What\u2019s a derivative?<\/strong><\/p>\n

The word \u201cderivative\u201d may ring a bell because Wall Street\u00a0speculation in \u201cinnovative financial instruments\u201d such as derivatives, helped tank the economy 2008.<\/p>\n

Mayra Rodriques Valladares provides a good definition in her recent article in the New York Times<\/em>. \u201cDerivatives Markets Growing Again, With Few New Protections:\u201d<\/a><\/p>\n

\u00a0A derivative,<\/strong> put simply, is a contract between two parties whose value is determined by changes in the value of an underlying asset. Those assets could be bonds, equities, commodities or currencies. The majority of contracts are traded over the counter, where details about pricing, risk measurement and collateral, if any, are not available to the public.<\/p><\/blockquote>\n

Michael Snyder writing at Washingtonblog weighs in on the continued dangers of banks gambling in derivatives in his article “The Size of the Derivatives Bubble Hanging Over the Global Economy Hits a Record High.”<\/a><\/p>\n

A derivative<\/strong> does not have any intrinsic value. It is essentially a side bet. Most commonly, derivative contracts have to do with the movement of interest rates. But there are many, many other kinds of derivatives as well. People are betting on just about anything and everything that you can imagine, and Wall Street has been transformed into the largest casino in the history of the planet.<\/p><\/blockquote>\n

So how much money are we talking about?<\/strong><\/p>\n

On May 8 2014, The Bank for International Settlements (the international organization of central banks) reported:<\/p>\n

OTC derivatives markets continued to expand in the second half of 2013. The notional amount of outstanding contracts totalled $710\u00a0trillion<\/strong> at end-2013, up from $693\u00a0trillion at end-June 2013 and $633\u00a0trillion at end-2012.<\/p><\/blockquote>\n

Does $710 trillion sound like a lot of money to you? It should because, by comparison, the U.S. GDP is projected to be around 17 trillion for 2014.<\/p>\n

A big chunk of that $710 trillion\u2014$236 trillion\u2014is held by the top 25 banks in the U.S. Of the top 25 U.S. banks, the top five banks hold the lion\u2019s share. The following figures are from Michael Snyder\u2019s post at Washingtonblog:<\/p>\n

JPMorgan Chase<\/strong> has about 2 trillion in assets and more than $70 trillion<\/strong> of exposure to derivatives.<\/p>\n

Citibank <\/strong>has a little more than $1.3 trillion in assets and more than $62 trillion<\/strong> of exposure to derivatives.<\/p>\n

Bank of America<\/strong> has $1.4 trillion in assets and more than $38 trillion<\/strong> of exposure to derivatives.<\/p>\n

Goldman Sachs<\/strong> has only $105 billion in total assets, but has more than $48 trillion<\/strong> of exposure to derivatives. That would be 460 times greater than their total assets.<\/p>\n

On the international scene, banking giant Deutsche Bank<\/strong> has $2.2 trillion in assets and more than $75 billion<\/strong> of exposure to derivatives<\/p>\n

The bottom line, as it were, is this:\u00a0Derivatives represent another gigantic bubble waiting to, once again, tank the global economy.<\/p>\n

Why are banks so overexposed to derivatives?<\/strong><\/p>\n

Louise Story answers this question\u00a0in her piece in the\u00a0New York Times<\/em><\/a>\u00a0of December of 2010:<\/p>\n

Perhaps no business in finance is as profitable today as derivatives.<\/strong> Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.<\/p><\/blockquote>\n

Well that explains a lot. But how do they work? Story offers a good analogy for why derivatives are so profitable:<\/p>\n

The profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more \u2014 $5,000, $25,000 or $50,000 more \u2014 is unknown. That\u2019s because the seller also is told only the amount he will receive. The difference between the two is the bank\u2019s fee and profit. So, the bigger the difference, the better for the bank \u2014 and the worse for the customers.<\/p>\n

It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent \u2014 and neither buyer nor seller \u2014 would have easy access to the prices paid recently for other homes on the same block.<\/p><\/blockquote>\n

Did Dodd-Frank do anything to reign in or regulate derivatives?<\/strong><\/p>\n

Dodd Frank set up clearinghouses for derivative trading to introduce more transparency, but like banks that are too-big-to-fail, the clearinghouses were deemed too-big-to-fail by the Obama administration. So Obama insisted they be\u00a0back-stopped by taxpayer money. Michael Snyder quotes The Wall Street Journal<\/em><\/a> from 2012:<\/p>\n

Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading<\/strong> \u2014 not behind banks that might make mistakes in derivatives markets, but behind the trading itself<\/strong>. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.<\/p><\/blockquote>\n

Jumping ahead to\u00a0May of 2014, Mayra Vakkadares explains other reasons why the purposefully weak Dodd Frank bill will not remove the risk associated with derivatives:<\/p>\n

As regulations like the Dodd-Frank law and the European Markets Infrastructure Regulation start to take effect, some aspects of the derivatives markets, like pricing and volumes, will slowly become more transparent. What will remain opaque, however, is how banks sell derivatives to clients, in what jurisdictions derivatives are recorded, the strength of risk management, and the extent to which governments and taxpayers can be affected if derivatives are again at the center of a crisis.<\/strong><\/p><\/blockquote>\n

As I read these articles on the continued growth of derivatives, and the risky behavior of TBTF banks, I\u00a0feel betrayed by\u00a0the\u00a0Wall Street owned Obama administration, and the Democrats and Republicans in Congress who continue to serve bank interests at the expense of\u00a0their constituents. This\u00a0can\u2019t, by any stretch, be pinned\u00a0on \u201cRepublican obstructionism.\u201d The biggest blame falls on\u00a0Corporate Democrats who pretend to be the party of the people on the campaign trail, but morph into corporate shills\u00a0on the floor of the House and Senate.<\/p>\n

After the financial nightmare of 2008, in which Americans lost trillions in personal wealth, our bank owned elected officials have done nothing substantial to protect us from another financial meltdown. Too-Big-to-Fail banks have grown\u00a0larger and speculative activities continue\u00a0in overdrive. Since we have not really recovered from the last crisis, I\u2019m afraid for what the future holds.<\/p>\n

Meanwhile a tiny fraction of the population, with the full backing of\u00a0the U.S.\u00a0government, continues to enrich themselves\u00a0at the expense of the rest of us. When people say we should put bankers in jail for their role in tanking the economy,\u00a0I say forget that\u2014we\u00a0need to\u00a0get the money back.<\/p>\n

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