This I found on the web. Sorry I can't acknowedge the writer. Others seem to have put it on their websites too. I asked a meeting of 35 people in New Plymouth the other day how many people know what a derivative is and only one person put up her hand. It is worrying that the shadow economy of at least $700 trillion is at least ten times as big as the real economy yet so few understand the shadow economy. A financial reporter in Australia said in 2009 all banks are exposed to toxic derivatives. If 1% of these contracts default because third parties get into trouble, the whole shareholder wealth would be wiped out and the banks could be broke. So here is the derivatives for dummies piece. Nice and easy. Derivatives for Dummies An Easily Understandable Explanation of Derivative Markets Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Heidi's "drink now pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit . By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for whiskey and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively. A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral. At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALCOBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses. One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi. Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs. Overnight, DRINKBONDS, ALCOBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks' liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her whiskey supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations. Her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers. Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-alcoholics.
Today’s Keiser Show interviewed the wonderful Dr Michael Hudson of New York. He had been to the American Monetary Institute meeting in Chicago, to an economic conference in Kansas Sity and attended the banking group of Occupy Wall Street where Sheila Bair spoke two weeks ago. Sheila Bair has just written a book (and Michael Hudson has written another one). She is a conservative Republican appointed by Bush and was head of FDIC, the Federal Deposit Insurance Corporation during the Global Financial Crisis. After investigating Citibank she wanted to close it down, but Tim Geithner, Secretary of the Treasury, came to a meeting with her in the White House and refused. Tim Geithner, said Hudson, had resigned from his role with the NY Federal Reserve when Obama came to power. He wanted to succeed Robert Rubin as head of Citibank at $20 m a year. But the bankers came to him and said they needed him in the key role in Treasury. Hudson says "I am paraphrasing here" but Bair said it was like we want our man inside so that no one will prosecute us. We need a smooth sophisticated crook like you and when you step down we will look after you. Hudson says it is a Wall Street Mafia takeover. Banks don’t make loans to build factories or create jobs anymore. They only lend these days for real estate, gas or oil reserves or for corporate raiding. So you can get loans to buy companies but not to build them up. Credit is only available for looting. They downsize labour, cut costs and grab the pension fund and the economy shrinks. The deficit spending these days is not to build infrastructure, it is for lending to Wall Street. Ben Bernanke’s helicopter dropping money only flies over Wall Street. Sheila Bair says the system can’t be fixed without sending a lot of bankers to jail. The first part of the Keiser Show described a situation where JP Morgan is being sued for selling fraudulent financial products but of course it is a civil suit. No one will go to jail. In the UK the Financial Conduct Authority can’t send people to jail. They can rig LIBOR and someone MIGHT get fined. Where is the criminal justice system? Which leads me to what is happening in New Zealand. Before Parliament is a very overdue piece of legislation, the Financial Markets Conduct Bill, which has been through its first reading and committee stages. The Commerce Select Committee reported back on 12 Sept. I notice from reading submissions that it is a civil offence not a criminal offence here too. So if banks sell fraudulent products our Government Superannuation Fund and our ACC may lose millions or more but no banker will go to jail. The worrying thing is that the ECB can put in its technocrats, which is a euphemism for a bank lobbyist, to rule Greece, Portugal and Spain so that nobody can vote for letting banks fail. We must be so vigilant. Canterbury democracy has already failed and we rolled over like lambs when the government appointees continued with Canterbury Regional Council. Who is to say we won't do it again?
I have some new heroines and yes, they are mostly women. Janet Tavakoli, Brooksley Born, Ann Pettifor are among them. Janet Tavakoli I have recently discovered. She was interviewed by Chris Martenson and quite late in the interview she said "Sorry, you are not getting it Chris. I am opposed to the fraud and lies. I am not opposed to all derivatives". So I downloaded an e-bookof hers called The Robber Barons, and read more. It is the fact that banks and rating agencies misled investors by rating an investment as AAA when they knew it was junk that is the problem. And the banks knew it was junk yet they sold it and demanded they be bailed out. Innocent investors and home owners lost billions. Yet nobody is in jail. Not a single one. Nobody has been brought to trial. This is unlike the earlier but smaller Saving and Loans crisis where 1000 or so were indicted. Quotes from Tavakoli's book: "Fraud thrives and spreads in a regulatory free, highly paid, criminogenic environment. Cheaters prosper driving honest out of the market" "While there were instances of fraud by borrowers, the key drivers of our housing crisis were fraud perpetuated by mortgage lenders and securities fraud – by some of our most revered financial institutions – that provided money to fuel fraudulent mortgage lending." And I have finally found this one: "If a high-on-crack driver crashed his speeding rental car into your house and killed your spouse, you would be outraged if law enforcers took bribes and gave the driver a pass on a blood test. If the judge then merely fined the killer and order you to pay it, you would appeal, wondering what happened to justice. If the government then handed the crack-driver keys to a bigger rental car and presented you with the rental bill, you would certainly protest. How is it, then that you have remained largely silent in the face of the same sort of behavior by Wall Street and Washington? Bonus-seeking bankers careened off the right path and ran Ponzi schemes that nearly ruined our economy. Bureaucrats and elected officials bailed them out without demanding consequences. Bankers are revving their engines again." Yes that is Janet Tavakoli.