortgage-backed security (MBS), that is a derivative. Any asset-backed security (ABS), be it based on car loans, credit card debt, or anything else, also qualifies as a derivative.
Beyond this, there are generally speaking two kinds of derivatives. The first type includes the derivatives which are traded more or less openly on exchanges like the Chicago Board Options Exchange, etc. These include options, futures, and indices, plus all the combinations of these. These are what expire in each quadruple witching hour in the markets. This type of derivative has generally amounted to about $600 trillion of speculation in recent years.
OTC Derivatives
Then there are the so-called over-the-counter (OTC) derivatives, otherwise known as structured notes, counterparty derivatives, or designer derivatives. These often take the form of contracts which are kept secret by the counterparties, and which are often not included on the balance sheets of banks and other institutions which enter into these contracts. This type of derivative is currently not reportable to any regulatory agency. This secrecy is a result of the successful effort by Robert Rubin, Larry Summers, and Alan Greenspan to block the modest proposal of Brooksley Born of the Commodity Futures Trading Commission to bring the OTC derivatives into the sunlight during the second Clinton administration. Since these derivatives are not reportable at the present time, we must guess at their amount, and the best guess is that OTC derivatives make up almost $1 quadrillion of ultra-toxic speculation.
CDOs, CDS, and SIVs
OTC derivatives include collateralized debt obligations (CDOs),which often represent the packaging together of large numbers of mortgage backed securities, along with other debt instruments. A CDO can also be concocted out of other CDOs, in which case it qualifies as a synthetic CDO or CDO squared (CDO²). Notice that a synthetic CDO is not really an investment, but rather a form of gambling, in which a speculator in effect places a bet on the performance of some other financial instruments. This fact exposes the big lie inherent in the widespread reactionary myth that the current depression was caused by poor people taking out subprime mortgages on slum properties and then defaulting on these loans, thus bringing down the US and British banking systems. This fantastic story ignores the fact that derivatives were only a wager placed by speculative bettors from afar on mortgage backed securities which included some subprime notes.
Credit default swaps represent bets on whether a given asset or company will go bankrupt or not. As such, they can be used as insurance against such an eventuality, or else they can be used to make money on the insolvency. CDS are therefore a form of insurance, but they are issued by counterparties who have not registered as insurance companies and who have not met the legal and capital requirements which are necessary to function as an insurance company. It ought therefore to be clear that CDS have been totally illegal all along, and have flourished only because of an outrageous failure by state insurance regulators to enforce applicable laws against the privileged class of financiers.
Structured investment vehicles (SIVs) are another type of derivative, commonly used to wrap up masses of CDOs and synthetic CDOs and then to park them off-balance sheet, where they can be hidden from regulatory and public scrutiny.
All Derivatives Illegal under the New Deal, 1936-1982
All kinds of derivatives, be they exchange traded or over-the-counter, were strictly banned and outlawed in the United States between 1936 and 1982 thanks to a wise measure enacted under the New Deal of President Franklin D. Roosevelt. In the wake of several attempts by predatory and sociopathic speculators to manipulate the prices of wheat and corn during the First Great Depression, the Commodities Exchange Act of 1936 outlawed the selling of options on agricultural products. This law had the effect of blocking most derivative speculation, until the counterattack of free-market fanatics gathered steam under the presidency of Ronald Reagan, an ideological zealot of the Austrian and Chicago schools. The very existence of derivatives today and their resulting ability to bring on a new world depression are thus directly attributable to the reckless and irresponsible dismantling of the New Deal regulatory regime. It should be added that derivatives were also banned in many states as a result of laws prohibiting gambling or forbidding bucket shops, which were betting parlors in which side bets could be placed on stock market fluctuations.
If Obama wants to pretend to have something in common with Franklin D. Roosevelt, he ought to be proposing measures to ban at least the most poisonous types of derivatives, and to discourage the others. Notice that he does nothing of the kind. Obama’s Cooper Union speech of April 22, 2010 approvingly cites Warren Buffett’s remark that derivatives represent financial weapons of mass destruction. But Obama then says that derivatives nevertheless have an important and legitimate role to play. So which is it? Some years back, French President Jacques Chirac rightly referred to derivatives as “financial AIDS.” What useful purpose can these toxic instruments possibly serve?
Again: in his 1936 re-election speech in Madison Square Garden in New York City, Franklin D. Roosevelt famously noted that the forces of organized money hated him, and that he welcomed their hatred. Obama, in sharp contrast, called on the Wall Street predators to join him in his efforts, compounding this with the monstrous thesis that Wall Street and Main Street are in the same boat. Nothing could be farther from the truth. The recent Goldman Sachs scandal has underlined once again that the Wall Street investment houses serve no useful social purpose whatsoever. They exist solely for the purpose of pursuing speculative profits through a process of looting and pillaging the rest of the economy. The Wall Street zombie banks are monopolizing US credit, while Main Street goes broke.
Thanks no doubt to the efforts of certain House Democrats, the reform bill is likely to contain two points which can qualify as positive half measures.
Force Derivatives Out in the Open
The first is the effort to end the secrecy of OTC derivatives by forcing these instruments to be traded on public exchanges or through clearing houses. This is a step in the right direction. But this provision needs to be strengthened by making all derivatives of any type whatsoever reportable to a central regulatory authority. This would include, for example, the derivatives held by hedge funds. In 1998, the Connecticut-based hedge fund Long-Term Capital Management went bankrupt with more than $1 trillion worth of derivatives, blowing a huge hole in the international banking system, and causing Greenspan to rush in with a crony bailout. Nobody has any idea of the amount of derivatives held by hedge funds today. Highly leveraged hedge funds are perfectly capable of causing a worldwide systemic crisis with derivatives, so they must emphatically be made to report their holdings.
http://tarpley.net/2010/04/25/fight-the-derivatives-cancer-with-a-wall-street-sales-tax-plus-bans-on-hedge-funds-credit-default-swaps-and-synthetic-cdos/#more-1488
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