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June 18, 2012

The Ongoing Multi-Trillion Dollar Heist That Continues to Shrink America's Middle Class

By Richard Clark

Remember how the mafia used to tell businesses to either pay up or your business will be ruined? What we have here is the new mafia, on a global scale. The main difference is that their names are not Italian. The 2nd largest difference is that the original mafia were pikers and tiny tots by comparison. The 3rd largest difference is that the new mafia essentially owns our gov't & can hire the best attorneys in the world.

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The entire world is being forced into a huge debt trap of austerity.   And so it is that the living standards of ordinary people in the US and Europe must continue to fall, if the bad loans of banksters are to continue to be paid off.   Understand, however, that this is one gigantic scam in which the banksters are slowly milking the rest of the world.   They are doing this with an ongoing scheme that involves bad derivative bets and toxic loans, which are insured by the government -- a government that the banksters and other Wall Streeters essentially own and control, and hold steady so that the extraordinarily lucrative milking process can continue for just a while longer.   How much longer?   Until our economy collapses under the burden of this diabolical and very complex scam, which, at their peril, most people don't want to take the time, or make the effort, to understand.   But be advised:   For every winner (e.g. the banksters), there is a loser (e.g. the taxpayers of the US and Europe).     

(As for the banksters' ownership of our government, let's remember what FDR said:   "The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.   That, in essence, is fascism -- ownership of government by an individual or by a group.")  

The ongoing derivatives debacle engineered by banksters like Goldman Sachs (who have made, and are planning on making ever more of a killing off of it) is largely responsible for the bankruptcy of the European banks.   (Derivatives are essentially bets between two parties with the losers going bankrupt and the winners going into hiding.   See a simple explanation of derivatives in the next section of this article.)  

The bailouts themselves represent money eventually paid out to the winners of these bets, in which the bailout payoff comes in the form of an interest-free loan from the Fed, which is then immediately gambled (i.e. "re-invested') back into the very same scheme that funneled the money back to the winners in the first place.   In this scam, the money going to those who _claim_ to be acting in the interest of the bankrupt is in reality being funneled into the pockets of the winners themselves.   The scam is that the supposed losers (banks), and the winners, are the very same individuals, while the losses are systematically being passed on to the suckers, i.e. the government -- especially to the hard working citizens who must eventually pay the government taxes that repay the loans of the money that ultimately fund the bailouts.   Convoluted?   Yes.   To understand the details and get the whole picture, read on.  

First, some circumstantial evidence  

During our recent and ongoing financial crisis, at least 18 former and current directors from federal reserve banks worked in banks and corporations that collectively received over $4 trillion in low-interest loans from the Federal Reserve.   (Remember:   a trillion dollars could be put into a million trucks full of cash, with a million dollars stuffed into each truck!)  

To learn the names of some of the perps in this part of the stunningly massive heist, and understand what they've done, go  here.   Then see the first comment in the discussion that follows this article for the full story, with evidence.  

Some derivatives are perfectly harmless to society, even beneficial  

   The beauty of derivatives, originally, was (and often still is) that they act like insurance:   If you're a company (like, say, an airline) that uses a lot of fuel, you can arrange a derivative contract that locks in the price of fuel a year or two in advance so that your costs don't abruptly rise to the point of causing great difficulty to the operation of your airline.   The person on the other side of this contract is betting on energy prices to fall, in which case they would book a profit when selling you the fuel next year at the agreed-upon price. All that's fine and good, though the insurer can get in trouble if they don't have enough money to pay up should the bet go against them, which is essentially what happened with AIG and the hundreds of thousands of mortgage securities it so profitably insured -- profitable until the bottom fell out of the housing market and all their customers tried to cash in on their insurance policies (known as credit-default swaps, or simply "swaps' for short).

  The idea behind a credit-default swap (sometimes referred to as a credit derivative) is that if you buy a bond and the seller of the bond defaults, you can recoup most of your losses from an insurance company if you've had the foresight to purchase a credit-default swap (insurance policy) on your purchase of that bond.   What's more questionable is when financiers place bets on the price of assets they don't own and have no intention of acquiring.   These so-called "naked' bets are in many ways tantamount to simple gambling, and were a prominent feature of the recent financial crisis, the lasting effects of which are still dogging us.   For example, many investors bought insurance policies on mortgage securities they didn't own as a way of betting on the price of the securities to fall.   However you feel about the social utility of this practice, it's not something that deserves government backing.   Yet in many cases the government then had to bail out these investors when it bailed out the likes of AIG.   Hence the possibility of sharing in the cornucopian rip-off proceeds when you buy CDSs, i.e. credit-default swap insurance policies. Many experts tell us that the solution to this problem is to require that derivatives (such as CDSs) be traded on exchanges, the same way we trade stocks.   The great benefit of this would be transparency:   We could all see who was trading and insuring what.  

According to Dylan Ratigan, one of the greatest obstacles in resolving the financial crisis in 2008 was the need to pay all the $600 trillion in swaps [a type of derivative] because central bankers couldn't see which swaps served as useful insurance for energy and commodities -- and were therefore essential to the smooth functioning of the economy -- and which had only to do with speculation and simple gambling.    So, because the central bankers couldn't see the difference, they were forced to pay off everybody, including the reckless speculators.  

In light of this problem, Richard Grasso (former chairman of the NY Stock Exchange) has a radical proposal:   Reclassify all the naked derivatives as online gaming.   As Grasso tells Ratigan: "I believe regulators should require the product to be " monitored globally to prevent contracts being written in excess of the debt obligations they are designed to insure. " Any contracts written outside these requirements would be deemed null and void by regulators as simply online gaming."  

I'm not sure I understand every implication of this--could the bet still be made, just not through a derivative contract, or could it not be made at all?   -- or maybe just where gaming is legal?     Once again consider the dicey financial innovation (scam) of naked bets.   Naked bets are, as previously stated, in many ways pure gambling and were a prominent feature of the recent financial crisis.   "For example, many investors bought insurance on mortgage securities they didn't own, as a way of betting on the price of the securities to fall.   This is not something that deserves government backing.   Yet in many cases the government then had to bail out these investors when they bailed out the likes of AIG."    Source article

Behind the Euro crisis:   Goldman Sachs playing both sides of the bets.  

Let's start with the perpetrators of the fraud:   the institutions of Goldman Sachs and J.P. Morgan.   It is important to emphasize that it is becoming ever more apparent that Goldman Sachs is involved in an engineered fraud wherein the trillion dollar profits being generated by the fraud are being funneled to private individuals.   It seems that Goldman Sachs was involved in a scam wherein it intentionally sold derivatives that were designed to lose for the client and win for the undisclosed other party of the bet (a typical Goldman Sachs set-up).   Goldman Sachs also scams governments by selling them sure-to-lose derivatives disguised as sure-to-win, and pockets huge fees in the process, as they systematically milk this-country-and-the-world for all it's worth.

Goldman Sachs discloses how credit derivatives risk is tied to European debt  

Goldman Sachs, the fifth-biggest U.S. bank, by assets, disclosed for the first time the gross value of credit-default swaps that the firm purchased and sold relating to Greece, Ireland, Italy, Portugal and Spain:   By the end of 2011, Goldman Sachs had sold $142.4 billion of single-name swaps (i.e. contracts that pay out in the event of a default) on the five countries -- so the firm said yesterday in an annual filing with the U.S. Securities and Exchange Commission.   The company also had purchased credit-default contracts with a gross notional value of $147.3 billion on the nations' debt, the filing shows. 

Goldman Scams Greece in Secret Greece Loan  

Spyros Papanicolaou (head of Greece's Public Debt Management Agency) and his predecessor, Christoforos Sardelis, recently revealed details of derivative contracts that helped Greece mask its growing sovereign debt to meet European Union requirements.   The two men said that neither they nor any other high-level Greek official understood what their country was buying, and so they were ill-equipped to judge the risks or eventual costs.  

Goldman Sachs's instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren't disclosed.  

"Sardelis couldn't actually do what every debt manager should do when offered something, which is go to the market to check the price," said Papanicolaou, who retired in 2010.   "He didn't do that because he was told by Goldman that if he did that, the deal is off."   Source article

How Goldman ever so profitably set Greece up for implosion

In this video clip, Greg Palast explains this to Dylan Ratigan and his sidekicks, who then force Greg to admit that the Greek government was, at least inadvertently, complicit in setting Greece up for financial and economic disaster.

J.P. Morgan gets in on this cornucopian ripoff -- by joining Goldman in keeping Italy derivatives risks hidden  

JPMorgan said in its third-quarter SEC filing that more than 98 percent of the credit-default swaps the New York-based bank has written (or issued, for its investor/customers), on the PIIGS (Portugal, Ireland, Italy, Greece & Spain) debt, is balanced by CDS contracts purchased (by JPMorgan) for the same type of bonds (also purchased by JPMorgan).   All these many insurance contracts will (supposedly) pay off if the bonds go belly up, i.e. if and when these countries default on the immense loans they've taken out (by selling those bonds).   JPMorgan said its net exposure was no more than $1.5 billion, with a portion coming from debt and equity securities.   But the company didn't disclose gross numbers or how much of the $1.5 billion came from swaps, leaving investors wondering whether the notional value of CDSs sold could be as high as $150 billion or as low as zero.  

Bank runs will become daily news in 2012.   The fear index is already running high.   A lot of banks are "under water' with debt.   The stunning info-graphics  here illustrate, breathtakingly, the absolutely gargantuan amount of money that banks in Europe and the US have loaned to Portugal, Ireland, Italy, Greece & Spain (the so-called PIIGS) -- the very countries that have surreptitiously gobbled up trillions in borrowed money and that are least likely to pay any of it back!     

So what happens when they default or threaten to default?   Answer:   Either the central banks and/or governments of the US and Europe start creating trillions of new dollars out of thin air (leading to unprecedented   inflation) so as to reimburse the banksters and bondholders, OR the world economy goes into a major depression as credit freezes up and investors everywhere cash out of their investments.    

Why will investors everywhere then cash out of their investments?   Let me answer that question by pointing out that there is no way in hell that the trillions-of-dollars-worth of credit default swap insurance policies on these toxic bonds can ever even begin to be paid off.   And when that reality is finally grasped, there will either be the mother of all bailouts (which will lead to the worst inflation the world has ever seen), or there will be a depression the severity of which the world has never seen.   Unconvinced?   If you haven't already done so, look at the graphics in the last link!   Then remember how the mafia used to tell business owners to either pay up or your business will be destroyed, and begin to realize that what we have here is the new mafia, on a global scale.   The main difference is that their names are not Italian.   The second largest difference is that the original mafia members were pikers and tiny tots by comparison.   The third largest difference is that the new mafia essentially owns the government and can hire the most capable attorneys and lobbyists in the world to get legislation that allows them to carry out this fraud and extortion, by and large within the letter of the law.  The fourth difference is that the new mafia is threatening the world economy rather than individual businesses.   Source article



Submitters Bio:

Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've always been more interested in political economics and what's going on behind the scenes in politics, than in mechanical engineering, and because of that I've rarely worked more than 8 months a year, devoting much of the rest of the year to reading and writing about that which interests me most.

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