Central clearing of derivatives seen adding risk (trouble in defusing financial WMD)

Reuters ^ | 06/09/09

[TigerLikesRooster]

Central clearing of derivatives seen adding risk

Tue Jun 9, 2009 4:31pm EDT

NEW YORK, June 9 (Reuters) - Proposals to require that all contracts in the $450 trillion derivatives market be centrally cleared could tie up valuable capital and constrain the liquidity of companies that use the contracts to hedge their businesses, derivatives users and dealers warned on Tuesday.

The use of central clearinghouses is viewed as key to removing systemic risks posed by the contracts, should the failure of a large dealer spark a chain of losses globally. The issue arose after the collapse last year of Lehman Brothers and insurer American International Group.

[TigerLikesRooster]

I am afraid that, one of these days, this thing could blow big.

[TigerLikesRooster]

Ping!

[NVDave]

Reading this makes my blood boil.

Yes, it would “reduce liquidity available for investment.” Just the same as having to put up margin at the end of the day on commodity exchanges reduces my liquidity.

DUH.

That’s the whole point of this proposal: if you don’t have the actual money with which to settle a derivatives contract, don’t enter the contract. If the contract has moved against you, put up more margin or get out before it gets any worse.. Is that really so difficult to understand?

Apparently so for some of these clowns.

This also exposes that this is a “shadow banking system” — where the players in the OTC derivatives market are looking to effectively create a money substitute from derivatives. Forcing them to post margin forces them back into the “real” banking system and takes away their pseudo printing press - much as the accounting change that forced companies to expense employee stock options took away their “printing press.”

There are some days I want to go on a rampage with a 3’ chunk of sucker rod upside some people’s heads.

This would be one of those days.

[JasonC]

I disagree with some of the violence and abuse in your comments, but certainly we need central clearing. Those playing the game have to be the ones on the hook if someone can't cover their side. It has worked fine for futures and options and it will work fine for swaps. Just get on with it, and tell the industry if they don't want to go along their contracts are unenforcable.

[jonrick46]

The derivatives market makes me very uneasy. It reminds me of a pyramid scheme. When there is failure at one end of the network, there is a ripple effect that can take the entire network down. The recent economic collapse is such an event. They are playing the same old Bucket Shops scheme that brought about the Great Panic of 1907.

The system needs to be made with more safeguards; not more Big Government control.

[NVDave]

That’s exactly my point - it has worked fine in markets where it is required.

My abusive comments are going to be mild by the end of this year when the public gets a taste of unemployment over 10% and then the Obama administration decides to do a second round of bail-outs for bankers because the administration refused to hold the bankers’ feet to the fire and force real change down upon them. As of right now, the bankers have wiggled out of nearly every substantial change.

Let’s be honest here: the reason why they want to pay back the TARP funds is that they want to remove any attached conditions on exec pay.

The real operators complaining about this OTC proposal are outfits like JPM, who know that without the shady OTC markets, they’re not going to generate anywhere near the profits they’re hoping for.

[RSmithOpt]

I could not agree with your comments more. People haven't a clue just how vile the OTC derivatives market has become. I cannot believe this was never regulated.

I have read where many have become very wealthy from bonuses paid from the ficticous derivatives economy.

The real operators complaining about this OTC proposal are outfits like JPM, who know that without the shady OTC markets, they’re not going to generate anywhere near the profits they’re hoping for.

I have read where the associated global losses with the $2-$3 trillion Fannie / Freddie no doc mortgage loan boondoggle pegs somewhere around $50-$70 trillion, yet none of those derivative holders know what parts of their contracts really still have value.

IOW, the 'insurance' risks were leveraged around 20X the actual losses.

The OTC derivatives crap with no requirements for margin calls as you have said, is pure BS. In the meantime, we (the US consumer) pay heavily. It is interesting that 66,000 Wall Street financial employees all lost their jobs in a span of basically 3 weeks - that's a big flag as to the crap that was floating around from the false global credit bubble.

[RSmithOpt]

Actually, come Christmas time, the actual unemployment could very easily top 20% (U6). The U3 numbers are heavily slanted downwards.

I have an associate that is a long time state auditor (19 yrs) whose office reports directly (him personally) to the governor. I was told it is much worse than the media and the officials are letting on.

There are a lot of once independent business contractors once associated with the housing construction industry that cannot receive unemployment benefits as many did not pay the required insurance for themselves (owners) nor their workers.

The commercial real estate defaults are starting here in NC and isn't being talked about.

NC state legislature missed their budget projections (income) this year by 20% on average and they already knew the economy was in a slide when they came up with it. That's another big WTF? just like Kalifornnika's WTF?

Get the picture?

If economic recovery equals growth, that won't happen for a good long while.

[CutePuppy]

Proposals to require that all contracts in the $450 trillion derivatives market be centrally cleared could tie up valuable capital and constrain the liquidity of companies that use the contracts to hedge their businesses...

That's the whole point of derivatives clearing system, to make it transparent and reduce the margin / leverage / exposure. How does that increase risk?

The "industry" doth protest too much, methinks.

[ex-Texan]

I agree with you 100%. Wall Street Banks are using phony accounting to mask major losses:

Bank Profits From Accounting Rules Masking Looming Loan Losses !

The temporary economic revival may be short-lived. Analysts who have examined the quarterly profits and Bovine Squat government stress tests say that accounting rule changes and in-built fantastic assumptions are making the institutions look healthier than they are. For example CitiGroup posted a $ 1.6 Billion profit in the most recent quarter. Profits would vanish under the old accounting rules. CitiGroup's allegation of profits were totally bogus, claims one senior accounting expert.

Without those very rosy accounting projection, CitiGroup would probably have posted a net loss of $2.5 billion in the quarter. In the five previous quarters, Citigroup lost more than $37 billion.

Are you getting the picture yet ________ ? Obama's Bovine Squat Economic Recovery is manufactured with smoke and mirrors. It's all bogus. Geithner and Bernanke are just like the crazy old coot in the movie 'The Wizard of Oz.'

[Vet_6780]

The casino will impose discipline one way or another.

Just ask Japan how excessive leverage has worked out for them after 19 years of deleveraging and serial recessions.

[ex-Texan]

Oh, by the way: I have posted new information on my freeper page. And will be updating my page again today. Things are getting worse, not better.

Obama has a team of expert con artists working for him. The media is shilling for Zero like never before in history. He is like a rock star gone crazy on free drugs and booze and 24/7 hype. It's all fake. Every bit of it.

Welcome to Bilderberg's New World Nightmare . . .

[RSmithOpt]

Yup, with numerous recent 'little' stories like in your link, the sheeple are completely oblivious to the legion of wolves that have descended upon them.

I do not think that I am too far off in saying that I see the big banks days of easy money have come to an abrupt halt.

I cannot believe the goobermint sponsored accounting crap being allowed with not only the banks, but the goobermint itself.

For the most part, middle America is broke, in debt and the future is not good....the very thing our glorious leaders relied upon for a robust economy was consumer spending...those days are gone and the warm fuzzies running goobermint and the SRM refuse to accept it as to shrink back the size of goobermint.

Kalifornika case in point.

[RSmithOpt]

Are you getting the picture yet ________ ? Obama's Bovine Squat Economic Recovery is manufactured with smoke and mirrors. It's all bogus. Geithner and Bernanke are just like the crazy old coot in the movie 'The Wizard of Oz.'

Many of us realize where we're at, unfortunately, the majority doesn't. Goobermint at all levels for 45 of the 50 states are using this time as an opportunity to take even more money out of the private sector....this is their Bohemian Grove solution. It is the exact opposite of what needs to be done.

They willfully refuse to eliminate useless make work agencies and spending programs.

Be very prepared for what the cost of food and energy will be come end of 3Q 2009.

Increasing the yearly federal fiscal deficit by a factor of 3 fold says 2 things:

First, the investment bank fiasco is huge.

Second, not only are they testing citizen response, they are using those huge amounts of money to line a select few pockets as well as add another layer to their evil web.

Personally, IMHO, 0's policies weren't implemented to succeed in economic recovery, they were implemented to destroy the economy and deepen the crisis.

The economy will continue to worsen and when the millions of alt-A's and option ARM's reset next summer at much higher rates, that'll be the straw that breaks the camel's back.

Talk to store owners you know...most are not doing so well.

[Fee]

DITTO DITTO. Freepers need to understand a simple saying from India, “if bankers are givened a chance to sin, they will sin”.

[GOPJ]

Thanks for the ping.

[GOPJ]

I have an associate that is a long time state auditor (19 yrs) whose office reports directly (him personally) to the governor. I was told it is much worse than the media and the officials are letting on. There are a lot of once independent business contractors once associated with the housing construction industry that cannot receive unemployment benefits as many did not pay the required insurance for themselves (owners) nor their workers.

The New York Times and Washington Post would "catch" this if the person in office had an "R" by his name rather than a "D".

[investigateworld]

There are a lot of once independent business contractors once associated with the housing construction industry that cannot receive unemployment benefits as many did not pay the required insurance for themselves (owners) nor their workers.""

So very true. I just finished up a multifamily project and daily guys with pickups and equipment (showing they are serious builders) were showing up looking for work.

In my area (Portland, OR Metro), it's dead.

Every single shopping center, strip mall is showing more vacancies every week.

The official stats for my area show 14% unemployment, but a grocery store checker friend of mine saying about 35% of that particular store's sales are now "Oregon Trail" (Food Stamps)

Having more at that location for a number of years, she advised she sees many former cash/check customers now on food stamps.

[RSmithOpt]

Yeah, you and many others too on FR are telling very similar stories.

Portland a good sized metro area too and that doesn't bode well.

To be fair, I usually try to be an optimist most all the time, but after living a few, being a realist settles in first.

I live in a small subdivision of 19 homes in rural NC 20 miles north of Raleigh. We have 4 homes in danger of foreclosure, one foreclosed on over a year ago that is still empty, and 3 for sale with one of those walking the foreclosure tightrope.

I have male 5 friends, 2 living in the subdivision (separate houses - see above) aging from 23 to 46 and single. All have been out of work since Nov/Dec '08 and cannot find work. They are construction / trade employed with 2 over 20 & 25 years experience in their trades.

The empty home is 1560 sq ft., 2 bdrm, 2 bath, cedar siding (natural stain), masonry fire place, oak kitchen & bath cabinets, interior trim is oak, decent back deck, covered front porch with porch swing, double paned windows, new HVAC, all on 1.18 acres. Only 2 people have ever looked at it and it sits on a corner lot. It is a ghost foreclosure home because of its value (2nd mortgage on it) with no for sale sign ever put out front. See it every day when I turn in off the main road.

[investigateworld]

Since '06 I've been stating here on FR this is a b/s economy - totally credit fueled, subject to collapse at any moment. These posts were usually in connection with free trade supporters, one of whom insisted the increasing homeowner ship was a sign Free Trade works.

I have a livable Cali cop pension (ya their good!) and am looking to relocate, Oregon is just to leftist for me.

Alas, while North Carolina is a beautiful state, with many of my fellow Scot - Irish, the Duke LaCross case brought every prejudice I developed (while in the Army) to the forethought of my mind, hence the South is totally out while I look for new diggs.

Irrational? Prolly - but I don't have a million bucks or so like those LaCross kids should Murphy's Law apply to me.