A brief excerpt:
Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy.
The precise amount that banks make trading derivatives isn’t known, but there is anecdotal evidence of their profitability. Former bank traders who spoke on condition of anonymity because of confidentiality agreements with their former employers said their banks typically earned $25,000 for providing $25 million of insurance against the risk that a corporation might default on its debt via the swaps market. These traders turn over millions of dollars in these trades every day, and credit default swaps are just one of many kinds of derivatives.
The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits.
If an investor trades shares of Google or Coca-Cola or any other company on a stock exchange, the price — and the commission, or fee — are known. Electronic trading has made this information available to anyone with a computer, while also increasing competition — and sharply lowering the cost of trading. Even corporate bonds have become more transparent recently. Trading costs dropped there almost immediately after prices became more visible in 2002.
Not so with derivatives. ...
And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.
It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.
The big banks who control these committees work to keep their competitors out and to keep the details a secret, because derivatives are very lucrative for them. And the wealthy bankers who control these big banks rake in huge bonuses every year, much of it because of derivative trading. They then spend some of that vast wealth to help elect politicians - mostly, but not exclusively, Republicans - who'll block derivative reform (and, of course, cut taxes on the rich).
Who pays for this? Well, we all do. We pay for it in derivative fees that are kept artificially high, (And therefore, to use an example from the article, when you lock in your furnace fuel costs, in an attempt to manage your home's utility costs, you pay a little extra to these wealthy bankers.) Individuals don't typically buy derivatives themselves, but this still increases the costs of what we do buy. Wealth may not "trickle down" to the rest of us, but costs certainly do.
We also pay for it because these right-wing politicians don't just block derivative reform and cut taxes on the rich. They do a lot of other terrible things, too. Of course, these bankers generally don't care about that. The side-effects of this legalized bribery aren't as important to them as their own greed.
And now, they don't even have to use their own money. Thanks to our far-right Supreme Court, they can use corporate money now - your money, if you own mutual funds in your pension plan or IRA - for political campaigns aimed at their own personal benefit.
I'm not a conspiracy theorist. In fact, a conspiracy isn't necessary. This is just wealthy people doing what's in their own economic best interest. It's natural. It's human nature to want to maximize your own wealth, and if your wealth depends on keeping information secret and limiting competition, you'll naturally find some reason to do that.
And if politicians promise to do that - and to cut your taxes, to boot - you might find it easy to overlook their other positions, or even decide that they're right. After all, it's very easy to believe what you want to believe.
The rest of us could change this, if we wanted. If we were smart. If we were knowledgeable. This is just a tiny minority, after all, and no matter how much they donate to political campaigns, we don't have to vote for their candidates. This is still a democracy.
But all too many Americans are ignorant, gullible, and/or apathetic. We're swayed by campaign ads. We believe what we hear on Fox "News." We're easily scared by all sorts of fears, and we're not smart enough to see through the lies. And we just don't know anything about politics or economics (or science or anything else, much, that we don't regularly encounter in our daily lives).
Or we're apathetic. We're lazy. We're dispirited. So we don't vote. We many not even pay attention to what's going on, because "all politicians are crooks" or "both parties are alike." We look for ways to justify our inaction. Well, we're human, too. And when you want to keep sitting on the couch, doing nothing, there are always ways to convince yourself that's a reasonable position.
Anyway, read the article. It's important. And America desperately needs an informed electorate.
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