By occupythesec. Cross-posted from Occupy the SEC.
Paul Volcker had a simple idea: get the government out of the hedge fund business. From his simple idea was born a simple proposal: ban proprietary trading and investments in hedge funds at government-backstopped banks. Congress agreed, to a point, and passed the “Volcker Rule” as section 619 of the Dodd-Frank Act.
The draft of the Volcker Rule, which grew from a three-page proposal to a 300+ page behemoth, was released by the regulatory agencies this October. The draft rule grants a number of exemptions from the proprietary trading restrictions. One of our major concerns is the blanket exemption for repurchase agreements (“repos”). The exemption isn’t mentioned in the statute, and for reasons discussed below it seems to defy the intent of the rule. In our eyes, the presence of such an overbroad exemption is profoundly disappointing. Whose interests are the regulators serving?
Repo lending is best described as the financial equivalent of a visit to the pawnshop. An asset is deposited with a lender in exchange for cash, with an agreement that at some point in the future a slightly larger amount of cash will be repaid and the initial goods returned. The pawnshop provides a way to exchange a valuable-but-illiquid asset (a grandfather’s watch) for a source of short-term liquidity (next month’s rent).
Repo provides much the same function for banks—except that instead of a watch, one deposits bonds or other securities, and instead of next month’s rent, it is used to fund today’s trading activity. Repo financing is an integral component in global financial markets. It is the major source of funding for trading positions in global Bond and Derivatives markets. The regulators argue that repos are simply secured-lending arrangements, and that the securities underlying repo transactions should be excluded from the definition of proprietary trading assets. If this were the case, why grant such a broad exemption?
In the Spring 2009 issue of Stanford Lawyer, Berkshire Hathaway Chairman Charles T. Munger described repos’ role in terms sharply divergent from those implied by the regulators presumption of repo as a benign banking activity in defense of the exclusion:
Munger’s comment should serve as sharp reminder that repo has hardly been a harmless bystander in recent systemic shocks. The fall 2008 ‘liquidity’ crisis was largely the result of a breakdown in the repo market. Yet the draft rule sees fit to license any and all repo trades in the name of innocuous ‘securitized lending’. These trades are hardly innocuous. Repos are intimately involved with prop trading books, overleveraging, and regulatory evasion, and are exactly the kind of mischievous and systemically risky transactions the Volcker Rule was meant to restrict. Starving the beast, rather than keeping it well-fed with regulatory exemptions, was the intent. That intent is damaged, if not entirely compromised, by the proposed exemption.
Repos are not simply secured lending anymore
If the last twenty years of financial history have taught us anything, it is that every instrument can be restructured into something barely resembling the core asset it purports to be based on. MF Global’s recent implosion—replete with the apparently-irretrievable loss of still-unknown amounts of shareholder money—offers an abject lesson.
“MF Global used a version of the off-balance-sheet move called ‘repo-to-maturity.’ The firm offered billions of dollars in sovereign debt as collateral on a series of loans designed to expire at the same time as the collateral itself. With the collateral and the loans coming due simultaneously, MF Global might never take possession of that debt again. That entitled the firm to count those as sales, and moved $16.5 billion off its balance sheet, most of it debt from Italy, Spain, Belgium, Portugal and Ireland.
…To top it all off, the accounting for these deals added $124 million in financing payments to the firm’s revenue over the last four quarters, according to SEC filings, firm documents and people close to the firm.”
This case illustrates one of the principal problems with the proposed rule’s interpretation of repos as secured loans: this interpretation fails to account for the fact that repos often take on the characteristics of proprietary trading. In the case of MF Global, the ambiguity around ownership of the underlying asset was exploited to destabilizing effect. Plain vanilla repo is unambigous about ownership of the asset during the secured lending period.
We would hope that regulators might have learned their lesson about assuming that all repo was plain-vanilla repo. Since there is no standard contract for repos like with ISDA, dealers are free to be extremely creative in their contracts. This potential has been abused, notably, with the Lehman Repo 105 and the MF Global reverse-repo account ploy.
At this point, little data is available on the number and nature of repo-to-maturity and other repo-as-prop-trade transactions in the marketplace, or on the specific counterparties involved. That said, in the same Reuters article it is noted that Merrill Lynch has “disclosed that they use the [repo-to-maturity] structure.” We feel it is very likely that other US banks have repo trades of this type on their books, making this transaction and the concerns it raises a potentially significant issue in both the Volcker Rule’s implementation and our future systemic stability. This is known to the regulators–Mary Schapiro said on December 1st that she is in talks with the FASB about whether the repo-to-maturity loophole MF Global used requires further disclosure, and the FASB has a new rule closing the Lehman 105 loophole. This seems to amount—as so frequently the case—to a closing of the stable doors after the horses have bolted.
These tardy responses to long-standing abuses suggest that the regulators had the authority but failed to use it to shut down repo abuses that resulted from reliance on varying interpretations of accounting rules. The SEC could have shut down the Repo 105 abuse by rule long before Lehman collapsed. Perhaps as damning, regulators are fully aware that a panoply of bad behavior by the banks has been carried out under the guise of repo. If past is prologue, Volcker’s repo exclusion perpetuates rather than limits the ability of firms to game the regulatory and accounting rules.
For all these reasons, the short-sighted reasoning the regulators present in support of the blanket exclusion should give us pause. They are aware—as indicated by Schapiro’s comment—that some portion of the repo market is structured, and some of those structures likely contain elements that would cause them to qualify as trading assets. Furthermore, they are aware that repos have been used multiple times to hide risky proprietary positions (or losses) that might otherwise be troubling to the marketplace. Taken in sum, this suggests a bizarre and seemingly willful amnesia on the part of the drafters.
How to run a Proprietary Trading book with Repo
Even if repo had not been abused in the past, we would be alarmed. The blanket exemption opens up enormous loopholes where banks could use repo to structure prop trades. Here are just a few examples of ways to do so:
- Shorting: A bank enters a reverse repo with Counterparty X using bonds as collateral. The bank immediately sells the bond, anticipating that the price of the bond will decline. When it is time to return the bonds to X, the bank buys them from the open market, hoping to benefit from price depreciation in the bond. This is essentially a short position on the bond, wrapped up in a repo.
- Basis Trades: A bank enters a reverse repo with Counterparty X, using securities as collateral. Later, the bank (the repo lender) returns “substantially equivalent” securities instead of the original securities. Since the proposed rule uses the broadly-interpretable ‘stated asset’ in the definition of repo, it seems the rule would allow the bank to return a “similar” asset instead of the original one. The bank is essentially going long the initial security it takes in as collateral, and short the “substantially equivalent” security that it will eventually return to Counterparty X.
- Put Options: A bank repos some securities in exchange for cash. The repo lender takes the securities. Later, the repo lender fails to return the securities, either due to an outright default or pursuant to an embedded right to refuse delivery. The bank has essentially sold the securities. The CFTC has actually highlighted this possibility. They said: “under new bank capital standards, a sale of securities subject to a repurchase agreement with a unilateral right in the transferee to refuse to return them could be construed to be the granting of a put from the perspective of the original ‘seller.’ This would attract a capital charge.”
- Interest Rate trades: A standard repo trade is a rates trade at its core, as the repo rate is effectively the interest on a collateralized loan. Booking a repo looks like three separate trades:
- a sale of securities
- a future purchase of the same securities, and
- a swap, the cashflows of which are the repo rate.
The purchase and the sale of the securities net out, leaving a (proprietary) directional swap.
- CDS: A bank wants to speculate on the failure of a Counterparty X, so it enters into a repo transaction with X with a significant haircut. The bank lends X some cash, and demands collateral with significantly higher value than the cash. If X defaults, the bank keeps the collateral and locks in a huge profit. (This is functionally a CLN with X, referencing X)
Alongside this menu of desired proprietary exposures that can be smuggled under the rule as basic “repos”, the advent of financial engineering has led to repos that are designed to house many more types of risk. Below is a list of some of the major structured repo categories that contain elements of proprietary trading:
- Cross Currency Repo: By accepting collateral denominated in a different currency than that of the cash exchanged for it, a bank can embed almost any desired FX exposure into a Repo.
- Callable Repo: By including an early termination option for the repo lender, any repo swap can be made to include an option on that swap. If rates go up, the repo lender can exercise its option, recall the collateral, and re-repo at a higher rate.
- Total Return Swap: A more generic way to structure a CDS into a repo, the repo rate in this structure is typically some spread to LIBOR, where the spread is determined primarily by the credit risk of the collateral at the time of the trade. In essence, the Bank is lending money in exchange for collateral AND gaining exposure to the credit risk of the collateral.
It is not difficult to see how banks can package almost any kind of risk into a repo by modifying the conditions of the ‘repo rate’ within them.
Repos are already excluded under the Liquidity Management exemption
The blanket exemption given to repo agreements is particularly puzzling—and perhaps sinister—in light of Section __.3(b)(2)(iii)(C) of the Proposed Rule, which states that a bank’s trading account is not subject to the Volcker Rule if that account contains financial positions undertaken for ”the bona fide purpose of liquidity management and in accordance with a documented liquidity management plan.” That section goes on to define five criteria the liquidity management plan must meet. These include requirements that transactions be for managing liquidity and not be prop trading, that positions taken are “highly liquid” and not expected to earn “appreciable P&L”, and that the amount spent on liquidity management be “consistent with the banking entity’s near-term funding needs, including deviations from normal operations.”
A classic plain-vanilla repo agreement would certainly meet the above criteria. The regulators—or those lobbying them—must be concerned that there are more exotic cases where the use of repos by banking entities do not adhere to the criteria. This makes the blanket repo exclusion all the more inexplicable and troubling.
Now’s the time to speak up
There is, however, some good news here. This draft of the Volcker Rule is, well, a draft! The public has the right to submit comments on this draft up until January 13th, 2012, and these comments will become a part of the public record.
Our objections boil down to:
- As evidenced by Lehman’s “Repo 105” and MF Global’s “repo-to-maturity,” repos can and have been used to obscure and misstate exposures, thus hiding growing insolvency.
- Repos can be structured to hide proprietary trades, thus subverting the rule and violating the law. There is no mention of special status for repos in the statute.
- Typical repos would be already covered under the exemption of accounts used for Liquidity Management, so there is no reason to carve out a specific exclusion for repos.
- The repo exclusion in the proposed Volcker rules impacts non-bank repo counterparties, primarily Money Market funds. The exclusion has a systemic effect on markets in general and should be an issue of public concern.
One of the questions the regulators have asked for public comment on in the Proposed Rule is about repos:
“Question 30. Are the proposed clarifying exclusions for positions under certain repurchase and reverse repurchase arrangements and securities lending transactions over- or under-inclusive and could they have unintended consequences? Is there an alternative approach to these clarifying exclusions that would be more effective? Are the proposed clarifying exclusions broad enough to include bona fide arrangements that operate in economic substance as secured loans and are not based on expected or anticipated movements in asset prices? Are there other types of arrangements, such as open dated repurchase arrangements, that should be excluded for clarity and, if so, how should the proposed rule be revised? Alternatively, are the proposed clarifying exclusions narrow enough to not inadvertently exclude from coverage any similar arrangements or transactions that do not have these characteristics?
If you have additional arguments against repos as they are included in the Volcker Rule, we invite you to leave them in the comments. Though we’d far prefer you’d address Question 30 in a comment letter of your own.
If you’d like to join Occupy the SEC in their efforts to sniff out and highlight other loopholes in the Volcker Rule, you can find out more at http://occupythesec.org.
There is standard documentation for repos akin to the ISDA; there is the Master Repurchase Agreement as well as the Global Master Repurchase Agreement. Both can be tailored to nefarious means, as can the ISDA itself (see the GS pre-paid currency swaps with Greece or JPM and Jefferson County).
Is that like those dog registries that have sprung up because the AKC doesn’t recognize certain breeds?
Brilliant. Extremely well put and useful. Thank you.
I like that this site is posting material on repos and rehypothecation — interesting stuff.
But it seemed to my like some of this could be a stretch — are there actual instances of repos being used to do basis trades, puts, or CDSs? I would see a few issues.
First, these are of course incredibly different economically from vanilla repos, so that the counterparties would also be aware that they are really not doing “repos.” No vanilla repo counterparty would allow a return of different securities, thus exposing that party to the basis risk usually avoided in repo, or grant an option to the lender to not return the collateral, or permit the counterparty to keep more value than the amount of the loan in the event of a default.
Second, I’m not certain, but I would be surprised if the first two trades could be booked as repos for accounting purposes, given that there is no requirement to return identical securities (a hallmark of repo). If this is the case, these trades won’t be invisibly sitting in the repo book.
Re the CDS trade, my experience is that banks don’t like to lend to risky counterparties where the upside would require that the contract survive a bankruptcy proceeding. Did the author check that this sort of repo would be safe-harbored in bankruptcy?
Third, though banks certainly do stupid things with shocking regularity, there’s a significant risk to a bank of setting up prop desks (or “structured repo” desks) on the hopes that this loophole isn’t closed.
So while I see that it would make sense to be clearer in the regulations, I’m not persuaded that this is an exception that will in fact swallow the rule.
Bankruptcy code treats repos like swaps.
No automatic stay to prevent party with the security from closing out the position.
There are other protections too.
But bankruptcy has caused problems with these too complicated to discuss on my iPhone
The CDS example is based on the role of repo described in the class action suit against JPM re SIGMA.
JPMorgan Accused of Breaking Its Duty to Clients
http://www.nytimes.com/2011/04/11/business/economy/11bank.html?_r=4&pagewanted=1&ref=business (follow the links, its a fascinating tale)
The short version: The plaintiffs allege that JPMs sec lending arm funded the last ditch repo funding to SIGMA, collateralized by assets of the SIV. The repos gave JPM the right to seize collateral as the fund collapsed. Since the repo haircut was appropriate JPM was made whole and then some.
The plaintiffs are distressed the JPM’s arm managed the pension funds of those same customers, at the same time, maintained the fund’s investments in the cratering SIV. JPMs customers lost virtually everything on that investment.
Adding insult to injury, the plaintiffs other assets provided collateral (via their participation in the Sec lending program w JPM) used by JPM to fund the repo that kept Sigma alive well past its sell-by date.
JPM argues chinese walls prevented the various arms from sharing information that might have prevented their clients from funding their own losses.
As it relates to Volcker, this case touches on the exemption for repo as well as the exemptions for sec lending as well as the exemption for certain Asset management activities.
This case suggests that, contrary to your experience, others have experienced situations where a bank does lend via repo to overextended counterparties when the haircut is attractive enough.
Great post, occupythesec, but what all you guys must understand is that this Repo rule was not drafted by the SEC. The SEC employs nobody smart or experienced or literate enough to even understand the two purposes for which repo exists. The first purpose is to create accounting profits where real profits either do not exist or exist only from creating unconscionable risk and passing that risk along to the Fed; the second purpose is confusing dumb counterparties like money market mutual funds into thinking they are getting return without risk, when what they are really getting is a ticket to a black hole. Every single word of these regulations has been written by the lawyers for the investment banks. At the SEC there is some putz sitting and taking dictation and hoping for a payoff junior partnership when he brings in this turkey on behalf of his furure employers. This is how Washington works and we will keep paying for it until we find a way to close the revolving door and get big money out of politics.
Yves, I know I am not as smart as you. But for some reason, as I have read this post, I got the sense that repos so sound like “get this tv now at 18 months Interest free”. It just sounded like someone who doesnt have the cash flow to get the tv now. So he trades 18 months of free interest payments in exchange for the tv now.
But it also sounds just like gambling to me. Here’s the watch for some quick cash that I can take to Vegas, hopefully make sum money on the cash, go back and buy back the watch. And now you have your watch and a pocketful of money.
One can only hope that the old Woody Allen joke — “My grandfather, on his deathbed, sold me this watch” — applies to the banksters.
Can someone explain to me what possible social utility these sorts of transactions might have, apart for using a single asset (which may itself be of dubious value) to create huge mountains of largely illusory “wealth” and thereby creating massive systemic risk?
improved sales of Gulf Stream Vs; higher property values in Vail, Sun Vally and the Hamptons; GOP Presidential candidates with multiple accounts at Tiffany’s and of course there is always the tried and true deadly sin of gluttony—Microsoft Guru Myhrvold Serves Wine in Blender, 30-Course Feast.
And then, for the skimmers who take their percent on the deal, hookers and blow.
It’s all good!
is it just me or is it really so simple and obvious…
when the financial “industry” uses 20 to 1; 30 to 1; 40 to 1 leveraging—DEBT, the purely speculative kind—it is a good and holy fundamental bedrock of free market capitalism.
when governments uses 2 to 1; 4 to 1; 8 to 1 leveraging—debt, the real asset backed, nation building, life affirming kind— it is a cardinal sin on the road to perdition.
In response to the question about whether repos have been used in the exotic fashions mentioned above, I worked on several deals where a dealer would use a repo as a put during 2007/2008. The trades were known as renting balance sheet, since the dealer was moving toxic assets (MBS) off to a hedge fund client, yet without having to actually record a sale at a loss.
With the client’s knowledge and consent, and a bit of compensation for his trouble, right?
Thanks! Did you look at the the accounting treatment for that at the time? I don’t understand how a sale with no requirement for repurchase would be treated as a financing — i.e., a repo — rather than a sale and a put option. I’m not trying to be thick or difficult, it’s just that embedding a right to not redeliver the securities changes the economics so much that I don’t see why it would be treated as a GAAP or IFRS repo. And of course, I can’t actually check with the pros during the weekend . . .
Thank you for this explanation. It was very interesting.
People should perhaps extend their “move your money” thinking to “move your wealth”. These kinds of well disguised looting operations/methods still work at the level of “money” and the possessors of that “money” still need to sell that “money” for wealth at some point if the “money” is to have its ultimate value to them.
What forms of survivalist-wealth can ordinary people start buying with their “money” right now so as to have a greater chance of personal biological survival later partway outside the looterist-money system?
It is increasingly obvious that this kind of thing is the future of American finance as the free flows of money are quickly being soaked up. Looting assets is all that’s left when the cash flow is gone.
Food, water, power, shelter — and hopefully not in a gated community, but a real one.
Those people who already live now in non-gated communities now might perhaps think about creating non-monetized survival and life-support-system flows within their nongated communities now. Suburbanites could grow more food than they know, but not until they realize it.
Jeff Vail has written some articles on Sustainable Suburbia. John Robb at Global Guerillas has been posting for a while now about “resilient neighborhoods” and other survivalism-related subjects. David Holmgren the co-founder of Permaculture has written an article about retrofitting Suburbia for Permaculture Sustainability. Money spent on the tools and inputs and effort to build some of these capacities is money no longer lying around for the upper class to loot and hoard to spend against us later.
Of course that still doesn’t solve the problem of financialist aggression against homeowners and homeowers. Is there any legal way for someone who has reason to think they “own” “their” home to be able to pre-prove that and pre-immunize their property against strong-arm robbery by the financialists and their governmental servants?
(Perhaps it will come down to “this mortgage paid off by Smith & Wesson” ?)
Thanks. “Non-monetized survival and life-support-system flows” is a more precise statement than mine.
As for ownership, I’ve thought — semi-seriously — of transferring the land to one of the tribes in exchange for continuing, er, occupation for myself and maybe one more generation….
They would want to know that is is not some kind of trick on your part. They would want to know that they could be sure that you would abide by their law and custom, or at least not be some kind of point-source pollution-emitting bad neighbor or local resource sucker-upper accumulator. (I’m just guessing about that of course).
I hope that Yves Smith will from time to time offer a post addressing, however tangentially, the survival strategy of counter-monetizing our survival and life-support system flows. And then monetization-proofing them as nearly altogether as possible.
We should also think about moving the money we still have and will still need out of megabanking and megacredit channels and into second and third tier minibanking and microbanking channels and no more credit-use than utterly unavoidable. The more money we move into mini-micro cash-and-carry type channels, the better chance those channels will stay strong enough to allow us to withstand megabank
After all the clever swindles the financialists have worked and all the main-force robbery they have committed under cover of their supportive Presidents and Congresses; they haven’t been able to suck a single sardine out through the side of a single one of my cans of sardines. There is a lesson in that somewhere.
Yes, I know there’s a horrible history there.
The repo code explained:
Good, but both object and abject seem right here.
Oops, meant that in response to goalbak below
Typo in “…abject lesson…”?
Good piece. And a good illustration of how complexity in the hands of “innovators” has become the primary means for creating instruments, legal (but should not be) or illegal, for the purpose of predatory wealth extraction.
How Shapiro remains head of SEC is quite beyond me – until I recall that her job is NOT to regulate. I can’t imagine her doing anything that might meaningfully rock the boat for banks in the current atmosphere of crisis, but here’s hoping….
Perhaps it’s the basic underlying assumption that must go, i.e., that the fundamental mistake was the presumption of real economic benefit just because banks (or shadow banks) made “healthy” profit from the collection of “innovations” that have been created over the past couple decades all largely to obfuscate or elude the existing thinking about risk and regulations and responsibility. Perhaps what’s needed are positive and negative burdens of proof as to both safety and real benefit. Actually, I’d go so far as to incorporate in any important financial or other vital law/regulation (environmental, for example)a clause to the effect that any effort of any kind which has the effect of circumventing the clear INTENT, not just the legalese language, of this law, regulation, rule, directive, etc., is a breach of same absent specific approval from the regulator in a completely transparent, public process. In other words, if there’s any chance at all that “product” or activity “x” is illegal, it IS illegal. An end to “our lawyers advise us…blah, blah.” Otherwise, you end up with things like Presidents who order assassinations like it was ordering a burger and fries and a collective finance predator/regulatory “who coulda known” or “I thought it was OK” shrug.
The interesting thing is that they are not extracting wealth in a single smooth step. They are extracting “money” which they then have to trick society into buying in exchange for “wealth” as the second step.
All the money in the world at this very moment is only worth all the stuff for sale in the world at this very moment. If we could get clear on the difference between “money” and “wealth”, we might be able to understand which battlefields to wage which kinds of warfare
“Hey pal, your money’s no good here. Your money’s no good anywhere.” That’s the kind of world we have to make for the gang bankers to have to deal with.
Well, as things stand, by capturing pretty much all important governments and institutions in most of the Western world, banksters with their interlocked Board brothers, the gargantuan multinational corporations and their supporting casts of professional cons/intellectual prostitutes have a hammerlock on the situation. I believe younger generations than mine are going to have an epochal fight on their hands attempting to right this appallingly imbalance, given that the Boomers (I am one) have so completely blown it, simply not caring enough about the world beyond their enormous Selves to head all this off long ago, let alone mount a fight in good measure against what we ourselves became. I think most people are still in deep denial as to how pathologically addicted to power in ALL its forms (financial, political, military, technological, social) the existing elite is, how far removed they are from life here on the ground, and how far they will go to maintain their position – all the way, I figure, as they are now so deeply entrenched. So I sympathize with the survivalist outlook though I’m not sure one can prepare for a real societal breakdown from whatever cause other than to cultivate as great a degree of flexibility/adaptability as possible. The next 10 years makes it or breaks it – not that we have 10 years, but that some time within that 10 year span, we will pretty much know if we’ve made it or broke it, really broke it.
If you have food, water, and clean enough air, and some family with care, how can you go wrong? And some 30 odd 6 and other weapons as, to prevent simple thieves from taking your stuff.
Health care. An awful lot of us need medicine, too.
That’s why it’s good to get an entire community. An entire community makes food and water easier, and makes medicine *possible*.
“Hey pal, your money’s no good here. Your money’s no good anywhere.” different clue
That presupposes that other monies are “good here”, doesn’t it? Thus the need for genuine private currencies.
Ammo is the ultimate currency.
Skippy…next is water and food… bang – bang.
You keep raisng an issue which is above my braingrade. You are interested in ultimate economic-philosophy issues but all I can handle are proximate economic-functionality problems. And I can’t even handle those very well.
“Your money’s no good here” is a colloquial phrase. It means “we won’t accept money from YOU in this context”. So I was expressing the hope that we the downtrodden could somehow create a social-cultural political-economic context wherein we could refuse to sell our wealth to the moneylords when they came to us to buy our “wealth” for their “money”. It is about accepting a dollar from our fellow downtroddenites, but not accepting the same dollar if it appeared in the hand of an OverClass Lamprey (or one of its myriad minions).
Most of the “money” in America is somehow credit-created and debt-based/ debt-monetized. That would be the digital-digitized data-entries all over everywhere. Very little of the “money” is in the form of actual physical currency . . whether Federal Reserve Notes or United States Mint Coins.
I gather some kind of monetization-of-debt is involved for every FRN that is printed . . . but that debt is only monetized once. If that FRN (or any other FRN) is spent from hand to hand to hand after that, debt is NOT re-emmitted during any of those hand to hand to hand FRNgood or service transaction. The FRN has become a mere Medium Of Exchange. So to the extent that I do bussiness in
already-existing FRNs or UMintCoins, I am not causing any more Virgin Debt to be fucked into existence. I am merely facilitating the transaction of stuff-for-money-for-stuff economic interactions between economic actors. Case in point: when I pay cash to a storekeeper, does a Credit Card Company get a Swipe Fee? No. See what I mean?
So if we the downtrodden did as much bussiness among ourselves in Legacy Cash and Legacy Coins as we could, we are avoiding just that involvement in the fucking-into-existence of new Virgin Debt, and we are avoiding the contracting of just that much Virgin Debt, which represents just that much Debt and Interest payments which we Will NOT Owe to ANYbody. And that represents just that much streams of money NOT REACHing the OverClass. And that means depriving the OverClass of just that much “money” thereby preventing them from having just that much “money” to be able to exchange for “wealth”.
Yes, I know what the expression typically means. But the problem is that the bankers’ debt-created money is the only real option when it comes to money because the bankers have used government to make sure of that.
BTW, “Your money is no good here” can also mean “Put away you wallet. All expenses are on me/us/the house.”
Nice post, really got me thinking.
I know that I am not so smart anymore, and learned in economics and finance, but about two paragraphs into this piece I began to remember that having to pawn your stereo to get money to fix your car is a sign that you are not doing well, and in fact you are going under. If these “entities” don’t have the money to buy whatever piece of paper they want to buy, shouldn’t they just NOT BUY IT. If they have to pawn other paper that they already have to buy new paper that they want, isn’t that a bad thing? If ordinary people do something that that they are morally condemned as being imprudent,wasteful, living beyond their means and unable to defer gratification. Why is it good for a bank to do it and bad for me to do it?
Also these other deals like the short, the cross swap and the callable repo remind me a lot of the time I had a quick change scam pulled on me when I was clerking in a grocery store: several bills going back and forth fast and in the end the outgo was a lot bigger than the income.
Bravo, brilliant analysis. “Whose interests are the regulators serving?” you ask rhetorically.
By enumerating the many evasions and shell-shuffling maneuvers banksters can and will exploit, you’ve effectively stripped the SEC of its mask of apparently reasonable rule-making, which once again is expicitly designed to aid the looters they work for. No doubt it riles them to believe that you perceive the web they weave. Way to go.
The analysis is not mine, so I removed my name. But the author will appreciate your comment, I am sure!
Makes you really think about the events that lead to the recession, and how these loopholes where exposed. Awesome post
I have been unhappily perturbed since Obama’s speech touting the Volker rule. Maybe it’s just my comprehension of the English language that is lacking, but my semantic reading of Obama’s speech seemed to be clear that after talking about the Volker rule in the first part of the speech that later on in the very same speech he began his perversions of the very intent. That was followed by ‘clarifications’ of his speech the next day by key admin figures further perverting Volker’s clear intent.
As time has gone on, my perception is that Volker’s intent has just about been completely eliminated. I would be interested if anyone has any comments as to anything that he recommended that has survived in any meaningful way at this point.
Volker was very urbane and very restrained about commenting on the perversions thereby giving Obama and Dodd-Frank some, to my opinion, erroneous cover. I have to say I have no idea why he didn’t speak up at any time. Perhaps he still wants to avoid exclusion from the inner circles – although I can’t for the life of me figure out why he would be so inclined and as far as I can tell he was always excluded from any meaningful participation anyway. I for one would certainly like to see his voice raised.
It is strange he would allow it to appear that he was transparently used like a Brand name. He should’ve walked the minute it was clear they had no intention of real reform, and made it very clear publicly why. Hard to imagine what stake he’d have in a piece of truly crappy legislation that would damage his public standing at his age, yet there it is.
Odd indeed, maybe they had some dirt on him. Or some made up dirt.
Or maybe he is such an institutional loyalist, and so loyal to the concept of institutional loyalty; that he believes he owes it to something-or-other to stay in the group, accept the insults and abuse, and try to change “something” “from the inside”.
At a certain level of committment it doesn’t matter whether you’re being used or you’re using yourself.
“But my semantic reading of Obama’s speech seemed to be clear that after talking about the Volker rule in the first part of the speech that later on in the very same speech he began his perversions of the very intent. ”
You mean like his claim that the US would close Guantanamo?
Or end the war in Iraq? (5000 mercenaries to be employed indefinitely)
Or to “restore the rule of law” (by which he meant, make it legal to assassinate American citizens)?
This is pattern and practice for Obama. He’s much slicker than Bush but he’s playing from the same playbook. I don’t know why, honestly — Bush knew that his pals would take care of him if he did what they wanted, and Obama should know that Bush’s pals will sucker-punch him even if he does do what they want. But apparently he doesn’t know this.
How anyone can read this discussion of repo’s, and the use of repo’s to facilitate propriatory trading and not come away shaken by the content of the discussion is beyond me? This is and has been financialization gone amok. If this is why we need the rich, then we don’t need them at all. Carried to its logical conclusion this practice will devastate employment in the financial services industry by virtue of its sheer incestuousness. Nothing is created, nothing is exchanged, and it appears that computers could accomplish this without the intervention of humans. This is pure extraction of wealth with transaction fees that can be generated without any legitimate and recognizable transaction.
Nothing is created but more wealth for the wealthy, who are supposed to be “the job creators” for the “little people.” At least during the mortgage bubble, there were jobs originating the mortgages that fleeced people out of their homes. (I was reminded of this after driving past a long abandoned World Savings location today.)
The financial services industry should be shrunken back to the size needed to perform real financial services for real economic function-performers who need those real services. The rest of the financial services industry should be shut down and the workers involved should be permanently disemployed.
Here is an article by Martin Hutchinson of The Bear’s Lair pointing out why Wall Street and the City of London “will” become Rust Belts. He confuses “will” with “should” (as in “deserve to become”), but making allowances for that confusion, I share his hope that Wall Street and the City of London become Rust Belts, as they deserve.
The more I read about the inner workings of the financial system, re how to profit from cooking the books and how to profit from transaction that can work only thanks to regulatory capture, the more I hate the highly functional psycopaths that are ruining/have ruined funding for main street.
The recent article from Reuters did a good job of speaking to hyper-hypothication in layman’s terms. But when you look to trace the data in the article it gets confusing. On Goldman, for example, Reuters shows $18.03B in repledges (from footnote 3 on page 51 on latest 10Q under table for ‘Other secured Financing’, i assume). But the very next paragraph, “Collateral Received and Pledged”, shows huge numbers – $464B repledged of $633B avail to repledge. Why is the $18.03B the right number to focus on here?
oops, the Reuters link: http://newsandinsight.thomsonreuters.com/Legal/Securities/Insight/ViewInsight.aspx?id=34089