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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?