As An Encore to Bailing Out the Big Banks, Government to Backstop Derivatives Clearinghouses … In the U.S. and Abroad

… Which Will Lead to Bailouts and Encourage Even More Fraud

The government has been bailing out the giant, insolvent banks for years. (Many of the bailed out banks are foreign.)

That is preventing the economy from recovering … like countries that have grabbed the bull by the horns.

The government has allowed the amount of derivatives to reach 1.2 quadrillion dollars.

That is feeding the parasite of casino gambling … which is preventing the real economy from recovering and is killing the host of actual productivity.

What is the government doing for an encore?  Bailing out the derivatives clearinghouses.

As the Wall Street Journal reported yesterday:

Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading — not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net.

***

The authority for this regulatory achievement was inserted into Congress’s pending financial reform bill by then-Senator Chris Dodd.

***

Specifically, the law authorizes the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies.

***

To get help, they only needed to be deemed “systemically important” by the new Financial Stability Oversight Council chaired by the Treasury Secretary.

Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club. After further review, regulators will make final designations, probably later this year, and will announce publicly the names of institutions deemed systemically important.

We’re told that the clearinghouses of Chicago’s CME Group and Atlanta-based Intercontinental Exchange were voted systemic this week, and rumor has it that the council may even designate London-based LCH.Clearnet as critical to the U.S. financial system.

U.S. taxpayers thinking that they couldn’t possibly be forced to stand behind overseas derivatives trading will not be comforted by remarks from Commodity Futures Trading Commission Chairman Gary Gensler. On Monday he emphasized his determination to extend Dodd-Frank derivatives regulation to overseas markets when subsidiaries of U.S. firms are involved.

***

If there’s one truth we’ve learned about government financial backstops, it’s that sooner or later they will be used. So eventually taxpayers will have to bail out one derivatives clearinghouse or another. It promises to be quite a mess.

Indeed, Nobel prize-winning economist George Akerlof demonstrated that if big companies aren’t held responsible for their actions, the government ends up bailing them out. So failure to prosecute directly leads to a bailout.  Bailing them out- in turn – creates incentives for more economic crimes and further destruction of the economy in the future.

As financial incentive expert William Black notes, we’ve known of this dynamic for “hundreds of years”.

Note: It’s not just banks.   The government has bailed out hedge funds and companies like McDonald’s and Harley-Davidson.  

Indeed, drug dealers kept the banking system afloat during the depths of the 2008 financial crisis.  So are the biggest drug cartels “systemically important” and “too big to fail”?  Will the U.S. government backstop the Colombian drug lords?

Sure, their actions don’t help society, and instead harm a lot of people.  But so do those of the giant banks speculating in derivatives.

And there may be more overlap than admitted in polite company.

Category: Bailouts, Derivatives, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

2 Responses to “Bailouts Led to Backstopping Derivatives Clearinghouses”

  1. Tioga says:

    This is a great article. It points out again that the politicians in DC don’t pay any attention to thoughtful competent advice or have no more brains than a gnat, but, in either case, will stop at nothing to mortgage America’s future to keep themselves in office.

  2. Futuredome says:

    Sure it helped, it kept the economy from contracting severely. No Harley Davidson, McDonalds=less job, less jobs wil multiple to even more less jobs and even more less jobs to the point you have nothing.

    Saying it is “preventing” a recovery is a joke. The recovery is going just fine considering the contraction and countries that took the bull by the horns are not doing any better.

    Until deleveraging ends, debt worked out and some innovation in energy, we will not be having a boom. The current financial system can be hand checked at any time. I suspect all 4 will happen at the same time. About 2017-20.