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What is $55 trillion between friends? Very little according to the CFTC. In perhaps the biggest under the radar news of the day – to be expected with every watercooler occupied by taper experts – theWSJ reports that the Commodity Futures Trading Commission said Wednesday that technical errors at two so-called swaps data repositories, which collect and supply regulators with transaction data, have led the CFTC to misreport the overall size of the swaps market by undercounting its size. Isn’t it curious how all these “glitches” always work out in the favor of preserving market calm and confidence and away from spooking investors and speculators? Either way, a better question is how big was the so called undercounting? The answer: as large as $55 trillion!
Regulators aren’t sure how much the repositories are undercounting. One CFTC official familiar with the matter said the discrepancy could be as high as $55 trillion, though another official said the figure is closer to $10 trillion once regulators cancel out certain transactions to prevent double counting.
One just has to laugh: the total US swaps market is what – roughly $400 trillion? So… just add enough notional to that number equal to the GDP of the entire world – or 4 times the size of US GDP – and call it a day. And in this environment somehow the Fed and other central planners are expected to have any clue what they are doing on a day to day basis?
Naturally this discovery makes a mockery of such transaprency enchancing initatives as Dodd-Frank.
The lack of clarity over the size of the market may undermine a key plank of the 2010 Dodd-Frank law aimed at bringing transparency to the opaque derivatives market. Swaps, which were at the heart of the 2008 financial crisis, are complex financial contracts that allow financial firms and their clients to hedge against risks or bet on an asset’s value.
The CFTC has issued a number of rules to bring transparency to swaps trading so regulators can detect risks that could pose a threat to a firm or the financial system.
It would appear that those rules, uh, failed. It gets better:
The CFTC said in a footnote to its weekly swaps report that the largest data repository, the Depository Trust & Clearing Corp., “has informed us that due to a…technical coding issue, the notional values in the interest rate asset class have been understated.” The agency also reported “a processing error” by a separate repository operated by CME Group Inc. A CME spokeswoman didn’t respond to a request for comment. A CFTC official characterized the data problems as “growing pains.” The agency formally began to report swaps data on a weekly basis just last month.
A technical coding issue with 12 zeroes?
Sure enough, the CFTC was quick to scapegoat someone for this epic clusterfuck – naturally, this someone was evil Congress for not spending even more money on the CFTC’s toothlessness, something popularized recently by the recently departedBart Chilton, who more or less told gold traders that manipulation in the gold market will continue because the government just doesn’t have the funds to stop it.
The official said the error also reflects the agency’s chronic lack of resources. Just two employees at the agency are charged with putting together the weekly swaps report and it takes them 12 days to prepare the data for publication compared with three for another report the agency publishes. The agency is reviewing the matter and hopes to have firmer figures by next week’s report, due Thursday.
In a statement, DTCC said: “We notified the CFTC immediately after we uncovered this matter and are working overtime to resolve these issues as soon as possible to ensure that the agency has timely access to the most accurate, highest quality market data.”
Oh that’s ok then, after all what’s a little eletronic $55,000,000,000,000 shuttling back and forth between insolvent counterpa…. oh hey look, over there everyone, the Fed just tapered!
The so-called Volker Rule for policing (ha!) banking practices, approved by a huddle of federal regulating agency chiefs last week, is the latest joke that America has played on itself in what is becoming the greatest national self-punking exercise in world history.
First of all (and there’s a lot of all), this rule comes in the form of nearly 1,000 pages of incomprehensible legalese embedded in what was already a morbidly obese Dodd-Frank Wall Street Reform (ha!) and Consumer Protection (ha!) Act of 2012 that clocked in at 2000 pages, not counting the immense rafts of mandated interpretations and adumbrations, of which the new Volker Rule is but one. These additions were required because the Dodd-Frank Act itself did not really spell out the particulars of enforcement but rather left it to the regulatory agencies to construct the rules — which they did with “help” of lobbyist-lawyers furnished by the banks themselves. That is, the lobbyists actually wrote the rules for Dodd-Frank and everything in it, which means the banks wrote the rules. Does this strain your credulity? Well, this is the kind of nation we have become: anything goes and nothing matters. There really is no rule of law, just pretense.
The Volker Rule was a lame gesture toward restoring the heart of the Glass-Steagall provisions of the Banking Act of 1933, which were repealed in 1999 in a cynical effort led by Wall Street uber-grifter Robert Rubin and his sidekick Larry Summers, who served serially as US Treasury Secretaries under Bill Clinton. Glass Steagall was passed in Congress following revelations of gross misconduct among bankers leading up to the stock market crash of 1929. The main thrust of Glass Steagall was to mandate the separation of commercial banking (deposit accounts + lending) from investment banking (underwriting and trading in securities). The idea was to prevent banks from using money in customer deposit accounts to gamble in stocks and other speculative instruments. This rule was designed to work hand-in-hand with the Federal Deposit Insurance Corporation (FDIC), also created in 1933, to backstop the accounts of ordinary citizens in commercial banks. The initial backstop limits were very modest: $2,500 at inception, and didn’t rise above $40,000 until 1980. Investment banks, on the other hand, were not backstopped at all under Glass-Steagall, since their activities were construed as a form of high-toned gambling.
The Glass Steagall Act of 1933 was about 35 pages long, written in language that was precise, clear, and succinct. It worked for 66 years. Banking during those years was a pretty boring business, commercial banking especially. It operated on the 3-6-3 principle — pay 3 percent interest on deposits, lend at 6 percent, and be out on the golf course at 3 p.m. Bankers made a nice living but nothing like the obscene racketeering profits engineered by the looting operations of today. Before 1980, the finance sector of the economy was about 5 percent of all activity. Its purpose was to allocate precious capital to new productive ventures.
As American manufacturing was surrendered to other countries, there were fewer productive ventures for capital to be directed into. What remained was real estate development (a.k.a. suburban sprawl) and finance, which was the enabler of it. Finance ballooned to 40 percent of the US economy and the American landscape got trashed. The computer revolution of the 1990s stimulated tremendous “innovation” in financial activities. Much of that innovation turned out to be new species of swindles and frauds. Now you understand the history of the so-called “housing bubble” and the crash of 2008. The US never recovered from it, and all the rescue attempts in the form of bail-outs, quantitative easing, zero interest rates, have turned into rackets aimed at papering-over this national failure to thrive. It is all ultimately linked to the larger story of industrialism and its relationship with the unique, finite, fossil fuel resources that the human race got cheaply for a few hundred years. That story is now winding down and we refuse to pay attention to the reality of it.
The absurdity of Dodd-Frank and the Volker Rule in the face of that is just another symptom of that tragic inattention. The baroque prolixity of these statutes must have been fun for the lawyers to construct — thousands of pages of incantatory nonsense aimed at confounding any attempt to enforce decent conduct among bankers and their supposed regulators — but it does nothing to really help us move into the next phase of history.
The bankers have written the most integral rule that would reform their business practices and President Obama is showing his support.
Obama has released a written statement supporting the new Volcker Rule that will make “sure big banks can’t make risky bets with their customer’s deposits.”
Obama said: “Our financial system will be safer and the American people are more secure because we fought to include this protection in the law.”
Speaking about the crash of 2008, Obama admonished the banks for “fueling a punishing recession on Main Street that ultimately cost millions of jobs and hurt families across the country.”
As part of the economic repair of our country, the president said that financial “rules that reward sound financial practices allow honest innovation and strengthen the financial system’s ability to support job creation and durable economic growth.”
Obama said that the Volcker Rule will make “it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm’s practices.”
This new rule will ensure that ‘our financial system will be safer.”
Experts say that the new Volcker Rule glosses over the fact that it was “trading mishaps” that were the “root cause of the financial crisis.”
Because of this, “the rule doesn’t go far enough . . . prohibition [will] draw a line, making it clear that banks’ business is about lending not investing.”
The Volcker Rule, within the Dodd-Frank law, is now being used by the president as a public relations ploy to give Americans a semblance ofgovernment oversight and the reining in of “risk taking after the financial crisis.”
The new Volcker Rule was created by the banks and is “the rule that the banks wanted.”
The 2011 draft of the Volcker Rule was leaked by the American Banker Association (ABA).
Rob Tooney, associate general counsel at the Financial Securities Industry and Financial Markets Association (FSIFMA) said : “Our concern is that whatever the final rule is that it doesn’t harm the markets’ overall liquidity. The short answer is we don’t know yet.”
The new rule was reported “far more restrictive than previously expected” and now that the banks have taken over the writing of the document, they feel more comfortable in supporting its passage.
Ben Bernanke, chairman of the Federal Reserve Bank (FRB) said at a central bank meeting this week: “Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments.”
In 2010, Alan Blinder, economist of Princeton stated of the burgeoning Dodd-Frank law in an op-ed piece : “It is devilishly difficult to draw bright lines between proprietary trading and trading, hedging, and market-making on behalf of clients.”
Paul Volcker said he was “disappointed with how the rule was turning out” and that he “didn’t expect the proposal to be diluted so much, said a person with knowledge of his views. He’s content with language that bans banks from trading with their own capital, the person said.”
The Dodd-Frank Law was signed that same year.
Volcker contended that the rule should have “clear concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators as they implement and enforce this law.”
In 2011, Senator Carl Levin co-sponsored the Volcker Rule and spoke toCongress about the importance of the regulation: “The Volcker Rule is essential to protect taxpayers from banks’ excessive financial risk-taking, conflicts of interest, and from the resulting billion-dollar bailouts. I look forward to reviewing the proposed rule and hope the regulators reject efforts to weaken the law.”
In early 2012, Jamie Dimon, chief executive of JP Morgan Chase & Co, brazenly told media : “If you want to be trading, you have to have a lawyer and a psychiatrist sitting next to you determining what was your intent every time you did something.”
In another interview, Dimon said of Volcker: “Paul Volcker, by his own admission, has said he doesn’t understand capital markets. Honestly, he has proven that to me.”
Lawrence Fink, chief executive of BlackRock commented : “We are not in support of it. We sent the letter as a firm. It’s very hard for me to understand how to navigate the Volcker Rule. What is proprietary trading? What is flow trading? It’s going to be very definitional.”
Volcker responded to critics, saying: “A lot of the criticism is over the complexity of the thing and, essentially it’s down to a lot of details. But the basic rule, of course, is incorporated in the law. And I think when you get all finished with this Sturm und Drang in the Congress now, I think you’re going to have a reasonable interpretation of a law and an interpretation that can be reasonably followed by the banks and enforced by the regulators.”
This past summer, Jacob Lew, secretary of the US Treasury, warned of a year’s end deadline on the Volcker Rule.
Lew said: “I want to mention that the Volcker Rule is particularly important, and I will continue to push for swift completion of a rule that keeps faith with the intent of the statute and the president’s vision.”
What we can expect to happen generally happens, as the causal chain cannot be disrupted by wishful thinking.
If I go to Las Vegas and gamble with abandon, what do I expect to happen? If I wander alone through a tough part of town waving my iPhone around, what do I expect to happen? If I insist on hiking up a muddy rain forest trail in street clothes in the pouring rain, what do I expect to happen?
We all know what is likely to happen: In Las Vegas, we will lose our stake; in the tough part of town, our iPhone will be stolen, and on the tropical trail, we will get soaking wet.
These consequences are easily predictable. What we can expect to happen generally happens, as the causal chain cannot be disrupted by wishful thinking.
Yet when we re-elect the same politicos who have failed miserably for years, we somehow expect they will magically succeed in providing leadership the next time around. When we eat visibly unhealthy packaged junk food that is engineered to trigger our reward centers with massive doses of fat, salt and sugar, we somehow expect there will be no consequences of eating this “food.”
We sit in front of digital devices all day and eliminate physical fitness from our schools, yet we expect there will be no consequences from this inactivity.
We create trillions of dollars from thin air and borrow trillions of additional dollars into existence, yet we expect there will be no consequences from this unprecedented monetary and credit expansion.
We borrow a third of all government expenditures, yet we expect there will be no consequences from this monumental dependence on public debt to maintain the Status Quo.
We buy the cheapest quality goods, yet complain about the poor quality.
We pursue a plan of borrowing our way to prosperity, yet we are flummoxed that prosperity is elusive.
We push everyone with any assets into risky asset bubbles with zero-interest rates, yet we are surprised when asset bubbles pop.
What do you expect to happen? The causal chain cannot be disrupted by wishful thinking. Bubbles will pop, and increasingly leveraged, fragile systems will crash. Hoping causal consequences will magically vanish is a strategy doomed to catastrophe.
- Fact Or Fiction: Obama Administration Proposes 2,300-Page “New Constitution” (zerohedge.com)
- oftwominds-Charles Hugh Smith: Have We Reached Peak Government? (olduvaiblog.wordpress.com)
- Darned if you do, darned if you dont The Feds Double-Bind (forum.prisonplanet.com)