Saturday, July 23, 2016

Derivatives: Reckless Criminal Gambling Hastening Civilizational Collapse

The Global Technological System (GTS), our civilization, societies and cultures around the world, our very Olympian personalities, all are in the process of collapsing. Jesus is inviting us, as Christians and churches, indeed all of his faithful witnesses everywhere, to make meaningful responses together to this growing calamity. We will do so, however, only when we acknowledge that we do indeed face catastropheIn today’s essay, we will look at the once and future disaster called derivatives.

Definition and nature. A derivative is simply a bet that a future event will either happen or not happen (Jeff Nielson in Snyder 10.07.15). These bets are made between the elites of banks, hedge funds, and other large corporations using other people’s money. While derivatives are bets, and nothing more, their true nature is disguised when elites, who know better, call them “securities” or “contracts.” The price of a derivative is derived from the asset being bet on. Assets which corporate elites typically bet on are “‘stocks, bonds, commodities, currencies, interest rates, and market indexes’” (Snyder 12.29.15). Derivatives, then, are simply a form of gambling and, given the global size of the bets and the consequences when they go bad, we will more accurately define derivatives as criminally catastrophic gambling.
Scope. As of December 2015, there were $553 trillion in derivatives (Snyder 12.29.15, based on Bank for International Settlements data).
Risk. Billionaire Warren Buffet said that derivatives “‘will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts’” (Snyder, 12.29.15). For those reasons, he called derivatives “‘financial weapons of mass destruction’” (Snyder, 12.29.15).

     Exposure of largest US banks to derivatives (Snyder, 12.29.15):
                                     assets                         derivatives
Citigroup:              $1.8 trillion                       $53 trillion
JPMorgan Chase   $2.4 trillion                       $51 trillion
Goldman Sachs     $0.88 trillion                     $51 trillion
Bank of America   $2.2 trillion                       $45 trillion
Morgan Stanley     $0.83 trillion                     $31 trillion
Wells Fargo           $1.7 trillion                       $6 trillion
Totals                    $9.8 trillion                      $237 trillion

Size of largest US banks. “At this point, the four largest banks in the U.S. are approximately 40 percent larger than they were back in 2008. The five largest banks account for 42 percent of all loans in this country, and the six largest banks account for approximately 67 percent of all assets in our financial system” (Snyder, 12.29.15). When one or more of these banks go bankrupt, it will have catastrophic consequences for the GTS.
Bail-ins. Federal law gives priority status to payment of derivatives rather than to the protection of depositors. If financial elites start having problems paying for their bad bets, their first priority by law is to pay off those who won the bets. The deposits of millions of ordinary people like you and me, legally defined as unsecured loans, and will simply be lost.

Copyright © 2016 by Steven Farsaci.
All rights reserved. Fair use encouraged.