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!
“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?”
Actually, Andy, I would have thought that, probably because of my inherently suspicious nature. Any time people start playing with language and creating their own definitions for even common words, we can all pretty well understand that they are… up to something. We got a great example of this from Bill Clinton and his now infamous, “what is the meaning of “is”?”, question.
As to derivatives, you are 100% correct. This will be the blade upon which the entire world financial system will impale itself… and it will be both painful AND messy. Derivatives are the equivalent of heroin for the financial system. It just feels SO good when they work and provide obscene profits… but when they do not and provide equally obscene losses, well, we will just shuffle those off onto the tax-payers, right? Problem is, the derivatives market has grown so incredibly huge that the tax-payer cannot cover these losses or even the interest on them. Net result? GAME OVER!
Ed,
I couldn’t have said it better myself, except there NEVER were any “profits,” just paper gains arbitrarily assigned by banks to themselves and funded by the government (with ZIRP) to pay themselves BONUSES.
Andy
Hi Andy,The question raised about FOFOA,I know them well!.
“A Tribute to the thoughts of Another and his friend”
‘Friend of friend of Another’.
In the late 90’s an ‘insider’ started writing as ANOTHER(THOUGHTS),covering gold and oil & other topics. FOA(Friend of Another),took up the themes,Counting USAGOLD’s Micheal Kosares as a friend.
FOFOA’s blog is a theoreticians world mostly,dealing with the prospects of returning to a genuine store of value.
Not the gold standard argument,more a reference point system,known as FreeGold(RPG). Although I found much of the comments to be interesting,I found it to be too abstract and limited in it’s approach. Blinkered!
Like most specialists having little or no experience of other fields.
The FOFOA ratio on silver is total nonesense.
Jack,
Frankly, I have not heard of FOFOA.
However, Michael Kosares lives here in Denver – and excellent writer – and I have spent some time hanging out wiht his son Jonathon, another sharp guy.
Andy
Randy, I love your rant. Just a commont on the Fed taking impaired assets as collateral. Many of these are mortgages. These mortgages will all default in the eonomic crash engineered by said Fed et al. The Fed will end up owning the real estate pledged as collateral on these mortgages. THAT is their motivation. They intend to break everyone and end up owning property encumbered by mortgages. Then they are going to break many more by an aggressive property tax collection program that will foreclose immediately for non payment of property taxes. This will be at a time when the economy is not functioning and nobody has any money. If this doesn’t work, they will eventually invade and take it by force.
Thanks for telling people about the coming economic collapse. You are one of the few that gets it.
James
James,
Much appreciated.
I think you give the Fed too much credit. They are now a government agency – contrary to what they tell you – particularly as the BANKS that own it now own the government as well.
They have become the largest owner of Treasuries on Earth, just as Fannie Mae (i.e. the government) is now the largest holder of mortgages.
They must PRINT MONEY and BUY EVERYTHING from their masters at the bank, until eventually the whole edifice of debt and insolvency collapses of its own weight.
This is why CONFIDENCE in the dollar must be maintained, care of the Cartel.
Andy
They will sacrifice some of the banks, and one of them could be the Fed, since it is owned by some of the others (JPM, Deutche Bank, et al.). The assets of the Fed will then become the assets of the one(s) that survive that owned the Fed. The rest of the scheme is the same for whichever banks they maintain through the coming collapse.
The surviving banks will end up owning 80% of the real estate. They will go after the rest with the property tax. If you don’t think they can and will, just look at how they have ignored law and the Constitution (e.g. MF Global, ECB exempt from CAC, immigration, citizenship, etc.). These people are not stupid and to believe they have just ignorantly gotten themselves in a muddle is to greatly underestimate your enemy. Just look at how they control all markets. That is power, not weakness. Never underestimate your enemy. This process is planned and has a schedule.
The big event will be when they take down the dollar and the bonds while they are short the dollar and bonds in offshore hedge funds. The destruction of bonds will be the end of wealth, for that is where most wealth is maintained. The Euro will go first though. Then the dollar in 2-3 weeks after that. They will also be short the Euro when they take it down, and they will profit from that as well.
James
James,
I think you are speculating a bit too much.
I don’t believe there is much thought going on, per what Sinclair says. They are simply scrambling from one crisis to the next, trying to get through each day without cratering CONFIDENCE.
“They” can’t go after the Fed b/c “they” ARE the Fed, as is JPM, the U.S. Treasury, etc.. All one being. If it gets to the point that they own 80% of real estate, we will be well into anarchy, chaos, and currency collapse, and all else would be moot, IMO.
That is why we own PHYSICAL PMs.
Andy
Great work. I read you every day. However there is one question that has been gnawing at my gut and no one seems to be able to answer it. Every bullion retailer and PM web site on the planet is always saying how doomed the fiat currencies are and that the dollar will be worthless and that you must protect yourself with gold and silver. If this is the case then why are they all tripping over each other to sell me their precious metals for a doomed and worthless currency??? Please help me understand this.
Chuck
Chuck,
First off, I wrote this stuff ten years ago, long before I worked in the PM business.
Secondly, I don’t mean to be condescending but it appears you are just trying to be antagonistic, and frankly I don’t have time for it.
MF is not selling you OUR metal – we have NONE. We, and ALL dealers, are BROKERS, trying to sell you on the CONCEPT of buying metals.
Not only that, MF has been educating the populace for FREE for two decades so they can make their own educated decisions.
Andy
Whoa! Now I know why they call you ranting Andy. No worries, it was an honor to get a verbal smack down by the best. Wasn’t trying to be antagonistic, just wasn’t clear on the whole PM dealer thing. You cleared it up and now I understand. Hey, I’m on your side and am a big fan of what you do. Thanks for the response and keep up the great work!
Chuck
Chuck,
No problem at all, we’re BFF.
And yes, there’s a reason they call me RANITNG ANDY.
Andy
“They” are not the Fed. “They” control the Fed, but the Fed is only part of their operation and plan. “They” have gained control of every central bank, not just the Fed. As one noteworthy personage once remarked, “Give me control of a nation’s money supply, and I care not who makes its laws.” It is also prima facie that “they” control the regulatory agencies, the commodities courts, various enforcement agencies (FBI, attorney generals, FEMA, TSA, etc.) and the Congress. This control certainly did not happen by accident. Further, these guys understand banking. They have been doing banking for centuries. They understand that if you cut off the money supply that you have a recession/depression and if you pour money into the economy you get growth/inflation. They understand that if you loan money to people that can’t pay, the money won’t be paid back, but they did it anyway. They know that if a nation borrows more money than it can pay back that its economy will crash. If all nations of the world borrow more than they can pay back, all of the economies of the earth will crash, particularly if they all use the same paper currency and there is no help coming in from outside the debtor nations. They know this, but they led the way in creating (as you note) a quadrillion in unpayable debt. They knew that was happening. They created the derivatives that tie all the financial institutions so that we have what amounts to everybody having the detonator button to everybody else’s suicide vest. Why would they do this? They were already at the helm of the world financial system, yet they deliberately created an interconnected system that will destroy the GLOBAL financial system. The destruction of the GLOBAL financial system will result in the destruction of the physical infrastructure that provides food, water, electricity, and fuel. The collapse of these systems will cause the deaths of millions, since the whole WORLD will be in the same boat, and there will not be aid forthcoming from outside the crashed system. They can see this will happen, yet they have deliberately created the conditions to make it so. The question is, why would they deliberately plan and execute the demise of the system that feeds them and which they already control? ANS: They want to own everything: people, property, and PMs.
Do “they” react in a panic mode at times? Yes. Do they have to resort to extreme measures to maintain control? Yes. But it is not because they are fearful of losing their wealth, it is because they have a schedule to keep and there is a bigger picture than just the financial market. They are after the whole world, and there are political considerations, particularly in the US, that must be melded with the financial. It is not enough to just destroy the economy of America. They must also destroy its people, otherwise, Americans will just rebuild without “they” being in charge any more. “They” are doing their best to insure there won’t be enough of us left to make any difference.
Anarchy, chaos, currency collapse, and death of billions IS the end game out of which emerges their new order. Got gold and silver?
James,
We are on the same page, just semantics.
That said, you appear to be doing what Bix Weir does – speculating on things you don’t have proof of.
Cheers!
Andy