I know that Jon Corzine doesn't read 321gold. If he did, he wouldn't have missed my warning about the dangers of what is now $708 trillion in derivatives. I called it "The Ticking Time Bomb" when I posted it in May.
Basically, with $708 trillion in derivatives on a $65 trillion world economy, something has to give. There is something like $210 trillion in debt supported by only $150 trillion in assets. A lot of people are broke and don't yet know it.
Jon Corzine knows broke but he doesn't know how he got broke. I do. According to him, "I simply do not know where the money is or why the accounts have not been reconciled to date." After his testimony in Congress concludes in five or ten years, he has a wonderful career ahead of him as a standup comedian.
If you open an account with a commodities broker or even with a stock broker on margin, you sign a document acknowledging the company has the right to use the securities and the cash in your account as collateral against the financing they get from banks to loan to you. In other words, they borrow money from banks at say, 3% to loan to you at say, 6% and pledge your assets against those loans. It's called hypothecation and is perfectly legal.
They can also make investments in their name using your assets. But the investments have to be in something safe, such as Greek government bonds now paying 352%. That's called re-hypothecation and again, you signed a document when you opened your margin account saying they could do that. It's perfectly legal.
Jon Corzine may go to jail for lying to Congress but he isn't going to jail for stealing your money. What he did was legal.
Basically here is all you need to know. If you go down to the bank and steal from them or sign false documents or commit fraud against them, it's illegal and you go to jail. On the other hand, if a bank or brokerage house steals from you or makes up fake documents or commits fraud against you, it's illegal but they don't go to jail and usually get a big severance check.
The beauty of this scam is that as long as it's legal, other brokerage houses and banks will get it and see the very real advantage of speculating with your money where you take all the losses and they take all the gains. It's a wonderful world.
If you have opened a margin account with anyone, don't be real surprised if you go to bed wealthy and wake up poor. If it happened to Gerald Celente, it can happen to you.
Derivatives offset one another. A buyer to every seller? Since when has a debt become an asset? Comon guys, let's get real here. The whole system is in bad shape. And as Judge Judy says ... if it looks like a duck and sounds like a duck ... guess what, it's a duck! Great bit of information. I am a regular reader at 321 Gold. Thank you for some real information on the message board. Cheers
been reading about the derivatives mountain for years now. here's a question: do these derivatives not cancel out on a net overall basis? There should be long and short sides. Only where a firm such as MF takes a huge one-sided bet that fails is there a problem.
do these derivatives not cancel out on a net overall basis? There should be long and short sides. Only where a firm such as MF takes a huge one-sided bet that fails is there a problem.
Wild_gold how solvent are both sides is the real question. If one side cannot pay, there is the cascade effect.
Editor’s Note: Mark Roe is a professor at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an op-ed by Professor Roe that appeared today in the Wall Street Journal.
Derivatives trades first of all should not just be centrally cleared, but should also be taken out from the government-guaranteed entities, such as commercial banks (or at least we need to impose tight capital requirements on those banks that deal in derivatives). Derivatives traders like doing business with Citibank, because they know the government won’t let Citibank go down. But this puts taxpayers at risk. It would be better to run those trades through an affiliate, not through the bank, so counterparties realize they might not be bailed out if the affiliate failed.
And, since a clearinghouse is itself at risk of being too big to fail, regulators need to police its capital and collateral requirements. If the derivatives market sees the clearinghouse as too big to fail, the potential for derivatives players making overly risky derivatives trades becomes real. Clearinghouses can help manage some systemic risk if they’re run right. If not, they can become the Fannie and Freddies of the next financial meltdown.