Best of the Week
Most Popular
1.Will UK Interest Rate Rises Crash House Prices? - Nadeem_Walayat
2.Full on Crash Alert for Major World Stock Markets... - Clive_Maund
3.Gold And Silver Market Bottoming? Big Rally Imminent? Reality Check Says NO - Michael_Noonan
4.The Coming Silver Price Rally Will Outperform All Previous Ones - Hubert_Moolman
5.The Trigger For The Upcoming Stock Crash - Harry_Dent
6.Imploding Department Store Results - James_Quinn
7.Dr. Copper is Speaking, are you Listening? ... - Rambus_Chartology
8.Pandemonium in the Stock Market, Dow falls 1,000 points in a week - EWI
9.Asia's Whirling Dervish of Devaluations Has Encircled China's Exports - Keith_Hilden
10.China Weakens the Yuan; Rattles Global Stock and Financial Markets - Gary_Dorsch
Last 5 days
Jeremy Corbyn’s “Quantitative Easing for People”: UK Labour Frontrunner’s Controversial Proposal - 4th Sept 15
Stock Market Third Wave - Elliott Waves Point to Market Probabilities - 4th Sept 15
Another Hysterically False BLS US Unemployment Report - 4th Sept 15
Bill Gross: Jobs Report Means ‘Fifty-Fifty’ Chance of Fed Sept Interest Rate Move - 4th Sept 15
Will The Government Confiscate Your Gold? - 4th Sept 15
Gold-Silver Ratio in Gear - 4th Sept 15
The Real Threat from China's Stock Market Crash - 4th Sept 15
The Stocks Bear Market Everyone Saw Coming - 4th Sept 15
Why September’s Stock Market Volatility Is a Huge Opportunity for Options Traders - 4th Sept 15
What IF Gold is Just in a Great Big Bull Consolidation Pattern ? - 4th Sept 15
This Stock Market VIX Chart Should Blow Your Mind - 3rd Sept 15
Eurodystopia: A Future Divided - 3rd Sept 15
Stock Market Prepares for the Next Decline - 3rd Sept 15
Europe Rethinks the Schengen Agreement - 3rd Sept 15
BP Oil Company Moves past Mistakes But Still Feeling Price Pinch - 3rd Sept 15
EU Migration Crisis and Population Density, Why Cameron is Right, England Really is Full - 3rd Sept 15
Stock Market Return to Crisis: Things Keep Getting Worse - 3rd Sept 15
Dow Theory Stock Market Sell Signal Examined - 3rd Sept 15
How OPEC’s Attempt to Save Face Affects the Crude Oil Market - 3rd Sept 15
Crude Oil Price Forecast 2015 and 2016 - Video - 3rd Sept 15
The Real Threat from China’s Stock Market Crash - 2nd Sept 15
How Our “Mixed Economy” Created These Mixed-Up Markets - 2nd Sept 15
'Gravity' Is Returning to Stocks and Bond Markets - 2nd Sept 15
OPEC Divorce And Self-Destruction Thanks To Saudi Crude Oil Strategy? - 1st Sept 15
The Beginning Of A New Financial / Stock Market Cycle - 1st Sept 15
Three Things Every Master Trader Knows About Trading Options - 1st Sept 15
Chinese Yuan Revolution? - 1st Sept 15
Take Advantage of Record-High Auto Sales… Before This Bubble Bursts - 1st Sept 15
Pondering Hitler's Legacy - 1st Sept 15
Mainstream Media Goes Berserk - 1st Sept 15
Your Decisive Stock Market Plan to Follow Whilst Most Investors Shiver With Fear - 1st Sept 15
Are There Stock and Financial Markets Investing Opportunities For The Remainder Of 2015 - 1st Sept 15
Crude Oil Price Forecast 2015 and 2016 - 1st Sept 15
REPO Window Hidden $Trillion QE Monthly Volume - 31st Aug 15
Silver and Warnings From Exponential Markets - 31st Aug 15
Stock Market Calls Fed’s Bluff - 31st Aug 15
Why Some ETFs Led the Stock Markets Down Last Week - 31st Aug 15
Stock Market Collapse - Take The Opportunity To Bail Before It’s Too Late! - 31st Aug 15
The Most Important Market Chart on The Planet - 31st Aug 15
Stock Market 50% Retracement - 31st Aug 15
Stock Market Crash Red Alert for 2nd Downwave... - 31st Aug 15
Independant Scotland 1 Year on, UK Civil War If the SNP Fanatics Had Succeeded - 30th Aug 15
Gold’s 7 Point Broadening Top - 30th Aug 15
The Day the Stock Market Shook the Earth: Takeaways From the Dow’s 1,000-Point Drop - 30th Aug 15
Gold Price Rally Marked by Short Covering - 30th Aug 15
Aging Stocks Bull Market - 29th Aug 15
Economic Destabilization, Financial Meltdown and the Rigging of the Shanghai Stock Market? - 29th Aug 15
The Stocks You Should Be Buying After the Market Drop - 29th Aug 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Global Stocks Slide

Derivative Monster Alive and Kicking Despite Financial Reforms

Stock-Markets / Derivatives Jun 29, 2010 - 08:23 AM GMT

By: Martin_D_Weiss

Stock-Markets

Best Financial Markets Analysis ArticleAnyone who thinks the new financial reform law will save us from the next debt disaster must be dreaming. Here are the facts …

Fact: The U.S. derivatives that helped cause the last debt crisis are merely being shifted around like deck chairs on the Titanic.


Fact: Nothing whatsoever is being done about the derivatives monster overseas, which is more than TWICE as big.

Fact: Most important, despite months of debate and thousands of pages of legislation, the two biggest risk-mongers of all — the Treasury and the Fed — didn’t even get a slap on the wrist. They got more power.

Little has been done to address the huge derivatives risks that the Government Accountability Office (GAO) warned about 16 years ago in its landmark study, Financial Derivatives, Actions Needed to Protect the Financial System.

And nothing has been done to address the risks we warned Congress about 15 months ago in our white paper, “Dangerous Unintended Consequences.”

Need proof? Then read on …

Fact #1 Derivatives at U.S. Banks to Be Shifted Like Deck Chairs on the Titanic

In its latest update, the Comptroller of the Currency (OCC) reports that the national value of derivatives held by U.S. commercial banks is $216.5 trillion, or nearly FIFTEEN times the nation’s Gross Domestic Product.

Moreover, instead of diminishing, they’re getting larger, up by $3.6 trillion — the equivalent of one full quarter of GDP — in just the most recent three-month period.

Yes, regulatory reform takes some steps in the right direction, such as getting a piece of this monster off the street and under the roof of exchanges. But how far is that going to go toward protecting investors if the beast keeps growing bigger?

Despite the new reforms, derivatives will continue to grow in size. And they will continue to be highly leveraged investments that put financial institutions, their trading partners, individual investors, and the entire financial system at risk.

Congress knows — or should know — what these risks are; the GAO explicitly warned about them 16 years ago, long before the 2008 debt crisis began. Derivatives create massive exposure to:

(a) credit risk, defined as “the possibility of loss resulting from a counter party’s failure to meet its financial obligations”;

(b) market risk, “adverse movements in the price of a financial asset or commodity”;

(c) legal risk, “an action by a court or by a regulatory or legislative body that could invalidate a financial contract”;

(d) operations risk, “inadequate controls, deficient procedures, human error, system failure, or fraud”; and

(e) system risk, a chain reaction of financial failures that could threaten the national or global banking system.

Are these risks addressed in financial reform? Only marginally.

Moreover, the GAO warned that a handful of big players accounted for the overwhelming bulk of the derivatives trading — a dangerous concentration of risk.

Has this risk diminished since then? No, it is even more deeply entrenched today: The latest OCC tally of the largest 25 banks (Table 1, pdf page 23) shows that …

  • Just FOUR of the largest commercial banks — JPMorgan Chase, Bank of America, Citibank, and Goldman Sachs — control $205.3 trillion in derivatives, or 94.9 percent of the total held by all U.S. banks.
  • Only 25 of the top banks control $216.1 trillion in derivatives, or 99.82 percent of the total. In other words, for every $100 of derivatives, the big banks hold $99.82; while all the rest of the banks hold a meager 18 cents’ worth.

Does the new regulatory reform address this intense concentration of risk? Hardly. In fact, I fear it could have precisely the opposite effect, tacitly giving the government’s rubber stamp of approval to this dangerous oligopoly.

Fact #2 The Derivatives Monster Overseas Is Twice as Big. But Nothing Whatsoever Is Being Done to Tame It.

The Bank of International Settlements (BIS) reports that, at year-end 2009, the total notional amount of derivatives traded on the over-the-counter market globally was $614.7 trillion.

In addition, the total traded on organized exchanges was $21.7 trillion in futures contracts and another $51.4 trillion in options.

Grand total globally: $687.8 trillion.

Problem: At this juncture, strictly the portion held by U.S. banks (the $216.5 trillion tabulated by the OCC) has anything to do with the new legislation. The balance of $471.3 trillion — TWICE as much — remains outside the realm of any reforms.

Fact #3 Financial Reform Does Nothing to Curb The Two Biggest Risk-Mongers of All: The Treasury and the Fed

The financial reform bill grants both the U.S. Treasury Department and the Federal Reserve new powers and responsibilities to control and monitor the risk-taking of large financial institutions.

What’s ironic, however, is that these are precisely the agencies that have created — and continue to create — the greatest systemic risks of all:

  • The Treasury, by running the largest federal deficits of all time, exposes the U.S. bond market to the same kind of contagion risk that recently struck Greece, Spain, Portugal, and Hungary. And …
  • The Federal Reserve, by massively increasing the U.S. monetary base, helps create the same kind of speculative bubbles that caused the debt crisis in the first place.

Clearly, Congress has done little more than tinker — fighting the last war, even as it sits on the powder keg of the next one.

My recommendation: Stay safe. And if you have speculative fund available, start now to stake out positions that stand to profit from the consequences of our government’s failure to act decisively — higher interest rates and lower equity prices.

Good luck and God bless!

Martin

Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History