Jump to content
The Education Forum

A conspiracy against the people of the world.


Recommended Posts

Heather Stewart, Guardian, Saturday 21 July 2012

A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary £13 trillion ($21tn) of wealth offshore – as much as the American and Japanese GDPs put together – according to research commissioned by the campaign group Tax Justice Network.

James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, The Price of Offshore Revisited, released exclusively to the Observer.

He shows that at least £13tn – perhaps up to £20tn – has leaked out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net-worth individuals. Their wealth is, as Henry puts it, "protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy". According to Henry's research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than £4tn in 2010, a sharp rise from £1.5tn five years earlier.

The detailed analysis in the report, compiled using data from a range of sources, including the Bank of International Settlements and the International Monetary Fund, suggests that for many developing countries the cumulative value of the capital that has flowed out of their economies since the 1970s would be more than enough to pay off their debts to the rest of the world.

Oil-rich states with an internationally mobile elite have been especially prone to watching their wealth disappear into offshore bank accounts instead of being invested at home, the research suggests. Once the returns on investing the hidden assets is included, almost £500bn has left Russia since the early 1990s when its economy was opened up. Saudi Arabia has seen £197bn flood out since the mid-1970s, and Nigeria £196bn.

"The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments," the report says.

The sheer size of the cash pile sitting out of reach of tax authorities is so great that it suggests standard measures of inequality radically underestimate the true gap between rich and poor. According to Henry's calculations, £6.3tn of assets is owned by only 92,000 people, or 0.001% of the world's population – a tiny class of the mega-rich who have more in common with each other than those at the bottom of the income scale in their own societies.

http://www.guardian.co.uk/business/2012/jul/21/global-elite-tax-offshore-economy

Link to comment
Share on other sites

You sir are conspiratorial.

The derivatives market is now worth 20 times the global economy

-------------------------------------------------------------------------------------------------------

http://www.mindfulmoney.co.uk/12059/investing-strategy/the-derivatives-market-is-now-worth-20-times-the-global-economy.html

The total derivatives exposure in the world's financial markets is estimated to be over a quadrillion dollars - or $1,200,000,000,000,000 to be precise. What's really scary however is not the size of this number but how complex and unregulated derivatives instruments are.

One and fifteen zeroes add up to the world twenty times over

Millions are really so 1970s while the Facebook float and the JPMorgan losses have accustomed us to billions:

•Facebook started at $104bn and its market value slumped and lost around $18bn on its second and third trading days.

•JPMorgan's trading - supposedly to dampen risk - has cost the bank anywhere between $3 and $7 billion.

Trillions - that's one followed by twelve zeroes - are rare but starting to creep in, often in headlines on planned Euro rescues or for measuring US government debt.

But what about a quadrillion - one followed by fifteen zeroes or §? Whether in dollars, pounds, euros or even the low value Japanese yen, it's a scary sum - so frightening and out of our experience that some can only express it as 1,000 trillion (or a million billion).

A quadrillion dollars is getting on for 18 times the value of entire global economy - from Apple and Exxon via Mexican drug cartels to the local builder and corner shop.

Derivatives are big beyond belief

So what is priced in quadrillions? According to derivatives expert Paul Wilmott, it's the total derivatives exposure in the world's financial markets. He estimates it - and it can be no more than very informed guesswork as there are no official figures - that all those instruments taken together add up to $1.2 quadtrillion. Mathematicians and obsessives can work out how high that would be in dollar bills.

And according to this blog that works out at 20 times the value of the world's economy, the world's annual gross domestic product is valued between $50 trillion and $60 trillion. The overhang of financial vehicles of stunning complexity, mostly used in in algorithm driven high frequency trading, would drown the real world twenty-fold if it were a tsunami. And the financial tidal wave can never be ruled out.

It is hard to put a real figure on something which may be several times removed from a concrete asset whose own price is variable - sometimes moving according to the derivatives. To give a very simple example, you could have a contract designed to play on volatility in a risk enhancing derivative which is based on mortgage receipts which are, in turn, based on a residential property index which, finally, has a connection with the real world insofar as money is used in the house purchase transaction.

But the property price itself may well depend on what is happening in other derivative markets - home values rise and fall with mortgage rates and availability, for example, and these depend on derivatives. And don't forget the need to hedge with portfolio insurance.

Whether the actual amount outstanding is Wilmott's $1.2 quadtrillion or other guesses such as $1.5 quadtrillion or as low as $0.8 quadtrillion really does not matter. What counts is a largely unregulated sum of cash whizzing around the world driven by a mix of maths and trader sentiment that few if any can understand.

Wilmott admits it's impossible to know the figure unless you understand the details of the derivatives contracts. But as they are unregulated, with no signs of anyone tackling this, precision is not on the radar. Worse than not knowing the exposure in dollars is that there is even less idea of the potential risk.

Plain vanilla or tutti frutti

Because the link between derivatives and the real world is now so tenuous, their designers are into the world of "moral hazard" - they have an incentive to invent ever more complex vehicles as yesterday's complexity is today's plain vanilla. And everyone knows you charge less for vanilla than for exotica.

This is not ice cream, however, even if the retail market is sucked in. Mindful of ultra-low deposit rates, US banks have recently sold deals offering more than 5% return in one year if gold stays within a certain trading range. This is known as a double knockout quanto option. In the UK, high street banks are offering savers "guaranteed returns" of 9% (not per year but over a six year lock in period so it is really under 1.5% compounded) plus half of any growth in the FTSE 100 index up to a ceiling but not counting dividends. The index is often averaged over the last six months of the contract.

Who knows what will happen in derivatives?

Mark Mobius, executive chairman of Templeton Asset Management's emerging markets group, said this time last year that another financial crisis is inevitable because the causes of the previous one haven't been resolved.

He said: "There is definitely going to be another financial crisis around the corner because we haven't solved any of the things that caused the previous crisis. Are derivatives regulated? No. Are you still getting growth in derivatives? Yes." And this from a man whose personal estimate of derivative exposure is one half that of Wilmott.

Banks bite back

By contrast, the investment banks claim that the huge amounts of derivatives themselves is unimportant because these are only "notional" values, and - after netting - the notional values are deflated to much more modest numbers.

This may be ingenuous. Once you net off "debits and credits" - with derivatives, it is multilateral rather than bilateral, you may well get to zero or at least a less scary figure. But that assumes there will be no short-circuiting in the model. It assumes that in a crisis, there will be an orderly settling off of positions. This seems wishful thinking.

Wilmott adds: "People don't really understand these products. And they never really have. There is a lot of obfuscation going on. People make the products very complex, and the mathematical models are far too complex. Investors are very confused about the basic concepts. They think they understand something, and they don't. You see people using these complex instruments and quite frankly, they don't have a clue about the basic risk management of these things where there are some fundamental issues. Anyone with half a brain soon realizes that these things do not have laws in a sense like physics.

++++++++++++++++++++++++++++++++++++++++++

I am also conspiratorial. BUT my viewpoint is moved by eschatology.

http://www.the-tribulation-network.com/denemcgriff/the_almighty_dollar.htm

Link to comment
Share on other sites

  • 4 months later...

November 28, 2012

How Wall Street "Privatized" Money Creation

Shadow Banking

by MIKE WHITNEY

Regulators are worried about the explosive growth of shadow banking, and they should be. Shadow banks were at the heart of the last financial crisis and they’ll be at the heart of the next financial crisis as well. There’s no doubt about it. It’s simply impossible to maintain a system where unregulated, non-bank financial institutions are able to create their own money (credit) without oversight or supervision. The money they create–via off-balance sheets operations, securitization, repo or other unmonitored mega-leveraging activities–feeds into the economy, creates artificial demand, lowers unemployment, and fuels growth. But when the cycle slams into reverse (and debts are no longer serviced on time), then thinly-capitalised shadow banks begin to default one-by-one, creating a daisy-chain of counterparty bankruptcies that push stocks into a nosedive while the economy slips into a long-term slump.

Sound familiar?

The reason the global economy is still in a shambles a full 5 years after Lehman Brothers collapsed, is because this deeply-flawed system –which had previously generated 40 percent of the credit in the US economy–was still in rebuilding-mode. But now, according to a new report by the Financial Stability Board, shadow banking has made a comeback and is bigger than ever. The FSB found that assets held by shadow banks have swollen to $67 trillion, a sum that’s nearly as large as global GDP ($69.97 trillion) and greater than the $62 trillion that was in the system prior to the Crash of ’08. The more shadow banking grows, the greater the probability of another financial crisis.

So what is shadow banking and how does it work?

Here’s how Investopedia defines the term:

“The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.

Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives and other unlisted instruments. Examples of unregulated activities by regulated institutions include credit default swaps.

The shadow banking system has escaped regulation primarily because it did not accept traditional bank deposits. As a result, many of the institutions and instruments were able to employ higher market, credit and liquidity risks, and did not have capital requirements commensurate with those risks. Subsequent to the subprime meltdown in 2008, the activities of the shadow banking system came under increasing scrutiny and regulations.” (Investopedia)

Shadow banking may have “come under increasing scrutiny”, but not a damn thing has been done to fix the problems. The banks and their lobbyists have beaten back all the sensible reforms that would have made the system safer. Instead, we’re back at Square 1, where credit is expanding in leaps and bounds by–what Pimco’s Paul McCulley called–”a whole alphabet...

Regulators are worried about the explosive growth of shadow banking, and they should be. Shadow banks were at the heart of the last financial crisis and they’ll be at the heart of the next financial crisis as well. There’s no doubt about it. It’s simply impossible to maintain a system where unregulated, non-bank financial institutions are able to create their own money (credit) without oversight or supervision. The money they create–via off-balance sheets operations, securitization, repo or other unmonitored mega-leveraging activities–feeds into the economy, creates artificial demand, lowers unemployment, and fuels growth. But when the cycle slams into reverse (and debts are no longer serviced on time), then thinly-capitalised shadow banks begin to default one-by-one, creating a daisy-chain of counterparty bankruptcies that push stocks into a nosedive while the economy slips into a long-term slump.

Sound familiar?

The reason the global economy is still in a shambles a full 5 years after Lehman Brothers collapsed, is because this deeply-flawed system –which had previously generated 40 percent of the credit in the US economy–was still in rebuilding-mode. But now, according to a new report by the Financial Stability Board, shadow banking has made a comeback and is bigger than ever. The FSB found that assets held by shadow banks have swollen to $67 trillion, a sum that’s nearly as large as global GDP ($69.97 trillion) and greater than the $62 trillion that was in the system prior to the Crash of ’08. The more shadow banking grows, the greater the probability of another financial crisis.

So what is shadow banking and how does it work?

Here’s how Investopedia defines the term:

“The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.

Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives and other unlisted instruments. Examples of unregulated activities by regulated institutions include credit default swaps.

The shadow banking system has escaped regulation primarily because it did not accept traditional bank deposits. As a result, many of the institutions and instruments were able to employ higher market, credit and liquidity risks, and did not have capital requirements commensurate with those risks. Subsequent to the subprime meltdown in 2008, the activities of the shadow banking system came under increasing scrutiny and regulations.” (Investopedia)

Shadow banking may have “come under increasing scrutiny”, but not a damn thing has been done to fix the problems. The banks and their lobbyists have beaten back all the sensible reforms that would have made the system safer. Instead, we’re back at Square 1, where credit is expanding in leaps and bounds by–what Pimco’s Paul McCulley called–”a whole alphabet soup of levered up non-bank investment conduits, vehicles and structures”. What we are seeing, in essence, is the privatizing of money creation. Privately-owned financial institutions of every stripe are increasing the amount of credit in the system even though the underlying collateral they’re using may be dodgy and even though they may not have sufficient capital to honor claims if there’s a run on the system.

Let’s explain: When a bank issues a mortgage, it is required to hold a certain amount of capital against the loan in case of default. But if the bank securitizes the mortgage, that is, it chops the mortgage up into tranches, pools it with other mortgages, and sells it as a bond (mortgage backed security), then the bank is no longer required to hold capital against the asset. In other words, the bank has created money (credit) out of thin air. This is the ultimate goal of banking, to maximize profits off zilch capital.

So how is this different than counterfeiting?

There’s no difference at all. The banks are creating “near money” or what Marx called “fictitious capital” without sufficient resources, without supervision, and without any regard for the damage they may inflict on the real economy when their ponzi-scam blows up. What matters is profits, everything else is secondary.

We live in an economy where the Central Bank no longer controls the money supply. Interest rates only play small part in this new paradigm where risk-oriented speculators can boost broad money by many orders of magnitude by merely increasing their debt levels. This new phenom has intensified systemic instability and caused incalculable harm to the real economy. Keep in mind, that ground zero in the financial crisis was a shadow bank called The Reserve Primary Fund. That’s where the trouble really began.

In 2008, the Reserve Primary Fund (which had lent Lehman $785 million and received short-term notes called commercial paper) was unable to keep up with the withdrawals of clients who were concerned about the fund’s financial health. The sudden erosion of trust triggered a run on the money markets which sent equities plunging. Here’s how Bloomberg sums it up:

“On Tuesday, Sept. 16, the run on Reserve Primary continued. Between the time of Lehman’s Chapter 11 announcement and 3 p.m. on Tuesday, investors asked for $39.9 billion, more than half of the fund’s assets, according to Crane Data.

“Reserve’s trustees instructed employees to sell the Lehman debt, according to the SEC.

“They couldn’t find a buyer.

“At 4 p.m., the trustees determined that the $785 million investment was worth nothing. With all the withdrawals from the fund, the value of a single share dipped to 97 cents.

“Legg Mason, Janus Capital Group Inc., Northern Trust Corp., Evergreen and Bank of America Corp.’s Columbia Management investment unit were all able to inject cash into their funds to shore up losses or buy assets from them. Putnam closed its Prime Money Market Fund on Sept. 18 and later sold its assets to Pittsburgh-based Federated Investors.

“At least 20 money fund managers were forced to seek financial support or sell holdings to maintain their $1 net asset value, according to documents on the SEC Web Site.” (“Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion”, Bloomberg)

The news that Primary Reserve had “broken the buck” sparked a panic that quickly spread to markets across the world sending stocks into freefall. Primary Reserve was the proximate cause of the financial crisis and the global crash, not subprime mortgages and not Lehman Brothers. This fact is obfuscated by the media to conceal the inherent dangers of the shadow system, a system that is just as rickety and crisis-prone today as it was in September 2008.

Although there are ways to make shadow banking safer, the banks and their lobbyists have resisted any change to the current system. Recently, the banks delivered a stunning defeat to Securities and Exchange Commission chairwoman Mary Schapiro who had been pushing for minor changes to money market accounts that would have made this critical area of the shadow system safer and less susceptible to bank runs. Schapiro’s drubbing at the hands of an all-powerful financial services industry sent shockwaves through Washington where even diehard friends of Wall Street –like Ben Bernanke and Treasury Secretary Timothy Geithner–sat up and took notice. They have since joined the fight to implement modest regulations on an out-of-control money market system which threatens to crash the financial system for the second time in less than a decade.

Keep in mind, that the changes Geithner, Bernanke and Schapiro seek are meager by any standard. They would involve “a floating net asset value, or share price, instead of their current fixed price,” or more capital to back up the investments in the money market fund (just 3 percent) in case there’s a panic and investors want to withdraw their money quickly. That sounds reasonable, doesn’t it? Even so, the banks have rejected any change at all. They believe they have the right to decieve investors about the risks involved in keeping their money in uninsured money market accounts. They don’t think they should have to keep enough capital on hand to cover withdrawals in the event of a bank run. They’ve decided that profits outweigh social responsibility or systemic stability.

So far, Wall Street has fended off all attempts at regulatory reform. The banks and their allies in Congress have made mincemeat of Dodd Frank, the reform bill that was supposed to prevent another financial crisis. Here’s how Matt Taibbi summed it up in a recent article in Rolling Stone:

“At 2,300 pages, the new law ostensibly rewrote the rules for Wall Street. It was going to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money, and a new set of rules would limit speculators from making the kind of crazy-ass bets that cause wild spikes in the price of food and energy. There would be no more AIGs, and the world would never again face a financial apocalypse when a bank like Lehman Brothers went bankrupt.

Most importantly, even if any of that fiendish crap ever did happen again, Dodd-Frank guaranteed we wouldn’t be expected to pay for it. “The American people will never again be asked to foot the bill for Wall Street’s mistakes,” Obama promised. “There will be no more taxpayer-funded bailouts. Period.”

Two years later, Dodd-Frank is groaning on its deathbed. The giant reform bill turned out to be like the fish reeled in by Hemingway’s Old Man – no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore.” (“How Wall Street Killed Financial Reform”, Matt Taibbi, Rolling Stone)

Congress, the White House and the SEC are all responsible for fragile state of the financial system and for the fact that shadow banking has not been brought under regulatory oversight. This mess should have been cleaned up a long time ago, instead, shadow banking is experiencing a growth-spurt, adding trillions to money supply and pushing the system closer to disaster. It’s shocking.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

Edited by Steven Gaal
Link to comment
Share on other sites

Please sign in to comment

You will be able to leave a comment after signing in



Sign In Now
 Share

×
×
  • Create New...