phands
Veteran Member
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Not really a surprise....
There's MUCH more at https://www.rawstory.com/2018/09/tr...owards-another-massive-financial-catastrophe/
[FONT="]At summer’s end, the U.S. economy looks to be sizzling. Unemployment is low. Growth is higher than expected. Consumer confidence is soaring and Wall Street just set a record bull run.[/FONT]
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[FONT="]“We are crushing it,” Trump’s economic advisor Larry Kudlow recently boasted.[/FONT]
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[FONT="]The euphoria feels a bit like… just before the crash of 2007-8. Does that worry you? It should.[/FONT]
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[FONT="]Hold onto your 401(k)s, because the Wall Street casino that nearly tanked the global economy ten years ago is up and running amok again.[/FONT]
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[FONT="]But what about the much-touted safeguards in place today? It’s true that in 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed to ensure that taxpayers would never again be on the hook to bailout big financial institutions.[/FONT]
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[FONT="]Alas, according to Michael Greenberger, a law professor at the University of Maryland and one the key voices to raise alarms a decade ago, you can’t trust that promise. In new research for the Institute for New Economic Thinking, he warns that bankers are wriggling right out of Dodd-Frank’s rules.[/FONT]
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[FONT="]If something goes wrong it could be even worse than last time. So we need to clearly see the game that’s being played.
<Long article snipped>
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[FONT="]Now, Dodd-Frank did do some good things. The riskiest stuff—like naked credit default swaps—was supposed to be overseen, principally by the Commodity Futures Trading Commission (CFTC), and the markets were meant to become more transparent. When you trade credit default swaps, somebody — a clearing facility — has to be between you and the other party to the swap to guarantee that the underlying obligation is paid off. Exchanges were created to make these transactions transparent.[/FONT]
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[FONT="]Both clearing facilities and exchanges would hit the alarm bell if a company like AIG started to lose a lot of money on swaps. The government would also be told who is making all the bets. If a firm didn’t have the money to cover the bets, then the clearing facility would close out the transaction before losses started to pile up.[/FONT]
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[FONT="]So we’re all good, right? Wrong, says Greenberger.[/FONT]
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[FONT="]The banks may have turned away from the business of insuring bundles of mortgages, but now they’re bundling and betting other kinds of debt, like credit card debt, student loans, auto loans, corporate loans — you name it. It’s the same casino games: they make asset-backed securities which turn into CDOs, then come the “naked” credit default swaps, and so on. Once again, people who are not making the loans are betting that those loans won’t be paid off.[/FONT]
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[FONT="]And guess what? While everybody was relaxing, the banks figured out a way to do their swaps deals outside of the jurisdiction of Dodd-Frank. They snuck the risky business overseas where the U.S. regulators can’t watch them.[/FONT]
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[FONT="]One thing they didn’t move overseas: the risk to you.[/FONT]
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[FONT="]The shady scheme went down like this: In 2013, the CFTC put out guidelines about how Dodd-Frank would apply to swaps executed outside the U.S. The CFTC said that “guaranteed” foreign subsidiaries to U.S. bank holding companies that traded swaps were subject to Dodd-Frank regulation. Since the standard swaps agreement for over two decades included a guarantee that the U.S. bank would back the deal if things went south for a foreign subsidiary, there was no reason to worry if risky swaps were traded by that subsidiary. Everybody understood if you were the counterparty to one of these deals, you counted on the bank to stand behind the foreign subsidiary.[/FONT]
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[FONT="]So far, so good. Except for the matter of a tiny footnote.[/FONT]
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[FONT="]Deep in the fine print of hundreds of footnotes in the CFTC guidelines, the major swaps dealer trade association found a little item saying that in a contract, you could, if you really wanted to, choose not to guarantee deals made in a foreign subsidiary. If you did not guarantee them, then Dodd-Frank would not apply.[/FONT]
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[FONT="]The swaps dealers association pounced. They said to their members, like Bank of America and Citigroup: Let’s do it! Just put a note in the contract that you won’t stand behind the subsidiary if it fails. We’ll move as many swaps as we want to our newly “deguaranteed” foreign offices so we can forget all about Dodd-Frank. Under cover of darkness, without notifying the CFTC, they got rolling. The banks got so cocky that some swaps dealers just started doing their deals in New York and then, after they were done, “assigning” them to foreign subsidiaries. Presto! No more pesky regulation.[/FONT]
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[FONT="]Some customers wanting to buy swaps complained that this was too risky. But then they said to themselves, wait: if the foreign subsidiary fails and Goldman or JP Morgan won’t cover the loss, does it really matter? After all, we know from 2008 that big banks get big bailouts from U.S. taxpayers if they fail. (Ed Kane, a finance professor at Boston College, has warned about this implicit guarantee, which actually inflates bank stocks and supports prices of their bonds). So the customers shrugged and kept on betting with these foreign subsidiaries.[/FONT]
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[FONT="]Greenberger explains that the CFTC caught up to the shenanigans in 2016 and made proposals to stop them. The four biggest banks, JP Morgan Chase, Goldman Sachs, Citigroup, and Bank of America, which do 90% of all the swaps deals in the U.S., argued that it’s really not a problem because if the trades get assigned to London or Frankfurt, for example, the European Union (EU) has lots of regulations to make sure everything is safe and sound.[/FONT]
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[FONT="]To this, Greenberger says, “Who are they kidding? Just look at the EU. Deutsche Bank is hanging on by its fingernails. Many Italian banks are failing. Turkey is in terrible trouble. The financial markets in those countries are teetering, and we’re going to rely on them to regulate this stuff?”[/FONT]
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[FONT="]There’s another catch: U.S. regulators can’t get information on these “foreign” deals, so nobody knows the full extent of the trading. But you can think in terms of many trillions of dollars. Basically, we’re right back to a non-transparent market with boatloads of money sloshing around everywhere. Just like last time.[/FONT]
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[FONT="]The CFTC regulators told the banks that their “deguarantee” argument was baloney and vowed to stipulate that Dodd-Frank applied to these deals. Then Trump got elected.[/FONT]
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[FONT="]“Deregulation” is one of Trump’s favorites words, so closing this loophole now is about as likely as a bank CEO going to jail. Not happening.[/FONT]
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[FONT="]Consider this: Right now, American students are amassing huge piles of debt. If students stop paying off their loans, there will be a lot of defaults. Actually, it’s already starting to happen. On Wall Street, people have been betting on these defaults and buying naked credit default swaps to guarantee that they will be paid if the students can’t pay.[/FONT]
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[FONT="]By the way, wonder why it’s so hard to get out of student debt once you’ve got it? Because the Wall Street casino guys with the naked credit default swaps want their insurance money, that’s why.[/FONT]
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[FONT="]Casino games are also rolling with credit card debt. Same thing with auto loans. Corporate-debt, too. We’re talking trillions of dollars in defaults. Sound familiar?[/FONT]
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[FONT="]If this continues, what happens to the credit defaults swaps that have been assigned to an office in Frankfurt? Who pays if the foreign subsidiary goes under? Not the citizens of Germany, says Greenberger. You can be sure of that.[/FONT]
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[FONT="]This hasn’t happened yet, but there was a red flag back in 2012. The London Whale scandal, which reared its ugly head when a trader at a London subsidiary of JP Morgan lost $6 billion in a swaps deal, came after Dodd-Frank passed, but before it went into effect (and before the loophole was discovered). The bank had enough in cash reserves to take that enormous hit, but most banks would not. JP Morgan CEO Jamie Dimon called it a “tempest in a teapot.” Others were not convinced: Forbes magazine put out an article about it called, “How Jamie Dimon and JPMorgan Chase Endanger the Public Safety.”[/FONT]
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[FONT="](By the way, JP Morgan and other big banks, along with bank-friendly regulators, have been arguing that they should be able to keep less money on reserve).[/FONT]
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[FONT="]Greenberger notes that the London Whale was the result of trading by just one guy. If you had ten of these, the banks probably wouldn’t be able to pay off their obligations and the counterparties wouldn’t be able to pay off theirs, either.[/FONT]
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[FONT="]It’s 2007 all over again.[/FONT]
There's MUCH more at https://www.rawstory.com/2018/09/tr...owards-another-massive-financial-catastrophe/
