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The Next Meltdown: How We Have Failed To Regulate Financial Derivatives

Economy Memo Pad

The Next Meltdown: How We Have Failed To Regulate Financial Derivatives


The biggest story about the financial crisis that began four years ago is what still hasn’t been done to make sure that the same disaster doesn’t happen again — and why.

As the crisis unfolded and since, many Americans heard about credit default swaps (CDS), the arcane form of insurance that ruined the huge American International Group. Yet while we all paid many billions for AIG’s mistakes, the effort to control so-called derivatives such as CDS has been no more successful than the attempt to prevent future bailouts of banks that are “too big to fail.”

With  $14 trillion outstanding at US banks as of March 2012, the CDS market is nearly equal to the gross domestic product of the United States. Even so, CDS represent just six percent of the overall derivatives market in the US banking system. The rest of the market – that is, the other 94 percent – is just as lightly regulated.

Yet it is hard to regulate a market few people — even experts — understand, especially when those who do understand it can still benefit by guarding its secrets.

Just ask the top managers at JPMorgan Chase.

The firm’s recent statements on its losses in the “London Whale” case show how poorly these financial wagers are understood. From the bank’s initial disclosure of $2 billion in losses, JPMorgan was estimating losses three to four times as large only a few weeks later. And JPMorgan is by far the largest player in the nation’s CDS business, with $6.1 trillion in contracts on its books. The net credit exposure of these swaps at JP Morgan in the first quarter of 2012 was more than 2.5 times the firm’s total risk-based capital.

In layman’s terms, a CDS — a two-sided contract — is insurance that protects against losses on, say, a specific bond. As with car insurance, the buyer pays a premium, and the seller covers the loss if an accident (in this case, a default) occurs.

But a CDS contract doesn’t require insurance buyers to own what they’re insuring. The reality is more like a casino bet — imagine neighbors taking out millions in collision insurance on your car. If you have an accident, they’re rich.

And unlike state-regulated auto insurance, there are currently no capital requirements for derivative insurers, and until recently, there was zero outside supervision. The little oversight created under the Dodd-Frank Act  has barely altered the market because the rules are easy to circumvent.


  1. Fern Woodfork August 17, 2012

    This Is What Biden Meant The GOP/Tea Party Want To Unchain These Banks, Oil Companies, And Corporations And Guess Who Will Pay??? WE The People That’s Who!!!! We Will All In Up Back In Chains!!!

    1. onedonewong August 17, 2012

      Yea as old Joe Biteeme charges the taxpayers $20,000 to use a cottage o his property to provide him with protection. Something he learned from Slick Willie

      1. Dominick Vila August 17, 2012

        The amount is $2,200 a month. Are you suggesting the secret service should sleep in a tent or under a tree, or are you saying a Democrat VP should not have secret service protection? I suppose if Biden was a multimillionaire and owned houses with car elevators, mother-in-law suites and other amenities he could have made a dwelling available for the Secret Service, but since his home is a modest dwelling in Wilmington he does not have that luxury.

        1. onedonewong August 17, 2012

          2000 X 12 equals what donny?? No the only folks who have ever charged the SS for using their facilities is slick willy and Joe Biteeme. Neither W or Cheney ever charged , nor had Reagan or HW.
          This is typical for the dems to skin the taxpayers

          1. Dominick Vila August 18, 2012

            Rent for SS agents has been paid with taxpayers money since the practice of assigning agents to protect our presidents, VPs, and other high level officials began.

          2. onedonewong August 18, 2012

            Sorry only Clinton and Biteeme have ever puled this con where they are making $$ off the taxpayers. The SS stayed at W’s ranch in Texas and he never charged the taxpayers the same for Reagan at his CA residence.
            Sorry this is just anther case of always eating at the taxpayers trough the greedy Dem’s can’t get enough

      2. Fern Woodfork August 18, 2012


        1. onedonewong August 18, 2012

          My parents taught me to spend time with those who have mental deficiencies so that’s why I talk with you

          1. Fern Woodfork August 18, 2012

            Your Mother Is A Retard!!! Your Butt Sucking TROLL!!!

          2. onedonewong August 18, 2012

            Its not nice to talk like to your Dad like that as well as your mother. Its not my fault that your mummy paid me for sex to have more kids to live on welfare

          3. Fern Woodfork August 18, 2012

            LOL YOU LOW LIFE BITCH AND A SAD EXCUSE FOR A HUMAN!!! ASSHOLE THUG!!! We Got The Good Sense To Get Educated And Got Great Job Skills There’s No Welfare Going On In My Family To Bad You Can’t Say The Same!! Cock Sucker!!

          4. onedonewong August 18, 2012

            Rigggght…Being on welfare is in your genes. How many illigetimate chilen does yu have

          5. Fern Woodfork August 18, 2012

            Is That Why You And Your Mother Is On It!! Beside You Have No Penis You Are Bitch!! No Man Would Lower Himself Like You Are Doing Bitch!!! Come To Chicago So I Can Bitch Slap The Hell Out Of You Little BITCH!!!!

          6. Fern Woodfork August 18, 2012

            Hey Little Bitch Go SCREW YOURSELF IN THE ASS With A Rusty Razor Blade BITCH!!!!

          7. Fern Woodfork August 20, 2012

            Being A Nurse Is Far From Being On Welfare BITCH!!

          8. onedonewong August 20, 2012

            It is when you hav been on ‘disabiity” for years

      3. Fern Woodfork August 20, 2012

        You Are A Little Teabagging BITCH!!

  2. dtgraham August 17, 2012

    Derivatives schmerivatives. The Republican trolls here tell us that a few too many poorer folks got mortgages that they shouldn’t have, causing the poor, oppressed, victimized, bankers to have to crash the world economy so they could keep putting groceries on their tables. It’s simple really. It usually is on the right.

  3. Dominick Vila August 17, 2012

    The GOP insistence on deregulation, in Wall Street and in every other segment of our economy, is designed to allow big business and wealthy investors to accumulate wealth without oversight, and often using business strategies that in most countries would put them in jail. In this case, the same banks that invested the money we deposited in their institutions in the subprime scam, derivatives, and risky foreign investments are once again getting ready to stick us with another investment bank bailout. We given them our money, they gamble with it, and when they lose it, we have to bail them out with taxpayer’s money. Amazing!

    1. onedonewong August 17, 2012

      So true the Community Reinvestment ACT which forced banks to make bad loans was the root cause of this problem. That’s the reason for these CDS in the 1st place.
      Why aren’t the ems standing tall and taking credit for their achievements??

      1. Dominick Vila August 17, 2012

        The CDS, the near collapse of our banking system, and the TARP had little to do with the Community Reinvestment Act. The banks that almost collapse were not mortgage institutions, they were investment banks, and their problems were caused by betting on derivatives, not because they were “forced” to give mortgages to poor people, as the GOP would like us to believe.

        1. onedonewong August 18, 2012

          and what did those deritatives consist of apples or grapes??

  4. PamelaT August 17, 2012

    Derivatives……are the way that Romney made is 20 million per year. For those that don’t know what they are a pledge to purchase stock at a particular price at a particular date. That is the simplified way of saying….it is much more complicated. The mortgage swaps from the Bush years are an example of a non-taxable derivative. Derivatives are generally non-taxable events so those of you on w-2 income stand in line to get a free tax break as the bankers have been getting them for decades.

  5. Dominick Vila August 17, 2012

    As troubling as Romney’s actual tax rate is, a fact that highlights how skewed our tax policies are and his ability to hire the best tax accounts in the country to pay as little as possible; what is really important is the source of his income. In addition to Bain earnings, which came mostly from management services rendered to corporations on how to liquidate or reduce operating costs, at the expense of their employees; it would not surprise me if much of his income comes from 401k losses in 2008-09, when we lost as much as 40%, and Romney taking advantage of that calamity to profit by doing short sales. The short sale scheme, while perfectly legal, would have allowed him to make millions when the stock market bounced back in 2011-12. If that is the case, did he profit from the misery of others because he is a wise investor, or could there have been some insider trading? Martha Stewart served time for the latter….

    1. onedonewong August 17, 2012

      Gee your Messiah has a tax rate of 20% yet the libs want to ignore that. 100.000 of his books were bought by the State Dept last year to prop up his income

  6. greghilbert August 17, 2012

    Just remember that the toothless and cosmetic post-2008-catastrophe “banking reform” bill was crafted by a Dem-majority senate banking committee and championed by the Obama Dem administration, and that the reduction of it from a pebble to a grain of sand in a raging river is in the hands of the same Dems.

  7. ObozoMustGo August 17, 2012

    Here is an issue that I know almost ALL of us can agree on. The NDAA that Obozo signed last December allows the President to have the power to detain any American anywhere with charge, trial, or representation. For all of you guys on the left that were screaming about the Patriot Act and George Bush’s overreach, I find it odd that I hear nothing but crickets from you on this one. The law is being challenged in court right now and neither The Memo or any other media outlet in the US is talking about it. Gotta go to the UK to find this…

    Hat tip, Tangerine Bolen at TheGuardian UK:

    What makes our NDAA lawsuit a struggle to save the US constitutionTime after time, Obama’s lawyers defending the NDAA’s section 1021 affirm our worst fears about its threat to our liberty

    I am one of the lead plaintiffs in the civil lawsuit against the National Defense Authorization Act, which gives the president the power to hold any US citizen anywhere for as long as he wants, without charge or trial.

    In a May hearing, Judge Katherine Forrest issued an injunction against it; this week, in a final hearing in New York City, US government lawyers asserted even more extreme powers – the right to disregard entirely the judge and the law. On Monday 6 August, Obama’s lawyers filed an appeal to the injunction – a profoundly important development that, as of this writing, has been scarcely reported.

    In the earlier March hearing, US government lawyers had confirmed that, yes, the NDAA does give the president the power to lock up people like journalist Chris Hedges and peaceful activists like myself and other plaintiffs. Government attorneys stated on record that even war correspondents could be locked up indefinitely under the NDAA.

    Judge Forrest had ruled for a temporary injunction against an unconstitutional provision in this law, after government attorneys refused to provide assurances to the court that plaintiffs and others would not be indefinitely detained for engaging in first amendment activities. At that time, twice the government has refused to define what it means to be an “associated force”, and it claimed the right to refrain from offering any clear definition of this term, or clear boundaries of power under this law.

    This past week’s hearing was even more terrifying. Government attorneys again, in this hearing, presented no evidence to support their position and brought forth no witnesses. Most incredibly, Obama’s attorneys refused to assure the court, when questioned, that the NDAA’s section 1021 – the provision that permits reporters and others who have not committed crimes to be detained without trial – has not been applied by the US government anywhere in the world after Judge Forrest’s injunction. In other words, they were telling a US federal judge that they could not, or would not, state whether Obama’s government had complied with the legal injunction that she had laid down before them.

    To this, Judge Forrest responded that if the provision had indeed been applied, the United States government would be in contempt of court.

    I have mixed feelings about suing my government, and in particular, my president, over the National Defense Authorization Act. I voted for Obama.

    But the US public often ignores how, when it comes to the “war on terror”, the US government as a whole has been deceitful, reckless, even murderous. We lost nearly 3,000 people on 9/11. Then we allowed the Bush administration to lie and force us into war with a country that had nothing to do with that terrible day. Presidents Bush and Obama, and the US Congress, appear more interested in enacting misguided “war on terror” policies that distract citizens from investigating the truth about what we’ve done, and what we’ve become, since 9/11.

    I, like many in this fight, am now afraid of my government. We have good reason to be. Due to the NDAA, Chris Hedges, Kai Wargalla, the other plaintiffs and I are squarely in the crosshairs of a “war on terror” that has been an excuse to undermine liberties, trample the US constitution, destroy mechanisms of accountability and transparency, and cause irreparable harm to millions. Several of my co-plaintiffs know well the harassment and harm they have incurred from having dared openly to defy the US government: court testimony has included government subpoenas of private bank records of Icelandic parliamentarian Birgitta Jónsdóttir; Wargalla’s account of having been listed as a “terrorist group”; and Hedges’ concern that he would be included as a “belligerent” in the NDAA’s definition of the term – because he interviews members of outlawed groups as a reporter – a concern that the US attorneys refused on the record to allay.

    Other advocates have had email accounts repeatedly hacked, and often find their electronic communications corrupted in transmission (some emails vanish altogether). This is an increasing form of pressure that supporters of state surveillance and intervention in the internet often fail to consider.

    I’ve been surprised to find that most people, when I mention that I am suing my president, Leon Panetta, and six members of Congress (four Democrats and four Republicans), thank me – even before I explain what I’m suing them over! And when I do explain the fact that I and my seven co-plaintiffs are suing over a law that suspends due process, threatens first amendment rights and takes away the basic right of every citizen on this planet not to be indefinitely detained without charge or trial, their exuberance shifts, and a deeper gratitude shines through newly somber demeanors. But this fight has taken a personal toll on many of us, including myself.

    My government, meanwhile, seems to have lost the ability to discern the truth about the US constitution any more; I and many others have not. We are fighting for due process and for the first amendment – for a country we still believe in and for a government still legally bound by its constitution.

    If that makes us their “enemies”, then so be it. As long as they cannot call us “belligerents”, lock us up and throw away the key – a power that, incredibly, this past week US government lawyers still asserted is their right. Against such abuses, we will keep fighting.

    • This article was commissioned by the Daily Cloudt and appears here by permission of the editors

    • Editor’s note: the article originally stated that the administration lawyers filed an appeal against the injunction on 9 August; this was amended to 6 August on 10 August, at 1pm ET

  8. onedonewong August 17, 2012

    Once again Barak even with all the new laws and expanding the size of the federal work force isn’t up to the job. This is what happens when some one with no experience no ability and no understanding of how an economy works gets elected.
    Its been amateur hour for 4 years and its past time for the adults to be placed in office to fix his mess

    1. Dominick Vila August 17, 2012

      It may interest you to know that the size of the civil service workforce is down by almost one million people compared to its high in the Reagan years.

      1. onedonewong August 18, 2012

        Once again your wrong..the military is down almost 1 million but the unelected bureaucrats continue to grow

    2. BILL August 17, 2012

      It seems the Republicans have been the one’s blocking the Bank regulation.
      Your blaming all our problems on Obama just doesn’t work, and just displays your prejudice.

      1. onedonewong August 17, 2012

        Sorry billy the dems forced this law thru in 2010 and barak has dropped the ball again..

  9. BILL August 17, 2012

    All this would become localized with the banks if congress would undo Bill Clinton’s parting gift and reinstate the Glass Steagall Act

  10. David Kerr August 18, 2012

    Projected Economic Devolution under Romney-Ryan
    Our money
    R money
    Romney’s money

  11. bcarreiro August 18, 2012

    chase would rather see homeowners who have paid religiously for many years and when hard times fall upon homeowners would rather put their home up for foreclosure than keep them in their home… their modification process is a bunch of red tape and stipulations.

  12. bigspender7 August 18, 2012

    In 218 BC, a carthaginian general named Hannibal Barca formed an army which traveled across southern europe with a few dozen elephants, over the alps into Italy to attack the romans on their home ground. His motive was revenge for his father and the spanking the romans laid on the carthaginians in the 1st punic war. For 15 years Hannibal rampaged thoughout Italy crushing one roman army after another. He was never defeated until forced to leave Italy to defend Carthage itself. So great was the fear romans had of Hannibal that mothers would routinely intimidate wayward children by threatening them that “if they didn’t obey, Hannibal would come to get them”. This went on for many years after the war ended in 202 BC.

    Now in 2012 a new boogey man has emerged. I forsee the day when mothers will discipline their children with “if you don’t go to bed right now, the Koch Brothers will come to our house and they’ll get you and you’ll be very very sorry.” Yes it could get that bad.

  13. C. Brian White August 18, 2012

    Thomas Jefferson wrote in 1802; “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property—until their children wake up homeless in the continent their fathers conquered.” Both Republicans and Democrats leaders share the blame for what’s going on.


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