Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place.
Derivatives took blame for some of the worst debacles of the financial crisis.
For Wall Street, switching to exchanges would have cut their profits in a lucrative business. "Exchanges are anathema to the dealers," because the resulting added price disclosure "would lower the profits on each trade they handle, and they would handle many fewer trades," said Darrell Duffie, a finance professor at Stanford business school.
Clearing is considered important by regulators because it requires parties to a trade to post margin or collateral meant to ensure that each side can absorb losses if the trade moves against them. With derivatives, often little margin was required, allowing risks to pile up. Another issue that emerged with the failure of Lehman Brothers was whether such margin should be held in central clearinghouses. Exchange trading usually involves clearing with margin.
Mr. White says the Dec. 11 financial-reform bill will exempt nearly half of the $600 trillion in outstanding derivatives transactions from clearing requirements
A 600 trillion market is a fantasy there is not that much money on the Planet. The reason why Derivatives are exempt from margin requirements is because requiring banks to post even a 5% margin requirement on all their Derivative contracts would mean the banks would have to find 30 trillion dollars.
The entire World’s GDP is only 60 trillion dollars the banks do not have half the worlds GDP in their vaults. Thats why the margin requirement was dropped
Now lets imagine a situation where the Derivatives market has to pay out 1% of its total value a not unlikely scenario. Lets say Joe Lieberman gets his wish and we invade Yemen oil prices go through the roof and nations like Iceland, Greece etc start defaulting on their National debt as the world economy slows everyone who bought a Derivative and bet the economy would slow down would want to get paid. Airlines who bought Derivatives as a hedge against higher fuel prices, people who bet grain prices would go up (farmers harvest crops with tractors that run on gas) Oil burning power plants buy Derivatives as a hedge against higher oil prices.
Now then just how would all these people collect on their Derivatives after all even a 1% pay out of a $600 trillion market is 6 trillion dollars.
Or about half of America’s National Debt after 8 years of Bush. Also as the world’s economy slows down banks will have a harder time trying to raising the cash.
Please explain to me why would anyone then buy a contract to protect themselves from price swings when the banks do not have the money to pay you if things get real bad?
I think thats the real reason the Banks do not want Price Disclosure or the government to look at their books. The Derivatives market is Magic you can’t fly Magically if you look down, you can’t run a Derivatives market if people want to look at the books and ask pesky questions.
Or in other words when you need the money the most the banks are the least able to pay you and not all the Imaginary Accounting in the world will save you then so I ask again why does anyone buy these contracts?.
Remember the Banks don’t have the money in the first place. Remember this money is not insured by the Federal Government unless there is another bailout of the banks by the government er Tax Payers! Remember that even in a good economy I doubt the banks can pay 6 trillion dollars.
I do not trust the banks books even if they say they could pay. After all the assets listed on the banks balance sheets like home loans as every home seller has found out in this economy are not worth what they were worth before the banking collapse. That and homes take forever to sell even at cut rate prices in this market.
Wallstreet has convinced the Government to keep the Derivatives Market secret that means we don’t even know how bad the damage would be and which banks are likely to fail. The Government does not want people withdrawing their money from the big banks because they don’t want them to fail.
However big banks are much more likely do gamble on Derivatives the more money the big banks have the more money they have to gamble with. So I suggest putting your money in small banks that don’t do Derivatives. We can vote with our dollars and say no more will it do any good I don’t know.
I do know America and the entire World should end the Derivatives Market World Wide the benefit vs harm ratio is to high.
useful facts and links
The U.S. economy is the largest national economy in the world, with an estimated 2008 gross domestic product (GDP) of US $14.4 trillion
The Outstanding Public Debt as of 01 Jan 2010 at 11:37:27 AM GMT is:
The estimated population of the United States is 307,573,120 so each citizen’s share of this debt is $39,505.60.
The National Debt has continued to increase an average of $3.81 billion per day since September 28, 2007! Concerned? Then tell Congress and the White House!
Investopedia explains Derivative
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros
I respectfully submit this article as part of my resume for the Obama administration as you can tell I am much more qualified than Helicopter Ben at the Federal Reserve, Geithner or Summers:) I can see when the Emperor/Economy has no clothes.