Wall Street

"The ONLY reason the system is still functioning with all its bad debt and fraud and corruption is that the balls are being juggled and accounts not settled -- Obama and the Congress want to keep the balls in the air so there can be no accounting."

Wall Street Bets a Quadrillion of Everybody Else’s Money

“Even if the whole planet were offered as collateral, it could not cover Wall Street’s bets.”

By Glen Ford

Information Clearing House,

11 October, 2013

October 11, 2013 "Information Clearing House - The clock is ticking, we are told, on the “good faith and credit” of the United States government, which might technically be unable to pay its bills after October 17 if the two corporate parties don’t make a deal on the debt limit. Congressional Republicans and the White House are “playing Russian roulette with the global economy,” says an editorial in the Dallas Morning News, warning of impending “economic Armageddon” as financial markets “crater,” the economy stalls and interest on future federal borrowing skyrockets.

Given that capitalism has entered a terminal stage of acute and escalating crises, the Dallas editorialists may be right; anything could set off another spasm of financial mayhem in a system that is ever more unstable. However, it is the “markets” – a euphemism for the financial capitalist class – that are the ultimate source of instability, the folks who play Russian roulette 24-7 and have dragged humanity to a place where an actual Armageddon is only a twirl of the chamber away. In this game, everybody’s head is in play.

It is proper that the corporate press speak of the impending fiscal threat – a minor one, in the maelstrom of crises that beset the system – in gambling terms. An increase of interest rates by a few basis points (fractions of a percent) on trillions of borrowed dollars amounts to quite a chunk of public money, to be paid directly into the accounts of these very same private “markets” that are supposedly biting their nails with anxiety over the budget. The Dallas Morning News and its fellow corporate propaganda spores spread the myth that the “markets” (bankers, hedge funds, etc.) crave stability, when the vital statistics of the real world of finance capitalism scream the opposite.

The Lords of Capital (the “markets”) are pure gamblers who have transformed the global financial marketplace into a machinery of perpetual uncertainty, in which all the wealth of the world is bet many times over by people who don’t actually own it, in a casino whose operators scheme against each other as well as their patrons, most of whom are not even aware that they are in the game – much less, that it is Russian roulette.

“Derivatives are valued at six times more than the total accumulated wealth of the world.”

The notional value of derivative financial instruments is now estimated at $1.2 quadrillion – that is, one thousand two hundred trillion dollars. This statistic is fantastic in every sense of the word, amounting to 16.7 times the Gross World Product, which is the value of all the goods and services produced per year by every man, woman and child on the planet: $71.83 trillion. Derivatives are valued at six times more than the total accumulated wealth of the world, including all global stock markets, insurance funds, and family wealth: $200 trillion.

The great bulk of known derivative deals are held by banks that are considered too big to be allowed to fail, with the top four banks accounting for more than 90 percent of the exposure: J.P. Morgan Chase, Citibank, Bank of America, and Goldman Sachs.

We are told that derivatives are simply bets between knowledgeable partners – hedges against loss – and that every time one of these financial institutions loses, another gains, so that there is no net loss or threat of global collapse. But that’s a lie. Never in the history of the world has finance capital so dominated the real economy, and only in the past two decades have derivatives been so central to finance capitalism. The players do not know what they are doing, nor do they care. The meltdown of 2008 was caused primarily by derivatives, requiring a bailout in the tens of trillions of dollars that is still ongoing, with the Federal Reserve buying up securities that no one would purchase – that is, bet on – otherwise. Yet, the universe of derivatives deals has grown much larger than in 2008, effectively untouched by President Obama’s so-called financial reforms.

The casino has swallowed the system. The sums the players are betting are not only far larger than the value of the rest of their portfolios, but six times larger than the combined assets of every human institution and family on Earth, and almost 17 times bigger than the worth of humankind’s yearly output. Even if the whole planet were offered as collateral, it could not cover Wall Street’s bets.

“Detroit has been rendered a failed city by the full range of derivatives and securitization.”

The events of 2008 demonstrated that derivatives collapses, like other speculative financial events, behave as cascades of consequences, rather than orderly “resolutions.” Derivatives deals infest or overhang every nook and cranny of the U.S. and other “mature” economies, poisoning pension systems and municipal finance structures. Detroit has been rendered a failed city by the full range of derivatives and securitization. When the casino is the economy, everyone is forced to play, and the poor go broke first.

Reformers of various stripes tell us that derivatives can either be regulated to a less lethal scale or abolished, altogether, while leaving Wall Street otherwise intact. That’s manifestly untrue. Finance capital creates nothing, reproducing itself through the manipulation of money. The derivatives explosion occurred because Wall Street needed a form of “fictitious” capital to continue posting ever higher profits, and ultimately, fictitious portfolios full of tradable bets. Derivatives deals are the ultimate expression of financial capitalism: they are primarily bets on transactions, rather than investments in production. The rise of derivatives signals that capitalism has run its course, and can only do further harm to humanity. The derivatives economy – all $1.2 quadrillion of it – is the last stage of capitalism.

If the Occupy Wall Street movement had understood this, and articulated the necessity to overthrow and abolish Wall Street, its impact would have been far more profound. As it stands, Americans are directed to quake in fear as the clock ticks down to some technical federal budgetary deadline on October 17 – as if that’s the sword of Damocles hanging over the world.

BAR executive editor Glen Ford can be contacted at Glen.Ford@BlackAgendaReport.com. - http://www.blackagendareport.com

italy

Italy faces restructured derivatives hit

Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999.

FT,

26 January, 2013

A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn.

While the report leaves out crucial details and appears intended not to give a full picture of Italy’s potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

The report does not name the banks or give details of the original contracts – questions that worried the state auditors – but the experts said they appeared to date back to the period in the late 1990s. At that time, before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999.

Italy had a budget deficit of 7.7 per cent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 per cent, by far the largest drop among the Euro 11. In the same period tax receipts increased marginally and government spending as a proportion of GDP fell only slightly.

The report was submitted, as required, early this year to the Corte dei Conti, Italy’s state auditors. According to a senior government official, who declined to be named, the auditors were concerned by the numbers and requested the finance police to intervene.

In April police of the Guardia di Finanza visited the offices of Maria Cannata, head of the Treasury’s debt management agency, asking for more information on the report drafted by the agency, including details of the original derivatives contracts, the senior official said.

The leaking of the 2012 Treasury report, which was also obtained by La Repubblica, the Italian newspaper, is likely to fuel debate over Italy’s exposure to derivatives. It comes at a time when markets have begun to exhibit new nervousness with the cost of borrowing rising sharply recently for eurozone peripheral countries like Italy.

Only a handful of Italian officials, past and present, are aware of the full picture, according to bankers and government sources. The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.

Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting. Mr La Via left the Treasury in 2000 and returned as its director-general in May 2012 – with the backing of Mr Draghi, according to Italian officials.

An ECB spokesman declined to comment on the bank’s knowledge of Italy’s potential exposure to derivatives losses or on Mr Draghi’s role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002.

The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

Italy does not disclose its total potential exposure to its derivatives trades. The experts contacted by the FT, who declined to be named, noted that the report revealed just a six-month snapshot on a limited number of restructured contracts.

Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.

An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.

The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.

Releasing its own report in February on the state accounts for 2012, Salvatore Nottola, prosecutor-general of the Corte dei Conti, noted that “the damage done to the state’s income constituted by the negative outcomes of derivatives contracts is particularly critical and delicate”.

The Corte dei Conti declined to comment on the report and the finance police did not respond to inquiries. A finance ministry spokesman confirmed the existence of the report but declined to comment on its contents and possible losses, citing commercial confidentiality. He would not comment on requests made by the police to Ms Cannata.

Gustavo Piga, an Italian economics professor, caused a storm in 2001 when he obtained one such derivatives contract taken out in 1996 and accused EU countries of “window-dressing” their accounts. Mr Piga did not identify the country nor the bank involved but they have since been named in the media as Italy and JPMorgan.

“Derivatives are a very useful instrument,” Mr Piga wrote. “They just become bad if they’re used to window-dress accounts,” he said, accusing the unnamed country of disregarding standard derivatives contracts in order to delay until a later date its debt interest payments.

Last year Der Spiegel, a German magazine, obtained official documents which it said demonstrated that in 1998 Helmut Kohl, then chancellor, decided for political reasons to ignore warnings from his experts that Italy was believed to be “dressing” up its accounts and would not meet the Maastricht treaty criteria for entry, including a budget deficit less than 3 per cent.

Italian officials, including former finance minister Giulio Tremonti, have said the EU was aware and approved of Italy’s use of derivatives in the build-up to euro entry.

Greece followed suit two years later but irregularities in its accounts only became public in 2009. Bloomberg News lost a case before the EU General Court in 2012 when it used a freedom of information request to obtain files held by the ECB that Bloomberg said showed how Greece used derivatives to hide its debt. The Luxembourg-based court, in rejecting the case, said disclosure of the files “would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece”.

Italy Embroiled In Latest Derivative Loss Fiasco Through Another Mario Draghi-Headed Scandal

Zero Hedge,

25 June, 2013

It was roughly four years ago when details surrounding such Goldman SPV deals as Titlos first emerged, that it became clear how for over a decade, using deliberately masking transactions such as currency swaps, Greece had managed to fool the Eurozone into believing its economy was doing far better, and its debt load was far lower than it actually was in order to comply with the Maastricht treaty's entrance requirements.

That this happened with the implicit and explicit knowledge of such European and Goldman "luminaries" as Helmut Kohl and Mario Draghi did not help Europe's credibility.

As for the Pandora's Box that was opened following the disclosure of just how ugly the unvarnished truth in Europe is, following the Greek disclosure, leading to the general realization that the European experiment has failed and it is now only a matter of time before its final unwind, any comment here is unnecessary - ths has been widely discussed here and elsewhere over the past several years.

Now it is Italy's turn.

Overnight, the FT reported that "Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999. A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn."

What was the point of these derivative contracts? The same as in Greece: to transform reality and make it mora palatable: "... before and just after Italy entered the euro, Rome was flattering its accounts by taking upfront payments from banks in order to meet the deficit targets set by the EU for joining the first wave of 11 countries that adopted the euro in 1999.  Italy had a budget deficit of 7.7 per cent in 1995. By 1998, the crucial year for approval of its euro membership, this had been reduced to 2.7 per cent, by far the largest drop among the Euro 11. In the same period tax receipts increased marginally and government spending as a proportion of GDP fell only slightly."

The chronology of events is presented below:

And while Mario Draghi managed to evade serious inquiry following his role as head of the Bank of Italy at a time when Monte Paschi was engaging in various swap transactions as reported previously, just as he managed to evade scrutiny in his role as a Goldman banker before that, when he was instrumental to aiding and abetting Greece in its economic embellishment efforts (even as Goldman was being paid generously for its "advice") when in June of 2012 the ECB outright refused to respond to Bloomberg's FOIA request on the central bank's Greek-ECB-Goldman currency swaps, Mario the untouchable, may finally be called to task: after all he was once again instrumental in covering up yet another financial crime this time as director-general of the Italian Treasury!

Only a handful of Italian officials, past and present, are aware of the full picture, according to bankers and government sources. The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.

Mario Draghi, now head of the European Central Bank, was director-general of the Italian Treasury at the time, working with Vincenzo La Via, then head of the debt department, and Ms Cannata, then a senior official involved with debt and deficit accounting. Mr La Via left the Treasury in 2000 and returned as its director-general in May 2012 – with the backing of Mr Draghi, according to Italian officials.

An ECB spokesman declined to comment on the bank’s knowledge of Italy’s potential exposure to derivatives losses or on Mr Draghi’s role in approving derivatives contracts in the 1990s before he joined Goldman Sachs International in 2002.

Of course the ECB will decline to comment: doing so would open up the can of worms of just how much alleged criminal activity Europe's central bank may have engaged in for its own benefit, for the benefit of members such as the Bank of Italy, and of course, for the benefit of such "financial advisors" as Goldman Sachs. 

After all let's not forget that we are now into the fourth year of the Fed's investigation into Goldman's role as facilitator of Greek currency swaps. That's right: we remember, and we are still holding our breath.

To summarize:

• Mario Draghi, complicit and aware of the Greek currency swap arrangement, as a member of Goldman Sachs in the mid-2000s.
• Mario Draghi, complicit and aware of various Monte Paschi derivative deals, as head of the Bank of Italy.
• Mario Draghi, complicit and aware in rejecting Bloomberg's FOIA requests that would have blown all of these scandals wide into the open, as current head of the ECB.
• And now, Mario Draghi, complicit and aware of at least one (and likely many) Italian window dressing derivative deals with one or more US investment banks, as Director-General of the Italian Treasury.

Just where does Mario Draghi's rabbit hole of endless scandals finally end?

Still, the ability to push yet another Draghi-centered scandal under the rug may be impossible especially if Italy suffers billions in losses on this latest derivative fiasco:

While the report leaves out crucial details and appears intended not to give a full picture of Italy’s potential losses, experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

In April police of the Guardia di Finanza visited the offices of Maria Cannata, head of the Treasury’s debt management agency, asking for more information on the report drafted by the agency, including details of the original derivatives contracts, the senior official said.

The leaking of the 2012 Treasury report, which was also obtained by La Repubblica, the Italian newspaper, is likely to fuel debate over Italy’s exposure to derivatives. It comes at a time when markets have begun to exhibit new nervousness with the cost of borrowing rising sharply recently for eurozone peripheral countries like Italy.

Needless to say the last thing the scandal-prone country, whose most popular politician was just sentenced to 7 years in jail for underage sex, is yet another disclosure that its financial system has been lying, and is about to suffer billions in cash outflow for legacy liabilities. Liabilities, whose total damage may be in the tens of billions:

The report does not specify the potential losses Italy faces on the restructured contracts. But three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

Italy does not disclose its total potential exposure to its derivatives trades. The experts contacted by the FT, who declined to be named, noted that the report revealed just a six-month snapshot on a limited number of restructured contracts.

And with derivatives being zero sum (unless there is a counterparty failure in the collateral chain in which case everyone loses), Italy's loss was someone else's gain. In this case Morgan Stanley (among others):

Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.

An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.

The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.

In the past, the orders to push back investigations into such illegal, shady dealings most certainly came not only from the very top Italian power echelons, but from the ECB, and ultimately, banks like Goldman. The question is: will Italy's state auditors, the Corte dei Conti, finally stand up for the people and expose the corruption, and the people behind the billions in soon to be revealed losses:

Releasing its own report in February on the state accounts for 2012, Salvatore Nottola, prosecutor-general of the Corte dei Conti, noted that “the damage done to the state’s income constituted by the negative outcomes of derivatives contracts is particularly critical and delicate”.

The Corte dei Conti declined to comment on the report and the finance police did not respond to inquiries. A finance ministry spokesman confirmed the existence of the report but declined to comment on its contents and possible losses, citing commercial confidentiality. He would not comment on requests made by the police to Ms Cannata.

Gustavo Piga, an Italian economics professor, caused a storm in 2001 when he obtained one such derivatives contract taken out in 1996 and accused EU countries of “window-dressing” their accounts. Mr Piga did not identify the country nor the bank involved but they have since been named in the media as Italy and JPMorgan.

“Derivatives are a very useful instrument,” Mr Piga wrote. “They just become bad if they’re used to window-dress accounts,” he said, accusing the unnamed country of disregarding standard derivatives contracts in order to delay until a later date its debt interest payments.

And speaking of openness, transparency, and the lack thereof, none of the above is news. At least not to the one person most instrumental for ushering in the failed European monetary experiment: Germany's Helmut Kohl.

Last year Der Spiegel, a German magazine, obtained official documents which it said demonstrated that in 1998 Helmut Kohl, then chancellor, decided for political reasons to ignore warnings from his experts that Italy was believed to be “dressing” up its accounts and would not meet the Maastricht treaty criteria for entry, including a budget deficit less than 3 per cent. Italian officials, including former finance minister Giulio Tremonti, have said the EU was aware and approved of Italy’s use of derivatives in the build-up to euro entry.

Not surprising considering in his own words, "he acted like a dictator to bring in the euro." And considering that Europeans have gladly ceded all their rights and powers to live in a dictatorial pipe-dream for the past decade, and which has since exploded into the worst depressionary nightmare the "developed" world has ever known, perhaps all those 20%, 30% and more unemployed should look in the mirror when deciding whom to blame for their plight.

But don't worry - the Goldmans, the Mario Draghis, the Cannatas, and the Berlusconis of the world are doing perfectly well, thank you, even as Greek and Spanish youth unemployment is now in the 60% range. Which is roughly just as one would expect of every neo-feudal, dictatorial regime.

Derivatives exposure

At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World (Hint: Not JPMorgan)

Zero Hedge,

29 April, 2013

Moments ago the market jeered the announcement of DB's 10% equity dilution, promptly followed by cheering its early earnings announcement which was a "beat" on the topline, despite some weakness in sales and trading and an increase in bad debt provisions (which at €354MM on total loans of €399.9 BN net of a tiny €4.863 BN in loan loss allowance will have to go higher. Much higher). Ironically both events are complete noise in the grand scheme of things. Because something far more interesting can be found on page 87 of the company's 2012 financial report.

The thing in question is the company's self-reported total gross notional derivative exposure.

And while the vast majority of readers may be left with the impression that JPMorgan's mindboggling $69.5 trillion in gross notional derivative exposure as of Q4 2012 may be the largest in the world, they would be surprised to learn that that is not the case. In fact, the bank with the single largest derivative exposure is not located in the US at all, but in the heart of Europe, and its name, as some may have guessed by now, is Deutsche Bank.

The amount in question? €55,605,039,000,000. Which, converted into USD at the current EURUSD exchange rate amounts to $72,842,601,090,000....  Or roughly $2 trillion more than JPMorgan's.

The good news for Deutsche Bank's accountants and shareholders, and for Germany's spinmasters, is that through the magic of netting, this number collapses into €776.7 billion in positive market value exposure (assets), and €756.4 billion in negative market value exposure (liabilities), both of which are the single largest asset and liability line item in the firm's €2 trillion balance sheet mind you, and subsequently collapses even further into a "tidy little package" number of just €20.3. 

Of course, this works in theory, however in practice the theory falls apart the second there is discontinuity in the collateral chain as we have shown repeatedly in thh past, and not only does the €20.3 billion number promptly cease to represent anything real, but the netted derivative exposure even promptlier become the gross number, somewhere north of $70 trillion.

Which, of course, is the primary reason why Germany, theatrically kicking and screaming for the past four years, has done everything in its power, even "yielding" to the ECB, to make sure there is no domino-like collapse of European banks, which would most certainly precipitate just the kind of collateral chain breakage and net-to-gross conversion that is what causes Anshu Jain, and every other bank CEO, to wake up drenched in sweat every night.

Finally, just to keep it all in perspective, below is a chart showing Germany's GDP compared to Deutsche Bank's total derivative exposure. If nothing else, it should make clear, once and for all, just who is truly calling the Mutually Assured Destruction shots in Europe.

NZ: Water and derivatives

This is important. Many thanks to Travellerev!

Are You Paying For Watercare’s Gambling With Derivatives?

Aotearoa: a Wider Perspective,

18 April, 2013

A couple of months ago Water Care started to charge incredible sums for water in the Auckland region.

Here is a Newspaper article about how derivatives trades can go (no, areprogrammed to go) terribly wrong. In it Watercare is quoted as having made a $ 60 million loss on its Derivatives gambles. Could it be that Aucklanders are paying the price for their bad decisions and for their gullibility in buying into the international derivatives scam. Aucklanders need to start asking questions and above all read up on the manipulation of the LIBOR rates by all big banks.

From original

Farmers were sold financial instruments that major companies manage through specialist departments, says the man responsible for the interest rate swap management programme at giant Auckland water provider Watercare.

Jason Isherwood, Watercare’s treasury manager, says companies must have deep balance sheets and high levels of sophistication to take on the risk of complex and volatile interest rate swaps.

The latest Watercare annual report revealed a $60 million loss on interest rate swap contracts in the year to June 30, highlighting the risks of derivative positions on interest rates.

Isherwood said that although $60m was not a “pretty number”, it was relatively modest in the context of Watercare’s balance sheet.

The Commerce Commission is continuing early stage inquiries into the sale of similar instruments to farmers in 2007 and 2008 by banks including Westpac and National Bank. The swaps were sold as protection against rising interest rates, but had the effect of locking farmers in to high rates just before a steep and prolonged downturn.

Claims of interest rate swap misselling prompted a national scandal in the UK with the Financial Service Authority finding banks culpable of mis-selling swaps to tens of thousands of unsophisticated small and medium-sized businesses.

In a statement the Commerce Commission may take note of, Isherwood said interest rate hedging was suitable for large organisations with big, long-term debts as it allows greater control over the long-term cost of funding by locking in attractive rates when available.

“I believe that you need to have a dedicated treasury function to adequately manage these risks and it needs to be staffed by people with market expertise,” Isherwood said.

“It needs to have adequate systems as well to monitor the risks and report on those risks so that at any point in time you can tell your exact risk position.”

Because derivatives exposures can be volatile, companies not only need to be able to understand when things are moving against them, they also need to be able to pay break fees should they need to shut down their exposure.

“An organisation with a turnover of $50m per annum is not necessarily going to have a sufficiently sized budget to justify having a dedicated treasury function,” Isherwood said.

Around the world, even organisations fitting that description have run into serious trouble with interest rate swaps, and, like some farmers, have found their businesses left paying crippling interest rates.

Some farmers say they relied on their banks – notably National Bank and Westpac – for advice and did not understand the true nature of the risks they were taking on, though the contracts they signed stated they did understand and that the banks owed them no fiduciary duties.

The sale of the swaps to farmers, the scale of which is not yet fully known, is a hot topic among derivatives experts who believe the Commerce Commission needs to look at whether farmers had the sophistication, size, tools and support to “manage” their interest rate risk.

One said banks have sometimes insisted that larger

corporates wanting to manage interest rate risk through the use of swaps get specialist advice. When banks had concerns over the capacity of a borrower to cope with swaps, they have sometimes carried out due diligence on the borrower’s treasury functions.

The commission has been told by another derivatives specialist that the swaps the farmers took out helped the banks manage the risks of their own, rapidly growing overseas borrowing, leaving them with large fixed interest payment obligations.

“It is apparent that the local banks receiving the hedge swapped New Zealand dollars have an asymmetric need to receive client fixed interest rate swap flows to offset those required to be paid under the terms of cross currency basis swap contract,” he told the commission.

He believed this would provide a motive for banks to engage in “a concerted push” to engage borrowing clients into swap contracts to pay fixed interest to offset the banks’ burgeoning exposure.

QUESTIONS EXPERTS SAY THE COMMERCE COMMISSION MUST ANSWER: 1. Were farmers advised it was prudent to protect themselves from spikes in interest rates when using swaps, and what did the banks selling swaps think was likely to happen with rates?

2. Did farmers understand the risks of the swaps, and did the banks take adequate steps to ensure they did?

3. Did the farmers have balance sheets large enough to cope with revaluations of their swaps, or the capacity to pay large break fees if their swaps soured?

4. How were farmers to monitor their swap position and make decisions to neutralise their exposure should rates move against them?

5. Did farmers realise that extra credit margins could be added by the banks should the revaluation of their swaps erode their balance sheet? 6. What risk modelling were farmers provided with, and did it accurately show the risks the farmers were taking?

7. What tools and ongoing support were farmers offered, and what support did they actually get?

8. What did frontline bank staff think they were selling, and are claims they did not understand the risks of the swaps fair?

9. What is the legal strength of the disclaimers that farmers signed? One National Bank document states: “Each party was capable of assessing the merits of an understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms and conditions and risks of that transaction. It is also capable of assuming, and assumes the risks of that transaction.”

10. Did the banks have any fiduciary duty to the farmers? One National Bank swaps presentation reads: “No party is acting as a fiduciary for or an adviser to the other in respect of that transaction.” 12. Did the swaps sold to farmers differ from those used in the interest rate risk management programmes of large, sophisticated borrowers?

On Water Derivatives And Privatizing Water!

With the financial system collapsing the Money junkies have to come up with new and innovative ways to loot the “little” people in order to protect their collapsing derivatives gambling system and one of the ways they can do that is by privatizing water and ripping us another financial hole by selling us water without which we would die within three days while driving up the price with derivatives.

As predicted the North Island drought has prepared the ground for the introduction of the privatization of water. We are being told that water is expensive and we are let to believe that as a result of the “Climate changes” we should pay through the nose  for the privilege of using water. This will go for everyone including farmers (Who will be bankrupted for using water they harvest themselves with infrastructure they have paid for themselves) and it will inevitably harm the most vulnerable and poor while the rich can afford their pools and hot pools while the rest of us will suffer

http://aotearoaawiderperspective.wordpress.com/2012/11/06/are-you-paying-for-watercares-gambling-with-derivatives/