In 2000, the Commodity Futures Modernization Act (CFMA) passed, legitimizing swap agreements and other hybrid instruments, a massive move towards deregulation and ending regulatory oversight of derivatives and leveraging that turned Wall Street more than ever into a casino. At the same time the first Internet-based commodities transaction system was created to let companies trade energy and other commodity futures unregulated, effectively licensing pillage and fraud. (Enron took full advantage of this until it all imploded.) Further, it launched a menu of options, binary options, forwards, swaps, warrants, leaps, baskets, swaptions, and unregulated credit derivatives like the now infamous credit default swaps, facilitating out-of-control speculation.
This deregulatory madness caused unprecedented fraud, insider trading, misrepresentation, Ponzi schemes, false accounting, obscenely high salaries and bonuses, bilking investors, customers and homeowners, as well as embezzling and other forms of theft, including loans designed to fail, clear conflicts of interest, lax enforcement of remaining regulatory measures, market manipulation and fraudulent financial products and massive public deception.
This slicing and dicing of risk-reducing derivative securities is still going on, creating a time bomb waiting to explode with catastrophic consequences. According to the latest BIS statistics on OTC derivatives markets there was a whopping $693 trillion outstanding at the end of June 2013. That is more than 10 times the GDP of the entire world and equivalent to $100,000 for each of the 7 billion inhabitants of our planet.
The complexity and high potential risk associated with derivatives requires innovative risk assessment procedures and strong technical knowledge. There are tools to measure and monitor complexity of these financial products. One can be found here.
With this innovative tool you can classify, rank and rate the complexity and resilience of derivatives, and establish maximum allowable levels of complexity and minimum allowable resilience. Products with low resilience contribute to making the system (economy) more fragile. Once the most complex (dangerous) derivatives have been identified, they should be withdrawn progressively from circulation.
Submitted by Hans van Hoek
0 comments on “Casino Capitalism: Legitimizing the Derivatives Soup.”