Destabilizing a country by derivatives is "counter productive" - Bernanke

It is counter productive to destabilize or destroy a nation through derivatives according to Federal Reserve Chair Ben Bernanke.

Counter productive. Hmmmm, if it was a military weapon I do believe it would be called something else but as long as it's financial....well, ain't thems just fightin' words.

Obviously, using these instruments in a way that intentionally destabilizes a company or a country is -- is counterproductive, and I’m sure the SEC will be looking into that. We’ll certainly be evaluating what we can learn from the activities of the holding companies.

The SEC? Like Madloff? Bernanke said this during testimony before the Senate Banking Committee.

Chris Dodd asks:

Should there be limits on the use of credit default swaps to prevent “runs against governments?

Speaking of Stuffing CDOs with Toxic Waste - Investors Sue Morgan Stanley Over CDOs

While we were just chatting about how to stuff a CDO with toxic waste, speak of the devil, someone is suing trying to get their money back.

Morgan Stanley is being sued over a $1.2 billion worth of defaulted CDOs.

Morgan Stanley (MS.N) has been sued by a Virgin Islands pension fund that accused the Wall Street bank of defrauding investors by marketing $1.2 billion of risky mortgage-related notes that it expected to fail.

The lawsuit filed December 24 in Manhattan federal court said Morgan Stanley collaborated with credit rating agencies Moody's Investors Service and Standard & Poor's to obtain "triple-A" ratings for notes marketed in 2007 as part of a collateralized debt obligation (CDO) known as Libertas.

Four "Drive your Truck through it" Loopholes in Dervatives Reform

While we are still reading an analyzing what is in the final bill, Seeking Alpha has a great outline post on the lack of reform on derivatives and identifies four glaring loopholes.

The risk to our financial system must be eliminated, not simply regulated. We as Americans should not tolerate our system being put at risk. All OTC derivatives should clear through a Central Counterparty (CCP) with novation and daily margin, so that all swaps counterparties are forced to make good on their bets every day. In addition, all derivatives that can trade on a public exchange should trade on a public exchange so that regulators have real-time transparency and the ability to police these markets for fraud and manipulation.

We're Back - Cap & Trade Based on Derivatives

Just when you think the fictional economy cannot get any worse, we get this. The Cap & Trade is based on a new derivatives market. Oh gee! Just what the nation needs, yet another fictional mathematics market so a few traders can put the entire global economy at risk!

The banks are preparing to do with carbon what they’ve done before: design and market derivatives contracts that will help client companies hedge their price risk over the long term. They’re also ready to sell carbon-related financial products to outside investors.

Another Warning from a Different CFTC Chair

This time it comes from current chair (and former Asst. Treasury Sect. under Robert Rubin) Gary Gensler. He is warning congress about exempting hedge funds from the current proposal on derivatives. As amended the current proposals have been weakened already but here is his warning:

Hedge funds and financial firms shouldn’t be allowed to sidestep potential new laws governing the $592 trillion over-the-counter derivatives market, Gary Gensler, chairman of the Commodity Futures Trading Commission said today in Chicago.

Any exemptions for so-called end-users should be “very narrowly defined” to include only non-financial institutions, Gensler said. End-users such as utilities, energy producers and agricultural companies have pushed for an exemption to new laws that would require standardized over-the-counter trades to go through exchanges or clearing houses.

Loopholes Will Be A Problem for Derivatives Bill

Amazing, there is a serious lack of courage to take on financial oligarchy and the corporate oligarchy. First, we hear that they are already watering down the legislation for the Consumer Financial Protection Agency. Now comes word that there is a proposal for a huge loophole in the derivatives bill:

Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

So, is this going to be one of those political exercises that says look we did something for show with no substance?

This a very brief summary of what is on the table:

Banks Still Love Credit Default Swaps

File this under Same Shit Different Day. I came across this article today on HuffPost:Banks Still Trading In Risky Derivatives. The articles is OK but the links to the Office of Comptroller of the Currency website are great.

I found a new report: OCC's OCC’s Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2009 (pdf file). I am kind of slow so this report may not be old news to most EP people.

First, the press release that accompanied the report:

U.S. commercial banks reported trading revenues of $5.2 billion in the second quarter of 2009, compared to record revenues of $9.8 billion in the first quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

The dysfuntion of today's financial system

There are two news articles out today that provide a sort of through-the-looking-glass view into the world of big banks.


(AP) -- U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter, as the level of risk eased in the global market for the complex financial instruments, according to a government report released Friday.

Update on the Derivatives Regulation War

My my. A few, now government funded, I might add, mega financial institutions (made that way with U.S. taxpayer help) are now lobbying against derivatives regulation.

It appears the great unregulated casino hall of derivatives can sometimes generate winnings. The last 6 months haul? $35 billion dollars.

Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago.

Five U.S. commercial banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., are on track to earn more than $35 billion this year trading unregulated derivatives contracts. At stake is how much of that business they and other dealers will be able to keep.