Please resist your natural instinct to click away from this commentary given the word ‘Derivatives’ in the title. I am acutely aware of the boredom and befuddlement that this word instills in you and that is why I added the word ‘Sex’ to the title! You wouldn’t have opened the article otherwise, now would you, but it is important that you read what I am about to say.
[The following is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Hague goes on to say in further edited excerpts:
Dear reader, I recently returned from two weeks of ‘high level’ meetings with a group of Bankers (this is code for two weeks of subsidized debauchery with bankers) in Rome with the intention to pursue a more chaste and pure existence but the bone chilling cold once again had me reaching for my trusty bottle of Jack Daniels for warmth and inspiration which has ‘drained’ me of my good intentions. That being said, my time in Rome had not been completely ‘wasted’, so to speak. I secured a contract from the European Central Bank [ECB] to research the topic of Derivatives and to present my findings at the upcoming World Economic Forum in Davos later this month.
The aforementioned lucrative contract was secured by two key factors:
- The first factor was my friendship with Gustavo Laframboise-Pierre the European Central Bank’s [ECB] Global Director of Statistical Creation. My relationship with such an esteemed member of the ECB traced its roots back to Gustavo’s days as a bookie for Wall Street’s elite. I referred so much business to him we became very good friends. His station in life took a remarkable turn when a senior member of the ECB, while in New York on a ‘fact finding mission’ (this is code for visiting his favorite escort) made an outrageously large and incorrect wager on the outcome of the 2010 World Cup. (Perhaps unsurprisingly, the term ‘derivative’ is commonly used in sports betting!) The only way the debt could be settled was for the banker to offer Gustavo a highly paid sinecure as the ECB. Gustavo became the Global Director of Statistical Creation with the responsibility of making up statistics to support whatever fantastical and deranged policies Central Banks around the world were initiating. Remarkably Gustavo’s aptitude for numbers, coupled with his moral lassitude, allowed him to excel at his job. It was Gustavo who invented the term ‘Quantitative Easing’ as a benign euphemism for runaway money printing.
- The second factor that secured the contract for me was a chance remark I made as Gustavo and I enjoyed a ‘working lunch’, with several senior executives who represented many of the world’s largest banks. The working lunch was held at Rome’s exclusive Blue Moon Gentleman’s Club. As the featured dancer left the stage I happened to mention to the assorted luminaries that I had read an article on the subject of derivatives. The bankers looked at me with something akin to awe and reverence. Gustavo whispered to me that the topic of derivatives had been discussed in a recent conference call by the world’s bankers. The conclusion reached at that time was that derivatives were too boring and too complicated for bankers to grasp. Despite JP Morgan’s very public, expensive and monumentally stupid 5 billon dollar derivatives trading loss bankers still choose to remain cocooned in a ‘Cloak of Ignorance’ as it relates to derivatives. Thomas Gray’s lament that where ignorance is bliss, ’tis folly to be wise could easily be the mission statement of the global banking industry.
Dear reader, I am not being rude and offensive in my remarks about JP Morgan. Surely you would agree with me that any large bank that loses $5 billion in derivatives trading is ignorant of the properties and risks of derivatives.
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The fact that I had actually read a complete article on the subject made me a de facto expert on the topic. Gustavo, in an act of kindness, seized the opportunity on my behalf and pressed his colleagues to retain me to research the topic and make a presentation at the upcoming World Economic Forum in Davos. Thus I found myself preparing to dazzle the world’s financial elite with my insights into the risks and opportunities presented by the global derivatives market. In a rush to complete the deal before the next dancer took the stage it was agreed that I would receive the standard banker’s honorarium of $5,000/hour up to a maximum of ‘whatever it takes’.
At $5,000/hr., you would surely not expect me to be brief
I sat at my desk, sipping ‘Gentleman Jack‘…and put my crack pipe in its case. Dear reader, like many of you (especially those of you who work in the banking industry), I have learned all too well the dangers of mixing crack cocaine with whiskey on an empty stomach. (Have we not all indulged, to our regret, that particular venial sin at least once?) I collected my thoughts and began to write my lengthy tome on the derivatives market. Dear reader at $5,000/hr., you would surely not expect me to be brief!
Online Poker Anyone?
One might think of derivatives as a random game of online poker:
- you don’t know who your opponents are (your counterparty),
- you don’t know if you will be paid (counterparty risk),
- you don’t know if the game is legitimate, (lack of regulation),
- your opponents are probably able to see what cards you’re holding (market domination by large banks),
- you’re making bets that, in many instances, neither you nor your opponents fully grasp (complexity of the market),
- you are potentially risking not only your current assets with every wager but your future assets as well (Leverage) and, in some cases,
- you don’t know how much you are betting.
Imagine, as well, that you play this game every day with trillions of dollars that you do not have. This is the global derivatives market.
Derivatives are Parasitic Financial Instruments
Derivatives are abstract financial instruments which, like parasites, can attach themselves to all manner of stocks, bonds, mortgages, commodity, debt obligations, currency exchange, interest rate fluctuations…in short anything.
Derivatives exist in the ‘twilight zone’ of the banking industry. Like black holes, their presence and massive influence are acknowledged yet the true influence on the global economy of this quadrillion dollar ‘event horizon’ is only theoretical. The near catastrophic disasters at Barings , JP Morgan and AIG are small examples of their destructive powers.
Investorpedia’s more clinical definition of ‘derivatives’ is: “A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties” or, alternately, as derivatives are often created as a form of insurance, you could think of them as an insurance policy in which you:
- don’t know the name, address or any contact information relating to your insurer
- don’t know if your insurer has the resources to pay a claim
- don’t understand the insurance contract as it is written in Greek
- must rely on a shadowy third party to decide what constitutes a claim. (Credit event) and
- don’t know whether your insurer is itself vulnerable to the particular risk you have contracted with it to insure.
The derivatives market is estimated to exceed one quadrillion dollars, yet despite the fact the derivatives market eclipses the market capitalization of the NYSE by an exponential factor, it is not discussed, reported or tracked because it is simply too complicated and opaque. Warren Buffett’s comment about ‘weapons of mass financial destruction’ seems to be the beginning and end of any discussion on the topic.
The Derivatives Market Is Bizarre
How bizarre is the derivatives market? How is the concept of money for nothing propagated by the derivatives market? What is the difference between a chump and a champion in the derivatives market? I will leave it to Shah Gilani in his excellent post in Wall Street: Insights and Indictments to explain. Suffice to say that one is able to buy insurance in the derivatives market. One can then cause the insured event to occur by collaborating with a third party. All that remains is to collect the insurance proceeds. (To be clear the proceeds are usually in the tens of millions of dollars.) The derivatives market makes the Ponzi-like money printing of the Central banks look like ‘Amateur Hour’.
‘Duck Dynasty’ and ‘Real Housewives’ to the rescue
How much attention does Main Street pay to the world’s largest and riskiest casino (AKA: the Derivatives market)?. If one were to Google the word ‘derivatives’, one will only get 34,000,000 hits compared to 713,000,000 hits for the word ‘sex’, 400,000,000 for the words ‘stocks bonds and markets’, 209,000,000 for the term ‘Duck Dynasty’ and 39,000,000 for the phrase ‘Real Housewives of Atlanta’. One must conclude that only when derivatives are discussed by one of the ‘Real Housewives of Atlanta’ posing nude in bed with one of the cast members of ‘Duck Dynasty’ will derivatives receive the attention they deserve.
Reality bites: Derivatives can only be discussed as ‘Fake News’
Where can one find insights and coverage of the Derivatives Market in the mainstream media? Is Fox News or CNN my best choice? Sadly, Dear reader, your best choice would be The Daily Show with John Stewart. Despite the calamitous risk and obvious importance of this topic only Mr. Stewart and his team have dared to share information with the general public. Given the outlandish and frightening risks derivatives constitute to the Global Economy, perhaps Mr. Stewart is correct that it can only be discussed in the ‘Fake News’ format.
Who needs ‘Crack’!
…but I digress. Dear reader, usually I need a little help from my friend Mr. Crack to feel as paranoid and euphoric as I do at this moment!
- Paranoid, because it is now clear to me that the derivatives market is truly a weapon of mass financial destruction.
- Euphoric because I know that my research will make my ‘Derivatives’ presentation at the World Economic Forum a groundbreaking ‘tour de force’ that will vault me to the forefront of ‘talking heads’ that pass for experts on mainstream media. Fame, fortune, a book deal and perhaps that elusive Nobel Prize will surely follow.
My 20 minutes of painstaking research, has made me one of the world’s foremost experts on this complex subject – and you, dear reader, by reaching this point in my commentary, now know more about derivatives than most bankers and traders on Wall Street. You should be quite pleased!
David, you are an imbecile
I decided to reach out to my pal Gustavo and share some of my findings. I knew that it was 3:30 in the afternoon in Paris so I would be able to catch Gustavo just as he arrived for another day of work.
“Gustavo”, I intoned, breathless with excitement. “I have uncovered some startling, controversial, and frightening information about derivatives. The luminaries and leading lights who attend my presentation in Davos will be utterly gobsmacked by my revelations. The media will undoubtedly ensure that my findings go viral. The topic of derivatives will no longer exist only in the dark shadows of the banking industry. The danger that derivatives pose to the global economy will permeate the consciousness of Main Street.”
“David” Gustavo sighed, “I do not know if you are stupid or naïve. Every September when you bet $1,000 that the perennially atrocious Toronto Maple Leafs will win the Stanley Cup, I assumed you were simply ingenuous. Your comments today have convinced me that you are an imbecile. Let me assure you that those will not be the findings that you present at the World Economic Forum. Rather you will inform the world that derivatives are a financial instrument that is being used by brilliant and prudent financial professionals to mitigate risk and make the world a safer place.”
“Gustavo”, I groaned, “that would be a lie. I cannot, in good conscious, sacrifice my integrity, my honor, my core beliefs and my good name simply to placate Wall Street and the Central Banks. I have a responsibility to my readers on Main Street to inform them, to warn them, to prepare them for the likely financial chaos that derivatives will cause. Gustavo”, I said with iron willed determination, “the Truth Will Out“.
“David”, Gustavo snarled, “If you change the tenor of your presentation and indicate that derivatives are the most benign form of financial instrument, somewhat akin to Treasury bills, we will double your fee”.
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Move along nothing to see here
Dear reader, in summary, let me say that derivatives are the most benign form of financial instrument somewhat akin to financial instruments.
Gustavo’s immutable logic and persuasive argument was instrumental in helping me reach the correct conclusion regarding the risks to the Global economy posed by derivatives. So dear reader, move along, there is nothing to see here.
Derivatives: better suited for Ripley’s Believe It Or Not than the Wall Street Journal
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
Other “Insights by David Hague:
Central banks are now privy to not only the emails and phone calls of all the world’s politicians, business leaders, journalists, accountants and lawyers but to the innermost thoughts of every citizen who uses an electronic device for communication. With this information we can use our resources to control the global markets. Read More »
I was afforded a most extraordinary experience recently that has given me unique insight into our global financial and political systems. The information I gleaned from this experience is disturbing. What you are about to read will forever change your view of banking, politics, economics and money. It certainly did mine! Read More »
This article relates to a recent dinner I had with an European Central Bank [ECB] “executive” during which it was expressed/revealed (some might say, confirmed) that there is an on-going global conspiracy by Central Bankers to overthrow democracy and take over the world so to speak in what many refer to as a New World Order (NWO). My first reaction was that what he had to say was outlandish but, upon reflection, I think, in spite of the humorous circumstances surrounding the meeting, what he had to say was of considerable merit. Read on and express your own views in the Comment Section at the end of the article. Read More »
I am on assignment at the World Economic Forum in Davos, Switzerland. Unfortunately my previous commentaries irked the organizers so profoundly that I was not allowed the intimate access usually accorded friendly members of the media. No matter, I am staying at a pleasant bed and breakfast about an hour and half outside of Davos….[But I digress. Back to the Forum.] Words: 2369 Read More »
Other Related Articles: (The articles posted on munKNEE.com deliberately present a diverse perspective on subjects discussed. Below are links, with introductory paragraphs, to a variety of related articles designed to help you become truly informed regarding both sides of the issues so that you can assess the merits of all points of view and come to your own conclusion.)
Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine. This works fine as long as there are not any wild swings in the economy and risk is managed with strict discipline but, as we have seen, there have been times when derivatives have caused massive problems in recent years – the government bailout because of derivatives at AIG; the failure of MF Global because of bad derivatives trades; and the 6 billion dollar loss that JPMorgan Chase recently suffered because of derivatives – [but the next] derivatives panic that comes will destroy global financial markets, and the economic fallout from the financial crash that will happen as a result will be absolutely horrific. [Let me explain my contention.] Words: 1485
The derivative market has blown a galactic bubble…and since there is literally no economist in the world who knows exactly how the derivative money flows or how the system works,…we really don’t know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times. [If, and when, it happens it] will be catastrophic for the world financial system. If you ever wanted a tool to help yourself or others visualize the staggering magnitude of US debt and derivatives, the infographic below is a good one to share. It visualizes who those 9 too-big-fail banks are, what their derivative exposures are, and what scandals they’ve been lately involved in. Words: 1915
The term “derivative” has become a dirty, if not evil word. So much of what ails our global financial system has been laid-at-the-feet of this misunderstood, mischaracterized term – derivatives. The purpose of this paper is to outline the origin, growth and ultimately the corruption of the derivatives market – and explain how something originally designed to provide economic utility has morphed into a tool of abusive, manipulative economic tyranny. Words: 3355
To achieve the EW target of $4,500/ozt. on the next upward move [in gold that I laid out in my article Alf Field: Correction in Gold is OVER and on Way to $4,500+!] will require something to trigger substantial new buying of gold. What could that event be? By definition, it will be a surprise to all market participants, a “black swan” event. That doesn’t prevent us from making a guess [and] one likely area from which problems could emerge…[would be] derivatives. [Let me explain why that might well be the case.] Words: 591