Omnibus, Derivatives, Elizabeth Warren and the Hangman. In a last minute passage of an Omnibus (or as some call it Cromnibus [referencing cronyism]) budget deal to avert a government shutdown, the US government has provided a quid-pro-quo $1.1 trillion spending allowance with Wall Street’s political donners.
This exchange allows taxpayers to be on the hook for yet another banker bailout, via a derivatives provision, that allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp. (FDIC). This potentially puts taxpayers on the hook for losses on nearly $300 trillion in derivatives.
US Sen. Elizabeth Warren (D-Mass.) on the Senate floor urged her colleagues not to support a, “deal negotiated behind closed doors that slips in a provision that would let derivatives traders on Wall Street gamble with taxpayer money and get bailed out by the government when their risky bets threaten to blow up our financial system.” This was originally prohibited via the Dodd-Frank provisions, put into law just after the 2008 crash. Is she right?
I appreciate Sen. Warren’s concern for the people, but to say that derivatives caused the 2008 crash is just off base. It was rather years of gutting the middle class and a housing bubble with fraudulent loans that cause the crash (that is still ongoing). Derivatives are just mere tools of the trade. The crash would have happened regardless. Besides, what is riskier? A shaky loan, or a shaky loan with a derivative hedge against it?
The other point here is that the FDIC does not ensure 100% of the depositors money, only up to a certain amount. So this is a mere small shield for big banks. They will rely more on the political shield for banker bailouts, though next time, I am not so sure it will come so fast as before. This is the problem of the speed of technology. Crisis are coming with increasing technological speed. The moral hazard risk from the previous crisis is still at a physical speed, as it’s too fresh in people’s minds.
That being said, the real danger of derivatives is this speed. The cascade of defaulting loans in the physical economic world happens slowly. It generally takes a few months, or worst case even a few days. In the high-frequency trading world of derivatives, this can now happen in milliseconds. When one disconnects the real world, and places the economy into the high-speed virtual world, this is a house of cards ready to fall. Placing this derivatives phenomenon in an FDIC organisation or not, will make little difference in the outcome.
Now for some of you that may disagree with me, perhaps you could look at it in a different way. The increased leverage and the speed at which it can occur, makes the house of cards even more apt to fall down. Is this so bad? Have you not been calling for “hope and change?” Crisis brings change, so bring on the derivatives – in fact let’s even increase their leverage, LOL. The quicker to the bottom the quicker the change. The hangman is waiting for Wall Street, now give them more rope.
Blue Point Trading, William Thompson