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.

“Business models of the larger dealers have such a paucity of opportunities for profit that they have to defend the last great frontier for double-digit, even triple-digit returns,” said Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which analyzes banks for investors.

The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives.

I think we need to kick out all of those financial institution lobbyists and sentence them to mandatory gamblers anonymous meetings.

Note, this is like going to a weekly poker game and one player, every single week on end, wins and you can lose...
Who is that winner? Goldman Sachs. But take heart...if you lose so big you can't pay them....you'll be sure to get a rescue under some claim of systemic risk. (See AIG pays out CDses at 100%).

Very nice reporting by Bloomberg, including linking to this report on Q1 2009 derivatives holdings by the Comptroller of the Currency.

I suggest reading this report, if you have not seen it, loaded with graphs, statistics and break downs on the derivatives market.

It shows 95% of all derivatives in the U.S. are in the hands of just 5 banks. Note of these five, Goldman Sachs, BoA, JPMorgan Chase, Citigroup, Morgan Stanley, three still have large amounts of TARP money (and we have no idea on the $2 trillion in loans from the Federal Reserve either). Morgan Stanley and GS repaid their TARP funds, GS returning large profits.

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Observations and Speculation

Excellent blog with an outstanding synopsis by Bloomberg's writers on this matter (although they could have been far more damning in the long term design of the derivatives situation).

When they quote Ms. Tavakoli, they didn't give her enough room to elaborate: namely by camouflaging the risk, the banksters were enabled to do superleveraging, thus creating the foundation of present and ongoing economic meltdowns.

The Bloomberg's article quote of Mr. Zubulake was spot on, such that the bankster derivatives dealers would refuse to utilize the already existing Chicago Mercantile Exchange (CME) since they didn't own it, correctly inferring the ownership of InterContinental Exchange (ICE) and and ICE US Trust. (If one of those business news services would run a chart explaining the original financing and ownership of ICE, ICE US Trust, Markit, Markit Wire, TradeSpark, Climate Exchange Plc, etc. --- Then no one would have any excuse to remain clueless.)

That very interesting quote from the Bloomber article:

"-- JPMorgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup Inc. -- held 95 percent of the $291 trillion in notional derivatives value of the country’s 25 largest bank holding companies at the end of the first quarter..",

reflects something I previously mentioned awhile back, namely that from BIS and Fed reports I had gleaned that the notional derivatives exposure holds true: JPMorgan at $80 trillion, Citigroup and BofA at approximately $40 trillion apiece, Goldman at $30 trillion (still uncertain as to the exact amount of exposure by understated Morgan Stanley).

SPECULATION: Given the recent activities mentioned in this blog, articles, and reports, and given the previous blog on the Tradable Insurance Credits (the Fed's recent contingent-CDS financialization invention), and given the extreme pushback by the Clearing House Association (ABN Amro, Bank Of America, The Bank Of New York, Deutsche Bank, HSBC, JP Morgan Chase, US Bank and Wells Fargo) and Geithner against an audit of the Fed, it could be suggested that there is a focused move to concentrate not only the pricing of capital by the Fed, but also the pricing of commodities, precious metals, etc., by way of overseeing Credit Default Swaps, new CDS instruments, and the complete lack of transparency in their money infusions.

And that new NY Fed head

Sorry, neglected to mention the new NY Fed chairman, Denis Hughes, NY AFL-CIO union official --- great time for a non-bankster to be heading the NY Fed!

enlighten me

How, specifically, is this a good thing?



Good for the NY Fed gang

because it will buy them more time having someone completely inexperienced in their realm, at their helm, while they continue to dissemble and obfuscate on that "misplaced bookkeeping" regarding those paid-out trillions which Bloomberg filed the FOIA on, and the judge agreed to, and the NY Fed is asking for a delay on.

More ammo for this blog

Some additional commentary (which I was just notified of, thanks) which will add to both this excellent blog, and my posted comments.

From Paul Amery's seekingalpha.com article ("Derivatives Probe Raises Pricing Issues for Investors" - dated 7/21/09):

There are very significant interests at stake. Trading in credit instruments continues to contribute a significant portion of the income of many banks – three quarters of JP Morgan’s (JPM) 2008 profits according to one observer, and a large part of Goldman Sachs’s (GS) recent record quarterly revenues. And individual investments linked to Markit’s credit derivatives indices have also been record breakers. Goldman’s proprietary traders reportedly made over US$4 billion in 2007 from short positions in the ABX index as the US sub-prime market imploded, while hedge funds run by New York’s Paulson and Co. earned over 600% in the same year from similar trades.

Curiouser and curiouser....


you can write up your own Instapopulist, blog post too.

Derivatives are a mile deep topic, takes a lot of research, citations to track on where the interests/money is on them.

i.e. EP is a group effort here and I'm personally trying to get something for work out the door. I'm missing so many yet "amazing facts" to "astound you" type of writings at the moment.