Friday, May 11, 2012


There is a distinction between making something transparent and whether it should be made.

So Dodd-Frank and the Volker Rule have missed the real point – derivatives add no value to any sector of our economy except for fees going to the Godfathers who run the Wall Street Banks and the minions who serve their sociopathic greed. (The reality is that Greed belongs in a cage.)

Think about the admission of J. Dimon of JP Morgan-Chase yesterday - 2 billion dollars gone down the drain due to failed hedging.  Failed bets on synthetic portfolio derivatives.

Wall Street Banks are rolling the dice to hit target earnings numbers!  That's what is happening.  Betting on highly complex (too complex to explain) synthetic structured investments - based on the anticipated returns to be realized from egregious leveraged risk - conducted in a parallel synthetic financial universe.

Derivatives based on geometric leverage and a shard of virtual value must be outlawed, because the derivative “market” casino is nothing but a disingenuous roulette wheel. If you make a roulette wheel or a huge casino transparent – does this, in fact, lesson the systemic economic risk.

It is generally acknowledged there are SEVEN HUNDRED TRILLION DOLLARS OF DERIVATIVES. And this amount of geometric egregious leveraged phantom stuff to bet on is like a gargantuan Hydrogen Bomb looming over us. So what happens when it is no longer possible to lay off all the bets? Think Lehman and much worse.  And the government has dropped the ball on prosecuting financial fraud!

The essential myth of transparency is that the Volker Rule will empower the SEC to strengthen compliance and tighten risk measurement. And if the past is prologue this is a total misrepresentation about SEC resolve to be concerned with compliance regarding significant issues – as there are significant regulations in existence now that for the past 2 decades the SEC has specifically not enforced. Read my 1989 letter to J. Katz, Secretary of the SEC, in the appendix of How We Got Swindled – about how to better protect investors, which also warned about Financial Darwinism: zealot born again Social Darwinism with the ethic of – survival of the richest.

The SEC is supposed to administer Dodd-Frank and the Volker Rule?  Really?  Consider current SEC lack of dedication to the enforcement of current significant regulations. For example the absolute lack of meaningful collateral behind Collateralized Bonds has not been disclosed, thereby committing: inadequate disclosure - a grave violation of law. Which then becomes: the omission of significant information - which constitutes fraud.

The SEC has no problem with Credit Default Swaps; which were not initially regarded as derivatives, ie., something that could be traded. Swaps were designed to furnish the illusion that the financial risk of complex investments could be insured against. The Commodity Futures Modernization Act, drafted by lobbyists and Wall Street lawyers for Phil Graham, termed the risk insurance Credit Default Swaps to avoid regulation (go around) by state insurance commissioners - that probably would have disallowed them because there were no reserves, and insurance requires meaningful reserves. So these were sham “contracts” called insurance and were also used as collateral, ie., “swap backed.”

Financial markets trade anything that can be securitized, and specialize in the too complex to explain; hence market makers discovered the value of trading Swaps - bets on insurance being paid or not.  How can the risk of 700 trillion dollars of unmitigated toxic leverage be reserved for!  How can Swaps provide insurance?  How transparent is fabreezed manure?

A Vice President of FINRA in charge of one of the largest districts, when we discussed Swaps asked me - how can nothing be shorted? And added he had no mandate to stop the madness.

Transparency will not improve anything. Derivatives will remain a mystery to the buyers (and apparently to their creators) – which make them illegal based on one significant Fed Bank Holding Company Bank regulation (out of over 1,500 pages of regs) which stipulates: complex investments to be sold must be explained well enough to be understood! And the sellers, so intent on continuing their ability to make markets for liquidity to continue to sell and trade derivates for fees produced a 325 page document to ostensibly provide comments to the Volker Rule. How naïve is it to accept this?  From a friend of 20 years who is a senior officer with the SEC, I know that the SEC considers the 325 pages a position paper from lobbyists.

Anyone who really cares about fixing what has been so wrong must speak out against the ability to continue to fabricate (innovate), make markets for and trade derivatives. And I do not know anyone who is not connected with derivatives, who is a rational liberal concerned for the common good, with an appropriate economic and financial background over 50 - who does not share this opinion.

We know recovering drug addicts are against drugs - some spend a life time trying to help get people off drugs. So if this logic applies – would it not apply to anyone involved in derivatives in the past who decided it was wrong to contrive financial investments that only produced vast amounts of fees at the risk of entire economies? Is it naïve to expect that people who formerly made a living from such toxic, virtual stuff to bet on, who decided they could not take it anymore – should become leaders to stop the betting madness?

The real issue is not transparency. It is not to make an Everest sized roulette wheel transparent. It is to separate the banks from investment banks and stop Trojan Megan Bank Holding Companies by returning to Glass-Steagall and the 1956 Bank Holding Company Act. The real issue is to put greed back into a cage, and get rid of derivatives – which add nothing to capital formation.

Never believe the Street propaganda that derivatives help manage risk – all empirical evidence is to the contrary. Derivatives only create geometric economic systemic risk and geometric fees for the greediest – the past is prologue! Hedging is what you do when you know what you are about to do won’t work. (From How We Got Swindled)

It is self evident Wall Street wants to divert attention away from the real issues. So to debate/parse the most functional ways to put rules in place for Dodd-Frank and to improve the Volker Rule is the diversion that is working.

In the final analysis – the acceptance of this diversion is fueled by gullibility and naiveté. (And all the money in politics.)

If you want to know what Wall St and Congress don't want you to know: 

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