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View Diary: LIBOR just the tip of the Iceberg: other Financial Markets probably rigged (140 comments)

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  •  It's the same problem as with naked short selling, (2+ / 0-)
    Recommended by:
    Brit, semiot

    … and more loosely derivatives like credit default swaps on debt instruments that the buyer doesn't own.

    1. Should the economy depend for its financing on "markets" that amount to gambling? Should what amounts to a betting industry be allowed to determine the fate of billions of people engaged in genuine, concrete economic activity? Should the courts really be in the business of enforcing bets, even if the bet is drawn up in the form of a contract? Where does one draw the line?

    2. Even without huge taxpayer bailouts, the temptation is issue paper with nothing behind it — to "earn" money out of nothing by faking collateral out of nothing (often this "nothing" is disguised as holdings in opaque investment vehicles and other issuers' derivatives on the balance sheet). IIRC a one-time Texas tycoon in the LBJ era, Billy Sol Estes, got into trouble with commodity trading. The storage tanks that were supposed to be filled with soybean oil as collateral turned out to be empty. In the current era, a whole pyramid of bets based on bets based on still more bets as collateral can arise.

    3. When political conditions are such that huge taxpayer bailouts are a certainty — like now — the moral hazard goes exponential. All bets are off, you could say — or more accurately, all bets are still on, when they should be off. :)

    The Dutch kids' chorus Kinderen voor Kinderen wishes all the world's children freedom from hunger, ignorance, and war.

    by lotlizard on Thu Jul 12, 2012 at 12:05:51 AM PDT

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    •  Oops: point "2" needs a "to". (0+ / 0-)

      Even without huge taxpayer bailouts, the temptation is to issue paper with nothing behind it . . .

      The Dutch kids' chorus Kinderen voor Kinderen wishes all the world's children freedom from hunger, ignorance, and war.

      by lotlizard on Thu Jul 12, 2012 at 12:12:13 AM PDT

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    •  From what I understand (2+ / 0-)
      Recommended by:
      lotlizard, shaharazade

      Hedging - selling oil or wheat futures - is fine if it is a small percentage of the market. That was the initial Chicago model, and it reduced risk and guaranteed some price stability.

      But now the hedging dominates the market, and quite the opposite obtains. For example, IIRC, about 40 million barrels of oil are drilled every day, but over a billion futures and options are traded.

      When the hedge is bigger than the asset by a factor of ten, it completely distorts the market.

      The bankers basically thought they could take the deposit/loan ratios from classical banking, and apply them to derivatives.

      The Fall of the House of Murdoch -with Eric Lewis ready by June. Get your name in the book.

      by Brit on Thu Jul 12, 2012 at 01:30:52 AM PDT

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