Those Damned Derivatives......

[JohnyCanuck]

How banks play Russian roulette with our financial security.

By Nick Fillmore, www.TheTyee.ca

The next major threat to Canadian and international financial systems is very likely to come from reckless investors gambling with derivatives, the dangerous betting vehicles that contributed to the 2008 collapse of financial services firm Lehman Brothers and the start of the Great Recession.

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The use of practically worthless derivatives during the recession helped destroy Lehman Brothers, once an investment banking heavyweight, and pushed insurance giant American International Group (AIG) to the brink of bankruptcy. The U.S. government stepped in to save AIG, for $182 billion. Much earlier, it was the scandalous use of derivatives that led to the 2001 collapse of Enron, a Houston-based energy, commodities and services company, that had employed close to 22,000 people.

On the other hand, when the gambles do work, derivatives can be very profitable. U.S. banks made a record $25.8 billion in revenue in 2012 by dealing in OTC derivatives and securities.

Today, while regulators struggle with banks to get the derivatives market under control, these gambling instruments are being used just as dangerously as they were leading up to the recession.

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Their bets, our risk

We would expect high-rolling banks and financial institutions to be ready to cover the risk they're taking on derivative bets, but that's not the case. Instead, if the Canadian government decides to approach the handling of derivatives the same way the U.S. has, derivatives obligations will be given "super priority" status in the event a big bank were to collapse.

This means that the holders of these derivatives contracts will have first priority for payment. Unsecured creditors such as business depositors, suppliers, and individuals with uninsured accounts (see part one of this series) will go to the back of line.

http://thetyee.ca/Opinion/2013/12/12/Those-Damned-Derivatives/?utm_source=mondayheadlines&utm_medium=email&utm_campaign=161213

[Octafish]

1. Thankfully, the banks no longer are on the hook for any losses.

We the Taxpayers are.

We Must Not Speak Uncomfortable Truths to Power: Why I Won’t be Briefing Congress about Derivatives

http://neweconomicperspectives.org/2012/05/we-must-not-speak-uncomfortable-truths-to-power-why-i-wont-be-briefing-congress-about-derivatives.html

[JohnyCanuck]

2. Thanks for that link..

I guess it's a case of, "Hear no evil; see no evil; speak no evil."

[Egalitarian Thug]

3. And we still let them pretend that they are solvent. We're not even half way through monetizing

their previous losses yet, and they're already racking up the next check.