Why Financial Instruments . . .

. . . that destroyed the global economy have not already been outlawed is quite beyond me.

I guess Anthony Weiner’s dick is more interesting and more important.

This post was read 83 times.

About author View all posts

Sean Paul Kelley

Traveler of the (real) Silk Road, scholar and historian, photographer and writer - founder of The Agonist.

16 CommentsLeave a comment

  • That is simply an argument right there to outlaw them. Complexity = confusion, danger, and deceit. Now of course no one who does not understand them should buy them anyway, but why even take the risk? We have seen what these types of things can do.

  • Just finished reading Matt Taibbi’s “Griftopia”. It is a great book and was very enlightening for me. For those who think that he is just the lefty equivalent of Glenn Beck, I think they are absolutely wrong. He lays out the facts mainly then he rants about the implications but they tie into the facts. For instance, he calls Greenspan the Biggest Asshole in the Universe, but based on his real actions and decisions. He does not try to say that, for instance, Greenspan is some Kenyan-born white supremacist fascist who hates all black people like Rush and Glen do with Obama. He is a lefty but he rips Dems and the Obama admin mightily as well.

    Anyway, the most enlightening chapter to me was about commodities futures speculation. Here is how he lays it out. Futures contracts were basically developed to help producers and users with their risk. A wheat farmer can lock in a price or so can a bread maker. Pure financial speculators were allowed in to provide liquidity but they were highly controlled so as to not to screw the market up. Those rules were put in place in 1936.

    Then in 1991 along comes, guess who, Goldman Sachs. GS sends a letter to the CFTC basically saying that they have risk in commodities too, money, so they should be able to trade just like the physical hedgers. The Bush I CFTC head agrees and gives them a letter allowing them to be free of the rules. Sixteen others got similar letters. What is really cool is that these letters were secret, no one else knew they existed, not even later CFTC officials, until there was a leak in 2008.

    Around 2003 GS uses this to come up with their commodity future index fund. Now all sorts of money can pile into these that couldn’t really do it before. What happens? From 2003 to 2008, the amount of money going into went from $13 billion to $317 billion, 25 times as much. What was the effect? The price of every single one of the 25 commodities in the index went up during that time period, by an average of 200%. This is because he says almost all this money bets on the long side.

    And that is a big deal. It does not really matter if the price of IBM shares go from $50 to $150, but when oil or wheat or corn do the same, it really really really matters. Remember what $149 oil did? Remember the food riots of 2008? How about the Arab uprising now that is partly tied to food costs?

    The vampire squid strikes again: GS taking advantage of their special political ties to rape the world. And it certainly looks like those who blame the speculators for rising prices have a good case.

  • The Alternative Investment Management Association, which represents hedge funds, has warned that a naked CDS ban could “push up government borrowing costs”.

    So if gambling on horse racing was prohibited, then the price of horses would rise?

    Or do I misunderstand?

  • but I like the image in the analogy..

    I’ve always understood Derivative investments to be gambling on gambles…trying to put scientific numbers to gambles (me guessing about how you will guess).


    “It’s no longer IOKIYAR….It’s OK If You’re A Republican, but IOKBYAR–It’s OK BECAUSE You’re a Republican.” — Me

  • all the power on this topic — and those who understand how close to failure they were (are?) fear that taking away their Credit Default Swaps and similar toys will being the entire house of cards down.

    On all our heads.

    And that is a good and necessary reason to outlaw what Buffett labeled financial WMD.

  • the political system is owned by moneyed interests. its not really a democracy anymore, because its really all about campaign donations. he who has the money controls the congress and political system.

  • Read it here

    “The financial system,” he said, “is stronger than the will of the people.”

    Must succinct excuse I’ve seen lately for ruining your national economy and selling off national assets to resolve foreign banks’ bad debts…

    “It’s no longer IOKIYAR….It’s OK If You’re A Republican, but IOKBYAR–It’s OK BECAUSE You’re a Republican.” — Me

  • the media doesn’t dig into that quote? They will ignore it just like they did when Bush said the Wall Street was a house of cards.

    feminazi extraordinare 😀

  • I would like to disagree, being a broke mofo who will never have a CDS 😛

    This would be a condensed version of what I think the guys at zerohedge.com are saying, regarding the EU quest to blame CDS for everything bad in the world. If only CDS speculators can be stopped, everything will be fantastic!! Really??

    Credit default swaps’ price is a good barometer of instability in government debt markets – after all, if people determine it should be expensive to guarantee Portugal’s bonds, then that’s a good indicator of the market tightening up.

    The problem lies in their vast scale, as well as being on the books of all these stupid banks that shouldn’t be anywhere near that entire class of financial instruments. (Although if you had some Portugal bonds and some Portugal CDS, wouldn’t that hedge some of your risk?)

    If you think the way that CDS affect the underlying stability of the bonds they’re referenced to, then what about the similar way that Exchange Traded Funds affect the prices of their components. When I buy up tons of ETFs (from my billionaire lair) that is a way of affecting the prices of the underlying parts without buying them normally (as individual stocks).

    The options markets also affect the regular markets too, like ETF affect stocks or CDS affect govt bonds — all of these are similar dynamics.

    How are people supposed to deal with (or hedge against!) the riskiness of government bonds as the euro falls apart under the debt monster? Would like to hear from numerian or others on this 🙂


  • …to outlaw something, you have to describe it fully, otherwise you’ll be in litigation until the cows come home as the courts tear up the law and say its not specific enough.

  • This is because he says almost all this money bets on the long side.

    Since I was investing in these in the same time frame, Taibbi is right but he’s wrong.

    Only an idiot would have shorted commodities in a period when the three largest emerging markets in history– China, India and Russia– were starting to ramp up their manufacturing and agricultural bases. Everything from oil to oranges to bacon (pork bellies) to rare earths were going to skyrocket.

    Indeed, now that China is undergoing its second market bubble (and this one may be a doozy), we can expect to see a drop in all these. Probably not as sharp as the rise from 2003, but certainly a significant one.

  • The underlying asset to the CDS is government paper, bonds and securities. Ban the CDSs, the thinking goes, and you’ll ban one instrument that probably caps pricing (and certainly hedges interest rates down) as holders scramble to hedge on debt from countries like Greece and Ireland.

Leave a Reply