The most recent value of the derivatives market from the Bank for International Settlements in Switzerland, as of June 2008, is about 650 trillion dollars. If we take the value of all the stocks on all the stock markets, the value of all the publicly traded companies, and add them up, we get about 30 trillion dollars or less than 1/20 of the value of all outstanding derivative contracts.
What does this mean? These contracts are bets on the rise and fall of commodity prices, stock prices, weather; whether or not someone can pay someone else (a naked credit default swap) and anything else the wizards of Wall Street can bet upon.
In a worst case financial melt-down, the gaping maw of derivatives will consume all the world's wealth and still only be satisfied to the tune of 1/20 of all existing debt. The wealth consumed by the derivatives payouts is not destroyed, it is relocated, transferred from the many to the few who are on the payout end of these contracts.
If we do not zero-out the worst of these contracts, we will see the greatest wealth redistribution in history. When the trigger on a derivative is pulled, it is pulled based on some underlying asset, or ability to pay, failing a test written into the contract. Since the value of the contracts vastly exceeds the world's wealth, we have many bets with full value payout placed on the same base asset or action.
To survive this downturn, we must consider zeroing-out the worst of these derivative contracts. When Lehman Brothers failed, the underlying assets for 100's of billions of dollars worth of derivative contracts was destroyed. The shock waves from this, one of the smaller investment banks, failure caused world-wide lending to freeze-up solid. We can not afford one of the larger banks to collapse without first dealing with derivatives.
Once the nuclear weapon of the financial world, the derivative contract, is defused, we can start to unwind the failing banks and begin a true economic recovery.
Monday, April 20, 2009
Tuesday, March 17, 2009
Bankruptcy law blocks AIG recovery
The 2005 bankruptcy law passed by the Republican House, Senate and President is preventing the current administration from properly disposing of AIG. In short, the problematic change is to move the holders of derivative contracts to the head-of-the-line in a bankruptcy hearing.
How can the order of payouts in bankruptcy make a difference? According to the International Bank of Settlements, BIS, in Switzerland, there are 1000 Trillion dollars in active CDO, and CDS derivative contracts. The world GDP is only 60 Trillion dollars. If we payoff the bad derivative bets before, say employees, creditors, or shareholders, we will have a massive movement of dollars from stakeholders to financial gamblers. A massive transfer of wealth from the tax payers to the owners of these derivative contracts. Unless the laws are changed back, we will be paying our tax dollars for generations to make good on these financial market creations.
Push your elected leaders to repeal the 2005 bankruptcy bill. We must not payout on Wall Street bets with our futures. Remember AIG has already sent about 90 Billion dollars to other banks, some outside of the US, to payoff these derivative bets. Once the derivative contracts are placed at the back-of-the-line in a bankruptcy hearing, we can start to properly unwind the failed financial institutions and start on the road to recovery.
How can the order of payouts in bankruptcy make a difference? According to the International Bank of Settlements, BIS, in Switzerland, there are 1000 Trillion dollars in active CDO, and CDS derivative contracts. The world GDP is only 60 Trillion dollars. If we payoff the bad derivative bets before, say employees, creditors, or shareholders, we will have a massive movement of dollars from stakeholders to financial gamblers. A massive transfer of wealth from the tax payers to the owners of these derivative contracts. Unless the laws are changed back, we will be paying our tax dollars for generations to make good on these financial market creations.
Push your elected leaders to repeal the 2005 bankruptcy bill. We must not payout on Wall Street bets with our futures. Remember AIG has already sent about 90 Billion dollars to other banks, some outside of the US, to payoff these derivative bets. Once the derivative contracts are placed at the back-of-the-line in a bankruptcy hearing, we can start to properly unwind the failed financial institutions and start on the road to recovery.
Friday, February 06, 2009
Repeal the Reagan tax cuts
Netflix CEO, Reed Hastings, has an excellent point, but misses the mark. Yes, the very wealthy use more of the commons than the rest of us and should pay a higher tax rate to pay for using the courts, roads, airports, police, fire, etc. What he should have added: Yes, CEOs use their membership on boards of directors to game more compensation for themselves. Yes, many CEOs are more interested in their own compensation than the health of the companies they are well paid to run.
But the real issue is: economic bubbles caused by top wage earners. The last time we entered a period of economic deflation was after three Republican administrations lowered the top marginal tax rates and reduced regulations. The current economic cliff we peer over was brought upon us by the last three Republican and one free-trading Democratic administrations that did very much the same thing. In both cases, the depression followed bubbles in stock and housing. America's experience and understanding the cause of the Great Depression and the current economic colapse shows that top tax rates that are too low cause economic instability, bubbles and ultimately major resessions and depressions.
I am not talking about taking wealth from the highest wage earners, I am suggesting that a system that allows massive capital movement from corporations to the top executives results in decisions that benefit management over the employer. When Reagan lowered the top marginal tax rate, he set into motion the fleecing of well capitalized companies and transfer of taxation from the top wage earners to the middle and lower income earners.
Remember the leveraged buyout mania of the 1980's? The top marginal tax rate of about 70% prevented the would-be corporate raider from profiting by buying and parting-out companies. If the raider had the cash to purchase the company, then there would still be profit, but a heavily taxed profit. The leveraged part of the LBO is: performing the buy-out with others peoples money. Once the cost of capital, from borrowing, was factored in, LBOs, in most cases, would not be profitable for the corporate raider. Leveraged buyout mania equals fleecing corporate America for the benefit of the very few, the corporate raiders.
The I'll-give-you-millions-if-I-am-on-your-board-of-directors, if-you-agree-to-give-me-millions-as-a-member-of-my-board-of-directors game, would not be played if most of the wages, above the top marginal rate level, were heavily taxed and went to the government. When this "game" is played, capital that would be used for employee health care, a war chest for economic down times, research and development for new products and services would go to the top executives. Now we have decisions made for personal gain, in violation of the fiduciary responsibilities of top management.
To say its not fair to heavily tax the very rich is to take the me point-of-view over the we point-of-view. When monies are taken, in the form of excessive compensation, from companies, there are consequences, namely, long term viability and competitiveness of the, now poorer, companies. What is more important, giving top management with whatever compensation they want, or insuring steady long-term growth for the corporation, all its employees and shareholders?
Cutting taxes never results in increased government revenue. The Reagan top marginal tax rate cut reduced tax revenue. This forced Reagan to raise taxes, mostly on the middle class in the form of doubling Social Security deductions, to make up for some of the tax revenue shortfall. Bush Senior also increased taxes, even with his pledge of "no new taxes" to make-up for the shortfall caused by his predecessor.
It's time to revisit the Reagan tax cuts. Tax cuts never fixed a road, never built an airport, put police on the beat or put out a fire. Starving the government, a long term goal of the far right, does not leave the lender of last resort, our federal government, much capital upon which to fight the economic depression our nation, and the rest of the world, is now facing.
Excessive top level management compensation weakens the companies run by these managers. Since management and the compensation committees who set the executive wages are compromised, corrupted, we the people have to step in and ensure the health of our jobs and of our country. Restoring Roosevelt, Teddy (the Republican one) that is, level taxation will restore buying power to America's corporations and give our government the capital it needs to fight the worst economic downturn since the Great Depression.
But the real issue is: economic bubbles caused by top wage earners. The last time we entered a period of economic deflation was after three Republican administrations lowered the top marginal tax rates and reduced regulations. The current economic cliff we peer over was brought upon us by the last three Republican and one free-trading Democratic administrations that did very much the same thing. In both cases, the depression followed bubbles in stock and housing. America's experience and understanding the cause of the Great Depression and the current economic colapse shows that top tax rates that are too low cause economic instability, bubbles and ultimately major resessions and depressions.
I am not talking about taking wealth from the highest wage earners, I am suggesting that a system that allows massive capital movement from corporations to the top executives results in decisions that benefit management over the employer. When Reagan lowered the top marginal tax rate, he set into motion the fleecing of well capitalized companies and transfer of taxation from the top wage earners to the middle and lower income earners.
Remember the leveraged buyout mania of the 1980's? The top marginal tax rate of about 70% prevented the would-be corporate raider from profiting by buying and parting-out companies. If the raider had the cash to purchase the company, then there would still be profit, but a heavily taxed profit. The leveraged part of the LBO is: performing the buy-out with others peoples money. Once the cost of capital, from borrowing, was factored in, LBOs, in most cases, would not be profitable for the corporate raider. Leveraged buyout mania equals fleecing corporate America for the benefit of the very few, the corporate raiders.
The I'll-give-you-millions-if-I-am-on-your-board-of-directors, if-you-agree-to-give-me-millions-as-a-member-of-my-board-of-directors game, would not be played if most of the wages, above the top marginal rate level, were heavily taxed and went to the government. When this "game" is played, capital that would be used for employee health care, a war chest for economic down times, research and development for new products and services would go to the top executives. Now we have decisions made for personal gain, in violation of the fiduciary responsibilities of top management.
To say its not fair to heavily tax the very rich is to take the me point-of-view over the we point-of-view. When monies are taken, in the form of excessive compensation, from companies, there are consequences, namely, long term viability and competitiveness of the, now poorer, companies. What is more important, giving top management with whatever compensation they want, or insuring steady long-term growth for the corporation, all its employees and shareholders?
Cutting taxes never results in increased government revenue. The Reagan top marginal tax rate cut reduced tax revenue. This forced Reagan to raise taxes, mostly on the middle class in the form of doubling Social Security deductions, to make up for some of the tax revenue shortfall. Bush Senior also increased taxes, even with his pledge of "no new taxes" to make-up for the shortfall caused by his predecessor.
It's time to revisit the Reagan tax cuts. Tax cuts never fixed a road, never built an airport, put police on the beat or put out a fire. Starving the government, a long term goal of the far right, does not leave the lender of last resort, our federal government, much capital upon which to fight the economic depression our nation, and the rest of the world, is now facing.
Excessive top level management compensation weakens the companies run by these managers. Since management and the compensation committees who set the executive wages are compromised, corrupted, we the people have to step in and ensure the health of our jobs and of our country. Restoring Roosevelt, Teddy (the Republican one) that is, level taxation will restore buying power to America's corporations and give our government the capital it needs to fight the worst economic downturn since the Great Depression.
Subscribe to:
Posts (Atom)
Posts
