Saturday, May 26, 2012

As An Encore to Bailing Out the Big Banks, Government to Backstop Derivatives Clearinghouses … In the U.S. and Abroad

This is absolutely insane, and I guarantee you aren't going to see much msm coverage of it. Why does the public have no say in this? The inevitable consequence of this course is eventual economic devastation for the 99%, whether it's sooner or later. And I'm thinking sooner is more likely. 

From Washington's Blog:

Government to Backstop Derivatives Clearinghouses … In the U.S. and Abroad

  … Which Will Lead to Bailouts and Encourage Even More Fraud.

The government has been bailing out the giant, insolvent banks for years. (Many of the bailed out banks are foreign.)

That is preventing the economy from recovering … like countries that have grabbed the bull by the horns.
The government has allowed the amount of derivatives to reach 1.2 quadrillion dollars.

That is feeding the parasite of casino gambling … which is preventing the real economy from recovering and is killing the host of actual productivity.
What is the government doing for an encore? Bailing out the derivatives clearinghouses.

As the Wall Street Journal reported yesterday:

Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading — not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.


 The authority for this regulatory achievement was inserted into Congress’s pending financial reform bill by then-Senator Chris Dodd.

***
Specifically, the law authorizes the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies.

***
To get help, they only needed to be deemed “systemically important” by the new Financial Stability Oversight Council chaired by the Treasury Secretary.


Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club. After further review, regulators will make final designations, probably later this year, and will announce publicly the names of institutions deemed systemically important.


We’re told that the clearinghouses of Chicago’s CME Group and Atlanta-based Intercontinental Exchange were voted systemic this week, and rumor has it that the council may even designate London-based LCH.Clearnet as critical to the U.S. financial system.


U.S. taxpayers thinking that they couldn’t possibly be forced to stand behind overseas derivatives trading will not be comforted by remarks from Commodity Futures Trading Commission Chairman Gary Gensler. On Monday he emphasized his determination to extend Dodd-Frank derivatives regulation to overseas markets when subsidiaries of U.S. firms are involved.


If there’s one truth we’ve learned about government financial backstops, it’s that sooner or later they will be used. So eventually taxpayers will have to bail out one derivatives clearinghouse or another. It promises to be quite a mess.

(The government has actually been backstopping derivatives for some time).

Indeed, Nobel prize-winning economist George Akerlof demonstrated that if big companies aren’t held responsible for their actions, the government ends up bailing them out. So failure to prosecute directly leads to a bailout. Bailing them out- in turn – creates incentives for more economic crimes and further destruction of the economy in the future.....More at   Washington's Blog.

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