With so many atrocities to report upon daily it becomes difficult to focus on the core problem — derivatives. We seem to have accepted that derivatives are here to stay, and now the question is whether or not, or how much to “regulate” them. But you don’t regulate a Ponzi scheme any more than you would attempt to regulate embezzlement or fraud. You prosecute it. You eliminate it. That’s what Neil Barofsky’s findings will ultimately support, and since he is back in the news with his highly controversial 23.7 trillion dollar bailout figure, perhaps it’s time to revisit and paraphrase some quotes from several well written articles about derivatives:

In an article on FinancialSense.com on September 9, Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants.  It was a bailout of the financial derivatives industry, which was faced with a $1.4 trillion “event of default” that could have bankrupted Wall Street and much of the rest of the financial world.  To explain the enormous risk involved, Amerman posits a scenario in which the mortgage giants are not bailed out by the government.  When they default on the $5 trillion in bonds and mortgage-backed securities they own or guarantee, settlements are immediately triggered on $1.4 trillion in credit default swaps entered into by major financial firms, which have promised to make good on Fannie/Freddie defaulted bonds in return for very lucrative fee income and multi-million dollar bonuses.  The value of the vulnerable bonds plummets by 70%, causing $1 trillion (70% of $1.4 trillion) to be due to the “protection buyers.”  This is more money, however, than the already-strapped financial institutions have to spare.  The CDS sellers are highly leveraged themselves, which means they depend on huge day-to-day lines of credit just to stay afloat.  When their creditors see the trillion dollar hit coming, they pull their financing, leaving the strapped institutions with massive portfolios of illiquid assets.  The dreaded cascade of cross-defaults begins, until nearly every major investment bank and commercial bank is unable to meet its obligations.  This triggers another massive round of CDS events, going to $10 trillion, then $20 trillion.  The financial centers become insolvent, the markets have to be shut down, and when they open months later, the stock market has been crushed. 
–Ellen Brown, September, 2008

Derivatives were the great financial innovation of the Greenspan era, a form of sleight of hand designed to hide the bankruptcy of the financial system after the stock market crash of 1987, the collapse of the savings and loan sector, the bankruptcy of the banking system as a whole, and the collapse of the junk-bond bubble. The derivatives market was a fraud from its inception, a virtual market where the big banks and other speculators could bet on the movements of currencies, bonds, stocks and the indices associated with them. Because the derivatives did not require the ownership of the instruments upon which they were nominally based (and because they could be highly leveraged) the level of bets soon outstripped the levels of their underlying instruments.  The attempt to save the fictitious “values” and “profits” of the derivatives market is one of the prime drivers of the largest bailout attempt in history.
–John Hoefle, October 2008

Last year (alone) DTCC settled $1.88 QUADRILLION in securities transactions across multiple asset classes. We essentially turnover the equivalent of the U.S. Gross Domestic Product every three days.
–Larry Thompson, General Counsel, Depository Trust & Clearing Corporation, June, 2009

Unless you shut them down, derivatives will eventually fuel an incalculable global economic cross-default event and whether it’s 23.7 trillion or 140 trillion in U.S. bank counterparty bailouts really is not the issue. Barofsky’s investigations will show that their underlying securities were fraudulently contrived and led to the global Ponzi scheme of all Ponzi schemes…IT CANNOT BE BAILED OUT.

YOU CANNOT REGULATE FINANCIAL DERIVATIVES! STOP ATTACKING THE SYMPTOMS AND PROSECUTE THE PROBLEM AT ITS CORE. END THE DERIVATIVES AND YOU END THE DERIVATIVE BAILOUT – it’s as simple as that.

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