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Crashopedia: Documenting the Causes of the Global Financial Meltdown of 2008

1994 legislation proposed by North Dakota Senator Byron Dorgan may have prevented the global financial economic meltdown. His fascinating article printed in Washington Monthly in November 1994 explains the problem with derivatives and his proposed legislation.

Best scholarship on role of derivatives in major financial disasters and crashes since 1980s comes from former derivatives trader turned law professor, Frank Partnoy. Must read book: "Infectious Greed." (Buy "Infectious Greed" at Visit for more information.

Glass-Steagall: 37 pages

Dodd-Frank: 2315 pages

Libor Scandal Timeline

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July 18, 2012 Propublica: Swap Market, Like Libor, Is Vulnerable to Manipulation

      • Missing Entries from Dec 2010 to July 2012

Dec. 9, 2010 The Economist reports on the possibility of an international tribunal being created to work though disputes in the financial derivatives industry, outside of the existing court system.

Dec. 3, 2010 Financial Times: "Sunlight shows cracks in crisis rescue story" by Frank Partnoy

Nov. 17, 2010 FT: Some experts and many voters support a return of Glass-Steagall - to legally separate traditional deposit/lending banks from investment banks that do more risky (not federally insured) proprietary trading (including derivatives) - but big banks have convinced most regulators to not push for a return of Glass-Steagall. [Editor's note: I believe the best way to reduce the risk of another systemic global financial crisis is to return to most of of the provisions of Glass-Steagall and to ban many forms of derivatives, including credit default swaps.]

August 31, 2010 Fortune: FDIC Chief Sheila Bair reports that banks had their most profitable quarter in 3 years, but not from lending. "We also continue to see declining loan balances, unfortunately, especially at the largest banks." [Editor's Note: under Glass-Steagall, banks would only make a profit by taking deposits and lending money. But in the post-Glass-Steagall era, banks get a much larger return from focusing on other speculative activities such as derivatives, commodities speculation, and other investments which do not in any way help Main Street or the small-business driven U.S. economy. If only we had Canadian banks in the U.S.]

July 29, 2010 Financial Times: CME CEO predicts opaqueness will remain in OTC derivatives market

July 6, 2010 Joe Nocera (NY Times) reports on FCIC (Financial Crisis Inquiry Commission) which just held 2 days of hearings on "The Role of Derivatives in the Financial Crisis."

July 6, 2010 CNNMoney reports that the Financial Regulatory Reform bill orders the government to do 68 studies on various issues that are covered by the bill.

July 5, 2010 Atlantic: 5 Ways Lobbyists Influenced the Dodd-Frank Bill

July 2, 2010 Johann Hari: How Goldman Sachs used derivatives to drive up worldwide commodities prices from 2006-2008 making a fortune at the expense of the world's poorest people.

At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 percent, maize by 90 percent, and rice by 320 percent. In a global jolt of hunger, 200 million people - mostly children - couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in over 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, called it "a silent mass murder", entirely due to "man-made actions."

June 30, 2010 Financial Crisis Inquiry Commission transcript on the role of derivatives in the Financial Crisis - day 1. First testimony of Joseph Cassano, former head of AIG FP in London. Description of Goldman Sachs initial collateral calls in mid-2007 to cover the declining value of the AIG derivatives contracts. Michael Sherman from Goldman (UK) was the individual whom Cassano had to negotiate with on the amount of the collateral calls.

June 15, 2010 Washington Post: SEC has hired some derivatives, fund and risk experts including Gregg Berman, Rick Bookstaber, Henry Hu, Michael Fioribello and Norm Champ.

April 14, 2008 CNN reports on riots from Haiti to Bangladesh over the price of food</blockquote>

June 27, 2010 Newsweek explains how Dodd-Frank legislation strengthens the biggest banks including allowing them to keep 80-90% of their derivatives business as is

June 27, 2010 The old pay system on Wall Street (blog post)

June 26, 2010 The Atlantic describes the late night Senate/House reconciliation proceedings which ended with a final vote at 5:39 am Friday, June 25th

June 25, 2010 Salon:

Let's start with the easy question first. Dodd-Frank is no Glass-Steagal. Glass-Steagal separated commercial and investment banking with one stroke of a giant Chinese meat cleaver -- no ambiguity allowed. Dodd-Frank is the polar opposite, a concatenation of intricate compromises tied up in 2,000 pages of complexity so dense that it willfully defies comprehension. Maybe the most optimistic way to think of this bill is as a stimulus program to create jobs for securities lawyers -- they'll be chewing on it for decades to come.

June 25, 2010 Investors Business Daily: Financial Deform

June 25, 2010 Barry Ritholtz, author of Bailout Nation, grades the Financial Regulatory Reform: C-

June 24, 2010 Forbes: Treasury, Dodd Sell Out To Wall Street - no statutory leverage limits left in place in reform bill

June 16, 2010 Analysis: BP Stress Highlights Risks of OTC Derivatives

"If a large industrial company fails and its counterparty was depending on their performance, the counterparty would be harmed unless they provided collateral," he said. BP is one of the largest corporate users of derivatives and enters into commodity and other private derivatives, in addition to exchange traded contacts. The company reported around $10 billion in derivatives assets and over $9 billion in liabilities at the end of the first quarter. Competitor Royal Dutch Shell(RDSa.L) also reported $20.45 billion in derivatives assets and $18.74 billion in derivatives liabilities at the end of 2009. Derivatives assets at the company had been as high as $40.62 billion at the end of 2008, while liabilities stood at $38.87 billion.

May 24, 2010 Robert Reich supports Lincoln amendment though it is on "life support" after Bernanke, Volker, and all of Wall Street came out against it: "The trading of derivatives is not so crucial to the US economy that taxpayers should subsidise the practice. If the past two years have taught us anything, the lesson is just the opposite. Derivatives can generate huge risks unless carefully regulated."

May 22, 2010 NY Times: "Executives and political action committees from Wall Street banks, hedge funds, insurance companies and related financial sectors have showered Congressional candidates with more than $1.7 billion in the last decade, with much of it going to the financial committees that oversee the industry’s operations. In return, the financial sector has enjoyed virtually front-door access and what critics say is often favorable treatment from many lawmakers. But that relationship, advantageous to both sides for many years, is now being tested in ways rarely seen, as the nation’s major financial firms seek to call in their political chits to stem regulatory changes they believe will hurt their business. The biggest flash point for many Wall Street firms is the tough restrictions on the trading of derivatives imposed in the Senate bill approved Thursday night." (Read entire article)

May 21, 2010 Dylan Ratigan endorses four of the most worthy features of the Senate financial reform bill: 1) Franken amendment on ratings agencies, 2) Collins amendment on capital requirements, 3) Paul's partial audit the fed bill, 4) Lincoln's ban on derivatives trading.

May 20, 2010 Annie Lowry (Washington Independent) explains who is involved in the House and Senate committee to reconcile the two financial reform bills.

May 11, 2010 Huffington Post: Six biggest banks have spent $600 million on lobbying since March 2008. Entire financial industry spends $1.4 million daily, including "hiring 70 former members of Congress to make their case."

May 3, 2010 Securities Industry News: A single word in the Senate financial reform bill will determine whether credit default swaps and interest rate swaps contracts can be made by phone, or only on exchanges.

May 1, 2010 Business Week: CTFC Chairman Gary Gensler says Clinton administration should have done more to regulate derivatives.

April 18, 2010 ABC News interview: Clinton says he was wrong to listen to Larry Summers and Robert Rubins position on derivatives. Says he wishes he had tried to regulate them. (Transcript here)

April 14, 2010 Time magazine reports that financial reform legislation being developed in the Senate Agriculture Committee to regulate the highly profitable over-the-counter derivatives market may be surprisingly tough, and may represent a major hit for the bank lobby.

April 14, 2010 Politico: "A new proposal by Senate Agriculture Committee Chairwoman Blanche Lincoln would require sweeping changes to the $450 trillion derivatives market, including forcing big banks to spin off “swaps desks” that handle the complex financial instruments — a more aggressive approach than either the White House or other congressional committees have advocated so far, according to the Arkansas Democrat and her aides.

April 14, 2010 Daily Kos summarizes the current efforts to create or defeat meaningful financial industry reforms.

April 14, 2010 Mother Jones: Senator Blanche Lincoln, Derivatives Crusader!

April 1, 2010 Robert Reich blogs that the SEC is investigating improper accounting by many Wall Street firms. Asks where the SEC has been the past couple of years in its enforcement of Sarbanes-Oxley, which was designed to put CEOs and CFOs on the hook for making sure company's financial statements are accurate.

March 1, 2010 USA Today: "As Congress pleads with banks to increase lending to small businesses to juice the recovery, one group of lenders is begging Congress to let them make more loans: credit unions. Credit unions say the economic downturn presents their best opportunity yet to persuade lawmakers to raise a federal limit on their business loans. But banks say it would give the tax-exempt credit unions an unfair advantage."

Feb 26, 2010 Credit default swaps drive Greece to the brink of default

Feb. 16, 2010 Bill Clinton in CNN interview: "I think that the only thing that our administration did or didn't do that we should have done is to try to set in motion some more formal regulation of the derivatives market."

Feb. 9 2010 Washington Post: Credit Unions have $35 billion in outstanding loans to small businesses (up from $5 billion in 2000) compared to banks which have $800 billion in outstanding loans. Under 1998 legislation, credit unions are limited to lending 12.5% of their assets to businesses. Credit Unions want Congress to raise that limit so that more loans can be made to small businesses.

Missing October 2009 to April 2010 updates

Dec. 16, 2009 Huffington Post: Treasury Department reports that for the 9th consecutive month, loans from the 22 largest recipients of TARP bailout money have declined.

Nov. 30, 2009 "There are about as many credit unions in the U.S. as there are banks but only about 30% of them make business loans. Because they are new to the game of making business loans and because of congress’ 1998 cap on business loans made by credit unions, most credit unions keep their average business loan size low."

Nov. 11, 2009 Huffington Post: Derivatives Just "A Sophisticated Form Of Gambling," U.S. Senators Say; Propose Bill Allowing State Gambling Laws To Apply

Oct. 30, 2009 Huffington Post article by Senator Maria Cantwell (D-WA), "Wall Street has a Gambling Problem."

Oct. 17, 2009 NY Times article. University of Maryland law professor and derivatives expert Michael Greenberger criticizes the derivatives legislation passed by the House Finance Committee: "While I know there was a good-faith effort to improve the regulation, the plain language of the legislation can only be read as a Christmas tree of decorative gifts to the banking industry. And this is being done when people acknowledge the unregulated O.T.C. derivatives market was a principal reason for the meltdown.”"

Oct. 16, 2009 On CNBC Sen. Maria Cantwell attacks proposed legislation on derivatives that is no regulation at all, but provides massive loopholes for financial institutions to continue to profit from OTC derivatives without any real government oversight or regulation.

Oct. 15, 2009 Bloomberg: "Joseph Stiglitz, the Nobel prize-winning economist, said this week that large banks should be banned from trading derivatives like credit-default swaps, which let buyers guard against a borrower’s missed debt payments."

Oct. 15, 2009 Article from Princeton computer scientists and economists about how CDOs (whose traunches are supposed to contain randomly distributed loans) can be created with more bad loans (toxic assets) in one CDO vs. another which are computationally undetectable both before an after the instrument goes bad. Based on computer science "Intractability Theory."

Oct. 12, 2009 Bloomberg: Joseph Stiglitz, the Nobel prize-winning economist, said the largest banks should be banned from trading derivatives.

Sept. 2009 Jim Rickards appears on CNBC to explain the coming gradual collapse of the US dollar. The International Monetary Fund is "being anointed as a global central bank" by the G20 and is issuing money ($300 billion worth of SDRs) and how the Federal Reserve needs the dollar to go down by about half over the next 14 years since we have about $60 trillion of liabilities when any feasible combination of growth and taxation can only afford $30 trillion. What the Fed does best is inflate the dollar. He mentions Triffen's dilemma, posed in 1960. He recommends gold at $1,000 for his clients, but "the problem is when you own gold you're fighting every central bank in the world. Central banks hate gold because it limits their ability to print money. But the market is the market -- the market will do what it wants and even the central banks are not bigger than the market, so Warsh is trying to preempt an unstable decline of the dollar, what they want of course, is a stable steady decline." (Kevin Warsh is one of 12 governors of the Federal Reserve Bank. His Wall Street Journal article was published on Sept. 25, 2009)

Sept. 23, 2009 Bloomberg: "Massachusetts is reviewing DBRS Ltd.’s grades on investments tied to life insurance policies because they might be inflated like the discredited mortgage bonds at the center of the recession."

Sept. 5, 2009 NY Times article describes how Wall Street bankers plan to securitize the life insurance industry -- creating derivatives products that can be sold worldwide. (Note: This will create enormous profits for the bankers but will create another layer of systemic risk that could someday cause another global financial crisis.)

Aug. 31, 2009 NY Times Dealbook "Report Rekindles China Derivatives Debate."

Aug. 31, 2009 Bloomberg reports that the top five US Commercial Banks will make $35 billion in profit this year from trading unregulated over-the-counter derivatives contracts, so they will lobby hard to keep them legal and unregulated.

Aug. 30, 2009 60 Minutes airs 12 minute report shows how Credit Default Swaps which were made illegal after the financial panic of 1907 under state gambling laws were made legal again by Congress (and President Clinton) in 2000 and largely led to the financial disaster that brought down Bear Sterns, Lehman Brothers, and AIG.

Aug. 24, 2009 From Derivatives Week: "Gary Gensler, chairman of the Commodity Futures Trading Commission, has pushed back on certain points of the Obama administration’s draft Over-the-Counter Derivatives Markets Act of 2009, a consolidation of previously voiced positions on the market. In a letter to Tom Harkin (D-IA), chairman of the U.S. Senate committee on Agriculture, Nutrition and Forestry; Saxby Chambliss (R-GA), ranking member of the committee, and several other regulatory officials on Monday, Gensler said he disagreed with certain exemptions, noting, “I believe the law must cover the entire marketplace without exception.”"

July 27, 2009 Rep. Sterns (R-FL) addresses House on hopelessly conflicted regulator, the New York Federal Reserve Bank.

July 23, 2009 Testimony before Senate Banking Committee by Allan Meltzer (Carnegie Mellon professor and author of books on the history of the Federal Reserve). His position is that Congress should not expand the authority of the Federal Reserve Bank to become the primary systemic risk regulator.

July 22, 2009 CNC reports that few members of Congress have any significant understanding of what derivatives are.

July 10, 2009 Rep. Maxine Waters has introduced legislation that would ban all credit default swaps. (Bloomberg) Press release from Rep. Waters about H.R. 3145, Credit Default Swap Prohibition Act of 2009. Full text of H.R. 3145

July 9, 2009 Stanford Professor John Taylor testifies at House Subcommittee on Monetary Policy and Technology hearing, expresses concerns about expanding the role of the Federal Reserve as systemic risk regulator. Professor James Galbraith testimony at same hearing.

June 25, 2009 NY Times article by Floyd Norris explains how forcefully the financial lobby will fight any attempt by President Obama, the Congress, the SEC and the CTFC to regulate or ban derivatives. It begins, "In the world of derivatives, profits for the dealers come from complexity and secrecy. As a new regulatory system for derivatives is shaped on Capitol Hill, the banks will try to preserve as much of both as they can. To the extent they succeed, it will be the customers, and the financial system, that are at risk."

June 20, 2009 Obama regulatory bill will not affect most derivatives that caused bubble and crash.

June 12, 2009 NY Times reviews new book "Fool's Gold" by Financial Times writer Gillian Tett, one of the top journalist covering the derivatives indusry and financial crisis.

June 12, 2009 NY Times reports that George Soros calls for complete ban on credit default swaps, a very dangerous form of derivatives. (Charlie Munger also called for such a ban on May 1, 2009)

May 19, 2009 Senate confirmation hearing of proposed CTFC Chairman Gary Gensler. Tom Harkin gives excellent speech in support of Gensler. Both agree that OTC derivatives should be regulated and traded only on a public, transparent exchange.

May 13, 2009 article says the total "gross exposure in the financial system to over-the-counter derivatives" is more than $20.3 trillion.

May 12, 2009 post by Justin Fox.

"The FT hosted a breakfast this morning where Gillian Tett promoted her new book about derivatives and the financial crisis, Fool's Gold. There was a great moment during the Q&A when NYT columnist Joe Nocera started off, "There's this character in your book, Mark Brickell ..."

"He's sitting behind you," Tett interrupted. At which point Joe and the rest of us turned around to look at the nattily attired man sitting on the windowsill.

Brickell is really the closest thing to a villain in Tett's book—a former J.P. Morgan derivatives guy who in the 1990s became the point man in the banking industry's effort to keep Congress from subjecting over-the-counter derivatives to regulation. Yet he showed up at Tett's book event, which tells you something about her style. She's a reporter (and a social anthropologist with expertise in Tajik wedding rituals) on a hunt not for villains but for explanations.

To me this is the great strength of her book, which tells the story of the team at J.P. Morgan that popularized credit derivatives in the 1990s (they didn't invent them; some people at Bankers Trust did that) and then pulled back during the great credit-derivatives-enabled housing insanity of the 2000s.

May 2, 2009 Reuters: Obama says financial sector will shrink, as new regulations discourage excessive leverage and risk-taking.

May 1, 2009 Bloomberg: Warren Buffett's partner Charlie Munger calls for 100% ban on credit default swaps.

Apr. 24, 2009 What Caused the Ecomomic Crisis?

Apr. 15, 2009 Blog post at the Financial Times by Willem Butler (Professor of European Political Economy, London School of Economics and Political Science) equates OTC derivatives with gambling and lotteries and makes a compelling argument that is time for the state (government) to regulate all derivatives.

Apr. 8, 2009 Bloomberg video interview with TARP Congressional Oversight Committee chair (and Harvard professor) Elizabeth Warren. She says that Secretary Paulson misled her, the public, and the Congress about the use of the first $350 billion in TARP funds. He told her the government was investing in equity in the banks, but her Oversight Commmittee research has shown that $78 billion was simply given to the banks as a subsidy. Here is a transcript of the video, which can be seen on YouTube, starting at 1:39.

"As Treasury is putting money into the banks, it describes it as "this is an investment" and Secretary Paulson said in a letter to me, in effect, for every $100 that the government is putting in to these financial institutions, they're getting back $100 worth of stock and warrants. Now, we could have stopped there, because frankly that sounds like a pretty fair deal, but we decided to do an independent valuation of the transactions, crunched a bunch of numbers, did all the fancy equations, put it all together, and basically what it showed was for every $100 of taxpayer money that went into these financial institutions, we got back on that day about $66 worth of stock and warrants. Now do that enough times, and it adds up to about $78 billion dollars that were just subsidies, just given away. That's not talking about how the market has fallen since then, it's talking about on the day, the transaction was structured to give away about one in every three dollars that went into the banks."

Q. Were you surprised by that figure?

"You bet. I have to say, when Secretary Paulson had sent me a letter assuring me that that was not happening, that these were par transactions, the way he described it, in other words 100 for 100, and it turns out that what the numbers showed was 100 for 66, yeah I was surprised."

Q. What does that type of figure say to the taxpayer?

"It says that at least as Treasury started this program, they really had the notion that they would spend the money the way they wanted, and they not only weren't going to tell the public, I don't think they were really going to tell the Congressional Oversight people.

April 4, 2009 Newsweek publishes article "The Senator Who Saw This Coming." It describes how Senator Byron Dorgan of North Dakota tried to warn the country in 1994 of the dangers of credit default swaps, and tried to legislate against them.

April 4, 2009 G-20 authorizes International Monetary Fund (IMF) to issue $250 billion of SDRs (reserve currencies) -- basically printing money. Analysis by Chris Martenson.

Mar. 29, 2009 Michael Ossinski publishes article in New York Magazine about writing the software that became the standard in the industry for turning mortgages into morgage-backed derivatives that helped collapse the economy. Article is titled, "My Manhattan Project: how I helped build the bomb that blew up Wall Street."

Mar. 27, 2009 Huffington Post's Cenk Uygur publishes "The Real Crime in the Bailout: Naked CDS Deals."

Mar. 20, 2009 Bloomberg:

China will develop its derivatives market and introduce interest-rate options even though problems in that market triggered the global financial crisis, said Liu Shiyu, deputy governor of the People’s Bank of China. “If we don’t develop our over-the-counter market for derivatives as early as possible, we may find ourselves lagging behind once the global financial crisis bottoms out,” Liu told a forum in Beijing today. “We should shift from a government- led to a more market-oriented mechanism to encourage financial products innovation.”

Mar. 19, 2009 Rolling Stone article describes root causes of AIG's collapse:

AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.
The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations. The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess.
When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.
What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.
Mar. 16, 2009 NY Times Opinion by Frank Partnoy and Jerome S. Fons explains how the seriously flawed ratings agencies contributed to the financial collapse. Excerpts:
  • "Until recently, the agencies maintained AAA ratings on thousands of nearly worthless subprime-related securities."
  • "Trillions of dollars of derivatives payments depend on ratings. Much of the panic at A.I.G. stemmed from ratings “triggers” embedded in credit default swaps, in which billions of dollars of payments depended on how Moody’s and S.&P. labeled A.I.G.’s credit risk."
Mar. 16, 2009 Bloomberg reports:
  • "AIG has faced pressure to disclose more on its operations since the U.S. took a stake of almost 80 percent last year. Yesterday, AIG named at least 20 banks that received money to avoid losses after buying credit-default swaps from the insurer. The derivatives almost bankrupted AIG, and the bonuses Obama cited went to employees who created or sold them.
    “It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million,” said Obama at the White House speech today. “How do they justify this outrage to the taxpayers who are keeping the company afloat?”
    "AIG has earmarked about $450 million for about 400 employees of the Financial Products unit, and the $165 million installment was due to be paid yesterday. AIG already paid $55 million in December, according to a company document. The top 2008 award in the unit was about $6.5 million, and six other employees got more than $3 million."
  • AIG finally disclosed the counterparties who received payments after the Federal bailout of AIG: "Goldman Sachs Group Inc. led beneficiaries, with $12.9 billion, followed by Societe Generale SA, France’s No. 3 bank, with $11.9 billion, and Deutsche Bank AG, Germany’s biggest lender, with $11.8 billion." [Editor's note: remember that Secretary Paulson was formerly CEO of Goldman Sachs.]

Mar. 9, 2009 Report shows that top 5 banks had "current" derivatives exposure of $587 billion as of December 31, 2008.

  • J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
  • Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
  • Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
  • HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
  • San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.

Mar. 7, 2009 WSJ article describes $50 billion in AIG counterparty payments to major banks (funded by the US Government bailout), including $6 billion each to Goldman Sachs and Deutsche Bank between September and December 2008.

Mar. 4, 2009 Former derivatives desk manager Martin Hutchinson on Wall Street's Worst Invention Ever: Credit Default Swaps

Feb. 23, 2009. March 2009 issue of Wired Magazine contains must-read article: "Recipe for Disaster: The Formula That Killed Wall Street." This article describes how a mathematical formula developed by David Li provided a simple (but fatally flawed) risk-management model that all derivatives traders used for years to justify what they were doing.

Feb. 23, 2009. Wired author Daniel Roth argues for radical transparency instead of limited government regulation to prevent future market manipulation and fraud in "Road Map for Financial Recovery: Radical Transparency Now!"

Feb. 23, 2009 American Enterprise Institute panel discussion (debate), "Everything You Wanted To Know About Credit Default Swaps." Peter Wallison, Mark C. Brickell, R. Christopher Whalen. Click to view video.

Feb. 20, 2009 Article by Chuck Burr claims that "Interest rate swaps are the largest derivative powder keg waiting to blow the world financial markets to supernova." He says that during Great Depression, about half of Americans lived on farms, but today "only 2% participate in their food production."

Feb. 11, 2009 "The terror beneath the TARP," by Alan Kohler in Business Spectactor (Australia)

It is a melancholy irony that much of the billion to trillion to be invested in bad bank assets via the Geithner TARP …er, Financial Stability Plan…will go into instruments that were meant to insure the banks against loss – synthetic CDOs.

Feb. 11, 2009 In Congressional hearing, Rep. Capuano (D-MA) rails on big bank CEOs for getting into credit default swaps (CDS), collateralized debt obligations (CDOs), and off-balance-sheet Special Investment Vehicles (SIVs) which he believes got us into the financial crisis and for which he thinks all these banks ought to be prosecuted, because they should be illegal. YouTube video

Jan. 30, 2009 Blog post: CTFC Not Dead

Tom Harkin, Chairman of the Senate agriculture committee, reintroduced his Derivatives Trading Integrity Act of 2008 as the Derivatives Trading Integrity Act of 2009 (S. 272). S. 272 brings OTC derivatives under CFTC control by repealing most of the CFMA. If OTC derivatives aren't exempt, they have to be traded on a CFTC-registered exchange. Meanwhile, Collin Peterson, Chairman of the House agriculture committee, is distributing a draft revision of his Commodity Markets Transparency and Accountability Act of 2008 (HR 6604 - now renamed the Derivatives Markets Transparency and Accountability Act of 2009). Peterson's bill leaves the CFMA in place (after all, he wrote it), but requires that all OTC derivatives transactions be settled and cleared through a CFTC-designated central clearing party.

January 27, 2009 Representative Paul Kanjorski (D-PA) appears on CSPAN. He is in 13th term. He is Chairman of the Capitol Markets Subcommittee. He wrote part of original bailout legislation. Explains his probable opposition to the $825 billion stimulus. Discusses the fateful days back in Sept 11th-15th when the Secretary of the Treasury and the Chairman of the Federal Reserve explained in private meetings with Congress how there had been an electronic run on the money markets, and that without immediate action the entire US financial system would have collapsed, along with our political system as we know it. YouTube clip is 6 minutes long.

Jan. 15, 2009 Senator Tom Harkin introduces S. 272, Derivatives Trading Integrity Act of 2009 (full text)

Jan. 6, 2009 WSJ article: NASDAQ clearing house for OTC derivatives tied to interest has gone live. Planned since March 2008. Nasdaq OMX Group bought an 80% stake in International Derivatives Clearing Group (IDCG), a new business set up to clear interest-rate-swap contracts. Last month the clearing firm received approval from CFTC to clear derivatives trades.

Jan. 4, 2009 article says Citigroup's derivatives exposure is so massive ($3.2 trillion as of June 2008) that it makes the bailout guarantees almost irrelevant.

Dec. 19, 2008 CQ Politics article: Obama pick to head CTFC (Gary Gensler) opposed regulating derivatives and helped pass the disastrous Commodity Futures Modernization Act of 2000. Senate Agriculture Committee Tom Harkin (D-IA) plans to introduce legislation making all derivatives subject to regulation by CTFC, and will likely discuss Gensler's earlier opposition to such regulation in his Senate confirmation hearings.

Dec. 5, 2008 Reuters: Mexican firms asked to reveal derivatives exposure after some firms lose billions in bad currency bets.

Nov. 26, 2008 Article in Operations Management (requires free subscription) says The Depository Trust & Clearing Corp. has plans to report on non-standard credit default swaps transactions by expanding capabilities of its Trade Information Warehouse. The move would presumably address concerns voiced recently by the market that data it does report--details of standard credit default swaps processed by Deriv/SERV--does not fully reflect the risk posed by the complex transactions. While observers agree the move would be positive, the ultimate impact is less clear. "You need detail to understand [the risk issue] right," said Robert Claassen, partner and chair of the derivatives and structured product group at Paul Hastings. The plan comes in the midst of a heightened focus by regulators on the size....

Nov. 25, 2008 Radio interview of Senator Inhofe (R-OK) re Paulson's scare tactics in September--vote for this bailout or else:

Nov. 11, 2008 NY Times article on the massive lobbying effort for companies and industries to get a piece of the $700 billion bailout. First contact for business community is Jeb Mason.

Mr. Mason, 32, a lanky Texan in black cowboy boots who once worked in the White House for Karl Rove, shook his head over the dozens of phone calls and e-mail messages he gets every week. “I was telling a friend, ‘this must have been how the Politburo felt,’ ” he said.

Nov 11, 2008 Liar's Poker author Michael Lewis explains in Portfolio article how the Wall Street collapse happened--how it started and how it ended:

Nov. 10, 2008 "The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral." (Source: Bloomberg)

Nov. 8, 2008 "federal%20reserve"%20m3&st=cse Paul Krugman column in New York Times brings reader comments that accurately depict how derivatives have dramatically increases the overall money supply so that Fed and Treasury efforts have little impact.

Nov. 7, 2008 British forum on why the media didn't predict/warn about the crash, or did they?

Nov 6, 2008 Bloomberg: Deutsche Bank AG, Germany's largest bank, appointed Michele Gissi and Roger Naylor to run global equity derivatives, overhauling the unit after it suffered losses of more than $400 million on trades. Richard Carson, former global head of equity derivatives, will leave the firm, along with Nino Kjellman, head of Asia equity derivatives, and trader Andrew Kent, Deutsche Bank spokesman Michael Golden said today. He declined to provide further details. Deutsche Bank lost more than $400 million on equity derivatives trades as stock markets headed for their biggest rout since the 1930s, two people with direct knowledge of the matter said Oct. 27. The losses were equal to almost half of the Frankfurt-based company's second-quarter revenue from equity sales and trading.

Nov. 6, 2008 Bloomberg: Credit Swap Disclosure Obscures True Financial Risk (Update2) By Shannon D. Harrington and Abigail Moses

Nov 5, 2008 Bloomberg: Credit Card Bond Sales at Zero, First Time Since 1993 (Update1).

Nov 2, 2008 Financial Week: experts urge regulators to think bigger. Recommend an exchange that covers all OTC derivatives, not just credit default swaps.

November 2008 Institute for Agriculture and Trade Policy releases 16 page study on how commodities speculation (involving derivatives) led to massive worldwide food price increases and food shortages. 43% of poor in developing nations had to cut back on food consumption as a result.

As of July 2008, $317 billion was invested in commodities index funds.20 The major traders of these funds, especially Goldman Sachs and the American Insurance Group, are headquartered in the U.S. but their investment products are traded globally. Therefore, any regulatory reform affecting those funds will affect commodity markets outside the United States, just as the deregulation of U.S. markets has contributed to excessive speculation worldwide. For example, in 2004 Hank Paulson, current Treasury Secretary and then chief executive officer of Goldman Sachs, successfully lobbied for an exemption from the rule that investment banks, like commercial banks, keep large enough currency reserves to cover their unsuccessful trades. The rule exemption freed billions of dollars that Goldman and four other banks used for high-risk investments, including commodity index fund bets. When these investments went sour, the erstwhile beneficiaries of deregulation either were bailed out by the U.S. government, or, in the case of Lehman Brothers, went bankrupt with global repercussions.

Oct 31, 2008 opinion letter to Staten Island Advance:

Oct 31, 2008 The Depository Trust & Clearing Corporation (DTCC) announced today that it will begin to publish aggregate market data from its Trade Information Warehouse (Warehouse), the worldwide central trade registry it maintains on credit derivatives. Starting Tuesday, November 4 and continuing weekly, DTCC will post on its website the outstanding gross and net notional values ("stock" values) of credit default swap (CDS) contracts registered in the Warehouse for the top 1,000 underlying single-name reference entities and all indices, as well as certain aggregates of this data on a gross notional basis only. The data is intended to address market concerns about transparency.

Oct 31, 2008 Cost of AIG credit default swaps going up again, even after government bailout, showing skepticism about the rescue plan.

Oct 31, 2008 New York Fed releases 7 goals for strengthening OTC derivatives market:

Oct 2008 60 Minutes. Steve Kroft interviews Frank Partnoy – San Diego Law Professor – Author of Books. Partnoy explains credit default swaps...

Oct 30, 2008 Bloomberg article by Katz brothers: Mentions George Miller, 39, Chair of American Securitization Forum “Miller was trying to preserve an accounting rule for off- the-books assets that helped U.S. banks export toxic debt around the world. It is a loophole that Jack Reed, the Rhode Island Democrat who chairs the Senate securities subcommittee, said had contributed ``to the severity of the current crisis. The damage to date: more than $680 billion dollars in losses and writedowns, about one-third of that by European banks.” Donald Young, FASB board member from 2005 to June 30, 2008, reportedly voted with FASB board to expand off-balance sheet accounting....

Oct 29, 2008 Paul Kedrosky attacks NY Times article about how bad banks are for not taking capital infusions so that they can continue loaning money. He argues that banks would be irresponsible to continue the loose-lending practices of the past several years. The bailout, wrong-headed as it was, was designed to strengthen banks, not ruin them.

Oct 28, 2008 Tim Ryan (former regulator at Treasury over S&L cleanup in 80s, elected as president of SIFMA in Jan 08), speaks at Annual SIFMA meeting and reviews the key financial events of the year:

  • Feb – Northern Rock nationalized by UK govt
  • March – Bear Sterns acquired by JP Morgan w $30 b support from Fed Reserve; Indie Mac fails
  • Early Summer: FDIC implemented program well
  • Later July, support for housing
  • “many events over many weekends:”
  • Fannie/Freddie in receivership
  • Sept 14 Merrill Sold to B of A
  • Sept 15 Lehman files for bankrupcty
  • Sept 16 money market reserves primary breaks the buck....
  • Sept 17 AIG
  • Sep 19 TARP program is made public by Treasury, starts campaign to pass it
  • Sep 21 Goldman, Morgan Stanley, become bank holding companies
  • Sept 25 WaMu seized by OTF, sold to JP Morgan
  • Sept 29 Europeans do massive bailouts; US house voted against TARP;
  • Oct Senate passes TARP; Oct 3 house passes it
  • Oct 6, Fed decides to pay interest on bank reserves, never before
  • Oct 7, Fed announces commercial paper program
  • Oct 8, first time ever, we had coordinated cuts by all G-7 central banks, 50 bps
  • Oct. Fed Reserve approves Wells Fargo, Wachovia merger
  • Fed expanses currency swap lines for all G-10 central banks
  • Fed and FDIC announce actions to recap banks

“Our job is to make sure all of you are informed about exactly what is going on....”

SEC’s action on short-selling

What is happening on money markets, auction rate securities

“securitization is a lynch pin of the capital markets”

07 $2.5 trillion of securitized products, this year we’ll be lucky to get to $1 trillion

“We’ve had trouble with credit reporting agencies, have ideas about how to reform them....”

“Regulatory reform should take place on a global basis”

Oct 28, 2008 CNBC: Congress wants details on bailout firms’ bonus plans. This article explains that the EESA restrictions on executive compensation is meaningless. In practice execs could still pull down $30 million. It just wouldn’t be tax deductible. That does nothing to limit their comp packages.

Oct 26, 2008 article by Nadeem Walayat, 20-year derivatives trader about futility of bailout, “the greatest heist in history”

Oct 26, 2008 Washington Post article says agencies are vying for oversight of swaps market, including SEC, CTC, New York Fed:

Oct 24, 2008 report that Bank of New York-Mellon was chosen as master custodian of the mortgage-backed securities purchase program; also AIG’s CEO says another $123 billion will be needed, has already used $90.3 billion.

Oct 23, 2008 Neel Kashari testimony before Senate Banking committee: In discussing executive compensation, he said one of four standards is: “required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate.” (I would love to see this standard applied retroactively to Secretary Paulson and other Wall Street executives, since they collectively earned billions of dollars booking gains that turned out to be fabrications....)

Oct 21, 2008, Next in the Financial Crisis, Possible Criminal Charges:

Oct 16, 2008. House hearings: FINANCIAL DERIVATIVES Committee on Agriculture, Nutrition, and Forestry: Committee concluded a hearing to examine the role of financial derivatives in the current financial crisis, after receiving testimony from Ananda Radhakrishnan, Director, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission; Eric R. Dinallo, New York State Insurance Department, Richard R. Lindsey, Callcott Group, LLC, on behalf of the International Association of Financial Engineers, and Robert G. Pickel, International Swaps and Derivatives Association, Inc., all of New York, New York; William K. Black, University of Missouri—Kansas City; Terrence A. Duffy, CME Group, Chicago, Illinois; and Johnathan Short, IntercontinentalExchange, Inc. (ICE), Atlanta, Georgia.

Oct 16, 2008. Washington Independent.

Oct 17, 2008 Australia business article,28124,24512665-30538,00.html

To put its size in perspective, the OTC market turned over $79.5 trillion in the year to June 30, 2008, up 0.5 per cent on the previous year after a 14 per cent rise in 2006 compared with $42 trillion for the total exchange-traded markets, which includes the ASX and the Sydney Futures Exchange.

What is frightening about these figures is that the OTC market is also the stomping ground for day traders, hedge funds and other operatives who want to operate under the radar of the less than perfect regulators of the on-market transactions.

It is in the OTC market where most of the share price manipulation happen. It is off-market where most of the exotic products are traded, such as contracts for difference (CFDs), which are estimated to account for more than 15 per cent of the trading volumes in the physical market as they hedge their accounts.

Indeed, Standard & Poor's New York-based global chief economist David Wyss recently warned that the OTC derivatives market was the next sub-prime bomb in global credit markets.

"The over-the-counter derivatives market is a little scary because we don't know how big the risks are," Wyss said during a recent visit to Australia.

Oct 15, 2008 Senator Harkin (D-IA) said he plans to introduce legislation to regulate OTC derivatives

Oct 15, 2008 House Agricultural hearing on derivatives. Panel 1: The Honorable Walter Lukken, Acting Chairman, Commodity Futures Trading Commission, Washington, D.C.; Mr. Erik R. Sirri, Director of Division of Trading and Markets, Securities Exchange Commission, Washington, D.C. Panel 2: Mr. Robert Pickel, Chief Executive Officer, International Swaps and Derivatives Association, Washington, D.C.; Professor Henry Hu, Professor, University of Texas School of Law, Austin, Texas; Mr. Johnathan Short, Vice President and General Counsel, Intercontinental Exchange, Atlanta, Georgia; Ms. Kim Taylor, Managing Director and President, CME Group Clearinghouse, Chicago, Illinois.

Oct 14, 2008 CNN: Ten Most Wanted Culprits of the Collapse, Phil Gramm.

Oct 13, 2008 Testimony of Henry Hu, University of Texas Law Professor, before US House Agriculture Committee: Credit Default Swaps and The Financial Crisis: "Interconnectedness" and Beyond

Oct 13, 2008 Neel Kashkari gives update on TARP, including interim team members, law firm hired (Simpson Thatcher), and firms to manage key components of the TARP program: 1) investment management consultant – Ennis Knupp selected (“our request went out to six firms, we received three proposals and selected Ennis Knupp as the winning vendor on Saturday”) 2) master custodian firm (minimum $500 b in assets: 3) securities asset manager ( – (minimum $100 billion in assets under management) “the Treasury may decide to include other types of securities in the portfolio as necessary” ... “The size of the securities portfolio may reach several hundred billion dollars. The portfolio mandate and composition will be driven by the aforementioned policy objectives rather than the pursuit of yield or diversification.” ... “The portfolio may be benchmarked to established indices, but more likely will be measured by a dashboard of custom metrics linked to the Treasury’s policy goals.” Selection Process: “The second phase, and subsequent phases, may be conducted under confidentiality agreements to facilitate information exchange, consistent with the public disclosure and transparency provisions of the Act.” Translation: the selection process will assure secrecy. ... “The Treasury, in its sole discretion, will select a Financial Institution to perform the services in this notice, based on its determination of what is in the best interests of the United States.” ... “The Treasury considers any information provided to a Financial Institution in evaluating its response to this notice to be strictly confidential and must not be disclosed to any third party outside the Financial Institution’s corporate organization, nor duplicated, used, or disclosed in whole or in part for any purpose other than to prepare a response.” 4) whole loan asset manager. Print: C-Span: rtsp://

“Taking aggressive steps to manage potential conflicts of interest is essential because firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP. We have asked firms that wish to compete for contracts to disclose their potential conflicts of interest and recommend specific steps to manage those conflicts. Firms are evaluated in part on the extent of those conflicts and their ability to design processes and procedures to manage them that are satisfactory to Treasury. Treasury then conducts its own independent examination to determine the firms' potential conflicts of interest, and to help ensure that the firms have fully disclosed any potential concerns. Treasury will only hire firms when we are confident in our and their ability to manage any conflicts.”

Translation: the same people that caused the problem with toxic assets are now going to be hired by Treasury to procure the taxpayer purchase of these toxic assets.

“Secretary Paulson and I believe that it is essential that the TARP be structured in a manner that encourages participation of small businesses, veteran-owned businesses, and minority and women-owned businesses. Our initial procurements set high capability standards; for example, securities asset managers had to have at least $100 billion of dollar denominated fixed income assets under management. This is critical given the magnitude of the program - up to $700 billion. Treasury believes that it would not be fiscally prudent to ask a firm that only had experience managing only a few billion to manage $100 billion. It could put the taxpayers at unnecessary risk. However - and this is very important - we asked vendors to demonstrate their ability and commitment to working with small, veteran, minority and women-owned businesses as sub-contractors.”

Translation: we are only going to hire the largest financial managers to manage this bailout program.

Editor's Note: While the print version talks about “mortgage-backed securities” Mr. Kashkari actually said “mortgage-related assets.” There may be an effort to carefully choose words to deflect attention on the derivatives problem.

Oct 11, 2008 article about how Brooksley Born (head of CFTC in 1998) could have prevented the global financial meltdown and tried to....but was silenced by Greenspan, Rubin, Levitt.,_rubin_and_summers/

Oct 10, 2008 Lehman bros CDS auction sets value at 8.625c per dollar. Widest intraday swing in stock market history. Biggest week drop in history. Highest volume ever today on NYSE and NASDAQ.

Oct 10, 2008 WSJ Opinion by Walter Lukken (acting Chairman of Commodity Futures Trading Commission) on How To Solve The Derivatives Problem (Clearinghouses provide a workable model.)

Oct 10, 2008 EIR World article: Shut Down the Derivatives Markets to Save Civilization

Oct 8, 2008. SEC Roundtable:

Oct 8, 2008 WSJ: Congress Grills former AIG Chief:

Oct 6, 2008 Dow drops X%, Nasdaq X% -- market is not reassured by the $700 billion that all is well

I see article about FHA growing to take over 30% of mortgages, mostly subprime. Online speculation about future FHA bailout.

Oct 3, 2008 House passes bailout package

Oct 1, 2008 FT article on “invisible scourge” reports on Vienna meeting of derivatives leaders, quotes Mark Brickell David Paterson, New York governor, has warned separately that his agency wants to start regulating credit default swaps (see box).

Sep. 27, 2008. Newsweek: The Monster That Ate Wall Street. Matthew Phillips. Credit Default Swaps. JP Morgan originated them in 1994 at a Florida weekend offsite. And then how they got out of control. Mark Brickell was present when they were “invented.” Terri Duhon: Bistro. Now runs consulting firm in London, with new services for unwinding/litigation, etc.

Sept 24, 2008: SEC Chairman Chris Cox mentions lack of regulation over OTC derivatives in senate hearings as possible cause of our banking crisis. Blogger notes that Cox voted against the Commodity Futures Modernization bill that formally banned the CTFC from regulating OTC derivatives in 2000.

Sep 23, 2008 Senate banking committee hearing on turmoil in financial markets: rtsp:// Paulson (Treasury), Cox (SEC), Lockhart (FHFA). In Sen Dodd’s opening remarks, he mentions bank failures, Indie Mac (largest in our history), Bear Sterns, AIG, etc. Also, transformation of MS and GS into holding banks. 4 hrs 47 min

Sept 22, 2008. Auction Rate Securities Mess. Article in Markets Media:

Sep. 18, 2008 Ellen Brown, author of Web of Debt, explains that the bailout of Fannie and Freddie is not about mortgages, but is about bailing out the derivatives industry.

Sep 17, 2008 Daniel Amerman explains credit derivatives very clearly and simply:

Sep 16, 2008 Financial Times article "Foundations of the CDS industry shaken by bank collapse" explains the impact of Lehman Brothers bankrupcy on the CDS industry:

"Lehman Brothers was a party to hundreds of billions of dollars of bilateral over-the-counter derivatives contracts covering credit, interest rates, equities and commodities - all of which are now worth substantially less because the US investment bank no longer stands behind them."

Sep 14, 2008 The Federal Reserve changes standards on its loans; it will now accept other kinds of securities, some with lower ratings. (Source: Bloomberg)

Sept ?, 2008: Zhu Min, Bank of China, explains on CNBC, what has been happening here. He calculated a total $1.8 trillion bail out so far, and explains there are only two ways to pay for it, both of them painful: 1) sell bonds or 2) print more money. US recession is coming. (Link to source)

Sep/Oct? (Find date) Bailout package rejected by the US House of Representatives

Find Date. Senate passes bailout package—throws in pork, other unrelated “sweeteners” to get more votes

August 21, 2008: Warren Buffett, three hours on CNBC, explains how he uses derivatives and personally does “mark to market” every day.

July 9, 2008 Darrell Duffie, Stanford Professor of Finance, gives testimony before the Senate Banking Committee, "Reducing Risks and Improving Oversight in the OTC Credit Derivatives Market”

June 2, 2008 Gillian Tett @ “Derivative thinking”. Quotes Brickell twice about “self healing” of financial markets and how he is deflecting blame to the housing markets (at conf in Vienna)

March 21, 2008 Congressional Research Service report to Congress, "Averting Financial Crisis"

One answer, put forward by Raghuram Rajan, former chief economist of the International Monetary Fund, is that compensation structures reward short-term performance and ignore long-term risk. That a strategy is likely to fail spectacularly every ten or twenty years is not a disincentive to the leveraged trader: he will probably receive several large annual bonuses before the bad year comes, and even then may keep his job, since many of his peers will probably have incurred similar losses. The CEO of Morgan Stanley, for example, received no bonus for 2007, but kept the $40 million from the year before.

The combination of modern financial engineering and short-term incentives may distort or weaken market discipline and lead to excessive risk-taking. The costs of failed speculation are not always borne by the speculators themselves but may be widely distributed throughout the financial system and, in extreme cases, may fall upon the economy as a whole. Is there a case for more stringent regulation to restrain speculation or limit the potential damage from speculative losses?

March 10, 2008: Paul Farrell article on MarketWatch, “Derivatives the new ‘ticking bomb’”{B9E54A5D-4796-4D0D-AC9E-D9124B59D436}&dist=MostEmailHome&dist=dist_smartbrief&dist=dist_smartbrief

Feb 2008: Trillion Dollar Meltdown published, author Charles Morris. Best 2-3 pages on how the credit bubble was money basically for bankers, which could be leveraged, with all the risk managed....

Dec 2007 BIS publishes semi-annual data about worldwide derivatives contracts totally nearly $600 trillion.

Oct 16, 2007 Earnings call with Citibank; CFO Gary Crittenden explains that a big hunk of revenue growth came from derivatives products...

Sept 3, 2007 Julian Tzolov, Eric Butler indicted for fraud. Traders for Credit Suisse.

June 4, 2007 Article claims most profitable part of Goldman Sachs business is trading and investing (including derivatives).

March 2007 “$300 Trillion Time Bomb”, by Jesse Eisinger in Portfolio magazine by Conde Naste

Feb 2007: Housing Market Crash to Lead to Second Great Depression:

Feb 16, 2007. Credit Suisse Group (CSFB) promotes derivatives trader Brady Dougan to CEO yesterday, first to head up a major bank.

Dougan's rise at Switzerland's second-biggest bank reflects the transformation of derivatives into the fastest-growing financial market. Derivatives -- instruments whose value is based on underlying stocks, bonds, loans, currencies and commodities -- account for $370 trillion in over-the-counter trading, 10 times more than in 1998. Deutsche Bank's revenue from credit derivatives alone was at least $3 billion in the first half of 2006, more than double its investment-banking fees. ``Those who make the money are the ones who have the power to be in charge, Scott Moeller, a finance professor at City University's Cass Business School in London and former banker at Morgan Stanley and Deutsche Bank, said in an interview.

Like Winters, 45, Blythe Masters, 37, had an early role in credit-default swaps at JPMorgan. The New York-based company, the third-largest U.S. bank, promoted her to run commodities and currencies last year.

Dec 13, 2006 NY Times article says Goldman Sachs is flying high; quarterly profits are up 93%; huge bonuses to be paid. "Like many universal and investment banks, Goldman Sachs has transformed its business to capitalize on sea changes in the capital markets, particularly new opportunities in far-flung markets and a shift from issuing and trading plain-vanilla stocks and bonds to building and trading complex derivative products."

Nov 17, 2006 Bloomberg article: derivatives explosion fueling revenue growth at major banks including Goldman Sachs.

"At London-based Barclays Capital derivatives accounted for more than 60 percent of revenue and profit, Chief Executive Officer Bob Diamond said in May."

Sept 22, 2006 Paulson hired by Bush, given unprecedented authority at Treasury; including crisis management:

May 16, 2006 Richard McCormick testimony at Senate hearing on hedge funds and derivatives

May 5, 2006 WSJ article: Are Derivatives Weapons of Financial Mass Destruction?

2006 Warren Buffett's partner Charlie Munger warns in book "Poor Charlie's Almanac" that there will be a derivatives blowup within 5-10 years.

Nov. 9, 2005 "The Coming Disaster in the Derivatives Market" by Michael J. Panzer.

Oct 28, 2005 EIR article documents derivatives losses and growing risk of systemic failure since 1987, predicts major economic meltdown

Sept 16, 2005 NY Times Article: “Trying to Put Some Reins on Derivatives”. Quotes Mark Brickell, about Jerry Corrigan (Goldman Sachs managing director, former head of Fed Reserve of New York) trying to solve the backlog problem in processing derivatives.

Dec 21, 2004 Source: Wikipedia

On December 21, 2004 Raines accepted what he called "early retirement" [4] from his position as CEO (Fannie Mae).

In 2006, the OFHEO announced a suit against Raines in order to recover some or all of the $90 million in payments made to Raines based on the overstated earnings [6] initially estimated to be $9 billion but have been announced as 6.3 billion.[7].

Civil charges were filed against Raines and two other former executives by the OFHEO in which the OFHEO sought $110 million in penalties and $115 million in returned bonuses from the three accused.[8] On April 18, 2008, the government announced a settlement with Raines together with J. Timothy Howard, Fannie's former chief financial officer, and Leanne G. Spencer, Fannie's former controller.

Oct 7, 2004 NY Times article on Falcon, OFHEA, taking on Fannie Mae in hearings two weeks after scathing report:

Oct 6, 2004. MSNBC article: Former Fannie Mae accountant Roger Barnes who raised concerns about earnings manipulation there took his concerns to CEO Franklin Raines in 2002.

OFHEO Director Armando Falcon, testifying under oath at the hearing, asserted that Fannie Mae improperly put off booking income to a future reporting period “to create a ’cookie jar’ reserve that it could dip into whenever it best served the interests of senior management.” Those interests included smoothing out volatility in earnings from quarter to quarter and meeting earnings-per-share targets linked to bonuses for executives, Falcon said.

Freddie Mac restated some $4.5 billion in earnings last year, ousted top executives and was fined a record $125 million in a settlement with regulators.

April 28, 2004 Rolling Stone magazine:

"At the time, the European Union was threatening to more strictly regulate the foreign operations of America's big investment banks if the U.S. didn't strengthen its own oversight. So the top five investment banks got together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson — made a pitch to George Bush's SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.
Donaldson OK'd the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox's tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one."

2003 Brickell nomination withdrawn

July 22, 2003 Hearings to confirm Mark Brickell as OHFEO head

March 14, 2003: Richard Freeman article in Executive Intelligence Review discusses housing bubble, warning of seismic risk at Fannie and Freddie by OHFEO regulator Armando Falcon, his firing the next day, and his proposed replacement by Bush of Mark Brickell.

2002 Warren Buffett includes 3 pages in 2002 letter to Berkshire Hathaway shareholders about the dangers of derivatives, including the famous statement that they are "financial weapons of mass destruction" (read page 13-15)

2002: statutory budget controls expire

June 2000: Derivatives Market Reform Act: Markey and Dorgan

2000. A section of H.R. 5660, the Commodity Futures Modernization Act of 2000 barred states from regulating credit default swaps under their gambling and “bucket shop” laws. That bill was folded into the Consolidated Appropriations Act, 2001, a massive spending bill, passed in haste at the end of the 106th Congress.

•Section by section analysis:

January 1999 In January 1999, a group of 12 major, internationally active commercial and investment banks announced the formation of a Counterparty Risk Management Policy Group (CRMPG). The objective of the Policy Group, whose formation was endorsed by Chairman Greenspan, Chairman Levitt and Secretary Rubin, has been to promote enhanced strong practices in counterparty credit and market risk management. Full Report of CRMPG on US House web site.

August 1999, article by Martin Mayer, fellow of the Brookings Institution, discusses Mayer’s 3 laws of derivatives.

What derivatives regulation did he recommend?

"I would require an open registry of instruments and I would require transactions to go through clearinghouses. . . . I think we are moving toward a world of renewed correspondent banking, and we’re going to have more payments done on a correspondent-banking chassis. An OTC derivatives contract is a correspondent-banking instrument and it’s going to get in trouble the way other correspondent-banking instruments do, because no correspondent bank knows what its respondent bank is doing outside the individual private relationship. I want this stuff moved onto exchanges. I want the settlement to be done out in the open, and I want there to be a clearinghouse in which the clearinghouse itself has a registry of large-trader positions and open instruments.

November 1999, “Somebody Turn on the Lights,” By Martin Mayer. Regulators are hindering transparent markets.

Nov 12, 1999 Congress passes Gramm-Leach-Bliley Financial Services Modernization Act which repealed part of the Glass-Steagal Act of 1933 and allowed banks to offer investment, commercial banking, and insurance services.

Oct 15, 1998. Brooksley Born (CTFC Chairperson) gives speech on lessons from LTCM collapse, and need for OTC derivatives regulation

July 30, 1998 Brooksley Born, Chairperson of the Commodity Futures Trading Commission (CFTC) testifies before U.S. Senate Committee of Agriculture, Nutrition and Forestry. She says derivatives (including futures) have been regulated for three quarters of a century by the CFTC, and she wants to commission a study on derivatives, since they had changed significantly in the previous five years since the last CFTC study.

“Chairman Greenspan testified just last week before the U.S. House of Representatives Committee on Banking and Financial Services, "I have no doubt derivatives losses will mushroom at the next significant [economic] downturn as will losses on holdings of other risk assets, both on and off exchange."

Washington Post article covers 1998 meeting of Brooksley Born (CTFC) with Treasury and Fed when she argued for regulation of OTC derivatives. They resist. Mark Brickell shows up here in 98, 99 opposing government regulation. There are transcripts to these meetings.

July 17, 1998 Mark Brickell, JP Morgan Securities, sends letter to Congress opposing derivatives regulations

May 7, 1998 Greenspan: “the major expansion of the over-the-counter derivatives market has occurred in [a] period of unparalleled prosperity. . . [in] which losses generally, in the financial system, have been remarkably small . . . And as a consequence of that, I don't think that one will fully understand or know how vulnerable that whole structure is until we have it really tested. And eventually that's going to happen.” (Cite Source)

1997 GAO Report “The 1997 GAO Report, entitled OTC Derivatives: Additional Oversight Could Reduce Costly Sales Practice Disputes, chronicles 360 end-user losses, of which 58% reportedly involved sales practice concerns.” (Brooksley Born, 1998 senate hearing)

March 1996: "International Financial Instability and the Financial Derivatives Market" published in the Journal of Economic Issues by Brent McClintock

1995: Senate votes on Balanced Budget Amendment. Sen Paul Simon on Charlie Rose: American public “overwhelmingly support balanced budget amendment.” Wirthlin poll 76%.

1995: Charlie Rose interviews Mark Brickell after Baring Bank failure

October 1994 cover story in Washington Monthly, "Very Risky Business" by North Dakota Senator Byron Dorgan, warns of future financial disasters if derivatives are not regulated. Dorgan wanted to prevent federally insured banks and financial institutions from speculating in these exotic instruments.

July 1994 Article in CPA Journal, "Derivative financial instruments: time for better disclosure."

June 1994: SEC asked to study derivatives by Markey

May 1994 GAO releases 190 page report entitled "Financial Derivatives: Actions Needed to Protect the Financial System"

April 12, 1994: Rep. Henry Gonzales introduces legislation (HR4170) "Derivatives Safety and Soundness Act of 1994" which would require "insured depository institutions to include information on derivative financial instruments" in reports

April 7, 1994: OTC derivatives study called for by Edward Markey (D-MA)

1994 Derivatives regulation legislation introduced by Edward Markey (D-MA):

1994: Credit default swaps invented by JP Morgan bankers on a Florida off-site retreat (Newsweek article).

"I've known people who worked on the Manhattan Project," says Mark Brickell, who at the time was a 40-year-old managing director at JPMorgan. "And for those of us on that trip, there was the same kind of feeling of being present at the creation of something incredibly important."

"Like Robert Oppenheimer and his team of nuclear physicists in the 1940s, Brickell and his JPMorgan colleagues didn't realize they were creating a monster. Today, the economy is teetering and Wall Street is in ruins, thanks in no small part to the beast they unleashed 14 years ago."

1994: Jim Leach introduces legislation to regulate derivatives. A lobby led by Mark Brickell defeats the attempt. (Source: “Infectious Greed," by Frank Partnoy.)

Nov 3, 1993 SEC Commissioner J. Carter Beese speaks at the International Swaps and Derivatives Association Conference in Washington, DC. "A Roadmap to SEC Regulation of Derivatives Activities." He said, "I do not believe that derivatives will be the next S&L crisis." He explained the 4 general themes to SEC regulatory oversight of derivatives activies: 1) risk assessment--the SEC required "securities firms to report on a quarterly basis the size of their derivatives exposure in terms of both notional amount and replacement cost value;" 2) the SEC was seeking public comment relating to the "appropriate capital treatment of derivative products under the Commission's net capital rule;" 3) since "settlement values under derivatives contracts are largely contingent . . . current accounting rules do not require settlement values to be reflected in firms' balance sheets," so he encouraged international efforts to harmonize off-balance sheet accounting, and he mentioned recent FASB rules and also SEC requirements for public companies with "material exposures from derivatives to discuss the commitments and uncertainties" in their reports, under Regulation S-K, Item 303; and 4) coordination between regulators and market participants. He said the CTFC had recently issued a study on derivatives and recommended the formation of an "interagency council" to fulfill this coordination function.

Similarly, in an extreme market stress environment, the liquidity of the nation's equity markets could be strained by the sell-off of stocks and futures by derivatives dealers trying to adjust their hedges to accommodate rapidly changing market risks. . . . I do think it is safe to say these would be low probability high impact events.

1993: Group of 30, with help from Mark Brickell, prepares recommendations for internal risk management, including daily mark to market. The derivatives lobby used this "best-practices" document for years to avoid regulation by claiming that self-regulation was sufficient and preferrable to government regulation.

Sept 8, 1993 According to EIR, John Hoefle testifies before House Banking Committee, discusses bailout of Citicorp in 1990, and Committee Chairman Henry Gonzalez responds by railing on the speculatives derivatives industry and accuses the participants of creating a mega-Las Vegas. (Find actual transcript of the Committee hearings.)

1992: Controversial EIR Founding Editor Lyndon LaRouche warns of economic devastation that would be caused by the spread of highly leveraged derivatives bets. (View EIR Timeline on derivatives here)

Longevity Derivatives: A New Asset Class

Life Insurance Settlements


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