derivatives 2

DERIVATIVES ARE GROSS 2

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note: LMDO! My former workplace just cut hours 40%!  Ah, how sweet to savor!
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note: very important.  Come on back at 7 PM.  I'll be posting two articles a day now, one in the morning and one in the evening.  You East Coasters can now have something to read with your coffee before work.  I'll yammer on incessantly for my reasoning and motivations soon.  Full length articles both times, my usual 1k words. 
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The gross derivatives amount in existence to date has been estimated at between 800 and 1,200 TRILLION dollars.  I don’t know what they call that were you come from, but to me one and a quarter QUADRILLION dollars is a fair bit to the right of Bat Crap Crazy.  Or would that be to the left?  Anyway, since the bankers have gamed the system for these kinds of “investments” or “insurance” ( to call these derivative scams insurance policies is akin to calling your $300 a month with a $5,000 deductible while on minimum wage medical, pharmaceutical and banker industry bail-out tax an insurance policy ), and love them so and continue to put the global economy at risk by playing this game, we can bet that rather than being far more cautious than the last time the odds are fair to assume instead they would actually gamble in a fair more exponentially hazardous manner as has been the case all along these last thirty years.  If for no other reason than there are less assets to bet, and so the ratio assets to exposure must increase.

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So if we take the last exposure ratios of 300 to 1 that both LTCM in the late ‘90’s and the Too Big To Fail banks in the late ‘00’s employed, and we take the lower number of total gross derivative instruments guess-ti-mated to be out there, in theory around two and a half trillion, give or take a large African nation Gross National Product amount, is the assets bet that are in danger.  No big deal, right?  The Fed can create that out of thin air and it isn’t but the equal amount of the yearly budget deficit.  Well, that doesn’t sound so bad, right?  If you accept the fiction that net derivatives are all that matter, but how could it?  Because the derivatives markets are not regulated ( exactly how the banks and investment houses and the insurance companies want it, and paid the politicians to make it so ), nobody knows how many derivatives bets are out there.  If you don’t know the risk, how can you arbitrage against it?  You are pretending every bet has a counter-bet and no one is in danger of defaulting because the government will bail everyone out.  But that is playing a game of chess.

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The derivatives markets are actually a 3-D game of chess, with twice the squares and pieces.  Try to stay with me here.  If a bank makes a bet and then buys a counter-bet to insure the first bet, everything equals out.  But if the counter-bet is counter-bet with a bet and then that bet is insured by buying another bet from a fifth bank that buys a counter-bet from a sixth bank who buys a counter-bet from another, and no one knows how many previous bets there are except their once removed bet, you can’t insist that only the net derivative is important.  The entire gross amount is dependent on the one initial bet.  Let us say that Goldman Saks buys a $1 billion swap from Citibank.  Goldman agrees to pay an overnight interest rate on a currency in exchange for a fixed five year Treasury interest rate.  The spread between the two is the profit.  To protect itself from market uncertainties ( the markets are rigged, obviously, and have been since Reagan authorized the Plunge Protection Team, an aboveboard and well known move that has nothing to do with conspiracy theories, but only to a certain degree ), another swap is necessary.

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Goldman goes to BofA and buys a reverse of the first, it buys the Treasury two year and receives the overnight rate ( all this crap is barely understandable, but if you look at it from the old style buying long or short you can approximate ).  This means the bet has actually doubled to $2 billion even though the claim is made that the two cancel each other out.  The reason is that Citibank took out a $1 billion bet to counter the risk of the Goldman bet with Bank D and Bank D took out a counter-bet at Bank E, which took out a bet with F to cover their ass betting with E.  But F has no idea that E is covering a bet with D, they only know that E is the ORIGINAL party seeking a bet, because of the lack of transparency.  Nobody is checking anybody else’s books.  Meanwhile, BofA is doing the same thing, going to Bank G to cover their bet with Goldman, and Bank G goes to H to insure itself against the insurance with BofA, and then H goes I who goes to J, and J thinks I is the original party bettor and has no friggin clue that by this time there are tens of billions of dollars in bets circulating on the instrument they thought they were insuring for $1 billion.

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That is how the system sees a single spark threaten to burn down the whole forest.  Which covers the continent.  There isn’t pennies on the dollar covering this market.  There are pennies on the thousand dollars.  And no one trader that is working for these Too Big To Fail banks has any incentive to do anything but embrace as much risk as he thinks he can get away with, to maximize profits.  Which are increasingly made up on playing about with matches alone since real economic activity has been falling with the net energy supply.  You look and see waves of retail store closings, it doesn’t mean Amazon took all their business ( sure, Amazon cut their incentives to get extra sales because they are doing so well on their own ) but rather that customers have less money to buy.  Why?  If they aren’t being cut in their hours it is because mandatory health care costs have doubled or quadrupled.  And who gets those profits from the medical industry?  Are there even any?  Or is it all being desperately sucked in to patch the sinking financial ship?  More bets to make more returns, more fixes for the last derivatives implosion? 

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I understand that it is embarrassing to admit you panicked and nothing happened last time.  But assuming the worst and moving in an extremely paranoid manner is not panicking.  It is being prudent.  I think it is prudent to assume the entire teetering financial sector is Too Big To Save next time.  Not without sacrificing you to save them.  You are actually making that bet by continuing with Business As Usual.  Continued and concluded next time.

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