The mysteries of complexity for exotic
financial instruments disguise the pure simplicity of their shared origin; namely, gambling games where the house always wins.
Who exactly is the casino host? Is it the exchange, the brokerage firm or the government regulators? What about the credit
rating agencies, the insurance bookie companies like AIG or the too big to fail banksters? Surely, the Federal Reserve, foreign
central banks or the infamous Bank of International Settlements, must be the bottom line keeper of the cage.
Each play their role and share or lose according to the screenplay script written for all those speculators. Money
is the medium to buy in. Volatility is required to maximize percentages. Risk is predetermined when the wheel of fortune is
rigged. The HOUSE never loses in the end when the public is the last resort to cover foolish bets.
Sovereign
wealth funds are governments in drag. The chorus line in this elaborate production entertains only the backers of the show.
The audience is the butt of jokes as they pay top dollar to enter the arena. Greed keeps the doors open as the barkers create
the allure of easy money. What is wrong with this financial model and how long can this play on the great Green Way of Wall
Street?
That is where derivatives come to the rescue. Wikipedia says, "a derivative is an agreement or contract that is not based on a real, or true, exchange, i.e.:
There is nothing tangible like money, or a product, that is being exchanged." Roy Davies refines the definition accordingly, "Derivatives are financial instruments that have no intrinsic value,
but derive their value from something else." Since the common denominator is that there is no inherent, natural or real
value changing hands, any swap of an intangible, but imaginatively designed financial instrument, could qualify in the broadest
sense as a derivative. Does this make any sense? Well, only addictive confidence thieves, who masquerade as respectable traders
of markets that do not exist in the real world, would see this as the new normal.
Futures and
options have a long record of pork belly slaughter that brings home the bacon for the stage-managers of this theater of the
absurd. Credit default swaps CDS, collateralized loan obligations CLO, collateralized debt obligation CDO, collateralized
mortgage obligations CMO, and collateralized bond obligations CBO are relatively new in comparison. The Commodities Futures Modernization Act of 2000 falls short from meaningful regulation. "There are a set of defined rules that govern stocks, bonds,
options and futures. Now that the 2000 Act was in place, the derivatives which encompass: CDSs, CLOs, CDOs and CMOs, do not have to abide by any of the
standard guidelines."
Shifting risk to anybody else is the beauty of these derivative devises.
"Anybody else" was AIG, temporally, before the U.S. Treasury was left holding the bag when the game of musical chairs
stopped. Hedge funds are in the business of playing a catchy tune and duck for the exit before the melody ends. Naked short
selling is immoral at face value, but deceptive derivative instruments give legal cover for outlaw behavior.
Now that the banking collapse has been papered over with mountains of additional debt, just how can these bond obligations
be serviced? Sensible questions are no longer significant and are certainly ignored by governments. The answer is obvious,
forget about a VAT to make the payments and rule out that growing the economy is the solution. The apparent response needs
to be more derivatives . . .
Here is how the "really too big to fail" sovereign
wealth dynasty factions can keep the amusement game going indefinitely. Since derivatives have no intrinsic value, the more
governments buy the greater the risk they shift to the peons. Paper fiat money, even debt created Federal Reserve notes are
unlimited, since the only officially permitted counterfeiter, is the government. Sure, the private banksters that own the
Fed get their pound of interest flesh, but the DC privileged elite can just hedge their huge municipal deficits with additional
credit default swaps. Buy all the Treasury Bonds that can be processed, whatever the need, since monetizing the debt is hedged
with derivative insurance.
A day of reckoning only comes due for the little people. Like paying
taxes, the privilege for maintaining a free society only falls to the NGE’s, none government entities. The greed machine
can be oiled with every extra layer of regulatory complexity, because the public never gets to run their own printing press.
The elegance of derivatives is that the rules that defy nature are not involved in intangible
swaps. The basic value in the payment from the risk is always dumped on the back of the taxpayer. Ponzi schemes are legal
when government croupiers spin loaded balls on their fudged roulette tables.
The reserve currency
status for the illusory U.S. Dollar keeps the diversion intact. Domestic legal tender laws work magic, while drone directed
smart bombs keep the rest of the world wagering their futures for mere table stake survival. Just think, all those aspiring
underprivileged continue to swell as the carrot on a string is always pushed farther away in front of their mouth.
Dummying down people is a true achievement of sovereign regimes. Just create innovative collateralized debt obligations,
to cover the risk of collecting larger tax increases! Creative financing is the stuff that makes this debt world spin. Sound
fiscal discipline is no longer an alternative because rational public policy is not an option.
Money Never Sleeps is more than Gordon Gekko becoming an outsider in a world he once dominated. The culture of Wall Street sees
shorting markets as a means to provide liquidity for their trading. Hedge funds are based upon derivative scams. Reigning
in greed is even more difficult than finding an honest person involved with financial reform legislation. Wishing that the
SEC, CFTC, Fannie or Freddie, FDIC or the Federal Reserve itself will put an end to this madness is ludicrous.
If governments, dressed up as sovereign wealth funds, enter the financial casino as principal traders, the destruction
of the invisible hand marketplace is complete. The appointment of the master manipulator, Joe Kennedy as the first
head of the SEC, set the pattern. The fox in charge of the henhouse works well. What is novel, if it was not so frightening,
is that the risk of unsustainable debt is now a manageable trade.
In play today is not just a
lack of confidence in the integrity of markets; but foremost, there is a total disconnect of the true purpose for useful financial
instruments. Greed is a fault in the nature of humans. Derivatives are perverted and contrived schemes to destroy real free
enterprise and substitute a perpetual nightmare of servitude. The prime House rule is to impoverish society so that a small
cabal of sociopath’s can exploit humanity. If a reformed Gekko really found religion, Wall Street needs the insights
of one of their own fallen crooks.
Frequency and flash trading only
leads to gaming the system. Fake financial reforms that do not even deal with the fundamental causes of the last meltdown
only lead to the next bigger bubble. Politicians who pass phony restructuring that favor the biggest risk taking institutions,
while penalizing traditional community credit unions, are a large part of the problem.
Like it
or not, we are all participants at the gaming table and the House creates its own chips but never has to pay off on the rare
occasion of a lucky bet from the mark. Implosion is necessary to wipe out the mechanism that created the debt bubble. Unfortunately,
the pain will be real and almost impossible to be hedged.
SARTRE – May 23, 2010
