U.S. Derivative Monster: Alive and Kicking

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    by Martin D. Weiss, Ph.D. 06-28-10

    Anyone who thinks the new financial reform law will save us from the next debt disaster must be dreaming. Here are the facts …

    Fact: The U.S. derivatives that helped cause the last debt crisis are merely being shifted around like deck chairs on the Titanic.

    Fact: Nothing whatsoever is being done about the derivatives monster overseas, which is more than TWICE as big.

    Fact: Most important, despite months of debate and thousands of pages of legislation, the two biggest risk-mongers of all — the Treasury and the Fed — didn’t even get a slap on the wrist. They got more power.

    Little has been done to address the huge derivatives risks that the Government Accountability Office (GAO) warned about 16 years ago in its landmark study, Financial Derivatives, Actions Needed to Protect the Financial System.

    And nothing has been done to address the risks we warned Congress about 15 months ago in our white paper, “Dangerous Unintended Consequences.”

    Need proof? Then read on …

    Fact #1 Derivatives at U.S. Banks to Be Shifted Like Deck Chairs on the Titanic

    In its latest update, the Comptroller of the Currency (OCC) reports that the national value of derivatives held by U.S. commercial banks is $216.5 trillion, or nearly FIFTEEN times the nation’s Gross Domestic Product.

    Moreover, instead of diminishing, they’re getting larger, up by $3.6 trillion — the equivalent of one full quarter of GDP — in just the most recent three-month period.

    Yes, regulatory reform takes some steps in the right direction, such as getting a piece of this monster off the street and under the roof of exchanges. But how far is that going to go toward protecting investors if the beast keeps growing bigger?

    Despite the new reforms, derivatives will continue to grow in size. And they will continue to be highly leveraged investments that put financial institutions, their trading partners, individual investors, and the entire financial system at risk.

    Read full story Derivative Monster: Alive and Kicking Despite Reforms | Money and Markets: Free Investment Email Newsletter
     

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