The world pumped in $9 trillion to prevent a financial meltdown of the banks. The list of countries failing to be able to support the losses of these global leviathans generated continues to grow. Iceland, Greece, Ireland and now probably Portugal and possibly Spain. A major world currency the Euro may be also in the firing line, and hence throw into economic turmoil the 450 million people that live in the European Union.
"Capitalism can't work unless these financial firms at the center of the heart of capitalism can be subject to orderly failure. The rules of capitalism need to apply to them just as they do to non-financial companies."
~Paul Tucker deputy governor of the Bank of England
The major global banks have become even larger than before the near meltdown.
Basel III will merely be another wet blanket.
When you look at the financial tools used by the banks to lend some $600 trillion worldwide you enter a parallel universe.
Professor Lord Robert May has turned his attention to this:
The recent banking crises have made it clear that increasingly complex strategies for managing risk in individual banks and investment funds (pension funds, etc) has not been matched by corresponding attention to overall systemic risks. Simple mathematical caricatures of "banking ecosystems", which capture some of the essential dynamics and which have some parallels (along with significant differences) with earlier work on stability and complexity in ecological food webs, have interesting implications. In particular, strategies that tend to minimise risk for individual banks can – under certain circumstances – maximise the probability of systemic failure.
We hear terms every day that nobody except but a few elite bankers really understands:
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset.
Vanilla derivatives (simple)
Exotic derivatives ( complicated)
Many of these Financial products open the way to fraud as the distance between the underlying asset and the parties involved in trading them grows.
We then head off into the even murkier world of:
Collateralized loan obligations are the same as collateralized mortgage obligations (CMOs) except for the assets securing the obligation. CLOs allow banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios to international markets, reducing the risks associated with lending.
These not being complicated enough or perhaps too transparent to the common regulator we now have
Types of CDO^2
A cash CDO-squared is a CDO backed by a collateral portfolio consisting of tranches of existing cash CDOs.1 On the other hand, a synthetic CDO-squared involves a portfolio of credit default swaps (CDS) and has a two-layer structure of credit risk. In most synthetic CDOs-squared, the underlying CDOs are created for the sole purpose of being included in the CDO-squared. Because of its synthetic nature, these underlying CDOs are simply conceptual and used to calculate cash flows and values of the CDO-squared. Therefore, a synthetic CDO-squared may be viewed as a complex derivative instrument, while its cash counterpart is simply a repackaging of existing CDOs.
These CDOs are identical to regular CDOs except for the assets securing the obligation. Unlike a CDO, which is backed by a pool of bonds, loans, and other credit instruments, CDO-cubeds are backed by CDO-squared tranches. CDO-cubeds allow the banks to resell the credit risk that they have taken once again by repackaging their CDO-squareds.
The trading is once again moving very far away from the assets and the paper trail becomes all but lost, hence opening the whole system to massive fraud.
Banks maybe only backing up their total loans with less than 1% in their reserves, even though Basel I in all its convoluted thinking pulled the 8% minimum out of a hat. This 8% had no mathematical basis whatsoever.
These tools were designed to maximize short term profit, and as we have all experienced medium term is they all but brought us too our knees.
Nothing has been done to reduce their size in fact the opposite has occured, their influence is global and they feel they cannot be challenged by mere governments and indeed many elected officials in power today will profit from them in their campaigns in the future. Just look at Goldman Sachs list of recipients if you don't believe me.
When banks harvest the profits and the public carry the losses then we have a system designed to fail.
Next time and yes there will be a next time: [the boom bust cycle is a fundamental design flaw]
They will be too big to save.
There needs to be a complete overhaul and break-up of the banks; the likelihood of this happening is close to zero as whole countries' political systems are beholden to the global financial leviathan.
Whenever threatened by regulation hence reduced profits they threaten to move to more understanding climes.
Ask yourself who owns these monstrosities and whose capital forms the foundation [cash reserves] for lending.
You will find most in the top 0.1%.
Here is the central battlefield in the class war.
We missed the opportunity to do something about this before we saved their necks, next time around the only thing left of value will be our souls.