House of Sticks: Happy New Bailout

by Kent Lyndon

Greetings, everyone! I am feeling compelled to return to the cyber waves to give you an update on the global derivatives conspiracy and the Libor rate scandals. Fabulous fines are flying into the faces of the firms investigated and, in a couple of cases, actual criminal charges have become a reality. Our normal, daily news outlets continue to grant minimal air space to one of the greatest financial fiascos in fiefdom history. So I am happy to point you in some meaningful directions and give you the information to help sort it all out.

Let’s start with a 10-31-13 Forbes article penned by Maggie McGrath. The headlines read, “Fannie Mae Suing Nine Banks Over Libor Manipulation”. You see, back in 2008, we were led to believe that Fannie Mae and Freddie Mac were the worst of the bad guys when it came to the financial management that led to their respective demises. Did they err with their own derivatives holdings? Of course. The manipulation of short term interest rates, however, made matters much worse.

Now let’s move to a Washington Post article dated 11-19-13 and penned by Neil Irwin. While Fannie and Freddie were dealing with the fact that price fixing was damaging their own leveraged derivatives holdings, other banks were selling them mortgage pools that just didn’t pass the “smell” test. Neil’s article is titled, “Everything You Need To Know About **********************’s $13 Billion Settlement”. It’s an eye opener and includes a lot of recent history to help refresh your memories.

The New York Times’ Business Day Dealbook dated 7-28-14 carried an article titled, “Understanding the Rate-Fixing Inquiry”. This lengthy but poignant work was penned by Charles Bray, Ben Protess, Mark Scott, and Julia Werdigier. The piece covers the criminal as well as civil charges and has an important “Question and Answer” section at the bottom. When we look at the global financial institutions and the fines they now have to pay, our memories should be telling us that the names of these players are quite familiar. Could it be? No, really? These guys again?

Remember the 16 trillion dollar bailout covered in the GAO report on Bernie Sanders’ website? Remember page 131 that listed the companies and the total amounts of short term cumulative loans they had to take to survive? Compare those names with the Libor rate price-fixing names and see how many matches you can make.

We can’t miss a couple of basic follow-up articles on derivatives before we part company. Reagan’s former budget director, David Stockman, has been a busy boy of late. Back in August he was quoted for telling us that the groups chasing derivatives today make the guys running the show in 2007 look like “pikers”.

Turning to a Fortune article dated 10-20-14, Eleanor Bloxham asks the question, “How Can We Prevent Another Financial Derivatives Disaster?” Perusing this article tells me that some of the same companies could have been getting ready to wash up on shore until……… TWO WEEKS AGO THE HOUSE PASSED A SPENDING BILL INFILTRATED WITH A TAXPAYER FUNDED DERIVATIVES BAILOUT PROVISION FOR THE BANKS WHO ARE ON THE WRONG SIDE OF PRIVATE DERIVATIVES SPECULATION IN THE COMMODITIES MARKET (OIL).

Do I have your attention now? This practice began over three years ago. It started with a FED order and now has Congressional support. FDIC insured deposits of Americans are now backing toxic derivatives. So, the most important provisions of Dodd-Frank, at the very least, have been postponed if not eliminated. I hope Orange County, Ca., Jefferson County, Al., and Detroit, Mi., are still fresh in your minds.

Twenty years apart, their afflictions were similar: interest rate swaps that blew up. How many other state and local government coffers are awash in these instruments that Warren Buffet called “financial weapons of mass destruction”? Ahhh……sounds like the lead for a new column in the near future. Stay tuned. In the meantime, are you all just a little curious as to how your politicians down there voted on that spending bill?