There has been a lot of talk about the cause of the financial crisis. At the root of the crisis were bulk packaged real estate loans called Collateralized Debt Obligations (CDO’s). These securities were bought and sold in bulk traunches in private markets. Despite all the talk about financial reform, this is the way it is still done today.
Emerging from the rubble of the crisis was one of the primary financial weapons of mass destruction – the Credit Default Swap. The CDS can be used defensively, or offensively. The CDS can be constructed to insure or speculate against any kind of debt instrument including the CDO.
The credit default swap sounds complicated and mysterious, but it isn’t. It can be viewed as an insurance product or a speculative weapon…but it is an option. The buyer of a credit default swap is buying insurance that the underlying debt will not default, and ownership of the underlying debt is not required. So you can effectively insure or speculate against debt you don’t even own.
If a default occurs, the price of the credit default swap rises dramatically. The seller of a credit default swap is selling that insurance. This is what bankrupted AIG…selling improperly hedged naked credit default swaps and then having the underlying debt default or nearly default without the necessary capital to pay off the insured.
So all that said, the weaponizing attribute of the credit default swap is that you don’t have to own the underlying debt in order to buy or sell the credit default swap on that debt. This is a so called “naked CDS”. It’s “naked” because the buyer or seller does not actually own the underlying debt, is not using it as insurance or for hedging purposes, but purely for speculation.
Further compounding the issue, these instruments are traded in private, so despite all the talk in Washington about “transparency”, there is no transparency regarding who is buying, and who is selling.
So despite all the talk about the the importance of transparency by politicians, regulators and media pundits, it’s all still done in secret inside the corrupt, “too big to fail” entities that now call themselves banks. As a trader or speculator, if you have deep enough pockets, you can buy credit default swaps on debt of cities, municipalities, states, and governments without any position size limit.
Using the credit default swap as a speculative weapon to destroy…
Assuming you are a financial entity with deep enough pockets or maybe one of the “too big to fails” backstopped by the US citizens, you could buy credit default swaps on any city, state, municipality or even an entire country you wished to destroy, and just keep buying until you caused the price of the debt to be so low and interest rate so high that the entity is forced into default. You can do it all in secret too. Recently accusations have been made public regarding Iceland and Greece and the use of the naked CDS to destroy and plunder the countries by US banks and hedge funds. Furthermore, US institutions who helped Greece hide their debt are the same ones who have attempted to profit from its financial destruction.
This presents an ethical and moral dilemma, because large US trading houses euphemistically called “banks” backstopped by the public have the ability and the financial wherewithal to cause the bankruptcy of any entity they wish, including US cities, states and even the US federal government. All that would be required is by relentless buying of the credit default swaps until the underlying debt is forced into default. This clearly establishes the large US banks and trading houses as the ultimate power broker, able to demolish a city, state or national government by pushing buttons on a computer in secret with no oversight, and absolute power.
America has been bankrupted by this too big to fail organized crime ring that runs the banking system, the politicians and the media. So now what? The large proprietary trading houses that call themselves banks, the ones who are “too big to fail” and effectively are bankrolled by the citizens, don’t have to go down with the ship. Quite to the contrary, these institutions and the people behind them have tools available to profit from the demise of America (or Greece or any other country), and even to create the circumstances for that demise. Furthermore, they will do that while being backstopped by the American citizens. Meanwhile, the people’s representatives, bought and paid for several times over by these same big money interests, will act as passive co conspirators in the bankruptcy and destruction of America.
“And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.” – Senator Dick Durbin 2009
Filed under: Financial Terrorism, collapse, economy
Naked Credit Default Swaps Are “Like Buying Fire Insurance On Your Neighbor’s House — You Create An Incentive To Burn Down The House”
I have repeatedly argued that naked credit default swaps should be banned. See this and this. Savvy commentators like Wolfgang Munchau and Yves Smith are saying the same thing.
Banks Bailed Out By American Taxpayers Are Paying Us Back By Shorting Our States and Cities
Tuesday, April 27, 2010
Americans bailed out the giant banks. So how do the too big to fails re-pay the American taxpayers?
By betting that American states and cities will fail.
v.tr.1. To commit (money or capital) in order to gain a financial return
When the Keynesian fractional reserve fiat banking model was sold to the public, the idea was that the citizens would accumulate wealth and prosper, furthering wealth and prosperity among the many and building the nation from the ground up. Using hindsight, we now know it was all a fraud.
The American Dream was sold on the idea that a citizen could work hard and save. You could “invest” your savings and earn a rate of return greater than the increase in the cost of living, thus increasing your real wealth over time with the magic of compound interest. That was the incentive to save. That was the basis for retirement. This could be easily accomplished by investing in government bonds which would yield a rate of return greater than the rate of inflation, plus a risk premium, plus a real return. The return could be calculated in advance at purchase time, and the only risk associated with the investment was a US default, which would have been called “impossible”. A retirement saver or a pension fund could calculate exactly how much the current investment capital would be worth at maturity. This provided certainty, stability and a sound basis for real economic growth, upward mobility and wealth accumulation by the citizens. This was called investing.
When we fast forward to 2010, we having a banking system that penalizes savings and provides incentives to borrow (from them at up to 30% interest) and to accumulate debt. We have a stock market that is artificially and covertly managed by the Government and the Federal Reserve. This sentiment used to be the bastion of “fringe bloggers” until recently when the CEO of Trim Tabs concluded that all data leads to Government manipulation of the stock market, something serious independent market watchers have all known for a long time. This revelation was met with a yawn by the corrupt, complicit corporate media.
We have short term interest rates held effectively at zero and we have a benchmark Inflation rate that is a contrived figure published by the Government to keep their costs down and artificially inflate the GDP. The officially stated rate of inflation, an important number that is used for all sorts of government payouts, does not correspond at all with the real increase in cost of living for ordinary Americans. Everyone who pays bills and lives in the real world knows this, and yet FED shill after FED shill are trotted out by the corporate media to take that number as fact without question. This is called fraud.
Furthermore, we have long term interest rates being artificially suppressed by so called “quantitative easing” program….selling debt out of one window and buying it from the other window…a classic ponzi scheme which always guarantees a buyer. Beyond that we have the banking system covertly and surreptitiously dabbling in any free market that dares to violate their policy goals. Various markets are regularly attacked by the few remaining large trading houses who have the deepest of pockets, and are backed by the taxpayers. These are not free markets, not in any sense, and not by any recognized definition. This is a financial attack on the American people by criminals who aspire for ever more wealth, ever more control, and ever more power at the expense of citizens and the nation.
We are told by the corporate media Wall Street cheerleaders including media personalities and pundits calling themselves economists and professors, that the FED is saving the economy, when in reality what they are doing is saving themselves and their friends on Wall Street. At the same time they are slowly, steadily and methodically bankrupting the citizens. This statement is reflected by the documented, increased concentration of wealth in America by a select few, and by the decreasing wealth and net worth of the many.
In the United States today there is no way to earn a guaranteed rate of return greater than the real increase in the cost of living. Today the opposite is true. As a saver, as an investor in US government bonds or other “safe” securities, the only thing that you are guaranteed is that you will slowly go bankrupt because the return on your money is less than the real rate of increase in the cost of living. This has the effect of being a wealth confiscation mechanism. It is a continuous wealth transfer from the people to the banking system and as that continues you would expect the middle class to disappear, which is exactly what is happening.
So what can a saver do?
- Invest in an artificially inflated, manipulated, overpriced stock market and hope it will go even higher? (the greater fool theory)
- Park your savings in a money market and have your wealth slowly confiscated as the return does not even keep up with the increase in the cost of living? (a certain road to serfdom)
- Invest in corporate bonds that yield a higher return but put the investor at greater risk of a default?
- Invest in long term government bonds at artificially suppressed yields and watch your live savings be transferred to the government and banking system through a continuous loss of purchasing power?
- Speculate in commodities, currencies or other risky and speculative derivative instruments that most people have no business speculating in?
None of these are viable alternatives for an “investor”. “Investors” are forced to speculate and we are all speculators now. We are forced to speculate that a manipulated stock market will move even higher . We are forced to speculate that the FED will continue to be successful in manipulating interest rates lower through the quantitative easing program. We are forced to speculate that one asset or another will move higher or lower amid imperfect knowledge about the future and manipulated markets corrupted by insider trading at the very highest levels.It’s like playing cards at a casino where the only thing you know is that the house is cheating. Why would anyone do that?
The law of large numbers and the laws of probability ensure one thing. The wealth of the citizens of the nation will be slowly, continuously confiscated by a criminal, privately controlled banking syndicate and cheerled by a corrupt, complicit corporate media. Say goodbye to the country you once knew. It’s time to be realistic. There will be no reform because the system has been corrupted, and the highly concentrated wealth now runs the show. It has the politicians dancing like puppets. It has the media in it’s pocket. Say goodbye to freedom and economic prosperity. We have something different now. Something dangerous.