Go Lean Commentary
What do you get for $5.3 Billion? There must be some return on that investment.
The book Go Lean … Caribbean asserts that the US Federal Election-Campaign system is not the model that the Caribbean should want to emulate. This book relates that $5.3 Billion was spent for the 2008 Federal Elections (Page 116), a lot of it contributed by corporations, resulting in a lot of influence peddling. This drama was vividly demonstrated this Saturday evening when the “lame-duck” Congress (the Senate in particular), delayed the required Omnibus Spending Bill – just in time – to extort favorable legislation that would roll back some of the federal regulations enacted after the Great Recession of 2008 to protect against banking systemic risks.
The Shadow Influences spearheading these changes are known to adhere to the principle that “a crisis is a terrible thing to waste” – a quotation credited to famed American Economist Paul Romer. While others will think that this drama was just politics as usual, the following article depicts the more strategic nature of the new legislation, to foster the environment and industry for financial derivative trading – this is too specific for any life-long politician (the US Senate) to advocate on the sly. No, this has the fingerprints of Wall Street Shadow Influences all over it. (See Appendix below for encyclopedic references on derivatives and swaps). See the news article here:
Title: A Christmas Present For The Banks From The Omnibus Bill
Forbes Magazine Investing Online Blog (Posted 12/13/2014; retrieved 12/15/2014) –
By: Robert Lenzner, Contributor
Wall Street banks like Citigroup and JP Morgan Chase have flexed the power of their influence to pressure Congress and the White House into a key change in the law that will allow the trading of risky financial derivatives in bank operations that are insured by the Federal Deposit Insurance Corp. This means the nation’s largest banks used the deadline for passing the Omnibus spending bill as pressure to reverse a key section of the Dodd-Frank bill of 2010 that was meant to prohibit a federal government bailout of swaps entities.
It was the existence of over $500 billion of Credit Default Swaps on the balance sheet of AIG in 2008 that threatened to bankrupt the largest insurance company in the world. So, in effect, six years later, the same Wall Street banks that were bailed out by federal largesse, are being given a legislative gift that will enable them to freely trade the securities that brought Lehman Bros down in 2008 — and obtain access to the benefit of insurance and loans from the federal government.
Behind the scenes, unbenownst to the media or the public, the nation’s Too Big To Fail banks used the Omnibus spending bill that is necessary to finance federal spending in 2015 to undo this little-known Dodd Frank provision that might have restricted the volume of trading in financial derivatives that have been a major source of profits as well as controversy since the 2008 financial crisis. Most financial derivatives will be able to be traded in entities holding deposits guaranteed by the Federal Deposit Insurance Corp. and subject to borrowing at the Federal Reserve’s discount window. This is a key advantage for the banks that will enable them to increase their activity in these securities.
Former Rep. Barney Frank, who was a key sponsor of the Wall Street reform legislation, attacked the change in Dodd-Frank as “a road map for further attacks on our protection against financial instability.” Frank was incensed that the last-minute procedure was “inserted with no hearings, no chance for further modification, and no chance for debate into a mammoth bill in the last days of a lame-duck Congress.”
If President Obama signs the Omnibus spending bill, he will have effectively rewarded Wall Street by reversing a provision that prohibits any federal assistance from being provided to “swaps entities,” including registered swaps dealers, security-based swap dealers, major swap participants and major security-based swap participants, according to information obtained by Forbes. This measure required banks to remove their swaps dealing from the bank itself and do its trading in non-bank affiliates not eligible for deposit insurance. Access to the Fed’s discount window would also be denied in case of a financial crisis in the markets.
The net effect of the changes in the Omnibus spending bill would be to expand permissible swaps activities within a bank and to only exclude swaps based on asset-backed securities that are unregulated and not of a credit quality.
All very technical, but the net result is to allow Citigroup, JP Morgan Chase and others to use the Fed’s discount window to borrow money in case of a crisis that roiled the derivative market for credit swaps again as took place in September 2008. In effect, it means the major banks need not limit their trading of financial derivatives to non-bank operations that the market will never be fooled into thinking some future risk of danger has just been avoided. It is a complex holiday present for Wall Street. And it is a warning sign that other sections of the Dodd-Frank Wall Street reform may also be vulnerable to political rollback.
An additionally relevant blog by Robert Lenzer: http://www.forbes.com/sites/robertlenzner/2014/12/08/the-ten-reasons-why-there-will-be-another-systemic-financial-crisis/
The crisis of the 2008 Great Recession was the lynchpin for the Go Lean movement, (book and blogs). This book, serving as a roadmap for the introduction and implementation of the Caribbean Union Trade Federation (CU), posits that the effects of the 2008 Great Recession continue to linger in the Caribbean. Therefore the book advocates learning lessons from 2008 and to turn-around, reform, and reboot the region’s economic, security and governing engines to ensure that “never again” will our society be so vulnerable to the financial misgivings of our American neighbors; or the “plutocratic” elements there-in.
The field of economics is not always solutions-oriented; sometimes, they have been responsible for the problem. Consider this VIDEO snippet here:
Documentary Film “Inside Job” – http://youtu.be/CaXNqGgIc-g
Published on Apr 19, 2012 – Since the repeal of Glass-Steagall in 1999, the total notional value of derivatives has grown by over 700% for holdings companies and 674% for commercial banks. Even more alarming, since the third quarter of 2008 when the cracks in the financial system were clearly evident, derivatives at the commercial banks have grown from $175 TRILLION to $234 TRILLION ” a $59 TRILLION increase. To put this in perspective, the cumulative Gross Domestic Product in the United States over that same time frame (Q3 2008 through Q3 2010) was approximately $32 TRILLION.
Despite our region’s small size (42 million people in 30 member-states), we do have some control over our own destiny. We want to be a protégé, not a parasite.
The CU’s prime directives, elevating the Caribbean’s economic-security-governing engines, recognize that the changes the region needs must start first with the adoption of new community ethos and controls. Early in the book, the need for this shift is pronounced (Declaration of Interdependence – Page 13) with these statements:
xxiv. Whereas a free market economy can be induced and spurred for continuous progress, the Federation must install the controls to better manage aspects of the economy: jobs, inflation, savings rate, investments and other economic principles. Thereby attracting direct foreign investment because of the stability and vibrancy of our economy.
xxv. Whereas the legacy of international democracies had been imperiled due to a global financial crisis, the structure of the Federation must allow for financial stability and assurance of the Federation’s institutions. To mandate the economic vibrancy of the region, monetary and fiscal controls and policies must be incorporated as proactive and reactive measures. These measures must address threats against the financial integrity of the Federation and of the member-states.
The Go Lean book, and previous blog/commentaries, stressed the key community ethos, strategies, tactics, implementation and advocacies necessary to effect change in the region ourselves, to improve the stewardship over the economy. They are detailed as follows:
|Who We Are – 2008 Internal Experiences||Page 8|
|Community Ethos – Economic Principles||Page 21|
|Community Ethos – Security Principles – Private Interest –vs- Public Protection||Page 23|
|Community Ethos – Security Principles – “Light Up Dark Place”||Page 23|
|Community Ethos – Governing Principles – Lean Operations||Page 24|
|Community Ethos – Ways to Impact the Future||Page 26|
|Community Ethos – Impact Research and Development||Page 30|
|Community Ethos – Ways to Improve Negotiations||Page 32|
|Community Ethos – Ways to Impact Turn-around – 2008 Crisis||Page 33|
|Community Ethos – Ways to Impact the Greater Good||Page 37|
|Strategy – Mission – Fortify the Stability of the Securities Markets||Page 47|
|Strategy – CU Stakeholders to Protect – Banks & Depositors||Page 47|
|Tactical – Growing the Economy – Minimizing Bubbles||Page 69|
|Tactical – Separation-of-Powers – Depository Insurance & Regulatory Agency||Page 73|
|Anecdote – Turning Around CARICOM – Effects of 2008 Financial Crisis||Page 92|
|Implementation – Assemble Caribbean Central Bank as Cooperative||Page 96|
|Implementation – Assemble Constitutional Convention||Page 97|
|Implementation – Ways to Better Manage Debt – Optimizing Wall Street Role||Page 114|
|Implementation – Ways to Impact Elections||Page 116|
|Planning – 10 Big Ideas – Single Market / Currency Union||Page 127|
|Planning – Lessons Learned from 2008||Page 136|
|Planning – Ways to Measure Progress||Page 147|
|Advocacy – Ways to Grow the Economy – Case Study of $5.3 Billion Influence||Page 151|
|Advocacy – Ways to Improve Credit Ratings – 2008 Lessons||Page 155|
|Advocacy – Ways to Improve Housing – 2008 Mortgage Crisis Lessons||Page 161|
|Advocacy – Ways to Impact Labor Unions – 2008 Effects on Main Street Jobs||Page 164|
|Anecdote – Caribbean Industrialist – Growing without Shadow Influence||Page 189|
|Advocacy – Reforms for Banking Regulations||Page 199|
|Advocacy – Ways to Impact Wall Street||Page 200|
|Appendix – Whitepaper: The 2008 Financial Crisis and Its Aftermath||Page 276|
|Appendix – Currency Capital Controls||Page 325|
The points of effective, technocratic regional stewardship, especially in response to the 2008 Great Recession / Financial Crisis, were further elaborated upon in these previous blog/commentaries:
|http://www.goleancaribbean.com/blog/?p=3311||Detroit to exit historic bankruptcy – Finally recovering from 2008|
|http://www.goleancaribbean.com/blog/?p=3164||Michigan Unemployment – Then (2008/2009) and Now|
|http://www.goleancaribbean.com/blog/?p=3090||Lessons Learned – Europe Sovereign Debt Crisis of 2009|
|http://www.goleancaribbean.com/blog/?p=3028||Why India is doing better than most emerging markets since the crisis|
|http://www.goleancaribbean.com/blog/?p=2930||‘Too Big To Fail’ – Caribbean Version|
|http://www.goleancaribbean.com/blog/?p=2448||‘Consumer Reports’ Survey Finds the American Consumer is Back|
|http://www.goleancaribbean.com/blog/?p=2435||Korea’s Protégé Model – A Dream for Latin America / Caribbean|
|http://www.goleancaribbean.com/blog/?p=2338||Lesson Learned – How Best to Welcome the Dreaded ‘Plutocracy’|
|http://www.goleancaribbean.com/blog/?p=2259||The Criminalization of American Business – Big Banks Let Loose|
|http://www.goleancaribbean.com/blog/?p=2105||Recessions and Public Health – Lessons from the 2008 Crisis|
|http://www.goleancaribbean.com/blog/?p=2090||The Depth & Breadth of Remediating 2008|
|http://www.goleancaribbean.com/blog/?p=1896||The Crisis in Black Homeownership since 2008|
|http://www.goleancaribbean.com/blog/?p=1309||5 Steps of a Bubble|
|http://www.goleancaribbean.com/blog/?p=841||Post 2008 – Having Less Babies is Bad for the Economy?|
|http://www.goleancaribbean.com/blog/?p=782||Open/Review the Time Capsule: The Great Recession of 2008|
|http://www.goleancaribbean.com/blog/?p=709||Post 2008 – Student debt holds back home buyers|
|http://www.goleancaribbean.com/blog/?p=522||Financial Crisis Jokes – Reflecting the cultural impact on society|
|http://www.goleancaribbean.com/blog/?p=518||Post 2008 – What Banks learn about financial risks|
|http://www.goleancaribbean.com/blog/?p=378||Fed Releases Transcripts from 2008 Meetings|
|http://www.goleancaribbean.com/blog/?p=242||Post 2008 – The Erosion of the Middle Class|
The 2008 Great Recession brought major upheaval to American and Caribbean societies, plus the rest of the world. Much of the world is interconnected; this is even more acute in our region. Our economy is structured as parasites on the US economy. According to the foregoing news article, our parasitic host is not worthy of our devotion. What qualifies the Go Lean promoters to make these assessments? Principals of this publishing foundation were also there in 2008, engaged with major stakeholders of the Global Financial crisis: Lehman Brothers, JPMorganChase, Citigroup, etc. They were on the inside looking out, not the outside looking in. They were equipped to discern the Shadow Influence.
The Go Lean movement advocates the role of protégé, not parasite. We must diversify our economy and additionally cater to other markets, other countries and other industries. This is the purpose of the Go Lean roadmap, to provide a turn-by-turn direction to accomplish this diversification.
If we want to make our homeland a better place to live, work and play then we cannot depend on the stewards of the US economy to shepherd the Caribbean. Look! Despite the cruel and harsh lessons from 2008, it appears – from the foregoing article and the Appendix below – that the Wall Street Shadow Influence wants to repeat the “Bubble” that lead up to 2008. When they succeed, they profit; but when they fail, the “low man” on Main Street – and parasite economies like the Caribbean – has to endure the pain, not Wall Street.
The Go Lean roadmap does not seek to change America, (though we lobby against these arbitrary “Derivative” rule changes in the Omnibus Budget Bill); only teach the lessons to the Caribbean. We can do so much better.
Appendix – Derivatives:
(Source: http://en.wikipedia.org/wiki/Derivative_(finance) )
In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often called the “underlying”. Derivatives can be used for a number of purposes – including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard to trade assets or markets.
Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as collateralized debt obligations, credit default swaps, and mortgage backed securities. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the Chicago Mercantile Exchange, while most insurance contracts have developed into a separate industry. Derivatives are one of the three main categories of financial instruments, the other two being equities (i.e. stocks or shares) and debt (i.e. bonds and mortgages).
Derivatives can be used to acquire risk, rather than to hedge against risk. Thus, some individuals and institutions will enter into a derivative contract to speculate on the value of the underlying asset, betting that the party seeking insurance will be wrong about the future value of the underlying asset. Speculators look to buy an asset in the future at a low price according to a derivative contract when the future market price is high, or to sell an asset in the future at a high price according to a derivative contract when the future market price is less.
The use of derivatives can result in large losses because of the use of leverage, or borrowing; (see VIDEO below). Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as the following:
- American International Group (AIG) lost more than US$18 billion through a subsidiary over the preceding three quarters on credit default swaps (CDSs). The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85 billion, to prevent the company’s collapse by enabling AIG to meet its obligations to deliver additional collateral to its credit default swap trading partners.
- The loss of US$7.2 Billion by Société Générale in January 2008 through mis-use of futures contracts.
- The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted.
- The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998.
- The loss of US$1.3 billion equivalent in oil derivatives in 1993 and 1994 by Metallgesellschaft AG.
- The loss of US$1.2 billion equivalent in equity derivatives in 1995 by Barings Bank.
- UBS AG, Switzerland’s biggest bank, suffered a $2 billion loss through unauthorized trading discovered in September 2011.
This comes to a staggering $39.5 billion; the majority in the last decade after the Commodity Futures Modernization Act of 2000 was passed.
Financial Reform and Government Regulation
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form to extend credit. The strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency however, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks. Indeed, the use of derivatives to conceal credit risk from third parties while protecting derivative counterparties contributed to the financial crisis of 2008 in the United States.
In November 2012, the SEC and regulators from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, and Switzerland met to discuss reforming the OTC derivatives market, as had been agreed by leaders at the 2009 G-20 Pittsburgh summit (see Photo) in September 2009. In December 2012, they released a joint statement to the effect that they recognized that the market is a global one and “firmly support the adoption and enforcement of robust and consistent standards in and across jurisdictions”, with the goals of mitigating risk, improving transparency, protecting against market abuse, preventing regulatory gaps, reducing the potential for arbitrage opportunities, and fostering a level playing field for market participants. They also agreed on the need to reduce regulatory uncertainty and provide market participants with sufficient clarity on laws and regulations by avoiding, to the extent possible, the application of conflicting rules to the same entities and transactions, and minimizing the application of inconsistent and duplicative rules. At the same time, they noted that “complete harmonization – perfect alignment of rules across jurisdictions” would be difficult, because of jurisdictions’ differences in law, policy, markets, implementation timing, and legislative and regulatory processes.
VIDEO: Leverage Explained – https://youtu.be/GESzfA9odgE
When things turn out good, big risk means big return; but if it turns out bad, you lose everything and left with a debt.
1. Derivatives (Report). Office of the Comptroller of the Currency, U.S. Department of Treasury. http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/index-derivatives.html. Retrieved February 2013. “A derivative is a financial contract whose value is derived from the performance of some underlying market factors, such as interest rates, currency exchange rates, and commodity, credit, or equity prices. Derivative transactions include an assortment of financial contracts, including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards, and various combinations thereof.”
2. Derivative Definition Investopedia
3. Koehler, Christian. “The Relationship between the Complexity of Financial Derivatives and Systemic Risk”. Working Paper: 10–11.
42. Kelleher, James B. (September 18, 2008). “”Buffett’s Time Bomb Goes Off on Wall Street” by James B. Kelleher of Reuters”. Reuters.com. Retrieved August 29, 2010.
43. “Fed’s $85 billion Loan Rescues Insurer”
44. Edwards, Franklin (1995). “Derivatives Can Be Hazardous To Your Health: The Case of Metallgesellschaft”. Derivatives Quarterly (Spring 1995): 8–17
45. Whaley, Robert (2006). Derivatives: markets, valuation, and risk management. John Wiley and Sons. p. 506. ISBN 0-471-78632-2.
46. “UBS Loss Shows Banks Fail to Learn From Kerviel, Leeson”. Businessweek. September 15, 2011. Retrieved March 5, 2013.
47. “Michael Simkovic, Secret Liens and the Financial Crisis of 2008.”. American Bankruptcy Law Journal, Vol. 83, p. 253. 2009. Retrieved March 5, 2013.
48. Michael Simkovic (January 11, 2011). “Bankruptcy Immunities, Transparency, and Capital Structure, Presentation at the World Bank”. Ssrn.com. doi:10.2139/ssrn.1738539. Retrieved March 5, 2013.
54. “Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-Border OTC Derivatives Market; 2012-251”. Sec.gov. December 4, 2012. Retrieved March 5, 2013.