Do Not Pass Obama’s Financial Reform Bill
Instead pass the following:
1. Outlaw Derivatives, Short Selling, Hedge Funds, Credit Default
Swaps, Synthetic CDOs, ARMs,
Payday Loans, Federal Reserve, Zombie Banks, Credit Rating Agencies, and Bankruptcy
Exceptions for the above.
2. Legalize the Volcker Rule and Glass/Stengel
Nobel Laureate,
The Rule of Law, which is the basis of
Americanism, keeps everything equal to all and fair to all. When there are exceptions to that equality
and justice for all, the system falls apart.
That is what happened in the 2008 crisis and crash. To understand the reasons for the crash of
the banking market you only have to look for the violation of the Rule of Law.
The
financial crisis which struck the
The recent Goldman Sachs
scandal has underlined once again that the Wall
Street investment houses serve no useful social purpose whatsoever. They exist
solely for the purpose of pursuing speculative profits through a process of
looting and pillaging the rest of the economy. The Wall Street zombie banks are
monopolizing
Now,
I ask what value to the economy do derivatives have to the society, to
producing national wealth, to bettering mankind, anything useful, except to
steal money from a great many people and companies for the personal wealth of a
few, without producing anything?
Derivatives???
Derivatives can be defined as any financial paper which is
based on other financial paper. In other words, they are financial
instruments whose value depends upon or is derived from the value of
other financial instruments. Any kind of securitization results in the creation
of derivatives.
If individual mortgages are wrapped up and packaged
together as a mortgage-backed security (MBS), that is
a derivative.
Any asset-backed security (ABS),
be it based on car loans, credit card debt, or anything else, also qualifies as
a derivative.
Beyond this, there are generally speaking two kinds of
derivatives. The first type includes the derivatives which are traded more or
less openly on exchanges like the Chicago Board Options Exchange, etc. These
include options, futures, and indices, plus all the combinations of these.
These are what expire in each quadruple witching hour in the markets. This type
of derivative has generally amounted to about $600 trillion of speculation in recent years.
When people say that the rich are getting richer and the
rest of us our getting poorer, the do not tell the entire story. The business people and owners of companies
are not getting richer; it is the Zombie Bankers who are getting richer by
harming the businesses.
Then there are the so-called over-the-counter (OTC)
derivatives, otherwise known as structured notes, counterparty derivatives, or
designer derivatives. These often take the form of contracts which are kept
secret by the counterparties, and which are often not included on the balance sheets
of banks and other institutions which enter into these contracts. This type of
derivative is currently not reportable to any regulatory agency. This secrecy
is a result of the successful effort by Robert Rubin, Larry Summers, and Alan
Greenspan to block the modest proposal of Brooksley
Born of the Commodity Futures Trading Commission to bring the OTC derivatives
into the sunlight during the second
OTC derivatives include collateralized debt obligations (CDOs),which often represent the
packaging together of large numbers of mortgage backed securities, along with
other debt instruments. A CDO can also be concocted out of other CDOs, in which case it qualifies as a synthetic CDO or CDO
squared (CDO˛). Notice that a synthetic CDO is not really an investment, but
rather a form of gambling, in which
a speculator in effect places a bet on the performance of some other financial
instruments. This fact exposes the big lie inherent in the widespread
reactionary myth that the current depression was caused by poor people taking
out subprime mortgages on slum properties and then defaulting on these loans,
thus bringing down the
Credit
default swaps represent bets on whether a given asset or company will go
bankrupt or not. As such, they can be used as
insurance against such an eventuality, or else they can be used to make money on the insolvency. CDS are therefore a form of
insurance, but they are issued by counterparties who have not registered as
insurance companies and who have not met the legal and capital requirements
which are necessary to function as an insurance company. It ought therefore to be clear that CDS have been totally illegal all
along, and have flourished only because of an outrageous failure by state
insurance regulators to enforce applicable laws against the privileged class of
financiers.
Structured investment vehicles (SIVs)
are another type of derivative, commonly used to wrap up masses of CDOs and synthetic CDOs and then
to park them off-balance sheet, where they can be hidden from regulatory and
public scrutiny.
All kinds of derivatives, be they
exchange traded or over-the-counter, were strictly banned and outlawed in the
It should be added that derivatives were also banned in
many states as a result of laws prohibiting gambling or forbidding bucket
shops, which were betting parlors in which side bets could be placed on stock
market fluctuations.
Short Selling
What
social good is short selling? If you are
talking about naked shorts or any shorts, they are all immoral and destructive
to companies and nations. Short selling
is betting that a company will do poorly and these people do not even own stock
in the company. In most cases they have
inside information that a stock will go down or they have so much money they
can drive the stock down. Good companies have gone bankrupt by predator short
sellers and the short sellers made money on the bankruptcy. Why should anyone make money on the
destruction of a company? In fact, by
short selling the English Pound, Soros made millions and put
There
is nothing useful to short-selling.
The Euro’s
Destruction
The
Euro is being intentionally shorted by Soros and other hedge funds to provoke a
rush against it. The second phase of this depression
world wide, which is now beginning, can also be attributed in large part to
derivatives, since derivatives are the main tool being used in the speculative
attacks on
Far from being some arcane or marginal activity, financial
derivatives have come to represent the principal business of the financier
oligarchy in Wall Street, the City of
Journalists and public relations types have done everything
possible to avoid even mentioning derivatives, coining phrases like “toxic
assets,” “exotic instruments,” and – most notably – “troubled assets,” as in
Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout
of Wall Street speculators which was enacted in October.
Warren Buffett’s remarked that
derivatives represent financial weapons of mass destruction. French President Jacques Chirac rightly
referred to derivatives as “financial AIDS.” What useful purpose can these
toxic instruments possibly serve?
The Volcker
Rule
The other positive half measure which might survive Obama’s
usual quest for a “bipartisan” sellout is the so-called Volcker Rule, which specifies that commercial banks with
insured deposits are not allowed to engage in proprietary speculation with
their own money. Depending on how this is worded, this may include a long
overdue ban on derivatives speculation by commercial banks.
Senator Blanche Lincoln of
Glass/Steagell
Glass/Steagell needs to be re-instituted - Wall Street got that
removed in '88. This law stated that a financial institution could be either or
a commercial bank, or an investment house, or an insurance company, but never
more than one of these. In other words, the suicidal folly of the
Gramm-Leach-Bliley Act of 1999, which repealed Glass-Steagall,
must be rolled back.
CDS are already illegal, because they always involve an
investor masquerading as an insurance company without having fulfilled the
legal and capital requirements that would be demanded from a real insurance
company. Credit default swaps have cost
the
Credit default swaps are also a clear and present danger
today, since they are the principal tool
being used by wolf packs of banks and hedge funds against
Unless credit default swaps are banned now, they will be increasingly used for
speculative attacks against the bonded debt of American states like
The synthetic CDO or CDO˛ must also be outlawed. These are the toxic instruments which brought
down Bear Stearns, Merrill Lynch, and Lehman Brothers in the great derivatives
panic of 2008. What are we waiting for to ban this kind of highly
destructive derivative? Such a ban is easy to formulate: “Any collateralized debt obligation which contains other collateralized
debt obligations is hereby prohibited.” End of story. This language recalls
the approach of the very successful Public Utility Holding Company Act of the
New Deal. One layer of CDO is more than enough risk, and it must not be further
compounded.
Adjustable
Rate Mortgage (ARM)
Another ban which is long overdue and which should be
included in the current legislation is the outlawing of the Adjustable Rate Mortgage (ARM). The ARM
is another catastrophic innovation of recent decades which inherently carries
with it an intolerable risk for any homeowner. No American family should be
deprived of a roof over their heads because of the unpredictable and volatile
fluctuations of interest rates over the life of a mortgage. These ARMs shift an unacceptable risk to the mortgage buyer.
Fixed-rate mortgages should be the only legal kind, and any reset or change in
interest rates on a residential mortgage should be strictly outlawed.
Payday Loans
While we are at it, we also need to outlaw the
high-interest payday loan, a type of
devastating usury to which the poorest and most defenseless parts of our
population are now exposed. The outlawing of payday loans should take the form
of a de facto federal usury law establishing an upper limit of no more than 10%
on any promissory note or credit card. This was the limit traditionally set by
state usury laws before the coming of the Volcker 22% prime rate three decades
ago, and it should be restored. This simple prohibition of adjustable rate
mortgages and payday loans will be far more effective than the proposed
creation of an inefficient and unwieldy consumer protection bureaucracy,
especially one that is located inside the Federal Reserve.
The Federal
Reserve
The Federal Reserve has repeatedly struck out when it comes
to recognizing systemic risk, when it comes to preventing financial bubbles,
and when it comes to protecting ordinary Americans. The Federal Reserve failed
in the run-up to the crash of 1929, in the run-up to the banking crisis of
1933, in the run-up to the stock market crash of 1987, in preventing the dot
com bubble of 1999-2000, and in regard to the financial derivatives which
caused the banking panic of 2008. Locating any consumer protection bureaucracy
inside the privately owned Federal Reserve is simply to guarantee that such a
bureaucracy will be subject to regulatory capture by Wall Street at the
earliest possible moment.
Derivatives which escape prohibition under these blanket
bans on credit default swaps and synthetic CDOs must
then be subjected to their fair share of the tax burden. In a time when
haircuts, bowling alleys, and restaurants are threatened with new taxation, it
is simply inconceivable that the financial turnover of US financial markets
should remain immune to all taxation, rather like the French aristocrats of the
pre-1789 old regime. Rather than crush the
The proceeds from
such a Wall Street sales tax would almost certainly decline as speculation
became less attractive, but in the meantime they would provide much-needed
relief for the public treasury. Needless to say, any idea of paying the
proceeds of such a tax to the International Monetary Fund is out of the
question. Many other countries are in the process of instituting a Tobin tax on financial turnover, so the
inevitable objection that a Wall Street sales tax would represent a crippling
competitive disadvantage for US financial markets is increasingly untenable.
Further safeguards against the derivatives plague are also
in order. Current bankruptcy law gives
special privileged treatment to derivatives. These poisonous instruments
continue to exact their claims even when protection against other creditors has
been provided by the federal courts. This abusive and unwarranted favoring of
derivatives must be reversed. Derivatives must be made to wait their turn in
bankruptcy court, and sent to the end of the line after all other creditors and
claims have been satisfied. If bankruptcy triage becomes necessary, it should
be at the expense of derivatives.
Another needed measure is the establishment of a reserve requirement for anyone issuing
derivatives. We have seen how Goldman Sachs is accused of designing their notorious
ABACUS 2007-AC1 CDO, colluding with hedge fund speculator
A final necessary change involves the grave risk inherent
in the existence of hedge funds.
Hedge Funds
Despite their name, the main business of hedge funds is
pure predatory speculation. Hedge funds are currently allowed to fly below the
radar of the Securities and Exchange Commission, escaping regulation because
they have only a limited number of super-rich investors. It is high time that
this loophole came to an end. Once a hedge fund is regulated, it is no longer a
hedge fund, so the call to regulate hedge funds is for all practical purposes a
call for their abolition. Hedge funds should have been subject to regulation no
later than the immediate aftermath of the Long-Term Capital Management debacle
of 1998. The hedge fund loophole in the SEC rules must be closed now.
Obama’s $50 billion resolution fund for bankrupt banks is
unnecessary. What we need most of all is to have the Federal Deposit Insurance
Corporation, the Comptroller of the Currency, and other regulators enforce the
applicable laws. Every Friday, Sheila Bair of the FDIC shuts down a number of
small town banks because of insolvency. In her interview yesterday on CNBC, Ms.
Bair blatantly admitted that she has no intention of enforcing these same
public laws against the large Wall Street and other money center banks. She
covers this malfeasance and nonfeasance with her opinion that bankruptcy does
not work for the big banks. But there is little doubt that, if their massive derivatives holdings were
priced according to mark to market rules, J.P. Morgan Chase, Citibank, and Bank
of
Credit
Ratings Agencies
Any Wall Street reform bill should also deal with the
public scandal of the ratings agencies – Standard & Poor’s, Fitch, and
Moody’s. These agencies enjoy a quasi-governmental status when it comes to
certifying the quality of certain investments. But the failure of these
agencies to provide timely warnings during the onset of the derivatives panic
was nothing short of spectacular. During that crisis, the ratings agencies were
certifying investments as AAA investment-grade until mere hours before they
collapsed. Senator Carl Levin’s investigation of the ratings agencies has now
unearthed horror stories of corruption and incompetence. The ratings agencies need
to be stripped of any special role in relation to the
George Soros
and Obama
George Soros has been the primary financier of Obama from
before he was a Senator. George Soros is
a billionaire who made all his money on derivatives and short selling. What chance do you think that Obama will end
all the above crimes? No chance at all!
Note:
Knowledge and writing has been largely plagiarized from
Webster Tarpley
at http://www.actindependent.org/