The Goldman Sachs Derivative Beast Report For Congress

Goldman Sachs just released a report to Congress which begs our Representatives and Senators to do absolutely nothing to stop the looting and destruction of all banking systems by a gang of vampiric gnomes.  Below is a section of this report and my analysis of what is really going on.  When dealing with criminals and looters who are highly educated, we need to peel away all their verbiage and get down to the nitty gritty of what is going on in this paper.

http://www2.goldmansachs.com/ideas/public-policy/3-regulatory-reform/effective-reg-part-4.pdf

Consider the honey bee.

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Please remember this ‘bee’ business of the opening line.  I suppose the author of this bizarre and self-serving report wanted to make Goldman Sachs sound like it is some necessary function that pollinates flowers and thus, gives us fruits.  But it brings to my mind ‘hive collapse’ which kills bee hives and destroys crops.  Now, there is no mention of bees or any bee analogy for quite a while as we shall see below.

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Perhaps an odd start to a paper on financial-market regulation, but it is an appropriate one. Financial systems, like complex eco-systems, are interconnected in ways that can be opaque to the casual observer – and sometimes to the informed observer as well. Reforms to financial regulation are undoubtedly necessary, and we support them wholeheartedly. But they should take into account the necessarily complex nature of the global financial system if they are to make it both safer and more efficient.

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These ‘interconnections’ are important. Now, why would these connections be so subterranean that even ‘informed observers’ can’t figure them out? Well, the job of analyst is to see these mysterious connections. And what is this report written for Congress about?

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.The Derivatives Beast. Since some irate politicians are openly hostile towards this super-sized monster and are very suspicious about it and think it caused the near total annihilation of banking systems, Goldman Sachs has a vested interest in keeping this monster alive. Alarmed that there may be laws passed to prevent this horror from expanding to thousands of trillions of dollars, GS has to make it look as if this thing is good for us, not a major destroyer of all banking systems.

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Of course, the interconnected nature of this bizarre system was exposed when AIG went bankrupt a year ago. Since then, there have been desperate efforts to keep the fiction of credit default swaps alive so international magic money credit creators can continue to make loans based on nearly zero capitalization levels.

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. Efforts to address a single flaw in isolation have often had unexpected and unwanted consequences as they ripple throughout the entire financial system. By singling out individual behaviors, current efforts to reform flaws in today’s system run the same risk of causing detrimental unintended consequences. That is not to say that significant improvements are undesirable or impossible. It is only to argue that as much effort should be dedicated to understanding financial interconnectedness as is dedicated to reviewing individual practices.

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OK—at test question for the GS writers of this screed: if these mysterious interconnections are so difficult to understand that EVEN GOLDMANN SACHS doesn’t understand them, then obviously, how on earth can anyone understand them? When anything is so mysterious and bizarre that even the creators can’t comprehend the systems then this is a system that is impossible for mere humans to use in the first place!

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I often talk about how magic is the underlying system in the creation of credit and fiat money. That is, the magicians go into the Cave of Wealth and Death and make deals with the Entities there: the Goddess of Infinity and the Goddess of Zero. That is, the Goddess of Eternity and the Goddess of Nothingness, ie, Fate and Death. Since numbers are by their very nature and status, magical and religious iconic entities, only numbers can go to infinity and only numbers can have pure, unadulterated random chance. When humans, consumed by lust, raging hunger and emotional rages tap into numbers to run any system, they always make things run to infinity as much as possible.

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This is because there is no limit to human imagination or human desires. We are, in this sense, ‘gods’. Only we are not gods, we are demons. That is, we are prey to our own lusts and thus, like Ouroboros, we swallow our own tails and eat our own selves. We thrive only if there are severe restraints on the length of our lives, the size of our bodies and how much we can consume. Infinity kills us.

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But the nature of any wealth creation system that is purely numbers like the Derivatives Beast drives mere humans insane and they always fall for the temptation to make these systems run to infinity as fast as possible. So this is why Congress is considering regulating or even, I hope, outlawing many Cave of Wealth and Death schemes based on infinite numbers.

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. Ultimately, reform should not only make the system safer, but also improve its ability to perform its two critical roles: to allocate capital to areas where it will be utilized best; and to provide individuals with the opportunity to participate in markets in an equitable fashion.

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. If we set out to cleanse the financial system of every practice that does not immediately appear “useful” or “good”, or that could be subject to abuse, we may find that we have accidently destroyed the ability of markets to provide essential services. Eco-systems require many parts. Although most of us would prefer not to deal with them, the world would be worse off without bees, bats or fungi. Similarly, the role played by each part of the financial system must be considered in a broader context if reforms are to improve the functioning of the system as a whole.

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Humans always wanted bees.  Bees are aggregators who create wealth via collecting pollen and nectar and turning it into honey in their manufacturing process we call ‘bee hives’.  I have owned many bee colonies, all of which died in the last 5 years due to hive collapse syndrome.  Bees have been recognized as ‘good’ for many centuries.  They are WORKERS.  They are PRODUCERS and we CONSUME their products and by products.

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Fungi: I love mushrooms.  Many humans love mushrooms.  Some mushrooms are very expensive delicacies.  Some can kill us. We don’t eat them indiscriminately.  We have to be very careful when we choose mushrooms to eat.  Millions of humans either hunt for mushrooms in the wild or grow them as a domestic product.  Note that Goldman Sachs writers get us all confused about this.  They want to make us think that the poisonous mushrooms they want us to eat can’t be distinguished from truffles!

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So we are supposed to eat both, I presume.  Bats eat insects and pollinate plants, too.  They can be bad if one blunders into bats and there are vampire bats.  Goldman Sachs writers want to make it seem as if we can’t tell apart the useful insect eating bats and vampire bats like Goldman Sachs bats.

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Understanding the role played by each part of the market requires an appreciation for how markets really work, and how different pieces interconnect. In our view, the core driver of complexity in financial markets is that markets tend not to be naturally balanced between buyers and sellers. Different market participants have different interests, needs, time horizons and liquidity requirements. Market makers and similar entities create balance in markets by bridging the gaps between what investors want to supply, and what companies, individuals and governments want to use.

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‘Market makers’ do not balance ANYTHING on earth at all. They are the main drivers of imbalance. They restlessly search for venues where they can DUMP DEBT. Then some poor sap, some mushroom grower or bee keeper has to then pay off these debts that were dumped on top of them. Usually, the way to do this is to outsource, offshore or merge. Every time the vampire bats of Goldman Sachs come flapping into some business, the end result is more debt and lots of employees being fired.

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. Filling the gap between the capital that investors want to supply and the capital that companies and others need is the core function of modern markets. The success of innovations such as the repackaging of risk into derivatives and the increasingly complex nature of market-making have allowed capital to be raised in larger quantities for more companies, and to be allocated more efficiently than in the past. This has, in turn, fuelled economic growth and the ensuing benefits of such growth – job creation, innovation and greater tax revenues.

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Far from ‘job growth’ nearly every packaged deal cooked up by the poison mushroom eating vampire bats causes job LOSSES, not creation. As for ‘greater tax revenues’: HAHAHAHA. And why are all the major countries hosting these vampire bats going bankrupt due to lack of tax revenues? Eh? Japan? England? The US? .

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That is not to say that complexity in and of itself is positive. The recent past is filled with examples of complexity getting the better of markets and of individual firms – in many cases because complexity appeared to be an attractive end unto itself. On the other hand, complexity that is the byproduct of markets serving the needs of their users and the economy should not be eradicated just because complexity sometimes fails. Simple is not always best.

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So what, if the super complex goofy games screw things up! That is no reason to stop these things! HAHAHA. The reason complexity was ‘attractie end unto itself’ is simple: these are ponzi schemes. And keeping things opaque and impossible to track enables theft.

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Our goal in this paper is to help better focus the debate on financial reform beyond individual issues and to look instead at how the whole system can be altered to reduce systemic risk and improve overall economic performance. This is likely to become a question of how to take some of the very good ideas that will drive the reform process – such as the standardization of financial products and the increased use of clearing houses – and better understand how and when they will be clear positives for the system, and when the opposite might well be true. Crises like the one we have recently experienced tend to drive their own momentum for change, but there is no idea that is so good it cannot be misapplied. .

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The most recent example of this is securitization. In response to earlier crises, financial markets and regulators embraced securitization as a powerful means of mitigating risk at individual banks. And it worked up to a point – local banking problems became fewer and more easily managed. But this good idea turned bad when it was applied to low-quality assets like sub-prime mortgages. It turned worse when it was used by financial firms to reduce the capital they held against low-quality loan portfolios or to hide risk in affiliates. Ultimately, securitization helped create the current crisis…..

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OK: what is ‘risk’? Risk is when a banker lends to a deadbeat who doesn’t honor his loans. How to deal with deadbeats?

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Palm them off onto someone else! Make it someone else’s problem. These ‘securities’ were based on lies. That is, AIG promised to pay 100% on any losses in various funding stream games. And capitalized this with virtually no capital at all. It was all made up out of thin air. Since buying insurance against losses was ridiculously cheap, all the players bought lots and lots of insurance. Everyone was happy and handed out loans like candy.

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Then, many defaults began to hammer the bankers who passed the losses on to AIG who went bankrupt nearly instantly. This was fixed by turning the entire US government into AIG and our government then gave 100% protection on bad loans. This proves, in a nutshell, that the entire securitization process was a FRAUD. A ponzi scheme. And thus, should be outlawed.

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. …Non-standardized products that trade over-the-counter (OTC) are critically important to financial markets. They allow companies to raise capital at lower costs, to manage risk more effectively and to engage in transactions that improve their structural efficiency. These non-standard transactions are often the kinds of transactions that drive the largest economic benefits – including job creation, investments in physical assets and the development of new technologies.

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The only jobs the OTC system created was more dealers in the investment banking gnome community or lawyers trying to unravel these bizarre things.

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. The high-volume parts of the markets – in addition to performing their most critical function of setting prices – are in fact what allow these low-volume, high value-added transactions to occur. As we will show, this is because market makers must execute many high-volume transactions to hedge the risks associated with a single non-standardized one.

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The OTC world is all about HIGH VALUE ADDED. This is why the Derivatives Beast grew so tremendously fast from $1 billion to over $600 billion in less than 20 years.

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. Thus, as we seek to standardize more financial products, we must take care that we do not accidentally inhibit the ability of markets to create economic value. Markets should continue to offer a broad array of products that can be used by capital providers and capital consumers. Market makers must be able to manage the risks that ensue from these products. The connections between custom and standardized parts of the markets need to be understood and maintained, rather than hindered or eliminated. For example, hedge exemptions can be critical to allowing market makers to offset risk from providing corporate clients with specific risk-management services that are impractical for corporations to manage for themselves.

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GS and the other Derivative Beast owners like JP Morgan are managing their risk by shifting all of the losses onto our government.  Markets do NOT have to provide a broad array of products that create debt.  Not even slightly.  They have to be careful, not careless.  They have to provide products, ie, lending, that THEY, not us, capitalize.

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Incentives to use standard products are highly appropriate, but prohibitions on non-standard products can seriously interfere with the ability of the market to help corporations raise capital and manage risk.

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There are no incentives to use ‘standard products’ because these are not profitable to the gnomes. They need the opaque, dark pool, over the counter, quasi-legal stuff because it is not regulated and thus, can be abused. This is how they ‘raise capital’: not like bees in the hive, collecting pollen and nectar and then building a honey comb and filling it with honey. Nor are they like mushrooms that grow and then are eaten. This is vampire time: sucking blood, making entities much weaker, killing its hosts. They are not raising any capital at all. They are creating money out of thin air.

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Which is extremely dangerous. This destroys the value of money and do note that the US dollar has been losing value against all other currencies lately. It debases economic systems, flooding it with easy to create magic money that has no capital basis. This is EXACTLY why the entire banking system collapsed and is still collapsing. It appears whole for the vampire banks only because they are now sucking all the life out of the EU, UK, US and Japan. The G7 is dying thanks to this methodology for raising capital.

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Many commentators argue that price volatility benefits only traders, while hurting the rest of the economy. While it is true that the price-discovery process in financial markets can be very messy, price discovery is undoubtedly one of the most important functions of markets.

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Price discovery yields good prices, which benefit everyone. This is because weak companies with inflated stock prices or an inappropriately low cost of debt waste valuable capital. Allocating capital instead to strong companies will help them fund expansion, and that expansion can, in turn, fuel economic growth. This is the key to long-term prosperity, a point we will demonstrate in detail later in this paper by looking at a few case studies involving oil companies.

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HAHAHA. So, when GS helped drive up the cost of oil to $150 a barrel in the summer of 2008, this benefited everyone? Who are they kidding? It did benefit Saudi Arabia. And GS. But it nearly killed the entire US economic system! And thus, was a very grave danger to everyone not only in the US but in all systems needing oil as energy systems.

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This emphatically did NOT ‘fuel economic growth’. It nearly killed the entire system! It didn’t bring prosperity to anyone outside of the tiny circle of dealers who inflicted this on us. The GS report here goes on to prove it helped ‘energy systems’ but neglects to discuss how it nearly destroyed all other systems.

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Short sellers and the buyers of credit default swaps (CDS) have come under particular criticism over the past year, with some observers arguing that they generate little economic benefit. Yet they bring valuable information to markets: contrarian views in the case of short sellers, and more accurate pricing information in the case of CDS buyers. As a result, they give market participants greater faith in prices and increase their willingness to provide funding. As we show later in this paper, companies with CDS are able to raise debt capital at lower rates because CDS allow buyers to more easily manage their risk. This lowers funding costs for the companies and improves their ability to invest….

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The ‘accurate pricing’ of the CDS markets was basically a total collapse in this sector due to no one willing to pay their end of the deal when all the deals went south for the winter. That is, the very instant these swaps began to play out, all the players ran out of the casino and the whole thing collapsed to nearly zero value except the G7 central bankers stepped in and paid off all the bad bets, one way or another.

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Since the players refused to play an honest game, GAME OVER. There was NO FAITH with each other, of course, these are gnomes. No one can trust a gnome especially when it comes to pricing anything. The CDS markets managed risk by defaulting and palming off all losses onto innocent bystanders who were forced to pay up.

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…It is important to understand the interplay of liquidity and transparency. Liquidity is the key attribute of well-functioning markets, ones that reduce systemic risk and serve the real economy. Transparency is a key attribute of liquid markets, as investors will not supply significant capital if they cannot understand the true value of an entity.

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. However, it is important to distinguish between price transparency and transactional transparency. Price transparency allows investors to know the price at which a security has been sold or bought. This, in turn, allows investors to accurately assess the value of their investments. This kind of transparency makes investors more willing to commit capital, aids liquidity and promotes systemic soundness.

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. An alternative notion of transparency – transactional transparency that allows all participants to see all trades on a real-time basis – can actually inhibit liquidity. This is because participants who invest large pools of money – such as pension funds and the mutual funds through which small investors allocate most of their capital – can be severely disadvantaged if all of their transactions are visible in real time. Having their positions visible to everyone else forces them to act much more defensively in their trading. This, in turn, significantly reduces the liquidity available to other large investors and corporations.

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Note how GS pretends that lack of transparency in trading helps the little guys! HAHAHA. Not the gnomes. Of course, this is a total lie. And so what, if this forces a much more defensive trading situation? We need a much more careful situation, not a Wild Wild West casino operation! This is exactly what went wrong in the first place!

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And if this reduces liquidity: good grief, of course, this is the whole point of regulation. To prevent the creation of debt money flowing into speculative game playing in a casino! Large investors and corporations were playing with money they owed, not capital. And this flood of easy lending so they could play wild, non-defensive games is EXACTLY why world markets collapsed!

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. While real-time reporting may seem like a simple positive, in the world of real markets, there are substantial trade-offs to consider. Many of the positive innovations in trading platforms over the last decade have allowed large investors to provide liquidity without having their orders broadly seen until after their transactions are completed (this is called “non-displayed liquidity”). These innovations have essentially transferred liquidity from hard-to-access slips of paper sitting on the trading desks of large mutual and pension funds, to easier-to-access electronic systems. Greater liquidity has, in turn, lowered trading costs by reducing bid-ask spreads, and has allowed companies to execute larger capital raisings and risk-management transactions. If liquidity provided by large investors goes from being non-displayed to virtually non-existent, everyone loses.

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HAHAHA. Everyone does NOT lose! The little investors don’t have ‘innovative trading platforms’. GS spends a lot of loot, creating these things. These things are much more like pirate ships used to raid the stock markets, for example. They could game the system using fake money, not capital. And do this in the dark and only after finished, would the results be revealed to the little players trying to tag along and not get steamrollered.

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. Clearing houses are really only effective when applied to highly liquid, high-volume markets, and only for major participants. This issue is quite simple: well-capitalized clearing houses that clear high trading volume and accurately priced products can massively reduce counter-party risk – but they do this at the cost of concentrating that risk at the clearing house itself…

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And the last thing the vampire gnomes want this Halloween is for themselves to be stuck with the damn risk!

…For regulators and other participants, there is another important lesson from securitization to be drawn. Altering a system to implicitly or explicitly promote a particular market structure or product – such as securitization or clearing houses – increases the risk that this structure or product will be used in ways that are unintended or inappropriate. If regulators and investors rely too much on this explicit or implicit promotion, they may overlook signs of strains in the market.

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These gnomes always seek ways to abuse things in novel, unintended or inappropriate ways. Ask any of the women they use for sex.

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Although securitization was originally intended to be applied to high-quality loans, the rules in fact incentivized institutions to relax their lending standards further and further, ultimately as far as subprime mortgages. Unfortunately, securitization itself could not transform poor loans into good ones. Similarly, clearing houses cannot make poorly capitalized counterparties or illiquid assets safer. We do not want the clearing houses of tomorrow to create similar systemic problems as securitization has. .

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This interesting GS document has more stuff about the CDS markets but I will save that for tomorrow.  It is very obvious, the GS traders want to keep the previous status quo going no matter what.  They love this system whereby they can pretend to capitalize things, have insurance, etc while using our government and central banks to fund all losses and protect them from all risks.  This is the IDEAL SYSTEM for them and they spend many millions of dollars every year on buying up politicians so they will do this service for the gnomes.

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And this has to stop!  This is what is wrong!  And I hope Congress isn’t bamboozled by the swill in this report!  But then, Congress is mostly owned by the insurance companies that refuse to insure the sick and international banking investment houses that are out to loot our entire economic systems for their own gain.

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