Finance: Derivatives and the Imploding Financial System

Most people don’t understand what derivatives are.  Unlike stocks and bonds, a derivative is not an investment in anything real. Rather, a derivative is a legal bet on the future value or performance of something else. Just as one can bet on the horse, or the outcome of a sports game, financiers in London and New York make multi-billion dollar bets on how interest rates, foreign exchange rates, and share prices will perform in the future; or on what credit instruments are likely to default.

 A financial derivative is an instrument based on or “derived” from underlying assets such as shares, bonds, commodities or currencies. In general, it is an obligation to buy or sell the underlying asset at an agreed price and time in the future. Since it usually takes only a small down payment (the margin or premium) to purchase such an obligation, any movement in the value of the underlying asset above or below the agreed price can produce immense profits or losses relative to the original down payment.

Financial derivatives have grown from a standing start in the late 1980s to a $2 quadrillion industry by 2015. The world’s GNP stands at about $70 trillion; this is more than  30 times more than the global GNP figure.  We are talking about an amount of money that is absolutely mind-blowing.

One thing is clear: derivatives have transformed the financial system. It has never been so easy to move money from country to country and market to market, nor move it so quickly, nor to take on so much risk in the blink of an eye. Derivatives have fundamentally altered the way markets work. In the space of less than 30 years they have become integral to the whole elaborate structure of international finance.

Derivatives were invented to limit, or hedge, risk. In a world of international trade, constantly changing exchange rates, unpredictable interest rates and fluctuating commodity prices, the risks have never looked more threatening. Derivatives enable a company to fix the cost of its foreign exchange or raw materials in advance, or borrow money at a cheaper rate. They make the future a more predictable place. This is good for business, and for everyone else. If you have a mortgage where the interest rate is capped so that it will not rise above a certain level, for example, you own an interest rate call option: a derivative.

Derivatives are not bad in themselves. Used properly and wisely, they are an undoubted benefit. It is when they are used improperly and unwisely that they become the equivalent of a bomb. Think of derivatives as a loaded gun. You can use it in self-defense or murder. Unfortunately, the temptations to use it for the latter purpose are immense.

This worries many people in the finance industry. What concerns them is the growing fragility of the financial system they have created. Derivatives have built interconnections between markets that never existed 30 years ago; they have woven international finance into a single fantastically tight and complex tapestry, yet the fabric seems thinner than ever.

Says a former central banker who has had to grapple with the reality of bank collapses and the threat of systemic financial failure; “ derivatives have the potential to create an unprecedented financial disaster”.

It could happen. If it does, it will almost certainly be in a way that no one has foreseen. It may be triggered by an extraordinary event that nobody in their wildest dreams had imagined. But more likely it will involve nothing more remarkable than the sort of problems that regularly crop up on the markets, only this time the particular combination of events will be so unusual, so unexpected, the results will be lethal.

In times of crisis, the financial system reacts in unpredictable ways. The more suddenly the crisis strikes, the worse the trauma is likely to be. Investors, caught off-guard and protecting their own individual interests, will react in all the wrong ways ; governments and financial regulators will be confused and paralyzed, perhaps making mistakes that worsen the situation ; the crisis will spread like lightning across countries and markets, faster than anyone can control until suddenly a local problem has become a global disaster.

Derivative Losses

Stupendous dealing losses have become commonplace. Let us list some of these losses:

  • In 1993, Feruzzi, the Italian-based food giant, lost $3 billion on derivatives; Germany’s MG Group lost $1.34 billion; Malaysia’s Bank Negara lost $3 billion.
  •  In 1994, various hedge funds, municipalities and banks lost $6 billion;
  • in 1995, Barings Bank went bust with derivative losses of more than $1 billion;
  • In 1996, Daiwa Bank lost $1 billion, and one of the largest trading companies, Sumitomo Corporation, lost $1.7 billion in the copper market;
  •  In 1997, Yamaichi Securities, Japan’s 4th largest investment bank, went bust on the back of derivative losses. Then UBS, one of the Swiss “Big Three” had huge derivative losses, and was forced to merge with another Swiss bank in order to save the Swiss and European financial system;
  • In September 1998, LTCM, a very large hedge fund in New York went bust. It blew a $4 billion hole, and nearly collapsed the international financial system;
  • In October 2000, JP Morgan went bust, and was taken over by Chase Manhattan Bank;
  • In 2001, it was Enron, and World Com;
  • In the mid-2000s, an Italian dairy company, Parmalat went bust on the back of huge derivative losses;

Then came 2008.

First Lehman Bros went bust, quickly followed by AIG, and a few others.

But not all such blunders become public knowledge. As everyone knows, banking is to a great extent a confidence trick. Banks only last as long as their depositors believe that their deposits are safe, so bankers see it as a duty to reassure the public even if that means misleading them. It is normally not until a bank is in direct trouble that the public ever gets to hear about it.

Just because the financial system did not crack in 2008, does not mean that a somewhat bigger shock could not create the ultimate financial nightmare – what the bankers call systemic risk – because if we can be sure of anything about the financial system is that something will eventually go wrong.

It is not a question of if, but when. These past financial eruptions are but a precursor to the “big one”, a reverse-leverage disintegration of the entire financial system in a matter of days, or hours.

The Crash – It’s After-Effects

Today, (Jan 2016), we have the biggest financial bubble in history. Every financial institution in the world is bankrupt, or close to it. Global financial turnover is about $6 trillion a day, with obligations based in this financial system. Most of these obligations are invisible, but they make themselves visible when somebody tries to collect. It’s like a gambling debt. It’s only when the guy comes to collect it, then it becomes visible. Only then is the family aware of what’s going on.

In a chain reaction, we find people rushing to try and collect, not because Wall Street is collapsing, but because the derivative market is collapsing. Banks and speculators are trying to save themselves.

Within a period of as short as 3 working days, the banks will not only collapse, but also the entire financial system will vaporize. It will be an implosion, because of the ratio of unpayable debts coming due at once, hitting the virtually non-existent margin of assets to cover it.

For example: Look at your wallet. How much of your money is in electronic form? How much of your money is actually cash? How many dollars/euros/pounds do you withdraw from the bank, and deposit – money- as opposed to electronic deposits and electronic withdrawals? How much credit that you rely upon, comes in the form of electronic credit as opposed to cash?

What does that electronic credit mean? It means you have a banking institution, which guarantees the conversion of that electronic credit into money. Now, what happens if that institution suddenly, no longer functions? You are there with a card; it is no good.

Now, what happens in about 3 or 5 days’ time at the local supermarket? They are functioning on electronic money. What happens when the current stock of groceries runs out – and there will be a rush for groceries? What happens?

They can’t get more groceries. The supply chain breaks down. Institutions break down. In modern economies, people do not realize how vulnerable they are. We no longer have local farms. We depend upon credit, especially electronic credit, and local stores and we get by through the week, largely on the basis of electronic credit.

What happens if that system of electronic credit breaks down? Then you actually get conditions of mass starvation throughout the world. The whole system of commerce comes to a standstill.  And that is what we are facing, unless something is done to deal with that.

The weakest part of the system lies in the interbank payment system (details of this will be explained in another issue) that, in turn, depends upon the extent of losses incurred by the major players in the market.

JP Morgan Chase

To give an example: JP Morgan Chase has an equity capital of $ 178 billion; assets (loans) of $2.1 trillion. And a derivative book of $78.7 trillion! This was as of December 31, 2010. That’s five years ago. In other words, its equity capital is equal to .24% of its derivative book. A loss equivalent to just .25% of its derivative portfolio would wipe out JP Morgan Chase’s entire equity! The ratios are slightly better for the other large international banks.

That tiny margin between existence and disintegration is a dominant feature of the international financial system today, and this is what has financiers, the regulators, and the politicians terrified. One false move and poof! The whole thing blows.

To understand the nature of the derivatives market, we must leave the world of mathematics, and enter the world of parasites.

Picture a dog with a very bad case of fleas, the dog representing the productive sector of the economy, and the fleas representing the worst elements on Wall Street. During the 1970s and 1980s, the fleas built up huge trading empires, trafficking in the flesh and blood of the dog. The fleas were so successful that the once-powerful dog began to dramatically weaken, and no longer produced enough blood to allow the fleas to continue trading in the manner to which they had become accustomed.

Being clever critters, the fleas came up with a solution that pleased them all. They began trading in blood futures. Since they were trading in futures rather than the actual “product” , they were no longer limited by the amount of the blood they could suck from the dog. The level of trading expanded dramatically, and the fleas became rich beyond their wildest expectations. Right up to the point that the dog died. That, in essence, is the nature of today’s derivatives markets, and the global financial system as a whole.

In the brave new world of derivatives, the big banks have blown up with some regularity; the landscape is littered with the detritus of derivative failures.

To sum up : the huge mass of financial values in the world economy has the form of an inverted pyramid. On the bottom of the pyramid, we have the actual production of material goods. Above that, is the commercial trading in commodities, and real services. Above that, we have the complex, interconnected structure of debt, stocks, currency trading, commodities futures, and so on. Finally, at the top, we have derivatives and other forms of purely fictitious capital.

This strange object is growing in a very unbalanced way: the upper layers – starting with derivatives – grow much faster than the lower layers. But, what is happening at the very thin base of the pyramid, which represents the real, physical economy?

Actually, it is not growing at all. In fact, the world’s physical economy has been stagnating, even declining, since the 1970s.  Looking at the situation for the world as a whole, we can see that the portion of physical output flowing back into agriculture, industry, and infrastructure has been decreasing. At the same time, fictitious capital is growing at an accelerating rate.

What is actually happening, is that the productive base of the world economy is being ‘sucked to death’ by the pyramid –shaped financial bubble. This is most clearly seen by the effect of the massive debt accumulation, which is causing farms and industries, and even entire governments, to shut down. The whole financial bubble depends, directly and indirectly, on squeezing” increasing amounts of income flows from the material base of the world economy.

This is the background for the call of globalization and free trade by New York and London. When nations around the world subscribe to these policies, they leave their economies wide open to be looted by these two networks. Both London and New York are desperately trying to prop up the financial bubble, and it needed to “open” the economies of various nations, in order to facilitate its looting of these economies. When these nations resist, their leaders are destabilized by “political scandals”, or worse, when the entire nation itself is targeted for destabilization.

America is very close to bankruptcy. It survives only by the tyrannical use of raw political, financial, and military power, to exact tribute from much of the rest of an already looted world. The world has been pumping roughly $3 billion per day into the US, in order to keep America going. Now, they have become very tired.

In this regard, the establishment of the AIIB, by China, is very eagerly welcomed by the world, with the exception of the US.

 The current economic and financial crisis is not something which might happen. It is something that is already underway. What we do not know at this stage is that when the already existing, hopeless bankruptcy of the system will explode into the streets – is whether this will occur as  a single event, to as a cumulative effect of a chain-reaction series of crisis, ricocheting around the world.

Whenever these two networks find their economic, financial, and political systems threatened, they react with VIOLENCE. In other words, when they cannot control the world by means of their financial and economic systems, they use the desperate action of the FIST to destroy and crush anybody who might be in their way.

We are now in such a period. We have the worst finance and monetary crisis in modern history.  While the financial elite are bailing out of the stock markets, fools like us are persuaded to buy yet more shares in the same markets.

All the largest bank groups are technically bankrupt. The situation in Europe is even worse. Of the estimated 40 trillion Euros of loans on its books, almost 25% , or 10 Trillion worth, are ‘non-performing’. These loans cannot be repaid to the European banks. At the heart of the EU banking cartel are the Rothschild-controlled banks. They are, without exception, all broke. The following is a snap shot of a part of the Rothschild banking empire.

The Inter-Alpha Group

With every passing day, the demands for austerity coming from the financiers of the Anglo-American empire grow louder. Governments worldwide are being told that they must slash their budgets, cut their services, and shred their social safety nets, and cast their populations to the wolves, all in the name of “fiscal responsibility.” “All available resources must be funneled to us,” the financiers shriek. “We need the money, and the people must fend for themselves!”

At the same time, the financier networks that are making these inhuman demands are continuing to loot the planet through a variety of open and hidden bailout schemes, currency manipulations, and derivatives scams – in short, these sanctimonious and hypocritical bastards continue to steal us all blind – destroying the basis for our very existence.

As explained before, there are two financial networks of power in the world today. One is based in New York, and is headed by the Rockefeller family. The other is based in London, and is headed by the Rothschild family. Here, we will look at only a part of the Rothschild family’s financial operation.

The financial group at the center of this conspiracy is the Inter-Alpha Group, a financial syndicate controlled by Lord Jacob Rothschild, the British baron and financier. We shall lift the rock and let the sunlight shine  on this group of parasites, both as a public service, and for the enjoyment of watching these pests scurry back into the darkness of their crypt. Identifying them, though, is only the beginning. If humanity is to survive, the Inter-Alpha Group must be destroyed.

A Legion of Parasites

The Inter-Alpha Group was formed in 1971, as a syndicate of six European banks.

Its composition has changed over the years, as it adapted to changing circumstances, but its essence as a tool for destroying nation-states and their populations for the glory of the British Empire has not changed a whit. The Rothschild family has been a power in world finance since the 1800s, emerging from Frankfurt and establishing additional banks in London, Paris, Vienna, and Naples. The family operates according to the Venetian-Illuminati method, not being tied to any particular nation, but to an imperial oligarchy which sees itself above the level of mere nations, viewing them as colonies with no real sovereignty. The empire exists by playing nations against each other, drawing them deep into debt, and taking control over their issuance of money through the mechanism of so-called “independent” central banks. The family was picked up in the early years by a network of Illuminati operatives in Germany, including the powerful Thurn und Taxis family of the Venetian intelligence service. This was the source of the Rothschilds’ notorious intelligence and courier network, which allowed them to trade on inside information, in a way that made them filthy rich and gave them the power to defeat their rivals. Behind the Rothschilds, stands the Illuminati network.

That is crucial to understanding not only their history, but their current operations. The Rothschilds specialize in dirty money operations for this Anglo-Illuminati empire, and the Inter-Alpha Group reflects that role. The banks in the group represent the family funds (or fondi) of some of the most powerful families in Europe, and provide a mechanism for those funds to be deployed, hidden from public view. These old families, located in enclaves across Europe, wield enormous power, but do so discreetly, to keep their power and influence hidden from the general public. As with certain insects, darkness is essential to their survival.

The founding banks themselves were hardly household names, even in 1971: Williams & Glyn’s Bank of England; BHF-Bank of Germany; Banco Ambrosiano of Italy; Crédit Commercial de France of France; Kredietbank of Luxembourg; and Nederlandsche Middenstands Bank of the Netherlands. Williams & Glyn’s was a subsidiary of the Royal Bank of Scotland, bankers to the opium-running British East India Company, the Venetian-controlled company which became the British Empire (as did Rothschild). These banks all serve as “private bankers,” specializing in managing the fondi of the imperial elite.

The Inter-Alpha Group is a conduit for these oligarchic families, and their wealth and power. It represents a predatory system which exists by keeping mankind as peasants, to be looted as required, and cast aside when they are no longer useful. It is the face of the enemy.

A Medieval Model

The medieval system of private banking, which the Inter-Alpha Group represents, is the key to understanding how a relatively small group of oligarchs has controlled the planet for centuries. Pooling their resources through these private banks, the oligarchs leverage their considerable collective wealth into control over large sections of finance and commerce. They specialize in corruption, bribing those who help them, and destroying those who refuse. They run the central banks of most nations, controlling both the price and supply of money, usurping the power of governments for their own tawdry purposes. They manipulate markets, jack up our prices where ever they can, and, in general, lie, cheat, and steal, as both an impulse and a tactic. Jacob Rothschild has been pushing fascist monetary policies upon Brazil since 1971.

Lord Rothschild is still after Brazil, in particular, through the Inter-Alpha Group’s Banco Santander’s role in the Brazilian carry trade. Despite the trillions of dollars of bailout money from the Federal Reserve and the European Central Bank, the British Empire is still hopelessly broke. Thus, the spectacle of the lords of the empire robbing the Brazilians blind, in the hope of sucking the last dollar out of a dying world, before it all collapses.

Enforce the Law

The way to defeat this lawless imperial mob is to use the power of the nation-state. The empire, as a predatory phenomenon, essentially operates according to the law of the jungle, where the strong eat the weak. It survives by bestializing man, making him a slave to his impulses and senses. Basically, it survives by making sure that its subjects are too stupid and self-absorbed to effectively resist imperial rule. (Sound familiar?)

The Inter-Alpha Group, 2010

  • Royal Bank of Scotland, U.K.
  • Banco Santander, Spain
  • Société Générale, France
  • Intesa Sanpaolo, Italy
  • ING, The Netherlands
  • Commerzbank, Germany
  • AIB, Ireland
  • KBC Group, Belgium
  • Nordea Bank, Sweden
  • National Bank of Greece, Greece
  • Banco Espírito Santo, Portugal

Bank Bail-Ins – Your life Savings Could be wiped out in a Massive Derivatives Collapse

In 2012-2013, the Cyrus banking system went bust.  The European Central Bank, the ECB, just 4 years earlier, had bailed out the European banking system, with the help of the EU governments. By 2012, the EU Commission and EU governments were not in a position to bail out any more banks.

And so a new type of ‘rescue’ was launched. This was the “bail’-in” concept, instead of the “bail-out” of the past. The first casualty of this new policy occurred in Italy.

At the end of November 2015, an Italian pensioner hanged himself after his entire $160, 000 savings were confiscated in a bank “rescue” scheme. He left a suicide note blaming the bank, where he had been a customer for 50 years, and had invested in bank-issued bonds. The rescue was a “bail-in” – meaning bondholders suffered losses – unlike the hugely unpopular bank bailouts during the 2008 financial crisis, which cost ordinary EU taxpayers hundreds of billions of Euros.

It is entirely possible in the next banking crisis that depositors in failing banks could have their money confiscated and turned into equity shares.

Once your money is deposited in the bank, it legally becomes the property of the bank. Your deposited cash is an unsecured obligation of your bank. It owes you that money back.

If you bank with one of the biggest banks, who collectively have trillions of dollars of derivative bets they hold “off balance sheet”( meaning those debts are not recorded on the banks’ balance sheets), those debts have a superior legal standing to your deposits and get paid back before you get any of your cash.

The bail-in policy went into effect across the EU on Jan 1, 2016, and the same has been authorized in the US.

Bail-in has been sold to the public as the way to make sure that another Lehman – style 2008 financial crisis never occurs. Instead of using governments’ funds to bail out failing banks through Quantitative Easing and other hyper inflationary measures, depositors and some investors will have to bail out the failing banks. This was done in Cyprus when its banks went belly-up in 2013.

One man’s bail in is another man’s bail out.  And the financial instruments to be bailed out are derivatives. The plan, in other words, is to rob Peter (you and your family) to pay Paul (Wall Street and the City of London).

Bail-in bonds are self-defined as bonds that would be instantly expropriated when a bank becomes insolvent – in other words, they are rat poison. Who in the world would ever buy such a guaranteed-to-fail financial instrument? In fact, no European banks were able to market any bonds whatsoever in the first 3 weeks of January!

The Crash Begins

William White is a top financial economist working for the British financial elite. He is the head of the OECD’s review committee. This is what he had to say; “the macroeconomic ammunition to fight down-turns is all used up, and many of the debts that have built up over the past 8 years will never be repaid; low interest rates provided by central banks used to kick start recovery the last time around have fueled credit bubbles in East Asia and emerging markets – leading to both private and public debt reaching historic levels.

 “Emerging markets were part of the solution after 2008. Now they are part of the problem, too.”

With central banks unable to lower interest rates much more, and with the economic slowdown in China, many economists fear it could be the start of a global financial meltdown.

In the first week of January 2016, the Royal Bank of Scotland sent a note telling its clients to “dump everything but high quality bonds”, saying they expect the markets to fall somewhere between 10 and 20%. RBS wrote, “In a crowded hall, exit doors are small”.

In the first week of 2016, global markets crashed by 10%, wiping out some $5 trillion in worthless paper. The price of oil and other commodities continues plunging. Puerto Rico defaulted on a chunk of its $72 billion debt, which could create a crisis that could spread throughout the entire municipal bond market.

And the January 1 activation of the British Empire’s bail-in policy across Europe is leading to a freezing-up of the bond market, with early indications that even inter-bank lending is seizing up. In fact, in the first 10 days of January, panicked depositors withdrew some 40 billion Euros from European banks!; an early indication of  a loss in confidence in the banks.

The entire trans-Atlantic financial crash is in full swing, and this collapse is gaining more and more momentum.  Four hedge funds have already gone bust in the US because they were entangled in a $5 trillion derivatives bubble; they had concluded contracts when oil was at $80 a barrel while the price had fallen to $30. Likewise the bubble in the commercial real estate market has now grown even larger than 2007.

Faced with indebtedness and derivatives exposures amounting to the trillions, Wall Street and London have only two cards up their sleeve: further money printing and the theft of depositors’ funds, and expropriation of investors bonds and stockholders. This can only be described as criminal. The more this crash expands the more human lives it will cost. Under this new bail-in policy now being implemented , everything you and your family may have – savings, pensions, food, health care, jobs, homes, everything – will be seized in the name of protecting the criminal financial system which created that speculative bubble. This is what is predicted for 2016; massive sacrifice of savings and jobs to prop up a bankrupt global financial system.

The actual root of the problem is that people fell for the lie that money is actual wealth, and an entire financial system has been built on that lie.  But, money is not something which has a self-evident value. Value depends upon the creative powers of mankind, to make better the conditions of life of mankind.

As the system is tearing apart, other countries may try to insulate themselves from this by embracing capital controls. The dollar has no peers. But the system that it anchors is cracking. Panic among Wall Street and City of London bankers is evident just barely below the surface.

When financial markets are crashing, wars inevitably follow. That is even more reason to keep a close eye on events in northern Iraq and Syria. As the competing nations try to grab the energy resources of the area, all it would take is a spark to detonate World War Three!

Leave a Reply

Your email address will not be published. Required fields are marked *

Posts by Month