Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

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.


© 2005-2019 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

6 Critical Money Making Rules