Financial Derivatives Time Bomb
According to many top financial analysts and the revealing news articles below, the $700 trillion financial derivatives market may be a time bomb waiting to explode with catastrophic consequences. $700 trillion is more than 10 times the GDP of the entire world and equivalent to $100,000 for each of the 7 billion inhabitants of our planet. These financial instruments have a legitimate place in hedging risk, yet the recent explosion of growth in the global derivatives market has created a huge potential for massive instability.
According to the most recent report from the U.S. government's Office of the Comptroller of the Currency (OCC), the total value of derivatives has increased approximately 1000% since 1996, and 250% since 2006 (see graph on page 12 of the OCC report). Derivatives continued their rapid climb even in the midst of the global recession that started in 2008. Most disturbing is the fact that 95% of all U.S. derivatives are monopolized by just five megabanks and their holding companies.
The below verbatim excerpts from major media and government reports speak for themselves. What they don't mention is one simple measure which could greatly decrease the risk of the derivatives bubble bursting.
A simple tax of 0.25% (1/4 of 1%) on each speculative financial transaction would change the whole risky game. European citizens pay a value added tax (VAT) of 15% or more and most U.S. citizens pay a state sales tax of up to 13% on purchased goods. So why not add just a small tax on all speculative transactions? This would also net hundreds of billions of dollars in tax receipts, easing the growing world debt.
Thankfully, politicians are slowly becoming aware of the huge risk of the derivatives bubble and are taking steps in the right direction, but there is a long way still to go. And the financial speculation tax has yet to gain traction. By choosing to educate ourselves and spread the word on this vital issue, we can make a difference. For concrete ideas on how you can play a part, see the "What you can do" box below the article summaries.
With best wishes for greater financial integrity,
Fred Burks for PEERS and WantToKnow.info
Note: For those who would like a simple explanation and very brief history of derivatives, click here.
A Secretive Banking Elite Rules Trading in Derivatives
December 12, 2010, New York Times
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan. The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential. Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk. In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks. The banks in this group ... have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available. Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.
Note: To explore highly revealing news articles on the powerful secret societies which without doubt back these top bankers, click here.
OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2011
December 2011, OCC (U.S. Office of the Comptroller of the Currency, Administrator of National Banks)
The OCC’s quarterly report on trading revenues and bank derivatives activities is based on Call Report information provided by all insured U.S. commercial banks and trust companies, reports filed by U.S. financial holding companies, and other published data. The notional amount of derivatives held by insured U.S. commercial banks decreased $1.4 trillion, or 0.6%, from the second quarter of 2011 to $248 trillion. Notional derivatives are 5.7% higher than at the same time last year. Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. The five banks with the most derivatives activity hold 96% of all derivatives. Insured commercial banks have more limited legal authorities than do their holding companies.
Note: Graphs in this OCC report (pg. 25 & 26) show that five U.S. banks, JPMorgan Chase, Citibank, BofA, Goldman Sachs, and Morgan Stanley, hold $235 of the $248 trillion above, while their holding companies control an additional $311 of the $326 trillion in derivatives held by holding companies. So these five banks and their holding companies combined hold $546 trillion in derivatives, 95% of the U.S. derivatives market, nearly 80% of the global market, and equivalent to over $75,000 for every person on the planet. If the above link fails, click here. For quarterly derivative reports by the OCC going back to 1995, click here.
The $700 trillion elephant
March 6, 2009, MarketWatch (Wall Street Journal Digital Network)
There's a $700 trillion elephant in the room and it's time we found out how much it really weighs on the economy. Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements. These contracts are tallied in notional values because no one really can say how much they are worth. But valuing them correctly is exactly what we should be doing because these comprise the viral disease that has infected the financial markets and the economies of the world. Try as we might to salvage the residential real estate market, it's at best worth $23 trillion in the U.S. We're struggling to save the stock market, but that's valued at less than $15 trillion. And we hope to keep the entire U.S. economy from collapsing, yet gross domestic product stands at $14.2 trillion. Compare any of these to the derivatives market and you can easily see that we are just closing the windows as a tsunami crashes to shore. The total value of all the stock markets in the world amounts to less than $50 trillion, according to the World Federation of Exchanges. To be sure, the derivatives market is international. But much of the trouble we're in began with contracts "derived" from the values associated with U.S. residential real estate market. These contracts were engineered based on the various assumptions tied to those values. Few know what derivatives are worth. I spoke with one derivatives trader who manages billions of dollars and she said she couldn't even value her portfolio because "no one knows anymore who is on the other side of the trade."
Note: The GDP of the entire world is estimated at around $60 trillion. Banks and financial firms deemed "too big to fail" were bailed out worldwide at taxpayers' expense. But what will happen if losses in the derivatives market skyrocket? No government in the world has the resources to save financial corporations from a collapse in their derivatives trading. For a treasure trove of reports from reliable sources detailing the amazing control of major banks over government and society, click here.
OTC derivatives market activity in the first half of 2011
November 16, 2011, Bank for International Settlements (Intergovernmental organization of central banks)
After an increase of only 3% in the second half of 2010, total notional amounts outstanding of over-the-counter (OTC) derivatives rose by 18% in the first half of 2011, reaching $708 trillion by the end of June 2011.
Note: The Bank for International Settlements (BIS) is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government. Their accounting shows a total global derivatives market controlled by the banks of over $700 trillion. That's $100,000 for every man, woman, and child on the planet. As reported in Reuters, the derivatives market is largely unregulated. Do you think there is any manipulation going on here? BIS helps the bankers to work together to keep their hidden power.
Buffett warns on investment 'time bomb'
March 4, 2003, BBC News
The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy and most shares are still "too expensive", ... investor Warren Buffett has warned. The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk. But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system. Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment. Outstanding derivatives contracts - excluding those traded on exchanges such as the International Petroleum Exchange - are worth close to $85 trillion, according to the International Swaps and Derivatives Association. Some derivatives contracts, Mr Buffett says, appear to have been devised by "madmen". He warns that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998.
Note: Investor Warren Buffett was ranked the world's richest man by Forbes magazine in 2008. Though written in 2003 when the value of the derivatives market was about 1/4 of what it is now, the excellent article above reveals Buffett's thinking on the incredible risk of creating derivatives that have many times more value than the entire GDP of the world. The risk has increased tremendously since then.
Deregulation of derivatives set stage for collapse
January 30, 2011, San Francisco Chronicle (San Francisco's leading newspaper)
"We certainly applaud the efforts of the commission," said White House press secretary Robert Gibbs, referring to the Financial Crisis Inquiry Report. "Frankly, I'm not sure much has changed," said one of commissioners, Byron Georgiou. "The concentration of assets in the nation's 10 biggest banks is bigger now than it was five years ago, from 58 percent in 2006 to 63 percent now." Referring to executives who remain at the head of those banks that almost ran aground, Georgiou said ... "Either they knew and didn't want to tell us, or they really didn't know. Either way, they put their institutions at risk." And have yet to be held accountable. Commissioner Brooksley Born can enjoy a certain sense of vindication. Not only had "over-the-counter derivatives contributed significantly to this crisis," ... but the enactment of legislation in 2000 to ban their regulation "was a key turning point in the march toward the financial crisis." As head of the Commodity Futures Trading Commission in the 1990s, Born was aware of the damage the largely unregulated instruments had already caused. Born suggested some more regulation. [She] was squashed like a bug by Clinton administration heavyweights, including Lawrence Summers and Robert Rubin, [and] Federal Reserve Chairman Alan Greenspan. One of the results: The Commodity Futures Modernization Act of 2000 eliminated government oversight of the OTC market. As the report documents, the use of such derivatives ... helped bring the entire financial system to its knees. Born hasn't seen much change in terms of accountability. One thing the report makes clear ... is just how preposterous were the "Who knew?" and "Who could have predicted?" statements offered up by chief executives and top government officials.
Note: So the 10 biggest banks now control 63% of total U.S. bank assets. According to the New York Times, the total for all U.S. banking assets as of the second quarter of 2010 were calculated at $13.22 trillion. Yet four of these megabanks also control an astounding 95% of the $574 trillion derivatives market, a sum over 40 times the amount of bank assets! Do you think there might be a problem with a derivatives bubble?
JPMorgan's Dangerous Derivatives
May 7, 2009, Bloomberg/Businessweek
Gillian Tett [is the author of] Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. Tett is a respected business journalist at the Financial Times. Tett successfully pieces together the colorful backstory of the bank's work to win acceptance in the market for its brainchild, turning credit derivatives "from a cottage industry into a mass-production business." With the benefit of hindsight, we know that while these inventions were intended to control risk, they amplified it instead. This novel idea turned noxious when applied broadly to residential mortgages, a game that the rest of Wall Street later entered into with gusto. We learn in deep detail about not only how collateralized debt obligations are assembled but also their many iterations. Perhaps it's noteworthy that Tett's book begins when JPMorgan had the face-value equivalent of $1.7 trillion in derivatives on its books. Today that number has jumped to a mind-boggling $87 trillion. Part of that portfolio includes almost $8.4 trillion in credit derivatives, more than Bank of America's (BAC), Citi's, and Goldman Sachs' (GS) holdings combined.
Note: So JP Morgan has $87 trillion in derivatives, a mass market it helped to create. That is greater than the GDP for the entire world! To verify, click here. For a New York Times review of this revealing book, click here.
Derivatives the new 'ticking bomb'
March 10, 2008, (Part of the Wall Street Journal's digital network)
"In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." That warning was in [Warren] Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. Despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession. Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. Keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets." The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today's slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.
Note: Do you think the financial industry is out of control? For lots more powerful, reliable information on major banking manipulations, click here.
How Goldman gambled on starvation
July 2, 2010, The Independent (One of the UK's leading newspapers)
This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions." Through the 1990s, Goldman Sachs and others lobbied hard and the regulations [controlling agricultural futures contracts] were abolished. Suddenly, these contracts were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born. The speculators drove the price through the roof.
Note: For a very powerful New York Times article by a top Goldman Sachs executive who recently quit for reasons of conscience, click here. Some researchers speculate that the global elite are aware that alternative energies will eventually replace oil, which has been a prime means of control and underlying cause of many recent wars. As a replacement for oil, the elite and their secret societies are increasingly targeting control of the world's food supply through terminator crops which produce no seed, and through the patenting of seeds.
Stock market time bomb?
May 10, 2010, Washington Times
Even the world’s most savvy stock-market giants (e.g., Warren E. Buffett) have warned over the past decade that derivatives are the fiscal equivalent of a weapon of mass destruction. And the consequences of such an explosion would make the recent global financial and economic crisis seem like penny ante. But generously lubricated lobbyists for the unrestricted, unsupervised derivatives markets tell congressional committees and government regulators to butt out. While banks all over the world were imploding and some $50 trillion vanished in global stock markets, the derivatives market grew by an estimated 65 percent, according the Bank for International Settlements. BIS convenes the world’s 57 most powerful central bankers in Basel, Switzerland, for periodic secret meetings. Occasionally, they issue a cry of alarm. This time, derivatives had soared from $414.8 trillion at the end of 2006 to $683.7 trillion in mid-2008 - 18 months’ time. The derivatives market is now estimated at $700 trillion. What’s so difficult to understand about derivatives? Essentially, they are bets for or against the house - red or black at the roulette wheel. Or betting for or against the weather in situations in which the weather is critical (e.g., vineyards). Forwards, futures, options and swaps form the panoply of derivatives. Credit derivatives are based on loans, bonds or other forms of credit. Over-the-counter (OTC) derivatives are contracts that are traded and privately negotiated directly between two parties, outside of a regular exchange. All of this is unregulated.
Note: This incisive article lays bare severe market manipulations that greatly endanger our world. The entire article is highly recommended. And for a powerful analysis describing just how crazy things have gotten and giving some rays of hope by researcher David Wilcock, click here.
BofA Said to Split Regulators Over Moving Merrill Contracts
October 18, 2011, Bloomberg/Businessweek
Bank of America Corp., hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits. Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates. Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation. Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC-insured bank accounts from risks generated by investment-banking operations. “The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.” Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June. That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives.
Note: Remember that the GDP of the entire world is estimated at around $60 trillion, less than JPMorgan or BofA own in derivatives. For an excellent article laying out the incredible risk this creates of a major economic collapse, click here. For more on the high risk and cost to taxpayers of BofA moving its massive amount of derivatives to its subsidiary, click here. For lots more from major media sources on the illegal profiteering of major financial corporations enabled by lax government regulation, click here.
Brooksley Born foresaw disaster but was silenced
December 5, 2010, San Francisco Chronicle (San Francisco's leading newspaper)
There's a brief scene in "Inside Job," the locally produced documentary on the Great Financial Meltdown, in which a colleague of the head of the Commodity Futures Trading Commission in 1997 describes how "blood drained from her face" after receiving a phoned-in tongue-lashing from deputy Treasury Secretary Larry Summers. The target of Summers' wrath was Brooksley Born, ... the first female president of the Stanford Law Review and a recognized legal expert in the area of complex financial instruments. Her crime: Born had the temerity to push for regulation of the increasingly wild trading in derivatives, which, as we learned a decade later, helped bring the U.S. economy, and much of the world's, to its knees. Summers, with 13 bankers in his office, told Born to get off it "in a very grueling fashion," said the colleague. The story is told in much more detail in All the Devils are Here, the latest, but eminently worthwhile, book on the roots of the crisis, by Bethany McLean and ... Joe Nocera. It makes for dispiriting, even appalling, reading. Responding to growing evidence of manipulation and fraud in unregulated derivatives trading – "the hippopotamus under the rug," as Born and others referred to it – Born suggested the commission should perhaps be given some sort of oversight. She had a 33-page policy paper drawn up, full of questions and suggestions, like, for example, whether establishing a public exchange for derivatives might not be a bad idea. Responding to the policy paper, Summers, "screaming at her," according to the book, told Born the bankers sitting in his office "threatened to move their derivatives business to London," if she didn't stop.
Interview: Brooksley Born
August 28, 2009, PBS Frontline
As head of the Commodity Futures Trading Commission [CFTC], Brooksley Born became alarmed by the lack of oversight of the secretive, multitrillion-dollar over-the-counter derivatives market. Her attempts to regulate derivatives ran into fierce resistance from then-Fed Chairman Alan Greenspan, then-Treasury Secretary Robert Rubin and then-Deputy Treasury Secretary Larry Summers, who prevailed upon Congress to stop Born and limit future regulation. PBS: Let's start with September 2008 as we all sat there and watched the economy melting down. Born: It was like my worst nightmare coming true. I had had enormous concerns about the over-the-counter derivatives [OTC] market ... for a number of years. The market was totally opaque. Nobody really knew what was going on. And then it became obvious as Lehman Brothers failed, as AIG suddenly appeared to be on the brink of tremendous defaults and turned out [to have been a major derivatives] dealer. PBS: How did it happen? Born: It happened because there was no oversight of a very, very big, dynamic, growing market. I would never say derivatives should be banned or forbidden. The problem is that they can be extremely misused. Traditionally, government has had to protect the public interest by overseeing the marketplace and keeping the extreme behavior under some check. All other financial markets have some kind of government oversight protecting the public interest. [But] not this one. The over-the-counter derivatives dealers business ... was something like 40 percent of the profits of many of these big banks as recently as a couple of years ago. PBS: We're the losers. Who were the winners? Born: Our largest banks. It was short-term benefit for a few major institutions at the expense of all the people who have lost their jobs, who have lost their retirement savings, who have lost their homes.
Note: Don't miss this entire, astonishing interview with Born, who practiced derivatives law for 20 years before being appointed head of the CFTC, which was tasked with overseeing the derivatives market. She lays bare the level of deceit, greed, and corruption by both bankers and some of the politicians who protect them.
Please note that most of the summarizing of the revealing news articles in the above summary was done by Tod Fletcher of WantToKnow.info. Many thanks to Tod for all the time and skill he puts into this. The box below provides several ideas on what you can do to spread the news.
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- Read concise summaries of revealing major media reports on banking and Federal Reserve manipulations available at this link.
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