Manipulating Your Opponent’s Force

Regulating the financial sector was one of the Obama Administration’s highest priorities (reflected in the watered-down federal Dodd-Frank financial regulation law); the economic collapse was so directly linked to the deregulated miscreant behavior of leverage-touting financial institutions encouraging people and companies to borrow… such as via subprime notes to buy overvalued homes they could not afford or companies to tap the debt markets in the wonderful world of mergers and acquisitions. No one product accelerated this demise more horrifically than bundled debt resold to gullible institutional buyers… derivatives. As the new central exchanges are being constructed to corner and purportedly “regulate” the derivatives marketplace, it is worthy to ask exactly who is running these exchanges and whose interests are upper-most in their minds.

First, an underlying touch of military arts philosophy, one which, for example, typifies how to use your opponent’s power against him – Jujitsu: “‘Jū” can be translated to mean ‘gentle, supple, flexible, pliable, or yielding.’ ‘Jutsu’ can be translated to mean ‘art’ or ‘technique’ and represents manipulating the opponent’s force against himself rather than confronting it with one’s own force.” Wikipedia. And so, grasshopper, it seems as if Wall Street mavens have figured out how to use the new push for regulation of derivatives trading through central exchanges into a self-benefiting closed shop where the regulated now manipulate the market principally for their own benefit.

The December 11^th New York Times lays the problem bare: “On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan… The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential… Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

“In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks… The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.” And so they are implementing the public’s cry for regulated derivatives exchanges via secret societies created to keep those same manipulative traders in control of this lucrative marketplace.

It is indeed likely that the only change effected by such new exchanges will be further consolidation of power with the mega-players and no significant alteration in either transparency or protection of the public interest. “Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. [Gary Gensler, the chairman of the Commodity Futures Trading Commission] wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On [December 9^th], the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.” NY Times. If anything, expect to see Congress averting its eyes to the machinations of such Wall Street firms.

Indeed, some of these newly elected Congressmen and women, who vigorously campaigned against the Washington lobbyist mentality are staffing up… with former lobbyists. The December 8^th Washington Post makes the point: “During his campaign to represent Wisconsin in the U.S. Senate, GOP nominee Ron Johnson accused Democratic incumbent Russell Feingold (D) of being ‘on the side of special interests and lobbyists.’… ‘After promising voters that he would reform the culture of lobbying in Washington, instead Senator Feingold embraced lobbyists and declared himself to be on their side,’ a Johnson spokeswoman said at the time… But after defeating Feingold, Johnson himself has turned to K Street for help - hiring homeland security lobbyist Donald H. Kent Jr. as his chief of staff… Johnson is not alone: Many incoming GOP lawmakers have hired registered lobbyists as senior aides. Several of the candidates won with strong support from the anti-establishment tea party movement.” Welcome to the new and improved Wall Street and Congress.

But wait, there’s more… if a California judge’s tentative ruling concerning the liability for debt rating services is actually upheld. The December 10^th Bloomberg.com summarizes: “[The California Public Employees’ Retirement System [Calpers] sued the three bond-rating companies in July 2009 for losses it said were caused by their ‘wildly inaccurate’ risk assessments on three structured investment vehicles [in this case, SIV units in a particular kind of bundled debt derivative]. The so-called SIVs, after receiving the companies’ highest ratings in 2006, collapsed in 2007 and 2008, according the Calpers complaint… Ratings by Moody’s Investors Service Inc., Standard & Poor’s and Fitch Ratings Ltd. described as ‘wildly inaccurate’ in a $1 billion lawsuit are protected speech, a California judge said in a tentative ruling…. Judge Richard Kramer in San Francisco state court said yesterday that the companies’ ratings of three structured investment vehicles that the [Calpers] lost money on are a form of speech about an issue of public interest that is protected under a state law designed to fend off cases meant to chill public debate.” Oh boy!

If this misinterpretation of the First Amendment is upheld across the land, then the necessary co-conspirators (the ratings agencies) on what is, in my opinion, the greatest fraud ever perpetrated on the American economy, will get off from any liability for the losses they helped inflict in the fall of the global economy – scot-free! Remember that such debt rating agencies are actually hired by the issuers of the debt (who shop for ratings agencies that will support their derivatives with the highest debt-ratings, insuring the maximum price when the units of debt are sold). Guess where the rating agencies’ loyalties are? To the debt issuer who pays them or the poor schmucks who rely on the information? I still love this great nation, but it really would be refreshing if those who run our country actually acted in the best interests of her people!

I’m Peter Dekom, and I am reminded of that expression that the definition of insanity is repeating the same behavior and expecting a different result.