Tuesday, July 10, 2012

562 Fiscal Cliff: Both the Socialist Left and the Christian Right have aimed to bankrupt the state - Curt Doolittle

Fiscal Cliff: Both the Socialist Left and the Christian Right have aimed
to bankrupt the state - Curt Doolittle

(1) Fiscal Cliff: Both the Socialist Left and the Christian Right have
aimed to bankrupt the state - Curt Doolittle
(2) Fiscal Cliff: reply to Curt Doolittle from Peter Myers
(3) Fiscal Cliff: Both the Socialist Left and the Christian Right have
aimed to bankrupt the state - Curt Doolittle
(4) "Starve the Beast" – a strategy by GOP conservatives to force cuts
in federal spending by bankrupting the country
(5) David Stockman blames tax cuts for wrecking the economy. We're
facing another crisis - "the carnage will be unimaginable"
(6) Fiscal Cliff: the world's banker can't put off the reckoning any
longer - Fan Gang (2011)
(7) The fiscal cliff conspiracy of fear
(8) US's Fiscal Cliff: The Need to do More than 'Rearrange the Deck
Chairs on the Titanic'
(9) Mobius Says Another Financial Crisis ‘Around The Corner’
(10) The Coming Derivatives Panic That Will Destroy Global Financial
(11) Wall Street finds a foreign detour around U.S. derivatives rules
(12) A Secretive Banking Elite Rules Trading in Derivatives (2010)

(1) Fiscal Cliff: Christian Right decided to"bankrupt the state before
it bankrupts the nuclear family" - Curt Doolittle

Date: Thu, 6 Dec 2012 08:10:32 +0200
Subject: Re: Fiscal Cliff: Class War reaches a climax as public opinion
turns against Tax Avoidance by the Rich
From: curtd59 <curtd59@gmail.com>


Just to put the Class War into perspective, it's the CONSERVATIVES and
libertarians who have "hired" the wealthy to oppose the combination of
- government and unions against socialism in business, and
- the government and minorities against the nuclear family.

This strategy has largely worked. I was involved when this strategy was
conceived. And I have been a bit player in advocating it. Conservatives
do this, and many conservatives are in the middle class, and they are
conservative for MORAL reasons.(see Haidt et al). If anything it is a
race-war on one hand and a family-preservation vs secular universalism
war on the other. Strong family ties cause perception of other members
of the polity as strangers and competitors if not predators. Weak family
ties cause perception of other members of the polity as potential
allies. Most of these sentiments are pre-cognitive. Or,what we call
metaphysical value judgements.

So, the class war is an EFFECT, not a cause. The cause is the assault on
Property and Family, which are mutually dependent concepts by the
secular socialist state. The reaction during the 1970's was that we
would lose the demographic battle and must bankrupt the state before it
bankrupts the nuclear family, and the high trust society that came from
it. This strategy has worked.

The enemy is the state. Not the other classes. The goal is the familial
society, not self aggrandizement. The wealthy are a tool for
conservatives. Religion is a means of opposing the state, and
maintaining the dominance of the family, by creating moral laws that the
state cannot override.

It is liberals who conduct moral battles with rational rhetoric for
short term solutions. And conservatives who conduct moral battles with
allegorical rhetoric for long term solutions. And there is no possible
compromise between these strategies.

Curt Doolittle.

(2) Fiscal Cliff: reply to Curt Doolittle from Peter Myers


Some of what you wrote needs clarification.

> government and minorities against the nuclear family

The assault on the family is Communist - specifically the Trotskyist
variant of Communism. Trots and their Feminist fellow-travellers look to
the early Soviet Union for inspiration; they regard Stalinism as a betrayal.

The Socialism we had from the 1940s to the 1970s was Christian and
pro-family. That all changed in the 1970s when defeat in the Vietnam War
brought Trots to the fore. Their philosophy was "bring the war back
home", ie turn the external war into a civilizational war back home.
This had been first enacted in Russia when it lost the 1905 war with Japan.

> government and unions against socialism in business

What do you mean "socialism in business"? - this is not clear

> This strategy has largely worked.

The cost has been the bankrupting of the state. America will never
recover from it. The United States is in terminal decline, just like of
the Soviet Union of 25 years ago.

> I was involved when this strategy was conceived.

Tell me more.

> the class war is an EFFECT, not a cause

You may be partly right. But Class War is still a reality in itself. I
gave plenty of examples of it.

> The cause is the assault on Property and Family
> by the secular socialist state

The assault on family is current. But the secular state has hardly been
able to touch Property. Look at the Budget Deficit. Look at the wealth
of the 1% and the poverty of the bottom 40%.

Surely Warren Buffet is aware of the realities - and HE attests to the
reality of Class War.

In a 2005 interview with CNN, Buffett said:
BUFFETT: It's class warfare, my class is winning, but they shouldn't be.

The NY Times ran an article "In Class Warfare, Guess Which Class Is
Winning", by Ben Stein, on November 26, 2006, which says,
“There’s class warfare, all right,” Mr. Buffett said, “but it’s my
class, the rich class, that’s making war, and we’re winning.”


(3) Fiscal Cliff: Both the Socialist Left and the Christian Right have
aimed to bankrupt the state - Curt Doolittle

Subject: Re: Fiscal Cliff: Class War reaches a climax as public opinion
turns against Tax Avoidance by the Rich
From: Curt Doolittle <curtd59@gmail.com>
Date: Thu, 6 Dec 2012 11:24:11 +0200

First. I've been following you for a very long time. And I'm a fan. But
you don't know me. And I use a lot of unfamiliar concepts. So please be
patient with me.


1) The strategy has been, since the seventies, to bankrupt the state. So
bankrupting the state is not a cost. It is the objective. There is a
very big difference between bankruptcy of a fiat credit system, and
bankruptcy of normative capital. A new government may repudiate all
debts and issue a new currency in weeks. Even at the cost of its prior
ideology. But a bankrupted portfolio of normative capital requires that
all extant adults die off and new generations be trained by institutions
that must be peopled. West Germany can fix east Germany slowly. North
Italy probably cannot fix south Italy. And eastern Europe and India,
unlike authoritarian china, have no one to fix them.

The greatest cost any population must beat is the cost of suppressing
corruption in all i's forms and outlawing all transfers that are
involuntary well enough to create trust.

2) socialism in business:
A) emphasis is on corporatism as a means of controlling both
unemployment and off book transfers with the external effect of
empowering state expanding parties and ideologies.
B) undermining medium and small businesses which are extensions of the
family. And which are less permeable for to corporatism and syndicalism
if only because of transaction costs.

3) it changed in the 1970's for a reason. Yes? Why did socialism in
America change from familial to individual? There are at least four
related reasons.

4) the secular state hasn't been able to touch property because the
libertarians were able to enfranchise the conservatives by providing
them arguments that conservatism, which is an unarticulated philosophy,
could not construct at the time. This array of interests captured the
moral high ground among whites and the middle class.

As whites have become a minority due to immigration and white
underclasses have returned to single motherhood and serial marriage,
part of which was possible due to credit expansion - an externality that
conservatives did not anticipate - the power that the conservatives held
over middle class morality has waned if only numerically. The one
percent ideology is successful mostly because middle class members are
angry about the socialization of losses, not the presence of
disproportionate wealth. The conservative moral code differs from the
progressive in that conservatives fall strongly in favor of
proportionality ( meritocracy). So do families. Families bear high costs
of opportunity. So they view free riding extremely negatively.

(4) "Starve the Beast" – a strategy by GOP conservatives to force cuts
in federal spending by bankrupting the country


How the GOP Became the Party of the Rich

The inside story of how the Republicans abandoned the poor and the
middle class to pursue their relentless agenda of tax cuts for the
wealthiest one percent


NOVEMBER 9, 2011 7:00 AM ET

The nation is still recovering from a crushing recession that sent
unemployment hovering above nine percent for two straight years. The
president, mindful of soaring deficits, is pushing bold action to shore
up the nation's balance sheet. Cloaking himself in the language of class
warfare, he calls on a hostile Congress to end wasteful tax breaks for
the rich. "We're going to close the unproductive tax loopholes that
allow some of the truly wealthy to avoid paying their fair share," he
thunders to a crowd in Georgia. Such tax loopholes, he adds, "sometimes
made it possible for millionaires to pay nothing, while a bus driver was
paying 10 percent of his salary – and that's crazy."

Preacherlike, the president draws the crowd into a call-and-response.
"Do you think the millionaire ought to pay more in taxes than the bus
driver," he demands, "or less?"

The crowd, sounding every bit like the protesters from Occupy Wall
Street, roars back: "MORE!"

The year was 1985. The president was Ronald Wilson Reagan.

Today's Republican Party may revere Reagan as the patron saint of low
taxation. But the party of Reagan – which understood that higher taxes
on the rich are sometimes required to cure ruinous deficits – is dead
and gone. Instead, the modern GOP has undergone a radical
transformation, reorganizing itself around a grotesque proposition: that
the wealthy should grow wealthier still, whatever the consequences for
the rest of us.

Modern-day Republicans have become, quite simply, the Party of the One
Percent – the Party of the Rich.

"The Republican Party has totally abdicated its job in our democracy,
which is to act as the guardian of fiscal discipline and
responsibility," says David Stockman, who served as budget director
under Reagan. "They're on an anti-tax jihad – one that benefits the
prosperous classes."

The staggering economic inequality that has led Americans across the
country to take to the streets in protest is no accident. It has been
fueled to a large extent by the GOP's all-out war on behalf of the rich.
Since Republicans rededicated themselves to slashing taxes for the
wealthy in 1997, the average annual income of the 400 richest Americans
has more than tripled, to $345 million – while their share of the tax
burden has plunged by 40 percent. Today, a billionaire in the top 400
pays less than 17 percent of his income in taxes – five percentage
points less than a bus driver earning $26,000 a year. "Most Americans
got none of the growth of the preceding dozen years," says Joseph
Stiglitz, the Nobel Prize-winning economist. "All the gains went to the
top percentage points."

The GOP campaign to aid the wealthy has left America unable to raise the
money needed to pay its bills. "The Republican Party went on a
tax-cutting rampage and a spending spree," says Rhode Island governor
and former GOP senator Lincoln Chafee, pointing to two deficit-financed
wars and an unpaid-for prescription-drug entitlement. "It tanked the
economy." Tax receipts as a percent of the total economy have fallen to
levels not seen since before the Korean War – nearly 20 percent below
the historical average. "Taxes are ridiculously low!" says Bruce
Bartlett, an architect of Reagan's 1981 tax cut. "And yet the mantra of
the Republican Party is 'Tax cuts raise growth.' So – where's the
fucking growth?"

Republicans talk about job creation, about preserving family farms and
defending small businesses, and reforming Medicare and Social Security.
But almost without exception, every proposal put forth by GOP lawmakers
and presidential candidates is intended to preserve or expand tax
privileges for the wealthiest Americans. ...

It's difficult to imagine today, but taxing the rich wasn't always a
major flash point of American political life. From the end of World War
II to the eve of the Reagan administration, the parties fought over
social spending – Democrats pushing for more, Republicans demanding
less. But once the budget was fixed, both parties saw taxes as an
otherwise uninteresting mechanism to raise the money required to pay the
bills. Eisenhower, Nixon and Ford each fought for higher taxes, while
the biggest tax cut was secured by John F. Kennedy, whose
across-the-board tax reductions were actually opposed by the majority of
Republicans in the House. The distribution of the tax burden wasn't
really up for debate: Even after the Kennedy cuts, the top tax rate
stood at 70 percent – double its current level. Steeply progressive
taxation paid for the postwar investments in infrastructure, science and
education that enabled the average American family to get ahead.

That only changed in the late 1970s, when high inflation drove up wages
and pushed the middle class into higher tax brackets. Harnessing the
widespread anger, Reagan put it to work on behalf of the rich. In a move
that GOP Majority Leader Howard Baker called a "riverboat gamble,"
Reagan sold the country on an "across-the-board" tax cut that brought
the top rate down to 50 percent. According to supply-side economists,
the wealthy would use their tax break to spur investment, and the
economy would boom. And if it didn't – well, to Reagan's cadre of
small-government conservatives, the resulting red ink could be a
win-win. "We started talking about just cutting taxes and saying, 'Screw
the deficit,'" Bartlett recalls. "We had this idea that if you lowered
revenues, the concern about the deficit would be channeled into spending

It was the birth of what is now known as "Starve the Beast" – a
conscious strategy by conservatives to force cuts in federal spending by
bankrupting the country. As conceived by the right-wing intellectual
Irving Kristol in 1980, the plan called for Republicans to create a
"fiscal problem" by slashing taxes – and then foist the pain of
reimposing fiscal discipline onto future Democratic administrations who,
in Kristol's words, would be forced to "tidy up afterward."

There was only one problem: The Reagan tax cuts spiked the federal
deficit to a dangerous level, even as the country remained mired in a
deep recession. Republican leaders in Congress immediately moved to
reverse themselves and feed the beast. "It was not a Democrat who led
the effort in 1982 to undo about a third of the Reagan tax cuts,"
recalls Robert Greenstein, president of the nonpartisan Center on Budget
and Policy Priorities. "It was Bob Dole." Even Reagan embraced the tax
hike, Stockman says, "because he believed that, at some point, you have
to pay the bills."

For the remainder of his time in office, Reagan repeatedly raised taxes
to bring down unwieldy deficits. In 1983, he hiked gas and payroll
taxes. In 1984, he raised revenue by closing tax loopholes for
businesses. The tax reform of 1986 lowered the top rate for the wealthy
to just 28 percent – but that cut for high earners was paid for by
closing tax loopholes that resulted in the largest corporate tax hike in
history. Reagan also raised revenues by abolishing special favors for
the investor class: He boosted taxes on capital gains by 40 percent to
align them with the taxes paid on wages. Today, Reagan may be lionized
as a tax abolitionist, says Alan Simpson, a former Republican senator
and friend of the president, but that's not true to his record. "Reagan
raised taxes 11 times in eight years!"

But Reagan wound up sowing the seed of our current gridlock when he gave
his blessing to what Simpson calls a "nefarious organization" –
Americans for Tax Reform. Headed by Grover Norquist, a man Stockman
blasts as a "fiscal terrorist," the group originally set out to prevent
Congress from backsliding on the 1986 tax reforms. But Norquist's
instrument for enforcement – an anti-tax pledge signed by GOP lawmakers
– quickly evolved into a powerful weapon designed to shift the tax
burden away from the rich. George H.W. Bush won the GOP presidential
nomination in 1988 in large part because he signed Norquist's "no taxes"
pledge. Once in office, however, Bush moved to bring down the soaring
federal deficit by hiking the top tax rate to 31 percent and adding
surtaxes for yachts, jets and luxury sedans. "He had courage to take
action when we needed it," says Paul O'Neill, who served as Treasury
secretary under George W. Bush.

The tax hike helped the economy – and many credit it with setting up the
great economic expansion of the 1990s. But it cost Bush his job in the
1992 election – a defeat that only served to strengthen Norquist's
standing among GOP insurgents. "The story of Bush losing," Norquist says
now, "is a reminder to politicians that this is a pledge you don't
break." What was once just another campaign promise, rejected by a
fiscal conservative like Bob Dole, was transformed into a political
blood oath – a litmus test of true Republicanism that few candidates
dare refuse.

After taking office, Clinton immediately seized the mantle of fiscal
discipline from Republicans. Rather than simply trimming the federal
deficit, as his GOP predecessors had done, he set out to balance the
budget and begin paying down the national debt. To do so, he hiked the
top tax bracket to nearly 40 percent and boosted the corporate tax rate
to 35 percent. "It cost him both houses of Congress in the 1994 midterm
elections," says Chafee, the former GOP senator. "But taming the deficit
led to the best economy America's ever had." Following the tax hikes of
1993, the economy grew at a brisk clip of 3.2 percent, creating more
than 11 million jobs. Average wages ticked up, and stocks soared by 78
percent. By the spring of 1997, the federal budget was headed into the

But Newt Gingrich and the anti-tax revolutionaries who seized control of
Congress in 1994 responded by going for the Full Norquist. In a stunning
departure from America's long-standing tax policy, Republicans moved to
eliminate taxes on investment income and to abolish the inheritance tax.
Under the final plan they enacted, capital gains taxes were sliced to 20
percent. Far from creating an across-the-board benefit, 62 cents of
every tax dollar cut went directly to the top one percent of income
earners. "The capital gains cut alone gave the top 400 taxpayers a
bigger tax cut than all the Bush tax cuts combined," says David Cay
Johnston, the Pulitzer Prize-winning author of Perfectly Legal: The
Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and
Cheat Everybody Else.

(5) David Stockman blames tax cuts for wrecking the economy. We're
facing another crisis - "the carnage will be unimaginable"


AP / March 2, 2012, 12:38 PM

Why David Stockman isn't buying it

NEW YORK - He was an architect of one of the biggest tax cuts in U.S.
history. He spent much of his career after politics using borrowed money
to take over companies. He targeted the riskiest ones that most
investors shunned - car-parts makers, textile mills.

That is one image of David Stockman, the former White House budget
director who, after resigning in protest over deficit spending, made a
fortune in corporate buyouts.

But spend time with him and you discover this former wunderkind of the
Reagan revolution is many other things now - an advocate for higher
taxes, a critic of the work that made him rich and a scared investor who
doesn't own a single stock for fear of another financial crisis.

Stockman suggests you'd be a fool to hold anything but cash now, and
maybe a few bars of gold. He thinks the Federal Reserve's efforts to
ease the pain from the collapse of our "national leveraged buyout" - his
term for decades of reckless, debt-fueled spending by government,
families and companies - is pumping stock and bond markets to dangerous

Known for his grasp of budgetary minutiae, first as a Michigan
congressman and then as Reagan's budget director, Stockman still dazzles
with his command of numbers. Ask him about jobs, and he'll spit out
government estimates for non-farm payrolls down to the tenth of a
decimal point. Prod him again and, as from a grim pinata, more figures
spill out: personal consumption expenditures, credit market debt and the
clunky sounding but all-important non-residential fixed investment.

Stockman may seem as exciting as an insurance actuary, but he knows how
to tell a good story. And the punch line to this one is gripping. He
says the numbers for the U.S. don't add up to anything but a painful,
slow-growing future.

Now 65 and gray, but still wearing his trademark owlish glasses,
Stockman took time from writing his book about the financial collapse,
"The Triumph of Crony Capitalism," to talk to The Associated Press at
his book-lined home in Greenwich, Conn.

Within reach was Dickens' "Hard Times" - two copies.

Below are excerpts, edited for clarity:

Bernard Condon: Why are you so down on the U.S. economy?

David Stockman: It's become super-saturated with debt.

Typically the private and public sectors would borrow $1.50 or $1.60
each year for every $1 of GDP growth. That was the golden constant. It
had been at that ratio for 100 years save for some minor squiggles
during the bottom of the Depression. By the time we got to the mid-'90s,
we were borrowing $3 for every $1 of GDP growth. And by the time we got
to the peak in 2006 or 2007, we were actually taking on $6 of new debt
to grind out $1 of new GDP.

People were taking $25,000, $50,000 out of their home for the fourth
refinancing. That's what was keeping the economy going, creating jobs in
restaurants, creating jobs in retail, creating jobs as gardeners,
creating jobs as Pilates instructors that were not supportable with
organic earnings and income.

It wasn't sustainable. It wasn't real consumption or real income. It was
bubble economics.

So even the 1.6 percent (annual GDP growth in the past decade) is
overstating what's really going on in our economy.

Condon: How fast can the U.S. economy grow?

Stockman: People would say the standard is 3, 3.5 percent. I don't even
know if we could grow at 1 or 2 percent. When you have to stop borrowing
at these tremendous rates, the rate of GDP expansion stops as well.

Condon: But the unemployment rate is falling and companies in the
Standard & Poor's 500 are making more money than ever.

Stockman: That's very short-term. Look at the data that really counts.
The 131.7 million (jobs in November) was first achieved in February
2000. That number has gone nowhere for 12 years.

Another measure is the rate of investment in new plant and equipment.
There is no sustained net investment in our economy. The rate of growth
since 2000 (in what the Commerce Department calls non-residential fixed
investment) has been 0.8 percent - hardly measurable.

(Non-residential fixed investment is the money put into office
buildings, factories, software and other equipment.)

We're stalled, stuck.

Condon: What will 10-year Treasurys yield in a year or five years?

Stockman: I have no guess, but I do know where it is now (a yield of
about 2 percent) is totally artificial. It's the result of massive
purchases by not only the Fed but all of the other central banks of the

Condon: What's wrong with that?

Stockman: It doesn't come out of savings. It's made up money. It's
printing press money. When the Fed buys $5 billion worth of bonds this
morning, which it's doing periodically, it simply deposits $5 billion in
the bank accounts of the eight dealers they buy the bonds from.

Condon: And what are the consequences of that?

Stockman: The consequences are horrendous. If you could make the world
rich by having all the central banks print unlimited money, then we have
been making a mistake for the last several thousand years of human history.

Condon: How does it end?

Stockman: At some point confidence is lost, and people don't want to own
the (Treasury) paper. I mean why in the world, when the inflation rate
has been 2.5 percent for the last 15 years, would you want to own a
five-year note today at 80 basis points (0.8 percent)?

If the central banks ever stop buying, or actually begin to reduce their
totally bloated, abnormal, freakishly large balance sheets, all of these
speculators are going to sell their bonds in a heartbeat.

That's what happened in Greece.

Here's the heart of the matter. The Fed is a patsy. It is a pathetic
dependent of the big Wall Street banks, traders and hedge funds.
Everything (it does) is designed to keep this rickety structure from
unwinding. If you had a (former Fed Chairman) Paul Volcker running the
Fed today 7/8- utterly fearless and independent and willing to scare the
hell out of the market any day of the week - you wouldn't have half, you
wouldn't have 95 percent, of the speculative positions today.

Condon: You sound as if we're facing a financial crisis like the one
that followed the collapse of Lehman Brothers in 2008.

Stockman: Oh, far worse than Lehman. When the real margin call in the
great beyond arrives, the carnage will be unimaginable.

Condon: How do investors protect themselves? What about the stock market?

Stockman: I wouldn't touch the stock market with a 100-foot pole. It's a
dangerous place. It's not safe for men, women or children.

Condon: Do you own any shares?

Stockman: No.

Condon: But the stock market is trading cheap by some measures. It's
valued at 12.5 times expected earnings this year. The typical multiple
is 15 times.

Stockman: The typical multiple is based on a historic period when the
economy could grow at a standard rate. The idea that you can capitalize
this market at a rate that was safe to capitalize it in 1990 or 1970 or
1955 is a large mistake. It's a Wall Street sales pitch.

Condon: Are you in short-term Treasurys?

Stockman: I'm just in short-term, yeah. Call it cash. I have some gold.
I'm not going to take any risk.

Condon: Municipal bonds?

Stockman: No.

Condon: No munis, no stocks. Wow. You're not making any money.

Stockman: Capital preservation is what your first, second and third
priority ought to be in a system that is so jerry-built, so fragile, so
exposed to major breakdown that it's not worth what you think you might
be able to earn over six months or two years or three years if they can
keep the bailing wire and bubble gum holding the system together, OK?
It's not worth it.

Condon: Give me your prescription to fix the economy.

Stockman: We have to eat our broccoli for a good period of time. And
that means our taxes are going to go up on everybody, not just the rich.
It means that we have to stop subsidizing debt by getting a sane set of
people back in charge of the Fed, getting interest rates back to some
kind of level that reflects the risk of holding debt over time. I think
the federal funds rate ought to be 3 percent or 4 percent. (It is zero
to 0.25 percent.) I mean, that's normal in an economy with inflation at
2 percent or 3 percent.

Condon: Social Security?

Stockman: It has to be means-tested. And Medicare needs to be
means-tested. If you're a more affluent retiree, you should have your
benefits cut back, pay a higher premium for Medicare.

Condon: Taxes?

Stockman: Let the Bush tax cuts expire. Let the capital gains go back to
the same rate as ordinary income. (Capital gains are taxed at 15
percent, while ordinary income is taxed at marginal rates up to 35 percent.)

Condon: Why?

Stockman: Why not? I mean, is return on capital any more virtuous than
some guy who's driving a bus all day and working hard and trying to
support his family? You know, with capital gains, they give you this
mythology. You're going to encourage a bunch of more jobs to appear. No,
most of capital gains goes to speculators in real estate and other
assets who basically lever up companies, lever up buildings, use the
current income to pay the interest and after a holding period then sell
the residual, the equity, and get it taxed at 15 percent. What's so
brilliant about that?

Condon: You worked for Blackstone, a financial services firm that
focuses on leveraged buyouts and whose gains are taxed at 15 percent,
then started your own buyout fund. Now you're saying there's too much
debt. You were part of that debt explosion, weren't you?

Stockman: Well, yeah, and maybe you can learn something from what
happens over time. I was against the debt explosion in the Reagan era. I
tried to fight the deficit, but I couldn't. When I was in the private
sector, I was in the leveraged buyout business. I finally learned a heck
of a lot about the dangers of debt.

I'm a libertarian. If someone wants to do leveraged buyouts, more power
to them. If they want to have a brothel, let them run a brothel. But it
doesn't mean that public policy ought to be biased dramatically to
encourage one kind of business arrangement over another. And right now
public policy and taxes and free money from the Fed are encouraging way
too much debt, way too much speculation and not enough productive real
investment and growth.

Condon: Why are you writing a book?

Stockman: I got so outraged by the bailouts of Wall Street in September
2008. I believed that Bush and (former Treasury Secretary Hank) Paulson
were totally trashing the Reagan legacy, whatever was left, which did at
least begin to resuscitate the idea of free markets and a free economy.
And these characters came in and panicked and basically gave capitalism
a smelly name and they made it impossible to have fiscal discipline
going forward. If you're going to bail out Wall Street, what aren't you
going to bail out? So that started my re-engagement, let's say, in the
policy debate.

Condon: Are you hopeful?

Stockman: No.

(6) Fiscal Cliff: the world's banker can't put off the reckoning any
longer - Fan Gang (2011)


Cashing Out

By Fan Gang


Foreign Policy Magazine

Wednesday, October 10, 2012

America's status as the world's banker has shielded it from harsh
economic realities for more than half a century. Not anymore.

The honor of printing the world's reserve currency did not come
accidentally, or easily, to the United States; the dollar's post-World
War II ascent to global primacy would not have happened had America not
demonstrated the unrivaled economic, military, and technological power
to back it up. But being the world's banker comes with benefits as well
as obligations -- and first among them is that the whole world wants to
make sure you don't default on your debt. If you are in a position to
repay your obligations by just printing more money, you might never

What is a blessing in the short run, however, could turn out to be a
curse in the long run. A country that controls the international
currency runs less financial risk when it borrows, but is thus likely to
be less alert to the risk of financial bubbles. Costs can be
underestimated, and problems undiscovered, for a long time. The United
States is now learning this lesson in a very big way.

For many countries, such as Argentina and Vietnam, a budget deficit of
more than 3 percent of GDP or a 5 percent current account deficit has
been enough to plunge them into a financial crisis. The United States,
by contrast, maintained about the same figures on its balance sheet for
a decade while enjoying a period of economic expansion. The result was
overconfidence and a flawed vision of limitless potential growth, as if
Americans could keep spending without saving to no one's detriment. Some
economists even claimed this was a result of the "super-efficiency" of
the U.S. economy.

You can see the logical consequences of this illusion in today's
overleveraged, debt-plagued U.S. economy, the major cause of both the
2008 global financial crisis and the current concerns over U.S.
government debt. The lesson is clear: The United States may enjoy a
greater line of credit than everyone else in exchange for providing the
dollar, but even the most forgiving balance sheet in the world has its
limits. America's long experiment with ballooning debt and an
ever-expanding financial sector has left the country with other
problems, too. Wall Street's disproportionate size in comparison with
"real" sectors of the U.S. economy such as manufacturing has resulted in
deteriorating industrial competitiveness, growing trade deficits, and

We cannot and should not attribute all of America's current problems to
the dollar's special status and the illusions that come with it. But
without it, we cannot explain why the United States did not make the
hard economic choices that less-privileged countries would have had to
make, and long ago. Today, even the world's banker can't put off the
reckoning any longer.

Fan Gang is a Peking University economics professor, director of China's
National Economic Research Institute, and chairman of the China Reform

(7) The fiscal cliff conspiracy of fear

by Alan Kohler

Published 7:08 AM, 7 Dec 2012


The fiscal cliff debate/imbroglio/terror in the United States is full of
contradictions and puzzles.

For a start, Americans profess to be bored by it and the market is
supposed to be ignoring it, yet it’s all anyone wants to talk about.
I’ve attended a series of CEO briefings in New York this week, and each
one of them has said he or she is being cautious because of the fiscal
cliff – cutting employment where possible and holding back investment.
Bankers I’ve spoken to agree that chief executives are, as one, being

There seems to be a wide disconnect between how Wall Street sees it,
which is that there will definitely be a deal, and how chief executives
see it, which is that there might not be a deal, so better act as if
there won’t be, just in case.

And everyone agrees that if and when there is a deal the market will
take off, even though it is supposed to be fully discounting the
prospect of a deal already.

Having been in the US a few days and listened to a lot of people, I
would put the chances of America actually driving over the cliff and
causing a recession at about 5 per cent, possibly less.

The problem is that it is in the interests of both sides of politics in
this country not to give in too easily: they both need to appear to be
driving a hard bargain to satisfy their constituents, and therefore must
orchestrate an atmosphere of crisis before eventually doing the deal
they were going to do all along.

It is also in Wall Street’s interests to promote the idea of crisis so
investors buy and sell shares, and it’s always in the media’s interest
to scare the living shite out of everyone to sell newspapers and
generate ratings.

So there is a conspiracy between politicians, investment bankers and
journalists to keep everyone on edge about the fiscal cliff, which is
succeeding to the sorry detriment of the economy, since chief executives
aren’t spending or employing while it goes on.

Why am I so sure the chances of “no deal” are only 5 per cent? Partly
because the cliff is not really on December 31, when the Bush tax cuts
expire and the legislated spending cuts kick in. It’s on or about
February 15 when two things happen: first, government departments
actually do start running out of money and the IRS has to start
withholding income tax at the higher rates, and second, the debt
ceiling, now $US16.4 trillion, is reached again.

So will the cliff actually happen on February 15, with a reduction to
GDP of between 3 and 5 per cent, leading to an instant recession? Well
probably not: by far the most likely outcome is a stop-gap extension to
existing tax rates and government spending until, say, August or
September, along with a promise to agree on a long-term deficit
reduction plan by then.

In other words, the December 31, 2012 fiscal cliff becomes the August
31, 2013 fiscal cliff, except this time there is no election to distract
the players from focusing on a genuine plan. At a guess I’d put this at
a 65 per cent probability.

The next most likely scenario is that they actually do a deal before
February 15, including a long-term deficit reduction plan with a smaller
reduction in 2013 than would occur with the fiscal cliff. This is a 30
per cent probability.

That leaves 5 per cent probability for no deal and no extension, just
calamity. It’s not zero, but close, in my view.

And they will eventually come up with a long-term plan, because they
have to. There is no choice (which is why the chances of that happening
by February are 35 per cent – because they might as well do it now). The
consensus around Wall Street is that it will be $US2 trillion over ten
years, through a mixture of revenue raising and spending cuts.

But here’s the thing: if America dodges the cliff by deferring it for
nine months while the politicians thrash out a plan (most likely) the
market will celebrate by going for a run, but chief executives still
won’t spend or employ in 2013 because they still won’t know what GDP
will be doing, or what the tax rates on corporate income and dividends
will be, or what defence spending will be.

So the market will get ahead of itself and end up disappointed, as it so
often does.

Follow @AlanKohler on Twitter

(8) US's Fiscal Cliff: The Need to do More than 'Rearrange the Deck
Chairs on the Titanic'

John Craig <john.cpds@gmail.com> 7 December 2012 09:47
To: "Alan Kohler (ak@exch.eurekareport.com.au)"

Alan Kohler

RE: The fiscal cliff conspiracy of fear, Business Spectator, 7/12/12

Your article suggested that markets expect the US to avoid its ‘fiscal
cliff’, while corporate CEOs are not so sure and are thus taking

I should like to submit, however, that if the US government reduces its
fiscal problems (eg by increasing taxes and / or reducing spending) this
will merely transfer fiscal problems from government onto US households
and the private sector so long as the US continues to suffer a
substantial current account deficit. My reasons for suggesting this are
outlined in Progress Towards Ending the GFC?. The latter suggests that
more than government fiscal policy needs attention in order to create a
sustainable basis for future growth.


John Craig

(9) Mobius Says Another Financial Crisis ‘Around The Corner’


By Kana Nishizawa - 2011-05-30T11:10:34Z

Mark Mobius, executive chairman of Templeton Asset Management’s emerging
markets group, said another financial crisis is inevitable because the
causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the
corner because we haven’t solved any of the things that caused the
previous crisis,” Mobius said at the Foreign Correspondents’ Club of
Japan in Tokyo today in response to a question about price swings. “Are
the derivatives regulated? No. Are you still getting growth in
derivatives? Yes.”

The total value of derivatives in the world exceeds total global gross
domestic product by a factor of 10, said Mobius, who oversees more than
$50 billion. With that volume of bets in different directions,
volatility and equity market crises will occur, he said.

The global financial crisis three years ago was caused in part by the
proliferation of derivative products tied to U.S. home loans that ceased
performing, triggering hundreds of billions of dollars in writedowns and
leading to the collapse of Lehman Brothers Holdings Inc. in September
2008. The MSCI AC World Index of developed and emerging market stocks
tumbled 46 percent between Lehman’s downfall and the market bottom on
March 9, 2009.

“With every crisis comes great opportunity,” said Mobius. When markets
are crashing, “that’s when we’re going to be able to invest and do a
good job,” he said.

The freezing of global credit markets caused governments from Washington
to Beijing to London to pump more than $3 trillion into the financial
system to shore up the global economy. The MSCI AC World gauge surged 99
percent from its March 2009 low through May 27.

‘Too Big to Fail’

The largest U.S. banks have grown larger since the financial crisis, and
the number of “too-big-to-fail” banks will increase by 40 percent over
the next 15 years, according to data compiled by Bloomberg.

Separately, higher capital requirements and greater supervision should
be imposed on institutions deemed “too important to fail” to reduce the
chances of large-scale failures, staff at the International Monetary
Fund warned in a report on May 27.

“Are the banks bigger than they were before? They’re bigger,” Mobius
said. “Too big to fail.” ...

(10) The Coming Derivatives Panic That Will Destroy Global Financial

by Michael

December 4th, 2012


When financial markets in the United States crash, so does the U.S.
economy. Just remember what happened back in 2008. The financial markets
crashed, the credit markets froze up, and suddenly the economy went into
cardiac arrest.

Well, there are very few things that could cause the financial markets
to crash harder or farther than a derivatives panic. Sadly, most
Americans don't even understand what derivatives are. Unlike stocks and
bonds, a derivative is not an investment in anything real. Rather, a
derivative is a legal bet on the future value or performance of
something else.

Just like you can go to Las Vegas and bet on who will win the football
games this weekend, bankers on Wall Street make trillions of dollars of
bets about how interest rates will perform in the future and about what
credit instruments are likely to default.

Wall Street has been transformed into a gigantic casino where people are
betting on just about anything that you can imagine. This works fine as
long as there are not any wild swings in the economy and risk is managed
with strict discipline, but as we have seen, there have been times when
derivatives have caused massive problems in recent years.

For example, do you know why the largest insurance company in the world,
AIG, crashed back in 2008 and required a government bailout? It was
because of derivatives. Bad derivatives trades also caused the failure
of MF Global, and the 6 billion dollar loss that JPMorgan Chase recently
suffered because of derivatives made headlines all over the globe. But
all of those incidents were just warm up acts for the coming derivatives
panic that will destroy global financial markets. The largest casino in
the history of the world is going to go "bust" and the economic fallout
from the financial crash that will happen as a result will be absolutely

There is a reason why Warren Buffett once referred to derivatives as
"financial weapons of mass destruction". Nobody really knows the total
value of all the derivatives that are floating around out there, but
estimates place the notional value of the global derivatives market
anywhere from 600 trillion dollars all the way up to 1.5 quadrillion

Keep in mind that global GDP is somewhere around 70 trillion dollars for
an entire year. So we are talking about an amount of money that is
absolutely mind blowing.

So who is buying and selling all of these derivatives?

Well, would it surprise you to learn that it is mostly the biggest banks?

According to the federal government, four very large U.S. banks
"represent 93% of the total banking industry notional amounts and 81% of
industry net current credit exposure."

These four banks have an overwhelming share of the derivatives market in
the United States. You might not be very fond of "the too big to fail
banks", but keep in mind that if a derivatives crisis were to cause them
to crash and burn it would almost certainly cause the entire U.S.
economy to crash and burn. Just remember what we saw back in 2008. What
is coming is going to be even worse.

It would have been really nice if we had not allowed these banks to get
so large and if we had not allowed them to make trillions of dollars of
reckless bets. But we stood aside and let it happen. Now these banks are
so important to our economic system that their destruction would also
destroy the U.S. economy. It is kind of like when cancer becomes so
advanced that killing the cancer would also kill the patient. That is
essentially the situation that we are facing with these banks.

It would be hard to overstate the recklessness of these banks. The
numbers that you are about to see are absolutely jaw-dropping. According
to the Comptroller of the Currency, four of the largest U.S. banks are
walking a tightrope of risk, leverage and debt when it comes to
derivatives. Just check out how exposed they are...

JPMorgan Chase
Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)
Total Exposure To Derivatives: $69,238,349,000,000 (more than 69
trillion dollars)

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $52,150,970,000,000 (more than 52
trillion dollars)

Bank Of America
Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,405,372,000,000 (more than 44
trillion dollars)

Goldman Sachs
Total Assets: $114,693,000,000 (a bit more than 114 billion dollars -
yes, you read that correctly)
Total Exposure To Derivatives: $41,580,395,000,000 (more than 41
trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives
contracts is more than 362 times greater than their total assets.

To get a better idea of the massive amounts of money that we are talking
about, just check out this excellent infographic.

How in the world could we let this happen?

And what is our financial system going to look like when this pyramid of
risk comes falling down?

Our politicians put in a few new rules for derivatives, but as usual
they only made things even worse.

According to Nasdaq.com, beginning next year new regulations will
require derivatives traders to put up trillions of dollars to satisfy
new margin requirements.

Swaps that will be allowed to remain outside clearinghouses when new
rules take effect in 2013 will require traders to post $1.7 trillion to
$10.2 trillion in margin, according to a report by an industry group.

The analysis from the International Swaps and Derivatives Association,
using data sent in anonymously by banks, says the trillions of dollars
in cash or securities will be needed in the form of so-called "initial
margin." Margin is the collateral that traders need to put up to back
their positions, and initial margin is money backing trades on day one,
as opposed to variation margin posted over the life of a trade as it
fluctuates in value.

So where in the world will all of this money come from?

Total U.S. GDP was just a shade over 15 trillion dollars last year.

Could these rules cause a sudden mass exodus that would destabilize the

Let's hope not.

But things are definitely changing. According to Reuters, some of the
big banks are actually urging their clients to avoid new U.S. rules by
funneling trades through the overseas divisions of their banks...

Wall Street banks are looking to help offshore clients sidestep new U.S.
rules designed to safeguard the world's $640 trillion over-the-counter
derivatives market, taking advantage of an exemption that risks
undermining U.S. regulators' efforts.

U.S. banks such as Morgan Stanley (MS.N) and Goldman Sachs (GS.N) have
been explaining to their foreign customers that they can for now avoid
the new rules, due to take effect next month, by routing trades via the
banks' overseas units, according to industry sources and presentation
materials obtained by Reuters.

Unfortunately, no matter how banks respond to the new rules, it isn't
going to prevent the coming derivatives panic. At some point the music
is going to stop and some big financial players are going to be
completely and totally exposed.

When that happens, it might not be just the big banks that lose money.
Just take a look at what happened with MF Global.

MF Global has confessed that it "diverted money" from customer accounts
that were supposed to be segregated. A lot of customers may never get
back any of the money that they invested with those crooks. The
following comes from a Huffington Post article about the MF Global
debacle, and it might just be a preview of what other investors will go
through in the future when a derivatives crash destroys the firms that
they had their money parked with...

Last week when customers asked for excess cash from their accounts, MF
Global stalled. According to a commodity fund manager I spoke with, MF
Global's first stall tactic was to claim it lost wire transfer
instructions. Then instead of sending an overnight check, it sent the
money snail mail, including checks for hundreds of thousands of dollars.
The checks bounced. After the checks bounced, the amounts were still
debited from customer accounts and no one at MF Global could or would
reverse the check entries. The manager has had to intervene to get MF
Global to correct this.

How would you respond if your investment account suddenly went to "zero"
because the firm you were investing with "diverted" customer funds for
company use and now you have no way of recovering your money?

Keep an eye on the large Wall Street banks. In a previous article, I
quoted a New York Times article entitled "A Secretive Banking Elite
Rules Trading in Derivatives" which described how these banks dominate
the trading of derivatives...

On the third Wednesday of every month, the nine members of an elite Wall
Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in
the vast market for derivatives, one of the most profitable — and
controversial — fields in finance. They also share a common secret: The
details of their meetings, even their identities, have been strictly

According to the article, the following large banks are represented at
these meetings: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of
America and Citigroup.

When the casino finally goes "bust", you will know who to blame.

Without a doubt, a derivatives panic is coming.

It will cause the financial markets to crash.

Several of the "too big to fail" banks will likely crash and burn and
require bailouts.

As a result of all this, credit markets will become paralyzed by fear
and freeze up.

Once again, we will see the U.S. economy go into cardiac arrest, only
this time it will not be so easy to fix.

(11) Wall Street finds a foreign detour around U.S. derivatives rules


(Reuters) - Wall Street banks are looking to help offshore clients
sidestep new U.S. rules designed to safeguard the world's $640 trillion
over-the-counter derivatives market, taking advantage of an exemption
that risks undermining U.S. regulators' efforts.

By Rachel Armstrong

SINGAPORE | Sun Dec 2, 2012 4:11pm EST

U.S. banks such as Morgan Stanley (MS.N) and Goldman Sachs (GS.N) have
been explaining to their foreign customers that they can for now avoid
the new rules, due to take effect next month, by routing trades via the
banks' overseas units, according to industry sources and presentation
materials obtained by Reuters.

The rules, a result of Washington's Dodd-Frank reforms, aim to prevent
financial catastrophes in the over-the-counter (OTC) market - a huge,
opaque market which is partly blamed for felling Lehman Bros in 2008 and
fuelling a global financial crisis.

They call for U.S. banks dealing in OTC instruments, such as
interest-rate swaps and cross-currency options, to effectively set aside
capital against the risk of trades turning sour, execute their trades on
electronic platforms and report them to U.S. authorities - requirements
that worry the banks' offshore clients and threaten to drive business
away from Wall Street.

OTC brokers say liquidity has already begun to suffer.

In response, Wall Street has launched a last-minute effort to show
foreign counterparties how they can keep doing business together and
still keep trades out of the U.S. regulatory net.

The banks' solution is to route trades via their non-U.S. affiliates -
subsidiaries with their own separate balance sheets, often in London -
rather than the parent banks. It is a detour that could eventually be
shut down by foreign regulators, but for now offers shelter from the
U.S. regulatory storm.

"What we are seeing now is a gamesmanship dance in which firms do
whatever they can to avoid regulation, which is an age-old phenomenon,"
said Thomas Cooley, a professor of economics at New York University's
Stern School of Business.

Financial industry concerns over U.S. regulation of the OTC market focus
mainly on trades in swaps, among the most common and flexible financial
instruments, used to hedge all kinds of financial risks from interest
rates to currency movements.

Under the new rules, any entity that trades more than $8 billion a year
of swaps with a "U.S. person" is required to register with the Commodity
Futures Trading Commission (CFTC) as "swap dealers", a designation that
brings with it capital and margin requirements that could drive up costs.

But the precise definition of a "U.S. person" is unclear.

A presentation given on November 16 by Morgan Stanley to its Asian
commodity clients explained how they might want to consider "cutting
over trading to a non-U.S. swap dealer". One slide named Morgan Stanley
& Co. International Plc, a London-based subsidiary, as an example of a
non-U.S. swap dealer.

Morgan Stanley spokesman Mark Lake said the presentation "was an update
to clients on Dodd-Frank regulation and clearly states that it was not
intended as advice or a specific recommendation from Morgan Stanley".

"While we note that one option for certain non-U.S. clients trading
swaps with a U.S. swap dealer may be to switch to a non-U.S. swap
dealer, we also point out that all G-20 jurisdictions are expected to
adopt similar requirements to the U.S."

Goldman Sachs, too, is sending a similar message. Its bankers are
meeting counterparts from regional Asian banks, assuring them they can
trade with Goldman's London entity, Goldman Sachs International, and not
be subject to the new rules, according to sources familiar with the matter.

Goldman declined to comment on the matter.

"What banks are looking at is: can they put their business with non-U.S.
counterparties through a London entity, and will the regulators in the
UK accept all the business coming through those entities?" said Mark
Austen, chief executive of the Asia Securities Industry & Financial

Lawyers say the answer may be yes, for now - at least until foreign
regulators, also mindful of avoiding another financial crisis, catch up
with Washington and impose similar rules.

Gareth Old, a lawyer at Clifford Chance in New York, said the CFTC had
made it clear that any swaps traded with the foreign affiliate of a U.S.
bank would not count toward the $8 billion "de minimis" threshold for
identifying a swap dealer.

"This is a very, very important exclusion. It means that non-U.S.
financial institutions can continue to trade with at least a unit of a
U.S. bank ... without running the risk of being a U.S. person," Old said.

However, lawyers say U.S. commercial banks like JPMorgan (JPM.N) and
Citigroup (C.N) may find it harder to detour their clients around
Dodd-Frank, noting that these banks tend to operate overseas through
branches, not stand-alone affiliates.

Overseas branches of U.S. banks are expected to still be classed as a
"U.S. person" under the new regulation.

It is not clear what JPMorgan and Citigroup are doing, if anything, to
address the impact on their offshore clients.

Citigroup spokesman in Hong Kong, Godwin Chellam, declined to comment on
the issue. JPMorgan also declined to comment.


U.S. regulators want their derivative rules to apply to offshore trades
by Wall Street banks as well as domestic ones, given that bad trades
outside their borders can still rebound on the parent banks, weaken
their balance sheets and add to risks that may be building up across the
U.S. banking system.

"Swaps executed offshore by U.S. financial institutions can send risk
straight back to our shores," said CFTC chairman Gary Gensler in June.
"It was true with the London and Cayman Islands affiliates of AIG,
Lehman Brothers, Citigroup and Bear Stearns."

However, Wall Street faces fierce resistance to the reforms from foreign
counterparties, especially those trading around the $8 billion threshold
which are seen as most likely to take the "affiliate" detour offered by
U.S. banks.

Several mid-sized foreign banks, including Singapore's DBS (DBSM.SI),
have said they do not intend to register with U.S. regulators as swap
dealers. Some banks have even stopped trading with U.S. counterparts,
brokers said.

In contrast, major foreign banks such as Germany's Deutsche Bank
(DBKGn.DE), whose OTC trade would dwarf the threshold, are simply too
big to escape the U.S. regulatory net entirely.

The CFTC is still working on cross-border guidance on the reach of the
rules, raising doubts over whether it will close the affiliate exemption
or not, but it clearly hopes foreign regulators will adopt most of the
Dodd-Frank reforms anyway.

Morgan Stanley itself notes that the detour strategy may be short lived
in the UK and other G-20 jurisdictions, saying that they are expected to
eventually adopt similar rules.

Morgan Stanley's November 16 presentation in Asia was aimed at clients
trading commodity swaps, but the rules will also apply to products such
as interest rate swaps and cross-currency options. Foreign exchange
forwards and swaps will be exempt, largely because the U.S. Treasury
felt this market had been operating well for decades with its own
risk-management systems.

(Reporting by Rachel Armstrong; Additional reporting by Douwe Miedema in
Washington and David Henry and Lauren Tara LaCapra in New York; Editing
by Jonathan Leff, Michael Flaherty and Mark Bendeich)

(12) A Secretive Banking Elite Rules Trading in Derivatives (2010)



Published: December 11, 2010

On the third Wednesday of every month, the nine members of an elite Wall
Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in
the vast market for derivatives, one of the most profitable — and
controversial — fields in finance. They also share a common secret: The
details of their meetings, even their identities, have been strictly

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley,
the bankers form a powerful committee that helps oversee trading in
derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the
multitrillion-dollar market. In practice, it also defends the dominance
of the big banks.

The banks in this group, which is affiliated with a new derivatives
clearinghouse, have fought to block other banks from entering the
market, and they are also trying to thwart efforts to make full
information on prices and fees freely available.

Banks’ influence over this market, and over clearinghouses like the one
this select group advises, has costly implications for businesses large
and small, like Dan Singer’s home heating-oil company in Westchester
County, north of New York City.

This fall, many of Mr. Singer’s customers purchased fixed-rate plans to
lock in winter heating oil at around $3 a gallon. While that price was
above the prevailing $2.80 a gallon then, the contracts will protect
homeowners if bitterly cold weather pushes the price higher.

But Mr. Singer wonders if his company, Robison Oil, should be getting a
better deal. He uses derivatives like swaps and options to create his
fixed plans. But he has no idea how much lower his prices — and his
customers’ prices — could be, he says, because banks don’t disclose fees
associated with the derivatives.

“At the end of the day, I don’t know if I got a fair price, or what
they’re charging me,” Mr. Singer said.

Derivatives shift risk from one party to another, and they offer many
benefits, like enabling Mr. Singer to sell his fixed plans without
having to bear all the risk that oil prices could suddenly rise.
Derivatives are also big business on Wall Street. Banks collect many
billions of dollars annually in undisclosed fees associated with these
instruments — an amount that almost certainly would be lower if there
were more competition and transparent prices.

Just how much derivatives trading costs ordinary Americans is uncertain.
The size and reach of this market has grown rapidly over the past two
decades. Pension funds today use derivatives to hedge investments.
States and cities use them to try to hold down borrowing costs. Airlines
use them to secure steady fuel prices. Food companies use them to lock
in prices of commodities like wheat or beef.

The marketplace as it functions now “adds up to higher costs to all
Americans,” said Gary Gensler, the chairman of the Commodity Futures
Trading Commission, which regulates most derivatives. More oversight of
the banks in this market is needed, he said.

But big banks influence the rules governing derivatives through a
variety of industry groups. The banks’ latest point of influence are
clearinghouses like ICE Trust, which holds the monthly meetings with the
nine bankers in New York.

Under the Dodd-Frank financial overhaul, many derivatives will be traded
via such clearinghouses. Mr. Gensler wants to lessen banks’ control over
these new institutions. But Republican lawmakers, many of whom received
large campaign contributions from bankers who want to influence how the
derivatives rules are written, say they plan to push back against much
of the coming reform. On Thursday, the commission canceled a vote over a
proposal to make prices more transparent, raising speculation that Mr.
Gensler did not have enough support from his fellow commissioners.

The Department of Justice is looking into derivatives, too. The
department’s antitrust unit is actively investigating “the possibility
of anticompetitive practices in the credit derivatives clearing, trading
and information services industries,” according to a department

Indeed, the derivatives market today reminds some experts of the Nasdaq
stock market in the 1990s. Back then, the Justice Department discovered
that Nasdaq market makers were secretly colluding to protect their own
profits. Following that scandal, reforms and electronic trading systems
cut Nasdaq stock trading costs to 1/20th of their former level — an
enormous savings for investors.

“When you limit participation in the governance of an entity to a few
like-minded institutions or individuals who have an interest in keeping
competitors out, you have the potential for bad things to happen. It’s
antitrust 101,” said Robert E. Litan, who helped oversee the Justice
Department’s Nasdaq investigation as deputy assistant attorney general
and is now a fellow at the Kauffman Foundation. “The history of
derivatives trading is it has grown up as a very concentrated industry,
and old habits are hard to break.”

Representatives from the nine banks that dominate the market declined to
comment on the Department of Justice investigation. ...

How did big banks come to have such influence that they can decide who
can compete with them?

Ironically, this development grew in part out of worries during the
height of the financial crisis in 2008. A major concern during the
meltdown was that no one — not even government regulators — fully
understood the size and interconnections of the derivatives market,
especially the market in credit default swaps, which insure against
defaults of companies or mortgages bonds. The panic led to the need to
bail out the American International Group, for instance, which had
C.D.S. contracts with many large banks.

In the midst of the turmoil, regulators ordered banks to speed up plans
— long in the making — to set up a clearinghouse to handle derivatives
trading. The intent was to reduce risk and increase stability in the

Two established exchanges that trade commodities and futures, the
InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange,
set up clearinghouses, and, so did Nasdaq.

Each of these new clearinghouses had to persuade big banks to join their
efforts, and they doled out membership on their risk committees, which
is where trading rules are written, as an incentive.

None of the three clearinghouses would divulge the members of their risk
committees when asked by a reporter. But two people with direct
knowledge of ICE’s committee said the bank members are: Thomas J.
Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley;
Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul
Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel
of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee
of Citigroup.

Through representatives, these bankers declined to discuss the committee
or the derivatives market. Some of the spokesmen noted that the bankers
have expertise that helps the clearinghouse.

Many of these same people hold influential positions at other
clearinghouses, or on committees at the powerful International Swaps and
Derivatives Association, which helps govern the market.

Critics have called these banks the “derivatives dealers club,” and they
warn that the club is unlikely to give up ground easily.

“The revenue these dealers make on derivatives is very large and so the
incentive they have to protect those revenues is extremely large,” said
Darrell Duffie, a professor at the Graduate School of Business at
Stanford University, who studied the derivatives market earlier this
year with Federal Reserve researchers. “It will be hard for the dealers
to keep their market share if everybody who can prove their
creditworthiness is allowed into the clearinghouses. So they are making
arguments that others shouldn’t be allowed in.”

Perhaps no business in finance is as profitable today as derivatives.
Not making loans. Not offering credit cards. Not advising on mergers and
acquisitions. Not managing money for the wealthy.

The precise amount that banks make trading derivatives isn’t known, but
there is anecdotal evidence of their profitability. Former bank traders
who spoke on condition of anonymity because of confidentiality
agreements with their former employers said their banks typically earned
$25,000 for providing $25 million of insurance against the risk that a
corporation might default on its debt via the swaps market. These
traders turn over millions of dollars in these trades every day, and
credit default swaps are just one of many kinds of derivatives.

The secrecy surrounding derivatives trading is a key factor enabling
banks to make such large profits.

If an investor trades shares of Google or Coca-Cola or any other company
on a stock exchange, the price — and the commission, or fee — are known.
Electronic trading has made this information available to anyone with a
computer, while also increasing competition — and sharply lowering the
cost of trading. Even corporate bonds have become more transparent
recently. Trading costs dropped there almost immediately after prices
became more visible in 2002.

Not so with derivatives. For many, there is no central exchange, like
the New York Stock Exchange or Nasdaq, where the prices of derivatives
are listed. Instead, when a company or an investor wants to buy a
derivative contract for, say, oil or wheat or securitized mortgages, an
order is placed with a trader at a bank. The trader matches that order
with someone selling the same type of derivative.

Banks explain that many derivatives trades have to work this way because
they are often customized, unlike shares of stock. One share of Google
is the same as any other. But the terms of an oil derivatives contract
can vary greatly.

And 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 —
$5,000, $25,000 or $50,000 more — is unknown. That’s because the seller
also is told only the amount he will receive. The difference between the
two is the bank’s fee and profit. So, the bigger the difference, the
better for the bank — and the worse for the customers.

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 — and neither buyer nor seller
— would have easy access to the prices paid recently for other homes on
the same block. ...

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