Media statement June 3rd 2012
Government’s huge derivatives exposure needs public scrutiny
The government should come clean on taxpayer’s exposure to credit and market risk from their derivatives positions, according to a New Economics Party spokesperson, Deirdre Kent. The government is putting New Zealanders at risk by increasing its investment in derivatives and not encouraging public scrutiny.
She said that buried in the government accounts is information that $115 billion is at risk through derivatives if the other party to the contract defaults. “On P156 of a 193 page document of government accounts of June 2011 is the statement on derivatives. If there were another global financial crisis our government’s growing exposure to derivatives would put all New Zealanders at risk. If the unthinkable happens and the other party to the derivative contract fails to pay, our government pays $115 billion and receives nothing. This is over half our GDP and ten times our education budget.”
“The problem is that the accounts are written in a way that is difficult for an ordinary person to fathom. Although they are legal, there is no transparency. For me it has taken five emails with a professor of accounting and a lot of research to come near to understanding this problem. The official accounts don’t explain that we have to add two columns together to get the total exposure of $120 billion or that you have to then subtract a certain figure”, she said. ”It seems only a professor of public accounting can work it out.”
“In the financial statement of government there are no fewer than 66 mentions of derivatives, which can become, as once described by investor Warren Buffet, ‘financial weapons of mass destruction,’” she said. “Derivatives are not just bets. They are sometimes bets on bets, she said. Orange County went bankrupt in 1994 after losing $1.8 billion in interest rate derivatives, JP Morgan has recently lost at least $2 billion and Lehman Bros went under very quickly. Despite reassurance from Treasury it can only end in tears if our derivative exposure keeps rising. If you want to make a killing you have got to be prepared to be killed.”
The government is starting to look like a casino government. We need limits, and the accounts need proper scrutiny and regulation. The deregulators have had their way and made a complete mess of things. It is time for the public to examine what is happening.”
I commented to you on twitter in regards to the ‘Dark World of Derivatives’ as I have diligently followed the subcommittee hearings on the Financial Crisis and the causes with Chairman Phil Angelides and the Commissioners.
I have made a number of comments in the Financial Times as well as the Wall Street Journal.