Oh Oh. "Regulated" Derivative Markets About To Blow Up?
Look folks, the risks involved here are real.
Rick Santelli was just on CNBC pointing out that there have been no answers forthcoming on the MF Global mess. There are reports that several people who you would never expect to have gotten caught in something like this did, including Gerald Celente.
The reason they got caught is the same reason I would have gotten caught if I had been clearing through MF Global: Despite being around the markets since well before the 2000 crash and having successfully negotiated that and the 2008 mess everyone has believed, right up until MF blew up, that customer funds were in fact segregated and thus this risk would never occur.
Simply put everyone has now discovered that this assumption is wrong.
Nothing that has come out of the CME, the SEC or Washington DC that has restored my confidence that MF Global is, in fact, a one-off situation. In point of fact The Fed is now requiring margin on certain repo transactions where they never did before, implying that there may well be additional snakes in the grass and additional unrecognized and intentionally hidden risks of this sort.
Read Ann's entire missive. Yes, it's highly partisan, but given what has just happened and Obama's continued insistence that "no crimes were committed" (yet no grand juries have been convened to investigate, so how would he know?) it is entirely justified.
Folks, we must insist that the rule of law be brought back into the forefront. We must do this particularly with credit instruments and other OTC derivatives and that has to happen right now. In addition all off-balance sheet BS must be ended immediately.
I have, since 2007, advocated that all credit instruments be forced onto an exchange and that cash margin be required on all underwater positions, marked nightly, without exception or offset. This has been "pooh-poohed" as impractical due to bespoke contracts and other considerations.
Now it turns that I was in fact right - there were additional "snakes" in the grass that were cheating. First we had ENRON, then Bear and Lehman and now this.
Here's reality folks: We either fix this problem and do it now or you had better pray that Europe doesn't detonate, because if it does you're going to see the very thing that everyone was talking about back in 2008 happen on a global scale, it's a hundred times the size that Lehman was, and we will not be immune to it here in the United States -- in fact we'll damn near be the "center of the sun!"
There is the potential for an imminent cascade failure on these contracts just as there was in 2008; it has not gone away, it has not been attenuated, it has in fact grown in size since 08 and if we do not act to put a stop to it and the risk becomes realized it will be too late.
Nov 17, 2011
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