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Swap
– an arrangement in which two entities lend to
each other on different terms,
e.g., in different currencies,
and/or at different interest
rates, fixed or floating.
Boy, that sounds
innocuous, another name for a simple trade. Unfortunately, the truth
is far different, as the “swap” is Wall Street’s euphemism
for the deadly derivatives that have devastated the global economy,
shortly to annihilate it for good.
When I
completed my Finance degree in 1992, I had not yet heard the word
“swap,” and for my final CFA exam in 1998, I wasn’t
required to learn anything more cursory than the definition above. Even when
I left Wall Street in 2005, I doubt the Series 7 exam incorporated
much more than a “swap = fixed for floating exchange” question,
which should show you how under-the-radar the growth of derivatives was until
Global Meltdown I in 2008.
By the way
– the Series 7 is the biggest joke of an exam on Earth, a
government-administered test with absolutely ZERO practical application.
In
reality, the definition of “swap” has changed, commandeered by
Wall Street as a euphemism for “over the counter”, “off
balance sheet”, or any method of obfuscating the true nature of a
transaction. Combined with liberal accounting rules from “self regulating organizations,” and in just a
decade “swaps” have ballooned to an astronomic $700 TRILLION of
notional value (actually, that figure is as of June 2011, likely much higher
now).
Per the
chart below, the amount of “swaps” and other over-the-counter
(non-Exchange Traded, and thus regulation-free) derivatives has EXPLODED,
blowing past the high from when Global Meltdown I commenced in
mid-2008. If you remember that time (how can one forget?), the entire market
implosion was blamed on such derivatives, particularly those related to
ill-conceived – and at times fraudulent – mortgage-backed
securities, taking down Lehman Brothers, Fannie Mae, and AIG, the
world’s largest derivatives dealer (now government-owned,
congratulations taxpayers).
Since
then, we have seen plenty of lip service about pending derivatives regulation
(such as the toothless “Dodd-Frank” bill), but lo and behold,
nothing happened. You see, the problem with derivatives is they are a Ponzi
Scheme, tangling institutions together in a deadly financial web that
MUST grow larger to survive. That is why the government has been silent on
the matter; in fact, allowing a subtle accounting change to misleadingly understate
notional value.
According
to Jim Sinclair – who knows more about derivatives than anyone alive
– the TRUE notional value of this table is above $1 QUADRILLION, or
$1,000 TRILLION! Moreover, five banks have written 97% of such
“swaps” – JP Morgan, Goldman Sachs, HSBC, Citigroup, and
Bank of America. Now do you understand why JPM and GS were allowed to
reorganize in 2009 as “bank holdings companies,” enabling them to
access unlimited, free, freshly printed money from the Federal
Reserve?
Swap is
such a simple term, “even a caveman can get it.” Unfortunately,
its “new meaning” describes essentially any security that cannot
be regulated, monitored, or marked to market properly. In other words, the
financial equivalent of EVIL. Enron was bankrupted by swaps, as was Lehman
Brothers and soon-to-be, GREECE, thanks to swaps executed by none other
than…drum roll please…GOLDMAN SACHS.
Let’s
also not forget the much ballyhooed Fed “swap facility,” which
essentially means that instead of simply giving money to hundreds of
zombie banks, the Fed is “trading” such money for obviously impaired
– but not written down – assets, which conveniently have been
allowed since Global Meltdown I to be valued at whatever level holders
choose. The real beauty of this “swap” is the Fed does not
count it as MONEY PRINTING because it has been “swapped” garbage
in return. Even the pawn shop gives you a better deal than these banks give
the Fed (with their worthless collateral), but without this FREE money
– which can be indefinitely rolled over – said banks would
file Chapter 11 immediately.
Finally,
the coup de grace regarding the blatant criminality of the derivatives
business – which ultimately will crash to the ground in a fiery blaze
– is that its top regulator is none other than the self-regulatory
organization called ISDA, or International Dealers and Swaps Association. As
many of you know, the voting members of the ISDA are the same five banks that
wrote 97% of all derivative contracts, and last week had the gall to deem the
proposed Greek “bond swap” to NOT entail a “default,”
but instead a (made-up term) “credit event,” which essentially
means a “default that we choose to pretend is not.” Have no fear,
truth-seekers, Greece WILL completely default and destroy that which the ISDA
seeks to hide, possibly as soon as this month.
Who would
have thought such an innocuous term could mask the most deadly financial
disease ever created, as virulent as Ebola and incurable as cancer?
PROTECT
YOURSELF, and do it NOW!
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