Brooksley Born on the role of OTC derivatives in the credit bubble

It was my worst nightmare coming true. Nobody really knew what was going on in the market.  The toxic assets of many of our biggest banks are OTC derivatives and caused the economic downturn that made us lose our savings, lose our jobs, lose our homes.  It was very frightening.

~ Brooksley Born, October 20, 2009

Jim Grant on the state of the US dollar since 1971

Since 1971, the dollar has been a derivative without an underlying asset.

~Jim Grant, publisher, Grant's Interest Rate Observer, GIRO, May 20, 2011

Jim Sinclair on OTC dervatives

The securitized debt OTC derivative market is seizing up. It is not seizing up, it is dying. This mountain is a two trillion dollar scam. It was known in 2008, but nothing was done about it. Now litigation is going to set the victims free. What the first OTC derivative crisis did not do to the international investment banks, litigation will. Here comes the final act in the OTC derivative crime against humanity.

Jim Sinclair on OTC derivatives, www.JSMineset.com, October 19, 2010

Doug French on a Bill Bonner speech: "Mathematical modeling is based upon conceit and pretension"

Bill Bonner provided a clear analysis of how the current crisis was engendered in his speech played for the [Doug] Casey faithful during the Wednesday night banquet. When Richard Nixon closed the gold window, the US dollar was then "based upon a fraud," and with central bankers being human, from that point the dollar would be made worthless. The next villain in Bonner’s story is Eugene Fama, who formulated the "Efficient Market Hypothesis," or in other words, the market knows everything, prices just move randomly. Since Professor Fama’s work was published, securities prices became natural phenomena that are supposedly not influenced by human behavior. Thus, stock and bond price movements could be mathematically modeled, and that risk isn’t risk anymore, but volatility.

From this thinking came the derivatives industry that is based upon models devised on historical market statistics during time frames that didn’t include a fiat currency regime, let alone the presence of $500 trillion in derivatives. This mathematical modeling is based upon conceit and pretension, according to Bonner, and the turning of Level 3 assets into AAA-rated paper were "miracles that would stagger Jesus Christ."

~ Doug French, "V.I. Bernanke," LewRockwell.com, April 1, 2008

Chris Whalen on derivatives market

One operations officer tells The IRA that his biggest headache is policing the tendency of equity traders, for example, to take punts in commodities or other asset classes, often using the same type of cash settlement index instruments employed with horrible effect by Mr. Kerviel. Such shenanigans are made possible due to the wonders of cash settlement derivative contracts. Financial contracts which settle in cash and do not require the seller to deliver some tangible asset upon maturity are gaming instruments, not investment vehicles. Such contracts actually enable young masters of the universe like Mr. Kerviel to multiply risks exponentially. The settlement procedures for derivatives also provide ample opportunities for a smart trader to game the system, thus the possible permutations of op-risk events are open-ended. The same phenomenon, incidentally, is visible in the way that third-party mortgage originators so handily gamed bank loan approval systems in creating the $1 trillion subprime structured asset debacle. Whether you speak of losses due to unauthorized trading in index contracts or write-downs of Collateralized Debt Obligations, the common cause in both cases is the unregulated and unrestrained use of derivatives to create instruments and risk exposures which are not transparent and which lend themselves to at least the appearance of intentional deception if not fraud.

~ "Rogue Traders and Economic Capital", IRI, January 28, 2008

Joseph Mason on derivatives

The contingent liability of banks to support off-balance sheet assets is a huge source of volatility in the financial markets and that a system which supports over $9 trillion worth of GSE and private label securitizations atop $6.7 trillion worth of US bank deposits is inherently unstable.

~ Joseph Mason, Drexel University Professor, "Rogue Traders and Economic Capital," IRI, January 28, 2008