Sunday, October 11, 2009


Imagine that you wanted to get insurance for your house. Then imagine paying for that insurance, but then learning that the company you had been paying couldn't pay out on a claim that you filed because they didn't have enough funds, or went bankrupt. Would you be upset?

This is essentially what happened in our financial markets when Wall Street's giants couldn't pay out financial (i.e. "derivative") claims in 2008. Companies that had been paying premiums to insure their financial products got the shaft (at least until the U.S. taxpayer stepped in). It's also what the "derivative lobby" is asking for (again) in the new financial reform legislation proposed by President Obama.

More specifically, President Obama's proposed reforms essentially says, "If you're going to get the premiums, you had better be prepared to pay out." At the other end of the scale, the financial sector wants to operate with virtually no oversight (Fair Warning: Clicking and reading the above links may be mind-numbing for all but those who are truly market anal; the derivative market is a logical mess).

At the end of the day the derivative lobby wants Wall Street's financial giants to be able to sell financial insurance contracts for everything from currency contracts to financial bets without adhering to traditional insurance industry oversight or standards. What kinds of standards, you ask? How about making sure that the companies who put together financial insurance contracts actually have the money, or collateral, to pay out on insurance claims? The derivative lobby says this is too much to ask for.

How would all of this would work in real life? You need look no further than at the firms involved in the private insurance Credit Default Swap (CDS) "insurance" market before the 2008 market collapse. They didn't have to prove they actually had the funds to pay out on financial claims. They only had to look like they were responsible. For Congress this meant showing up in a $2,500 suit and saying "I'm from Wall Street [do you need a campaign contribution]."

The derivative lobby wants this to continue. You know, because it worked out so well the last time.

As an aside, and in case you're wondering ... JPMorgan Chase, Goldman Sachs, Bank of America and Citigroup - the biggest recipients of U.S. taxpayer bailout money - control over 90 percent of the $592 trillion derivative market. Yes, that $592 trillion. And it's part of a growing $1.14 quadrillion global derivatives market (that's 15 zeroes).

This isn't about reform. Can you say Bonus Bonanza?

- Mark

1 comment:

Anonymous said...

Fight On Republicans!