Winner Takes All: The Super Priority Status of Derivatives

[marmar]

Winner Takes All: The Super Priority Status of Derivatives

Posted on Apr 10, 2013
By Ellen Brown, Web of Debt

This article first appeared at Web of Debt.

Cyprus-style confiscation of depositor funds has been called the “new normal.” Bail-in policies are appearing in multiple countries directing failing TBTF banks to convert the funds of “unsecured creditors” into capital; and those creditors, it turns out, include ordinary depositors. Even “secured” creditors, including state and local governments, may be at risk. Derivatives have “super-priority” status in bankruptcy, and Dodd Frank precludes further taxpayer bailouts. In a big derivatives bust, there may be no collateral left for the creditors who are next in line.


Shock waves went around the world when the IMF, the EU, and the ECB not only approved but mandated the confiscation of depositor funds to “bail in” two bankrupt banks in Cyprus. A “bail in” is a quantum leap beyond a “bail out.” When governments are no longer willing to use taxpayer money to bail out banks that have gambled away their capital, the banks are now being instructed to “recapitalize” themselves by confiscating the funds of their creditors, turning debt into equity, or stock; and the “creditors” include the depositors who put their money in the bank thinking it was a secure place to store their savings.

The Cyprus bail-in was not a one-off emergency measure but was consistent with similar policies already in the works for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles (hyperlinks at link below). “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage the deposits of their customers, the customers will now be put into bankruptcy to save the banks.

Why Derivatives Threaten Your Bank Account

The big risk behind all this is the massive $230 trillion derivatives boondoggle managed by US banks. Derivatives are sold as a kind of insurance for managing profits and risk; but as Satyajit Das points out in Extreme Money, they actually increase risk to the system as a whole. ......................(more)

The complete piece is at: http://www.truthdig.com/report/item/winner_takes_all_the_super_priority_status_of_derivatives_20130410/

[MrYikes]

1. What must be done to eliminate this problem? nt

[bemildred]

3. Glass-Steagal and the FDIC were instituted to prevent this sort of crap.

They worked quite well, until we decided such regulation for the banking business was unnecessary.

It is fraud and theft, but they won't EVER call it that. Running a bank is not good enough, they want to all run their own casinos.

[kenny blankenship]

5. Since the only warning you will get b4 it happens are articles like these-

that is, in fairly obscure and technical commentary- there is no real way to eliminate the problem. Whatever you think the standing rule is - and whatever reform you might try to enact to preclude the possibility of confiscatory "bail in"- it will likely be swept away by the criminals running the government and the banks in the heat of the next crisis. Propose whatever preventive measures you like, it probably won't matter.

Put this emergent trend of deposit confiscation next to the destruction of clear sequence of title records wrought by the banks in their MBS fiasco, and legally normalized by the mortgage foreclosure fraud settlement. What it all adds up to for ordinary schmoes is the end of the rule of law in any matters involving financially significant sums. Blows are being struck at foundations on which the edifice of Anglo-American property law has been raised - ironically by the very people who have benefited the most from it. It was never a very fair and welcoming structure maybe, but at least it was very stable. Now it's becoming even more inequitable, oppressive, and also dangerously arbitrary and unstable. Henceforth, wherever the interests (and criminal culpability) of the financial class are concerned ALL BETS ARE OFF. This situation will certainly get worse before it gets better. And no one should imagine that history will step in to supply an automatic and fast-acting corrective. Corrupt nations can go on being corrupt nations for CENTURIES. Some of the most charming places on Earth are like this, actually. Generation after generation passes, and no moral force in Nature nor in Humanity ever shows up to shift the power out of the hands of the oppressor.

The next Obama will just breezily dismiss depositor outrage by stating "The outgoing administration and the banks did nothing illegal", and the next Holder will sit on his hands, and the People can go pound sand up their ass if they're still unhappy. It worked before and it will work again.

[OnyxCollie]

6. + everything.

Republican Liberalism: Representation and Rent Seeking

Republican liberal theory emphasizes the ways in which domestic institutions and practices aggregate those demands, transforming them into state policy. The key variable in republican liberalism is the mode of domestic political representation, which determines whose social preferences are institutionally privileged. When political representation is biased in favor of particularistic groups, they tend to "capture" government institutions and employ them for their ends alone, systematically passing on the costs and risks to others. The precise policy of governments depends on which domestic groups are represented. The simplest resulting prediction is that policy is biased in favor of the governing coalition or powerful domestic groups.

A more sophisticated extension of this reasoning focuses on rent seeking. When particularistic groups are able to formulate policy without necessarily providing off-setting gains for society as a whole, the result is likely to be inefficient, suboptimal policies from the aggregate perspective-one form of which may be costly international conflict.63 While many liberal arguments are concerned with the seizure of state institutions by administrators (rulers, armies, and bureaucracies), similar arguments apply to privileged societal groups that "capture" the state, according to assumption 2, or simply act independently of it. If, following assumption 1, most individuals and groups in society, while acquisitive, tend also to be risk-averse (at least where they have something to lose), the more unbiased the range of domestic groups represented, the less likely they will support policies that impose high net costs or risks on a broad range of social actors. Thus aggressive behavior-the voluntary recourse to costly or risky foreign policy-is most likely in undemocratic or inegalitarian polities where privileged individuals can easily pass costs on to others.64

This does not, of course, imply the existence of a one-to-one correspondence between the breadth of domestic representation and international political or economic cooperation, for two reasons. First, in specific cases, elite preferences may be more convergent than popular ones. If commercial or ideational preferences are conflict- ual, for example where hypernationalist or mercantilist preferences prevail, a broadening of representation may have the opposite effect

Second, the extent of bias in representation, not democratic participation per se, is the theoretically critical point. Direct representation may overrepresent concentrated, organized, short-term, or otherwise arbitrarily salient interests.

Moravcsik, A. (1997). Taking preferences seriously: A liberal theory of international politics. International Organization, 51(4), 513-553.

Democratic mass parties are bureaucratically organized under the leadership of party officials, professional party and trade union secretaries, etc.... Of course, one must remember that the term 'democratization' can be misleading. The demos itself, in the sense of an inarticulate mass, never 'governs' larger associations; rather it is governed, and its existence only changes the way in which the executive leaders are selected and the measure of influence which the demos, or better, which social circles from its midst are able to exert upon the content and the direction of administration activities by supplementing what is called 'public opinion.' 'Democratization,' in the sense here intended, does not necessarily mean an increasingly active share of the governed in the authority of the social structure. This may be the result of democratization, but it is not necessarily the case.... The most decisive thing here- and indeed it is rather exclusively so- is the leveling of the governed in opposition to the ruling and bureaucratically articulated groups, which in turn may occupy a quite autocratic position, both in fact and form.

Weber, M. (n.d. [1946]) in Gerth, H. H., & Mills, C. W. (Eds.) From Max Weber: Essays in sociology (pp. 224-226). New York, NY: Oxford University Press.

[xchrom]

2. du rec. nt

[OnyxCollie]

4. DU's Defenders of the Status Quo

will be along shortly to tell us that Ellen Brown, Yves Smith, and Richard Wolff are Chicken Littles and that there is nothing to worry about.