Monday, 11 July 2011

Banking is still the real scandal - and Italy is next

It must be time for my monthly reminder that the world's banks created some $500 trillion of worthless derivatives out of pure greed and avarice, a sum that dwarfs the entire globe's GDP. And also to add the caveat that in truth they're not entirely worthless; when the trades are collapsed back, like Russian dolls, the best estimate is that UK banks are holding a net total of 'just' $10 trillion in worthless derivatives. Hence the squaking over Greece's potential default; ah yes, the bankers said, our direct exposure may only be $3 billion, but $600 billion of our worthless derivatives are linked to Greece. 

This month I'm not alone in remembrancing this scandal; John Redwood blogged about it on Friday, making the telling point that the book value of derivatives had changed not one iota since 2008. And now we must delve into the arcane world of shorting, Credit Default Swaps, naked Credit Default Swaps, Exchange Traded Funds and Synthetic Exchange Traded Funds. Suffice to say, they're all ways for bankers to get rich quick, are all founded on sand and all demonstrate that those gilded Onanists have learned exactly nothing since 2008. You can't do better than listen to R4's 'File On Four' to get a full flavour of the threat these tossers are continuing to create. 

And now to Italy. You may be wondering if only $0.6tn of our banks' worthless derivatives are linked to Greece where the other $9.4tn is linked to. Well, the answer for another big chunk of it is Italy. You also need to know the way CDSwaps work; it's in the interests of investors for the loan to fail, like it's in the interests of life insurance beneficiaries for the insured to die. Insuring other people's lives has been illegal since 1774 in the UK, but insuring the failure of others' loans apparently isn't. So these Ruperts are now turning on Italy, undermining in whatever way they can the country's financial stability so they can make a quick buck. You think I'm in tinfoil hat territory here? Assuredly not. This is one comment from John Redwood's blog entry;
I looked after Credit Default Swaps at HSBC during the crash. I cant say anything about their positions – but can say they didn’t harm them. They didn’t take on mortgage backed bonds and only got hit for a few years buying the US mortgage brokers Household – whose staff acted like double glazing salesmen. HSBC were a well run bank in the centervwith a good banking ethic. The other banks seemed to be put profit above risk. I still think naked short a CDSwaps are illegal under the 1774 Life Assurance Act – the Act is clear and short and still in effect.
You’re absolutely right that some derivatives are the problem. I still believe Italian banks will bring the Euro down. In the CDSwaps market a huge number of CDSwaps have been taken out insuring against Italian banks – more than any other banking sector. I’m not sure if that is published. Derivatives have hidden our debts and risks from all of us, including politicians. But risks are like water you cannot hide them.
You can financially engineer situations so that risks become highly geared – so huge losses come quickly and without fanfare. Of course the warning signs are all there but derivatives hush them up and politicians only oil the squeaky wheels. I think that is what is key about derivatives – they change the profile of the products. They allow debts to go off balance sheet, to be deferred, to swap short term small potential losses for large ones in the long term via risk transfer.
So Italy's in their sights this morning. And as the Telegraph reports, the EU stumbles into its next financial crisis. And though our enemies in the Berlaymont who are fighting like rats for the Euro would dearly like to see London's financial pirates strung up on the lamp columns of the Rue de la Loi I find on this occasion I really can't disagree with them. Investment bankers and EUphiles are down there in the dirt next to eachother.  


DeeDee99 said...

Raedwald. I don't have a financial/banking background. I know something is very badly wrong with both banking and the Euro but it is to a large degree instinctive, rather than based on knowledge.

The Financial pages of the DT can be hard to follow for someone like me, who is interested but not part of that world. Thank you very much for your easily understood blog. Please keep posting.

Bernie in Pipewell said...

I also know nothing of banking but have been reading the financial blogs at the weekend, they all seem to agree with you.

Italy is a huge can of worms financialy.

schober said...

you might like to listen to don coxe's analysis fo the eu/pigs situation - i suspect he has a better grasp of things than redwood ever will - (not to mention a better turn of phrase)

The 7 july webcast

He explains wyy it is that the "good "banks are now in trouble along with many other eu related things

Curioulsy though, the ted spread is not flashing a warning

look at the 5y graph

Rupert (not-a-banker) said...

Raedwald - I've been interrupted from reading your informative and enlightening (really) blog by seeing the name "Rupert" used as a shorthand for bankers.
Coming from a long line of Ruperts (none of them bankers), I do find this irritating, and likely to put off readers who share this distinguished name.
Thank you!

James Higham said...

OTCs and SDRs are the two to keep a close eye on. No movement on the former and movement on the latter might mean it's time to up sticks and go.

Raedwald said...

Anon - point taken. And I won't even use the distinguished name to refer to subalterns holding commissions in 'smart' regiments, either.