by Alan Barton, All News Pipeline:
Derivatives. Not much being said lately on them but a lot has been said on bank failures of as late. I do not understand why not, they are directly related. In math a derivative of a function is, in the most simple terms, “the rate of change of the function’s output relative to its input value”. Easy enough, but in financial terms a derivative is “a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark”. Again, that sounds simple enough, but there is far more to it than the textbook mentions. Yes, far more to it. Ostensibly, they are used to “hedge a position, speculate on the directional movement of an underlying asset, or give leverage to holdings…. It’s important to remember that when companies hedge, they’re not speculating on the price of the commodity. Instead, the hedge is merely a way for each party to manage risk.” As a matter of fact, the frantic meetings of financial masters on both sides of the Atlantic seem to be trying to keep the entire financial system from blowing out. The collapse of Credit Suisse along with the collapse of Silicon Valley Bank and First Republic Bank would blow out the entire derivatives financial bubble. And what a bubble that is, as the rate of change is most assuredly NOT relative to its input value.
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Wikipedia says the game of Craps is “a dice game in which players bet on the outcomes of the roll of a pair of dice. Players can wager money against each other (playing “street craps”) or against a bank (“casino craps”).” As I read through the rules and gaming strategies on that game, I see no difference between playing derivatives markets and shooting craps. Well, perhaps the amounts of money as I suppose hundreds or even thousands are a bit less than trillions and quadrillions of dollars. A number of recent articles have said that the total wealth of the world as a whole is around something a bit less than 500 trillion dollars. That is half a quadrillion dollars rounding up a bit. The estimated debt in derivative markets ranges from estimates of around 3 quadrillion to 4 plus quadrillion dollars. In other words, a failed large bet on the derivatives market has the chanced of destroying the entire worlds economy. And that is just what the recent spate of bank failures is doing. Please note that they are not regular banks, but investment banks; banks used to invest dollars (both real and imagined) into speculative hedges on mythical outcomes of the crap shoot called derivative markets.
Most of those banks scheduled or expected to fail (or are failing) are Investment Banks as opposed to ‘normal’ or Commercial Banks. What is the difference? Investopedia puts it in these terms; “Retail banks primarily focus on banking services for individuals” while “investment bank arranges capital raising for and provides advisory services to institutional clients that invest in capital markets and companies that seek capital.” The Glass-Steagall Act of 1933 separated Wall Street from Main Street as a direct consequence of the 1929 bank and stock market crash that nearly wiped out this nation and those failures were felt all over the world for many years. The primary purpose of World War Two was to push industrialization increases crawl out of that massive depression and FDR had a major hand in all of it. Glass-Steagell created a “firewall” between commercial banks and investment banks and also created the FDIC, the Federal Deposit Insurance Corporation which began as $2,500 maximum and because of the Frank-Dodd Act was raised to $250,000 in 2010. But the dragging down of commercial banks is inevitable and those smaller banks are starting to fail at increasingly large rates as the money fails to keep them solvent. It is seemingly not a matter of cascading failures like in falling dominoes as much as it may be more like a thermo-nuclear chain reaction.
One of the major points as stated in the act was to “provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.” Fed chair Allen Greenspan thought that if banks were permitted to go into investment strategies with their customers then the greater possible profits could be made from the increase in return for their customers, or their depositors. Add in the fact that most of the information used in deciding on the status of investing in derivatives is base on rumor and hunches or fabricated narratives to bilk someone, and the very idea of posting any hard earned cash in one is tantamount to a guaranteed failure. I therefore have no pity for those who lost so much in the SVB failure and see the FDIC bailout as pandering to those who elect the “woke” monkeys that cause the business failures to begin with. In 1999 Bill Clinton signed the Financial Services Modernization Act, commonly known as Gramm-Leach-Bliley, which effectively (and the Frank-Dodd Act) neutralized Glass-Steagall by repealing key components of the act. This bit of maneuvering then led to the effective elimination of Glass-Steagall and led to the “Great Recession” of 2007-2008. It is also the entry for the looming Great Depression that we are now running into at full speed. The safety margins that G-S Act gave us are null and void, and we are witnessing firsthand the insane stupidity of those wealth madness driven actions.
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