If you are in a hurry, just read the yellow highlights.
Ellen Brown wrote this excellent article.
The sudden dramatic collapse in the
price of oil is an act of geopolitical warfare against Russia and Iran. The
result could be trillions of dollars in oil derivative losses; and depositors
and taxpayers could be liable, following repeal of key portions of the
Dodd-Frank Act signed into law on December 16th.
On December 11th, Senator Elizabeth
Warren charged Citigroup with “holding government funding hostage to ram
through its government bailout provision.” At issue was a section in the
omnibus budget bill repealing the Lincoln Amendment to the Dodd-Frank Act,
which protected depositor funds by requiring the largest banks to push out a
portion of their derivatives business into non-FDIC-insured subsidiaries.
Warren and Representative Maxine
Waters came close to killing the spending bill because of this provision. But the tide turned,
according to Waters, when not only Jamie Dimon, CEO of JPMorgan Chase, but
President Obama himself lobbied lawmakers to vote for the bill.
It was not only a notable about-face
for the president but represented an apparent shift in position for the banks.
Before Jamie Dimon intervened, it had been reported that the bailout provision
was not a big deal for the banks and that they were not lobbying heavily for
it, because it covered only a small portion of their derivatives. As explained in Time: The best argument for not freaking
out about the repeal of the Lincoln Amendment is that it wasn’t nearly as
strong as its drafters intended it to be. . . . [W]hile the Lincoln Amendment
was intended to lasso all risky instruments, by the time
all was said and done, it really only applied to about 5% of the derivatives
activity of banks like Bank of America, Citigroup, JPMorgan Chase, and Wells
Fargo, according to a 2012 Fitch report.
Quibbling over a mere 5% of the
derivatives business sounds like much ado about nothing, but Jamie Dimon and
the president evidently didn’t think so. Why?A Closer Look at the Lincoln
Amendment, the preamble to the Dodd-Frank Act
claims “to protect the American taxpayer by ending bailouts.” But it does this through “bail-in”: authorizing
“systemically important” too-big-to-fail banks to expropriate the assets of
their creditors, including depositors. Under the Lincoln Amendment, however,
FDIC-insured banks were not allowed to put depositor funds at risk for their
bets on derivatives, with certain broad exceptions.
In an article posted on December 10th
titled “Banks Get To Use Taxpayer Money For
Derivative Speculation,” Chriss W. Street explained the amendment
like this:
Starting in 2013, federally insured
banks would be prohibited from directly engaging in derivative transactions not
specifically hedging (1) lending risks, (2) interest rate volatility, and (3)
cushion against credit defaults. The “push-out rule” sought to force banks to
move their speculative trading into non-federally insured subsidiaries.
The Federal Reserve and Office of the
Comptroller of the Currency in 2013 allowed a two-year delay on the condition
that banks take steps to move swaps to subsidiaries that don’t benefit from
federal deposit insurance or borrowing directly from the Fed.
The rule would have impacted the $280 trillion in
derivatives primarily held by the “too-big-to-fail (TBTF) banks
that include JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo.
Although 95% of TBTF derivative holdings are exempt as legitimate lending
hedges, leveraging cheap money from the U.S. Federal Reserve into $10 trillion
of derivative speculation is one of the TBTF banks’ most profitable business
activities.
(Watchman comment: Now you know why interest rates are low!)
What was and was not included in the
exemption was explained by Steve Shaefer in a June 2012 article in Forbes.
According to Fitch Ratings, interest rate, currency, gold/silver, credit
derivatives referencing investment-grade securities, and hedges were
permissible activities within an insured depositary institution. Those not
permitted included “equity, some credit and most commodity derivatives.”
Schaefer wrote:
For Goldman Sachs and Morgan
Stanley, the rule is almost a non-event, as they already conduct derivatives
activity outside of their bank subsidiaries. (Which makes sense, since neither
actually had commercial banking operations of any significant substance until
converting into bank holding companies during the 2008 crisis).
The impact on Bank of America,
Citigroup, JPMorgan Chase, and to a lesser extent, Wells Fargo, would be
greater, but still rather middling, as the size and scope of the
restricted activities is but a fraction of these firms’ overall derivative
operations.
A fraction, but a critical fraction,
as it included the banks’ bets on commodities. Five percent of $280 trillion is
$14 trillion in derivatives exposure – close to the size of the existing
federal debt. And as financial blogger Michael
Snyder points out, $3.9 trillion of this speculation is on the price
of commodities, including oil.
As Snyder observes, the
recent drop in the price of oil by over $50 a barrel – a drop of nearly 50% since June – was completely unanticipated and
outside the predictions covered by the banks’ computer models. And with repeal
of the Lincoln Amendment, the hefty bill could be imposed on taxpayers in a
bailout or on depositors in a bail-in.
Financial expert Yves Smith suggests
other derivative-related reasons the banks are likely to be concerned over the
oil crisis, which are too complicated to explain in this article, but the link
is here.
Interest rate swaps compose 82% of
the derivatives market. Interest rates are predictable and can be controlled,
since the Federal Reserve sets the prime rate. The Fed’s mandate includes
maintaining the stability of the banking system, which means protecting the
interests of the largest banks. The Fed obliged after the 2008 credit crisis by
dropping the prime rate nearly to zero, a major windfall for the derivatives
banks – and a major loss for their counterparties, including state and local
governments.
Manipulating markets anywhere is
illegal – unless you are a central bank or a federal government, in which case
you can apparently do it with impunity.
In this case, the shocking $50 drop
in the price of oil was not due merely to the forces of supply and demand,
which are predictable and can be hedged against. According to an article by
Larry Elliott in the UK Guardian titled “Stakes Are High as US Plays the Oil
Card Against Iran and Russia,” the unanticipated drop was an act of
geopolitical warfare administered by the Saudis. History, he says, is repeating
itself:
The fourfold increase in oil prices
triggered by the embargo on exports organized by Saudi Arabia in response
to the Yom Kippur war in 1973 showed how crude could be used as a diplomatic
and economic weapon.
Now, says Elliott, the oil card is
being played to force prices lower:
John Kerry, the US secretary of
state, struck a deal with King Abdullah in September under which the
Saudis would sell crude at below the prevailing market price. That would help
explain why the price has been falling at a time when, given the turmoil in
Iraq and Syria caused by Islamic State, it would normally have been
rising.
. . . [A]ccording to Middle East
specialists, the Saudis want to put pressure on Iran and to force Moscow
to weaken its support for the Assad regime in Syria.
War on the Ruble
If the plan was to break the ruble,
it worked. The ruble has dropped by more than
60%against the dollar since January. (Watchman comment: you can bet Soros, Dimon and other criminal banksters made money shorting the Ruble.)
On December 16th, the Russian central
bank counterattacked by raising interest rates to 17% in order to stem “capital
flight” – the dumping of rubles on the currency markets. Deposits are less
likely to be withdrawn and exchanged for dollars if they are earning a high
rate of return.
The move was also a short squeeze on
the short sellers attempting to crash the ruble. Short sellers sell currency
they don’t have, forcing down the price; then cover by buying at the lower
price, pocketing the difference. But the short squeeze worked only briefly, as trading in the ruble was quickly
suspended, allowing short sellers to cover their bets. Who has the
power to shut down a currency exchange? One suspects that more than mere
speculation was at work.
Protecting Our Money from Wall Street
Gambling
The short sellers were saved, but the
derivatives banks will still get killed if oil prices don’t go back up soon. At
least they would have been killed before the bailout ban was lifted. Now, it
seems, that burden could fall on depositors and taxpayers. (Watchman comment: the Obama
administration made a deal with the big derivatives banks to save them from
Kerry’s clandestine economic warfare at taxpayer expense.)
Whatever happened behind closed
doors, we the people will again be stuck with the tab. We will continue to be
at the mercy of the biggest banks until depository banking is separated from
speculative investment banking. Reinstating the Glass-Steagall Act is supported
not only by Elizabeth Warren and others on the left but by prominent voices
such as David Stockman’s on the right.
Another alternative for protecting
our funds from Wall Street gambling can be done at the local level. Our state
and local governments can establish publicly-owned banks; and our monies,
public and private, can be moved into them.
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