Leveraged trading.. which in many ways is simply gambling.. has been around for quite some time here in the US. . Every day in America, people bet on sports teams without actually owning part of them. "Bucket Shops" as they were called, were essentially gaming establishments.. only instead of the Yankees or the Red Sox, they were betting on a stock.. GE, US Steel, etc.. without actually owning the stock. They were essentially side bets. During the early part of the 1900's, Edwin Lefevre ran one such shop on behalf of the legendary Jesse Livermore. Worse, in these bucket shops, people were buying on margin. For example, if you wanted to bet $1,000 that GE was going up to $65 a share, you would only have to lay down $100. Of course if you were wrong, you owed the bucket shop bookie the other $900. All of this without actually owning any stock.. it was, at it's heart, gambling. These bucket shops became so pervasive that they actually began, through inside information, to affect the actual stock prices.. and this was what in large part led to the "Panic of 1907", where the NYSE lost more than 50% of it's value from the high in 1906. The "Bucket Shop Laws" were enacted by Congress shortly after the Panic.
Fast forward three quarters of a century and we're in the partying 1980's.. the last days of Bill Clinton's presidency to be exact. Alan Greenspan, the Fed Chairman, has become very, very powerful as prosperity grips the nation, with many giving Easy Al the credit. Among those who believed Easy Al was Clinton himself. As his Presidency was coming to a close, Greenspan championed a bill in Congress, HR 5660, called the Commodity Futures Modernization Act, written by a Republican Congressman from Texas on behalf of Goldman Sachs.. He touted it as a necessary further step in the deregulation of Wall Street. It was on the last day of the last lame duck Congress that this bill came up for a vote. In their haste to pass it, the Democrats simply wrapped this bill into an Appropriations Bill, who's passage is a given. The appropriations bill was passed on a "unanimous consent".. ie.. everyone was so anxious to get home for the holidays they did'nt even bother with a formal vote. Clinton signed it into law on New Years Eve. The Commodity Futures Modernization Act allowed for Credit Default Swaps (the new term for bucket shop side bets) to become legal again. Worse, the CFMA expressly forbade any governmental agency, local or federal, to either regulate or halt it. Unknown to Greenspan, Clinton or the bill's authors, they has just unleashed the worst financial crisis in mankind's history, one which has yet to be fully played out.
Instead of betting on the Yankees or even Ford Motor Co, unemployed mathemeticians took this craft to new and unimagineable levels. They were initially sold as insurance policies. Here's an example: JeffBank has $10 million in the vault.. and of this $10 million, a million of it is yours, and it's in the form of a 5 year Certificate of Deposit (CD), therefore you cannot simply go into JeffBank tomorrow morning and get your money out.. you have to wait the five years. Now lets say you were getting nervous about JeffBank.. and thus your million dollars. Therefore you want some form of insurance on it, and so you then turn to "JaneBank" (which also has $10 million in the vault), who agrees to write you an insurance policy on this million dollars.. so long as you pay JaneBank a monthly premium. So far, this is legitimate business. But free from regulation, JaneBank then turns to you and says "If you really think JeffBank is going down, we'll write you a $20 million insurance policy, so long as you make the monthly premiums".. even though they only have $10 million in the bank. These are called "naked" Credit Default Swaps.. and are essentially a side bet. Despite not being able to cover their bets, profits at JaneBank are exploding thanks to the monthly premiums they're collecting.. as are CEO bonuses. Today CDS's are written on everything under the sun.. Greek Government Bonds, City of Detroit Bonds, stocks.. everything. The biggest banks in the US.. CitiBank, JP Morgan, Chase, Bank of America.. are so unimagineably head over heels with CDS's it literally blows the limits of imagination. It makes the problems of JaneBank look like kindergarten. Here's an example of just how bad things are: Bank of America, which has deposits of about $825 billion in deposits, has underwritten CDS's for $48 trillion. Yes Trillion. The entire US economy is only $15 trillion. JP Morgan is the worst.. they guarantee $75 trillion. The entire world economy is $50 trillion. As a whole, US financial institutions have underwritten about $225 Trillion in CDS, guaranteeing everything under the sun.. including each other. So if one big financial institution goes down, they are likely to take a number of others with them. This is exactly what happened on September 18th 2008, when Lehman Bros was allowed to go under.. and instantly made AIG insolvent. The US Government immediately stepped in to save AIG. The street rumor was that if AIG had gone down, it would've taken down Switzerland's largest bank (UBS) and Germany's largest bank (DeutcheBank). It would've been financial armageddon. The biggest CDS these days are written on interest rates. If the US Ten Year Bond goes from it's current 3.65% to 7%, the CDS's this will trigger could crash several very large banks.. which would then crash yet more banks. The Domino Effect on steroids.
So now that we know the problem, has the Obama Administration done anything meaningful to halt this insane cancer ? The Frank-Dodd Reform Act calls for CDS's to be regulated.. but not eliminated. It's yet to happen.. the lawyers are still working on the specifics. Why were'nt they simply eliminated ? This is a question best directed towards your Congressman.. and very likely they will have absolutely no idea what a CDS actually is. By reading this article, you now know more than 3/4's of the US House of Representatives. The banksters who are making bazillions on the profits from these highly dangerous devices.. and who are giving Congressmen millions in "consulting fees" and "campaign contributions".. are banking on Congressional ignorance and silence.. and they're getting it. Thus do civilizations collapse.