Friday, February 3, 2012

Derivatives, The Ticking Time Bomb For World Economic Collapse: It's ONLY 700 TRILLION Dollars - What Could Possibly Go Wrong?

One of the many subjects that I have been following very closely over the last few years is the failing economic state of the entire planet, primarily due to the evil woes of the criminal Usury debt based monetary system.  It is a fact that throughout history, any nation that has adopted such a disastrous economic system, and a "fractional reserve" monetary policy system, has always collapsed, to only become a footnote in history.  Such is the present situation in the United States, and most western nations.

But again, even with the impending economic collapse of most of the economies on planet Earth, few governments and financial institutions ever talk about the real ticking time bomb that could spell not only world wide economic collapse, but financial armageddon for the entire world.  That of course is the absolutely horrendous Derivatives markets. 

I have found that very few people actually understand still what a Derivative, or a "Credit Default Swap" actually is.   To help everyone to understand exactly what these terms mean, and how they are the true ticking time bomb for world wide economic collapse, I want to present the following article that I just came across from Poor Richard's blog, at, entitled: "It's Only $700 Trillion - What Could Possibly Go Wrong?".    This is a great article for the common person to get up to speed on exactly what a Derivative is, and how the criminals have allowed them to explode to the point now that they could cause full financial armageddon.   I do have some additional comments to follow:

Friday, February 3, 2012

It's Only $700 Trillion – What Could Possibly Go Wrong?


If you can read this article without being worried, you just ain’t thinking. Charles Hugh Smith is another truth teller. He should be read every day.

Counterfeit Value Derivatives: Follow the Bouncing Ball (Guest Essay)

This guest essay on derivatives was written by frequent contributor Zeus Yiamouyiannis.
Here is how the counterfeit value derivative con works.It’s a game of “I pretend, you pretend, we all pretend, and the taxpayer will pay in the end”.

1) I’ll create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain “notional” value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount.)

2) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDS’s value is based in nothing more than my promise to pay. I don’t have to have adequate capital reserves on hand, but I can pretend as if I do perhaps with some mini-reserves based on objective-seeming risk ratios calculated by my mathematical models. (credit default swap.)

3) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDS’s. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.

4) As buyer and seller of CDS’s either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces. This allows us to retain even less reserve capital and spend freed-up funds on more high-risk, high-(pseudo) return speculation. (The monster that ate Wall Street.)

5) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.

According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are not transparent or regulated.

With regulated economic markets, when an underlying real asset is impaired (i.e. the company in question is bankrupt, the mortgage has defaulted, etc.), market value is assessed, default insurance is paid up to replacement or full value, bond holders and stock holders make claims on remaining value and the account is closed. There is no need for bailouts because order and proportion of compensation has been established and everything is attached to the value of the underlying asset.

When the unreal, counterfeit economy intrudes, you now have a situation where a person can put in an unregulated, but recognized, claim to be paid a thousand times over in case of impairment. Say market participants have negotiated for a bankrupt company a 70% payback for bondholders and (36% payback for insurance claims), and I come with not one but rather 1,000 CDS claims demanding to be paid for each CDS.

Where does that money come from?Well if it were regulated insurance, I would have to be invested in the company in some way, my bond or stock payout would be limited by the actual asset value of the company, and my insurance payout would be limited as well. However, since I am unregulated and unrestrained, the money due me has to come from the CDS seller and my contractual agreements with that company (say AIG).

AIG could easily have sold 1,000 different unregulated insurance policies to the same person or a million CDS’s to a hedge fund, and when AIG could not pay up, it was threatened with insolvency, under which both its regulated and unregulated insurance policies and investments would become impaired. In fact there is abundant evidence that hedge funds (i.e. Magnetar) did in fact multi-insure certain portfolios while simultaneously pressuring the portfolio managers to select risky investments to ensure that the portfolios would crash. This is the opposite of a traditional “stake,” and this is the disease that modern derivatives bring—profit from intentional market destruction.

This chaotic state of affairs and its cascading implications for other interlinked parties and counterparties (read “too big to fail banks”), essentially resulted in economic extortion to force a huge public bailout of the whole crooked mess (totaling somewhere in the neighborhood of 10 – 14 trillion dollars in giveaways, loans and guarantees starting in 2008 in the U.S. alone.) Instead of agreeing to the extortion temporarily to prevent collapse and then aggressively pursuing orderly investigation, prosecution, and receivership, regulators and world leaders have simply covered up the events and even rewarded the perpetrators.

No wonder the market goes up dramatically when there is talk about another quantitative easing (Fed bailout) or emergency rescue (government/taxpayer bailout).These financial game players already know that an open public spigot is on its way, pouring real capital directly into their pockets.

In regulatory actions and legal courts, unregulated insurance claims should simply be declared null and void when applied to real assets and real compensation. “You have no stake, therefore you have no claim. Your agreement was with a third party that did not have adequate capital to pay for a contract with you. Take them to court.” Or “You have an imaginary claim for imaginary damage. Here’s your imaginary money. Your deal was private and unregulated, then it should be settled in private between companies without public intervention or support.”

Did that happen? No, because AIG had collapsed its unregulated private and regulated public functions and Congress had allowed it to do so with the repeal of the Glass-Steagall Act. Because the wall came down between regulated and unregulated activity, transparent and “shadow” markets, traditional and investment banking, this private fiat virus broke quarantine and the resulting contagion cannot be put back in the lab.

Because world leaders and their regulators blinked and did nothing, counterfeit private fiat (backed by nothing) has metastasized and infiltrated “genuine” public fiat (backed by country’s productivity if not by gold), and more and more actual money and productivity in the form of austerity is being thrown at a gargantuan and unrecoverable sea of counterfeit obligation.

How can you exceed 700 trillion dollars in unregulated derivatives alone? This is easy when market players are buying and selling from each other and when people can buy an infinite number of claims, insurances, and guarantees on credit events rather than assets. When banks are allowed to mark-to-model and then claim somehow that their back-and-forth trading and abstract multiplication of asset value is real, then all bets are off (or “on” depending upon which side of the fence your sitting).

Is it any wonder that the market for derivatives has grown another 100 trillion over the last two years? “We’ll concoct value and you’ll pay us real money for it? Of course we are going to keep doing it! Why not another 100 trillion!”

This probably is not going to stop until there is massive world-wide outcry and political change, a “black swan event,” or both. Let’s hope the first gains steam along with some long-overdue accountability for fraudsters before these nefarious banks destroy the body politic with their hubris and greed.

by Zeus Yiamouyiannis

NTS Notes:  OK...First, there is something that everyone must be made aware of, and an update to this article... Recent estimates are showing that the actual value of Derivatives and "Credit Default Swaps" as of January, 2012 are in the neighborhood of some 1.4 QUADRILLION dollars!   This is almost double the figure presented in this original article...

I have a simpler method of showing how dangerous Derivatives truly are... The total value of ALL assets, properties, infrastructure, resources, etc, of the entire planet Earth has been estimated to be somewhere in the 60-70 TRILLION dollar range... That means that the value of Derivatives is some 20x the entire value of Planet Earth itself!    Are you worried yet?...

I have long wondered how anyone could have ever allowed this kind of financial trading in horrific Credit Default Swaps and Derivatives take place on this planet?   I now know that we are living in a world full of evil and ultra-greedy maniacs that care not about the welfare of the planet itself.   

Is there a solution to this problem?  The simplest method is to just dissolve the entire Credit Default/Derivative trading markets all together, make any ill gotten assets or insurance in these schemes null and void, and put the fraudsters behind the entire scheme behind bars .  The result could be a serious financial meltdown, but only temporarily.... The world would eventually recover....I say this is better than the alternative than continuously bailing out these criminals to the tune of tens of trillions of dollars, or allowing this scheme to collapse under its own weight and destroy the entire finances of the planet all together!

More to come



Anonymous said...

..."and how the criminals have allowed them to explode to the point now that they could cause full financial armageddon."If what you say that they are "criminals"why don't the people put up "dead or alive"wanted posters on the "criminals????After all the"law"is making no effort to apprehend them.We need Bounty Hunters again in this world.All we do is talk.

anchorage said...

I work in the investment industry. Way back in 2005, I saw data on the explosion of unregulated OTC derivatives & wrote strategy pieces highlighting some of the obvious issues; the potential risks were plentiful and clear. My basic quesion became, how could you bail out something larger than the global economy?

Your article highlights the potential for fraud by issuing and self-pricing these derivatives. Banks have made massive phantom, virtual profits using this process. All the regulators had to do to stop the fraud & massive build up of systemic risk was to impose proper collateral, margin and reserve requirements. They were willfully blind and did nothing. They have still done nothing.

Fast forward to the collapse in credit markets (solely due to these OTC derivatives); my question then was whether policymakers would protect the criminal banking syndicates from the economy or protect the economy (i.e. most of the population) from the criminal bankers. We now know the answer to that.

Incidentally, the largest banks still account for the majority of OTC derivatives. They remain unfunded and, indeed, unfundable as they are many hundred times the size of balance sheets. The global financial system is still massively insolvent. When you hear that countries such as Greece are being bailed out, the truth is that its the banks holding Greek paper that are being bailed out, nothing more.

The pretence has to be maintained. Take one single brick from the wall (e.g. Greek default) & the financial system collapses quicker than WTC7 as counterparties would have no hope of meeting their 'obligations' if called.

It should now be clear to all that a few financial oligarchs sit above national governments, buying and selling Presidents and governments, and driving policy. They continue to loot & syphon wealth from the real economy.