When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives

One of the big lessons of the fraught negotiations over bailing out (or more accurately, in) Cyprus’s banks is that deregulating institutions with an implicit or explicit state guarantee is a bad idea. You’ve just given them a license to gamble with the public’s money, and you can rest assured that they will eventually avail themselves of it.

In Cyprus, bank deposits, which in theory are senior (meaning everyone else who gives money to the bank gets wiped out before they lose a penny) are proving to be not so. The reason is that there isn’t much left in the way of equity, there is pretty much no subordinated debt. The senior debt (still junior to deposits) is mainly sovereign or central bank debt. The Germans are insisting on “private sector participation” which means someone other than central banks need to take losses. Joseph Cotterill of FT Alphaville described why the officialdom decided it was too hard to go after the non-central bank bondholders:

As it is, there were lots of good reasons why a sovereign debt restructuring did not happen. I don’t want to downplay them. Notably, the fact that the bonds that were best to restructure were governed under English law, and were likely held by the kind of investor who’s willing to litigate. I listed the problems here. Around it all was the inability to get write-downs out of Cypriot domestic-law sovereign debt, because that was held by the banks which already bore big black holes in their balance sheets. Again we come up to something that could be raised in the defence of the deposit levy — local exposure was so great everywhere, that any distribution of losses would have been painful. For the widow depositor, substitute the pension fund holding local-law bonds.

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders. Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation its depositary in late 2011. As Bloomberg reported:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

And Bank of America is hardly unique. Bloomberg again:

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

As we wrote at the time:

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.

Now unlike Cyprus, the US does not have a financial sector that is a ginormous multiple of the real economy, so that taxpayers almost certainly can and will foot the bill for any derivatives misadventure that digs too deeply into FDIC reserves. And don’t kid yourself about the odds of that happening. Academics that aren’t on bank meal tickets consistently find that FDIC insurance is underpriced. The last time bank losses bled the FDIC dry, in the savings & loan crisis, the FDIC got a Congressional appropriation to make up the shortfall.

A bit more than a week ago, Jim Himes (an ex Goldman officer) and Randy Hultgren introduced bills that not only aim perpetuate this situation but will make it worse. And do not labor under any delusion as to whether this bill has official support. Himes is national finance chairman of the Democratic Congressional Campaign Committee, and Bernanke made approving noises about the legislation.

The proposed legislation, which predictably is not getting much attention from the mainstream media, will grease the wheels even more for banks. And where is Elizabeth Warren when a real bill is moving forward? (The three bills we will discuss are going before the House Agricultural Committee for markup on Wednesday; a Senate version of the most obviously troubling one, as discussed immediately below, has been introduced).

Americans for Financial Reform has written a series of layperson friendly letters opposing each of these bills. The first is to pretty much eliminate Section 716 of Dodd Frank, which would force banks like Bank of America and JP Morgan to take their derivatives operations out of taxpayer-backstopped subsidiaries and house them in separately-financed operations. This is the germane section discussing the House bill (its Senate evil twin is S. 474):

Since the Senate hearings on the London Whale trade confirmed that JP Morgan has an ugly combination of terrible controls and no respect for regulators, allowing banks to continue to gamble with taxpayer deposits is asking for bigger, more costly blowups. Remember, these losses took place when financial markets were calm and JPM had simply made a big, clumsy series of wagers. What happens if we get a repeat of the crisis, of banks choking on their own highly levered bad cooking?

The second bill also makes banks impossible to resolve through a sneakier mechanism. If you read Sheila Bair’s Bull by the Horns, she recounts that it was particularly troubling to see at Citigroup how its operations took place with no relationship to legal entities. One of her big pushes with the bank was to tidy that up. And in coming up with living wills, banks who were not as loosely managed as Citi have still found it difficult to move businesses into specific legal entities so they could be resolved (as in sold or put into bankruptcy).

One proposed bill would end Dodd Frank restrictions on inter-affiliate swaps. The reason this matters is that swaps can be used to move risk, profits, or other economic exposures from one entity to another. And the effect of this sort of arrangement is to tie entities that might have been separated out legally back into one big economic hairball. That would make it impossible to hive them into pieces, so it would also impede legislation aimed at forcing the banks to break up. Think this sort of thing doesn’t happen now? One of the reasons that AIG was not broken up and sold as originally planned was that its property and casualty operations in the US are tethered together in a dense web of cross company-guarantees, turning what on paper are subsidiaries licensed and supervised in 19 states into one operation overseen by no one (I had a whole team, including two heavyweight economists and two serious insurance accounting experts, one of them a former senior examiner, trying to figure out how to get through all the cross guarantees and figure out the economics of the major subsidiaries, and after spending weeks on it with statutory filings, we concluded it was too hard).

AFR Letter Opposing HR 677 (on inter-affiliate swaps)

The third bill, HR 1003, is a more straightforward “throw sand in the gears” operation. It seeks to neuter the CFTC by requiring it to make more than twice as many cost-benefit assessments of proposed decisions, which will undermine enforcement actions. It effectively subjects regulation to a second screen, by requiring regulators to jump through another hurdle and prove that rules already passed by Congress don’t impose an undue cost relative to the supposed benefits. But that logic is heinous. First, recall that that sort of reasoning led to exploding Pintos. It was cheaper for Ford not to fix its cars and merely pay off the bereaved relatives of people who got fried. Second, the banks will always argue that tail risks, which is what a good deal of regulation is intended to reduce, are lower than they appear. But the cost of tail events, as in financial crises, are so great that it is imperative to be overinsured, since (as Nassim Nicholas Taleb has stressed) is inherently hard to measure and established approaches lowball it. And most important, he has described how complex derivatives risks are inherently unsuited to statistical measurement. Our summary of the key points of his article on what he calls the fourth quadrant:

Nassim Nicholas Taleb gave a presentation in New York yesterday which hews closely to a recent piece of his, although his talk did include some additional interesting charts and anecdotes…

First was his “fourth quadrant” construct. He sets up a 2 by 2 matrix. On one axis is phenomena that are normally distributed versus ones that have fat tails or unknown tails or unknown characteristics. On the other axis is the simple versus payoff from events. Simple payoffs are yes/no (dead or alive, for instance). “How much” payoffs are complex.

Models fail in the quadrant where you have fat or unknown tails and complex payoffs. A lot of phenomena fall there, such as epidemics, environmental problems, general risk management, insurance, natural catastrophes. And there are phenomena in that quadrant that have very complex payoffs, like payoffs from innovation, errors in analysis of deviation, derivative payoffs.

The other part that caught my attention was the estimation of fat tail risk.

As most readers know, all the fundamental models of finance theory use Gaussian (normal) distributions…Now supposedly quants have developed some fixes to various pricing and risk management models to allow for tail risk…

Taleb casts doubts on these fixes:

The tragedy is as follows. Suppose that you are deriving probabilities of future occurrences from the data, assuming (generously) that the past is representative of the future. Now, say that you estimate that an event happens every 1,000 days. You will need a lot more data than 1,000 days to ascertain its frequency, say 3,000 days. Now, what if the event happens once every 5,000 days? The estimation of this probability requires some larger number, 15,000 or more. The smaller the probability, the more observations you need, and the greater the estimation error for a set number of observations. Therefore, to estimate a rare event you need a sample that is larger and larger in inverse proportion to the occurrence of the event.

If small probability events carry large impacts, and (at the same time) these small probability events are more difficult to compute from past data itself, then: our empirical knowledge about the potential contribution—or role—of rare events (probability × consequence) is inversely proportional to their impact. This is why we should worry in the fourth quadrant!

So it isn’t just that the CTFC will be snowed under with busywork to justify its efforts, but that they are also likely to be shoehorned into a statistical template which will give the banks the upper hand. Well played!

Please contact your Senator and Representative and tell them you are firmly opposed to these bills since they are all “gimmie my bailout and leave me alone” proposals from the banks. One bit of good news here is that at least on paper, Republicans are not happy about the fact that Dodd Frank resolutions aren’t likely to work even before the launch of this effort to assure they won’t ever be attempted. Spencer Bachus issued a paper last year criticizing the inadequacy of the Dodd Frank resolution provisions. So it can’t hurt to tell Democrats that they need to stand behind Dodd Frank, and remind Republicans that they’ve stood for “no more bailouts” and they need not to allow those sneaky ex Goldman Democrats to allow Wall Street to suck resources away from Main Street. This sort of bill depends on the complacency and indifference of the public to get passed, and correctly painting its as an egregious piece of pro-bailout pork might make some Congresscritters loath to be associated with it.

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    1. Yves Smith Post author

      No, all three bills are going to the Ag Commitee for markup on Wednesday. They are very much alive. Unless you mean Dodd Frank. And that isn’t correct either. Some of the clearinghouse rules are having unanticipated but not negative side effects (if you are on the systemic stability side, not the bank looting side). I’m having to nail down some details, but I want to post on this soon. Dodd Frank is proving not to be completely useless (remember, we also got the CFPB out of it), just way short of what was promised.

      1. Susan the other

        Thank you for this info. Learning about the work of the CFTC was an eye opener. I guess that’s why this is going to the Ag Committee. And that’s probably why Eliz Warren is not saying anything. I’d like to know where she is too. Inter-affiliate swaps. What a great opportunity to scam every depositor in the US.

      2. Doug Terpstra

        Yves: “…we also got the CFPB out of it”.

        Is the CFPB actually proving to be an effective regulator? I had expected it to suffer paralysis, partial or total, as the “Fed’s” dependent tenant. I do hope it asserts its independence, but time and again the cartel’s steamroller seems proves implacable—especially if the White House or Treasury have oversight power, given how clearly subservient they are to Wall Street.

      3. bluntobj

        Is the CFPB going to be a good thing?

        With the exploratory work on regulating or overseeing IRAs and other retirement accounts that is now underway at the CFPB, coupled with the testing of the waters for direct bank levies of depositor funds to make bondholders & elites whole, it is now a probability that such a scheme may be applied to retirement accounts.

        SEIU floated such a plan in 2011, which involved nationalization of all retirement accounts. An easy modification would be to have the CFPB require that all IRAs have US Treasury debt as a key component of the asset mix, say in the range of 25 to 50% for discussions sake.

        I am simply stating that the tools are in place for such actions, and the willingness to do so will be coming to the forefront as TPTB and TBTF cannibalize each other trying to stay on top. The CFPB is one of those tools.

        Oh, and as for deposit insurance? How much is outstanding in deposits in banks at the moment, in total? How much in liabilities in those banks? How much is in the FDIC?

        If the outcome of that equation is, say, $1 trillion+ that must be covered by the Treasury, where will the money come from again?

        Perhaps deposit insurance is just as imaginary as property rights after Cyprus.

  1. AbyNormal

    Legal Update, OCC Offers Swaps Pushout Rule Extensions.
    Note that while this transition period provides relief for federally insured US banks, it does not aid uninsured community banks and US branches of foreign banks that have access to the Federal Reserve’s discount window. Under the current guidance, such entities must comply with the Swaps Pushout Rule by ***July 16, 2013***, pending further legislative or regulatory action.

    enter the dragon on adderall… I.C.E
    Derivatives will also become more expensive because funds need to put up larger safety buffers, or collateral, which functions much in the same way as property does in a mortgage. The banks offer tools to help keep these costs down. (laffing thru tears)

  2. from Mexico

    Randy Hulgren (R – Illinois) and Jim Himes (D – Connecticut): One could do worse than Huey Long’s appraisal of the difference between the Democrats and the Republicans:

    “Huey Long – Difference between Republicans and Democrats – YouTube.wmv”


    The influence of folks like Long moved FDR far to the left:

    That the forces of capital and management–bankers, investors, big business men, and their sympathizers–should have closed ranks against him was natural in view of his reform legislation, his monetary unorthodoxy, his huge spendings for relief, his intermittent hostility to big business, and his expansion of the area of government authority. But what if he could not hold the support of the have-nots, and found himself the leader of a centrist minority, raked by a cross fire from both sides?

    On the left Roosevelt must reckon with Huey Long, the Kingfish of Louisiana, who had always been a maverick in national politics…

    In dealing with these various political menaces on the left the quarterback showed himself to be a brilliant broken field runner. Roosevelt smiled upon Sinclair–without embracing him. Pushing forward the Social Security Bill, he gave implicit assurance to the Townsendites that he intended to secure for them at least half a loaf. Not without a side glance at Huey Long and Father Coughlin, he suddenly produced in the summer of 1935 a proposal to increase the taxes upon the rich–to levy a big toll upon inheritances and large incomes and a graduated tax upon corporation incomes. The tax did not produce much revenue and its effect upon the wealthy was apoplectic; but Huey was so delighted that he moved back on the New Deal reservation–for how long, nobody could predict.


    1. jake chase

      Since nobody else seems to have noticed, let me say that the main post is one of the very best things I have seen on derivatives in the past four plus years.

      It seems we are moving inevitably forward toward an avalanche of money, which will make patsies out of those who have been frightened out of the stock market and buried whatever they can in the back yard.

      Of course, timing is everything, but prudence has clearly been turned on its head. I wouldn’t count too much on writing to Congressmen. How about jamming their fax machines?

      1. Susan the other

        Yes this was very clearly explained. What was just my nagging feeling over stuffing depositaries has now turned into pure dread. About that money in the mattress – why can’t we expand the Post Office to include a strictly-deposit-bank for money nobody wants to risk. Let the PO buy treasuries only.

        1. Anon Too

          That’s a proven workable system that makes way too much sense to ever happen here in the states.

        2. Old Hickory

          Well, the reason such a sensible proposal would get absolutely nowhere with the Gang of 535 (OK, minus a very small number) is that the banks, even the medium-sized ones who also availed themselves of the bailouts-would throw all their lobbying forces against it.

      2. Nathanael

        “It seems we are moving inevitably forward toward an avalanche of money, which will make patsies out of those who have been frightened out of the stock market and buried whatever they can in the back yard.”

        Until it blows up.

        Eventually, the fraudulent accounting leads to organizational shutdown.

        1. Massinissa

          Its a conspiracy theory, thats all. Impossible to prove. I dont believe it myself. Though, it was a convenient death.

  3. JGordon

    I am not sure what the problem is here. If the government has to deficit print trillions of dollars to fund more bailouts, that will be excellent for the economy, won’t it? I mean, after all “deficits don’t matter”. And all that deficit fiat money would soon be economically recycled very nicely into things like hookers and coke and kickbacks once all that glorius fiat finally does work its way through the economy, enhancing the employment prospects of everyone it touches.

    So I wish you all would just be consistent and says “yes, deficit financing trillions of dollars in bailouts would be great for the economy, so let’s do it.” That would be consistent anyway.

    1. from Mexico

      @ JGordon

      In case no one has clued you in, straw man arguments are considered to be a dishonest form of argumentation.

      You do yourself and your cause no favors with the sort of dishonest argumentation, and especially when you do it so ham-fistedly.

      This sort of rhetoric might resonate when you’re preaching to the choir, but that’s the extent of its utility.

      1. JGordon

        Rather than a strawman, this is something I genuinely don’t understand. I fail to see how government money printing could ever be a bad thing from the MMT perspective.

        Or are there in fact hard and certain rules in MMT where money should in fact not be printed? You tell me. Because all this seems pretty similar to what religious fanatics do, where they pick and choose parts of their holy book they like, and conveniently ignore the rest of it.

        And besides that, the only thing you did in your reply there is ad hominem me, which does not lead me to believe that you or MMT has any answer for this.

        1. lambert strether

          Normally, I discourage “do your reading” as an answer, but the point you raise has been asked and answered over and over again. You may disagree with the answer, but you might as well have the good grace to recognize that one had been given. Color me very skeptical on “genuinely,” unless “genuine” has become a symptom for “tendentious.”

          So, the meta-straw man fails along with the straw man.

          1. JGordon

            Lambert, my ultimate problem with MMT is that the advocates of it are very short sighted. They certainly are very clever, but they lack wisdom.

            Yes, MMT certainly can work and do everything people say it can do in certain specific situations. But you seriously need to ask yourself if the things you can do with MMT are worth doing in the first place. After all, we can now manufacture fission bombs and nerve gas in massive quantities, but is that really such good idea? Believe me, I understand where you are coming from. But this thing you all are advocating is pure evil.

        2. from Mexico

          @ JGordon

          MMT for you seems to be like an all-purpose, catchall pejorative.

          You brand entire groups of people as being MMTers, regardless of whether there’s the slightest scintilla of evidence to back up that charge or not. Then you combine that with your cartoon cutout of MMT, which allows you to paint them with the face of evil. In such a way you dismiss entire groups of people without ever listenting to anything they actually have to say.

          Am I missing something, or did anyone, anywhere on this thread mention MMT? And yet here you are, trying to slay an enemy that is solely the product of your own imagination.

        3. steelhead23

          Shoot Gordon, I likely understand this stuff less well than most, but I have a simple answer. Velocity. There seems to be a bit of propaganda going around that the wealthy are this nation’s job creators. This is completely false. In fact, consumer demand is THE job creator. So here is a very different view of bank bailouts vs. people bailouts. Banks are (or at least used to be) useful institutions for credit origination. They provided the credit so that ingenious creators could produce products consumers wanted. They got themselves into serious trouble by betting against each other’s credit originations. It would be one thing to bail them out had they been prudent, took reasonable risks, and avoided becoming gaming institutions. I stand apart from the mainstream NC crowd and suggest, to the full of my lungs, that bailing out the banks was not necessary – it was stupid. The truth is that the institutions are too large. They take stupid risks, etc.

          Now, let’s take your side’s favorite punching bag – the FSA (free stuff army). If you hand a poor person money, the most likely outcome is that they would spend it. Buy things they need, not shiny new financial assets that put nobody to work. Then, voila, they create demand, demand stimulates production – and production means jobs. Lambert may tire of splaining things, but I know so little, I enjoy explaining what little I do know. Now you know too. Its velocity stupid.

          1. JGordon

            I have seen that answer before and I think it is pretty good. The problem is that the mathematics demand an exponentially rising credit origination or the entire system will collapse. While I do agree that poor people would make better use of money than the rich, that does not change the fact that a pure fiat, interest-bearing currency will eventually collapse because of the nature of the mathematics. Whether that is a fair or moral outcome, or whether it was the poor people that were driving demand or the rich people who were driving speculation in the mean time doesn’t really have any relevance to the eventual result. Currency collapse is baked into the cake whenever an exponential function is introduced into the currency.

    2. Massinissa

      Gordon, arnt you the one who usually complains that youre treated rudely round here? So then why is your first post today a strawman argument trying to get attention by offending folks?

      1. JGordon

        Strawman? I’m actually genuinely curious about what you all would see here. As far as I know there is nothing in MMT that says that money printing is ever the wrong thing to do. Although I may be wrong about that. Please correct me if so.

        1. Susan the other

          Here’s the difference. MMT proposes functional finance, spending for the good of society, whereas this fiat for gamblers you are advocating is just more dysfunctional finance.. which got us into this crisis.

          1. jake chase

            It seems to me that MMT is neutral. All it says is that monetarily soverign countries are not constrained by borrowing. Using the Go’mint for bailouts ultimately creates asset inflation; using it for socially useful projects builds infrastructure and increases wages.

            Getting socially useful projects out of a Go’Mint controlled by predatory parasites is not easy.

        2. lambert strether

          Surprisingly, what’s “genuine” isn’t determined by assertions of genuineness, but by participation in threads using good faith. Straw men don’t fall into that category.

        3. steelhead23

          Dear Lord, you truly are ignorant. I am not a full-throated advocate of MMT, but I find the theory interesting. You ask, would there ever be a time when producing more money was the wrong thing to do. Oh, hell yes. I would argue that an MMT Treasury Dept. should keep careful track of inflation. As inflation heats up (say, anything over 3% for 2 quarters), Treasury would have to take money OUT of the economy. The obvious approach is taxation, but I would bet that the MMT community would have a bunch of less unpopular approaches.

          On the other hand JGordon, I have to admit that because MMT imagines monetary policy in the hands of the government and because politicians are loathe to do anything unpopular, among my concerns about MMT is the WILLINGNESS of politicians to slow the economy down when inflation gains strength. Well, this is not an MMT thread so perhaps we should seek answers elsewhere.

          1. reslez

            among my concerns about MMT is the WILLINGNESS of politicians to slow the economy down

            Odd, for so many politicians these days are perfectly ready to slow the economy via austerity. So perhaps it is not at all as difficult as you fear.

  4. Drfrank

    Historical note: in the years before Congress got around to setting upnthe Resolution Trust Corp, insolvent S&Ls were put into receiverships and managed by outside consultants subject to approval of regulators. The idea was to restructure bad loans in such a way that the closing the institution could be avoided, because the FDIC did not have enough cash to cover insured deposits and going to the taxpayers was a huge fight in Congress. That meant that defaulted debtors got great deals, especially those with friends in Washington. Perhaps some NC readers will remember then speaker of the house Jim Wright.

    i have long advocated publication of a simple ratio which would inform the public how a the FDICs deposit insurance liability looks relative to the unquestionably safe assets of the insured institution. By publication I mean widespread public awareness, perhaps a star system like the one used for hotels. By unquestionably safe I mean the assets that are classified Pass inthe standard regulatory examination scheme, i.e., not those classifed adversely in categories such as Loss, Doubtful, Substandard or Especially Mentioned. The taxpayer who stands behind the FDIC has a right to know. Like any other kind of insurance, deposit insurance ought to be priced in relation to risk. And many retail depositors would likely want to put their money in those banks that have a better ratio of good assets to FDIC insured deposits, a 3 star bank if not a 5 star.

    Lack of information keeps market froces from regulating bank behavior, one might conclude. How else explain the current system which measures bank health by capital adequacy ratios, where determining haircuts on questionable assets and complex derivatives is the key question on the asset side and where there are tiers of capital to be considered. This game favors the insider against the regulator. It leads to complex legislation in bank regulation that is easily defeated in implementation.

  5. Parker Dooley

    It appears to me that holding companies are the root of all evil. They facilitate obfuscation, obscuration, concealment, disguise and camouflage of all kinds of wrongdoing, as well as evasion of responsibility for same. Furthermore, surely, since corporations are now “people”, the ownership of one by another is in violation of the 13th amendment.

    1. Wat Tyler

      Great point. I would contribute to a lawsuit charging a corporation with slavery if it owns a subsidiary corporation given that they both have personhood.


  6. David Fiderer

    Defenders of speculative trading and market manipulation always say they are engaged in “risk management,” as in:

    “Himes, Hultgren Introduce Bill to Help Keep Risk Management Costs Low for American Companies & Farmers, Protect Soundness of American Financial System”

    So the London Whale cornered the market in an a CDS index as a “hedge,” and David Viniar would testify that Goldman’s Big Short was nothing more than deploying tools in “risk management.”

  7. mwfolsom

    All you need to know about this is:
    “Himes is national finance chairman of the Democratic Congressional Campaign Committee,”

    This and the other bills mentioned are payback to the big banks and wall street for past and future political donations. Corruption knows no party!

  8. briansays

    pelosi needs 17 seats to take back the house and obama has hit the road fundraising–i suspect this is all a part of the effort—she is gonna need a lot of campaign $$$

    1. lambert strether

      I’m totally sure that control of the House by Democrats will make a huge difference in public policy terms, even if the win is achieved by craven subservice to FIRE sector funding.

      I mean, think back to 2008.

      1. reslez

        Well, they will need to come up with fresh excuses why Obama can’t do any of the things he ostensibly wants to do. So it’s not all fun and rainbows.

  9. Deloss

    Forgive me for offering advice, Yves, but I wish you would put ACTION ALERT or some such other cliché at the top of the post. I had to read down a long way to discover you wanted us to write to our representatives (I did).

  10. Chauncey Gardiner

    Thank you so much for this very excellent contribution to keeping the derivatives issue publicly visible. IMO you are absolutely right that they will continue to speculate with the financial resources of the American people and personally pocket any gains from their gambling, while saddling us with their material losses a`la AIG. That their risk management and internal controls are very deficient is painfully self evident, as the London Whale episode and their recent congressional testimony amply demonstrated.

    The sheer magnitude of their many hundreds of trillions of dollars in derivatives speculations through the FDIC-insured depository bank subsidiaries of the bank holding companies places the entire monetary and financial system at risk. That they have deliberately designed and engineered the placement and intertwining of these enormous risk exposures throughout the FDIC-insured depository banks and been able to engineer super-priority for derivatives over depositors under the bankruptcy code is very telling.

    These derivatives add little or nothing to the overall health of the real economy and are in fact a huge negative risk to the nation’s economic well-being IMO. Beyond writing to our Congressional representative and senators about this serious matter, how do we eliminate the stranglehold these individuals have on our monetary, financial and political systems, and begin to reverse the damage they have done and are continuing to do every day that they remain in positions of control and influence?

  11. allcoppedout

    Are we missing something in all this? Are they engineering a collapse in order to get something for the derivatives and is there any evidence they are getting out of the investments that will be trashed? In the standard looting model they don’t care if they bring everything down as long as they (personally) hold the stuff that can be sold at a profit. Is there any way to track how they might be doing this? I’m not just thinking Bill’s ‘the best way to rob a bank’ here, but pondering on whether the underlying structure now prevents more financialisation and fee rip-off (rather as Rover could no longer make competitive cars) and they are heading the good bits into a bankruptcy corral knowing this is the only profitable end-game.

    1. David Petraitis


      The whole point of collateral is to allow the creditor to seize the collateral in a default scenario. Basically putting the people’s deposits in the same basket with the derivative collateral allows the derivative creditor to seize the people’s money first, before even the people can get to it.

      It’s not so much engineering a collapse as ensuring in any downturn that I’ve got mine before you can get yours, even (or especially as we see in Cyprus) you are one of the “little people.”

      Though with the bets being backstopped by the Fed and the possibility of beaching more whales at any time, a collapse scenario is not far from any analysts mind these days. (Aside in an Anti-Antidote de Jour I remember going down to Black’s Beach in La Jolla when in college to look at a beached whale. It stunk.)

      Debt is the right of seizure backed up by the force of law.

  12. Laughing_Fascist


    Your post is brilliant. Some possible outcomes:

    If the bills are killed in the Agriculture Committee, they will be dead at least for awhile. But if they pass, at least one maybe all have to go to the Financial Services Cmmtee where there will be another chance to kill them. Though if Ag passess it you can be certain the Wall Street campaign donations to all members of the Finance Cmmtee will ensure passage.

    Then Boehner would have to bring the bills to the floor for a vote. But he won’t. Not by themselves anyway. Cause they wouldn’t pass standing alone. Instead one or more of the bills will be attached to some giant must pass piece of legislation.

    But the kicker is, even if the bills are killed in committee, the language of the bills can be appended to must pass legislation anyway. And become law. There are many ways to skin the republic.

  13. Kathy

    Good writing! But is this anything short of what they’ve been doing as it is? Just something else to get us in an uproar about! It’s not just stolen homes. Look at how corrupt and dirty they’ve already been!Nothing will be good enough to talk sensible to any of these folks! Continue drinking the kool aid this is just more of the same old crap!Get rid of them all and restore some sanity of right vs wrong! Give the power back to the people vs to these corrupt warmongers! Elizabeth is just another bought off politician!Why do we pay actors instead of real hard working people to resolve this crisis? They’ve had enough time to STEAL THE WHOLE COUNTRY BLIND! This whole crisis worldwide a lot of it is MANUFACTURED FRAUD for years..It’s just bubbling over now! The ? is just how far back does the deceit upon every person worldwide go? Their corruption and perversion of the laws should have them hung! The blood on their hands of good people trying to do the right thing regardless of adversities in their life is just WRONG! If they can’t vote FOR THE PEOPLE get them out! Steal their houses and pensions and see how they like it! Why act like the biggest thieves in our country should be treated like Roaylty? You know the FED is complicit in their manufacturing of the FRAUD. The FED knows where all the transfers to the off shore accounts went! You don’t think they didn’t use the Wire Transfer services of the FED do you? Now for my newest video http://www.youtube.com/watch?v=870afUu6bS0

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