From the Rostra

The Quadrillion Dollar Conundrum

Quadrillion Dollar Conundrum

Late last year, we wrote several articles about a warning from the Bank for International Settlements about a $75 trillion unidentified loss in the foreign exchange markets.  Then, all went quiet for months, almost as if the problem had thankfully healed itself like a salamander regenerating a lost tail.  In the past few weeks, an issue has reappeared with concerns about an even more significant number, $1 quadrillion ($1,000 trillion).  This figure is beyond comprehension for most of us, so it just seems to go in one ear and out the other.  To understand how a number this large could exist in markets, and no one knows what it is comprised of and who owes whom, we must go back to the days of President Clinton. Clinton Weakens Banks and brokerage houses might have duped Clinton into repealing the Glass-Steagall Act and replacing it with the Financial Services Modernization Act, allowing banks and brokerage companies to merge again.  This combination of banking and brokerage led to the downfall of banks in 1929 and contributed to the Great Depression.  The Glass-Stegall Act served as a firewall for the economy for decades.  While on this repeal path, Clinton later signed the Commodity Futures Modernization Act, which exempted credit default swaps and other sophisticated and controversial instruments from regulation.  We must get into the “Way Back Machine” and figure out what happened in 1999 and 2000.  Banks had long wanted to get back into the brokerage business to boost profits but had never been able to convince Congress to repeal the Glass-Stegall Act.  But in 1999, President Clinton was at the height of his famous scandal and facing impeachment.  In this weakened state, he signed bills that loosened the regulation of banks, brokerage businesses, and commodities.  Under the “Modernization” banner, some futures and derivative transactions are now less regulated and exempt from supervision.  Derivative transactions between “sophisticated parties” became unregulated.  This opened the door for what we saw in 2008 and prompted the Dodd-Frank Act, reversing much of the damage from the 2000 Clinton-era act.  But typical for Congress, they enabled the problems

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