Greed is Good, but Derivatives are Better

“The mysteries of complexity for exotic financial instruments disguise the pure simplicity of their shared origin; namely, gambling games where the house always wins. Who exactly is the casino host? Is it the exchange, the brokerage firm or the government regulators? What about the credit rating agencies, the insurance bookie companies like AIG or the too big to fail banksters? Surely, the Federal Reserve, foreign central banks or the infamous Bank of International Settlements, must be the bottom line keeper of the cage.

Each play their role and share or lose according to the screenplay script written for all those speculators. Money is the medium to buy in. Volatility is required to maximize percentages. Risk is predetermined when the wheel of fortune is rigged. The HOUSE never loses in the end when the public is the last resort to cover foolish bets.

Sovereign wealth funds are governments in drag. The chorus line in this elaborate production entertains only the backers of the show. The audience is the butt of jokes as they pay top dollar to enter the arena. Greed keeps the doors open as the barkers create the allure of easy money. What is wrong with this financial model and how long can this play on the great Green Way of Wall Street?

That is where derivatives come to the rescue. Wikipedia says, “a derivative is an agreement or contract that is not based on a real, or true, exchange, i.e.: There is nothing tangible like money, or a product, that is being exchanged.” Roy Daviesrefines the definition accordingly, “Derivatives are financial instruments that have no intrinsic value, but derive their value from something else.” Since the common denominator is that there is no inherent, natural or real value changing hands, any swap of an intangible, but imaginatively designed financial instrument, could qualify in the broadest sense as a derivative. Does this make any sense? Well, only addictive confidence thieves, who masquerade as respectable traders of markets that do not exist in the real world, would see this as the new normal.

Futures and options have a long record of pork belly slaughter that brings home the bacon for the stage-managers of this theater of the absurd. Credit default swaps CDS, collateralized loan obligations CLO, collateralized debt obligation CDO, collateralized mortgage obligations CMO, and collateralized bond obligations CBO are relatively new in comparison. The Commodities Futures Modernization Act of 2000 falls short from meaningful regulation. “There are a set of defined rules that govern stocks, bonds, options and futures. Now that the 2000 Act was in place, the derivatives which encompass: CDSs, CLOs, CDOs and CMOs, do not have to abide by any of the standard guidelines.”

Shifting risk to anybody else is the beauty of these derivative devises. “Anybody else” was AIG, temporally, before the U.S. Treasury was left holding the bag when the game of musical chairs stopped. Hedge funds are in the business of playing a catchy tune and duck for the exit before the melody ends. Naked short selling is immoral at face value, but deceptive derivative instruments give legal cover for outlaw behavior.

Now that the banking collapse has been papered over with mountains of additional debt, just how can these bond obligations be serviced? Sensible questions are no longer significant and are certainly ignored by governments. The answer is obvious, forget about a VAT to make the payments and rule out that growing the economy is the solution. The apparent response needs to be more derivatives . . .”

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