The Armageddon Looting Machine: The Looming Mass Destruction From Derivatives, by Ellen Brown

I have long believed Ellen Brown truly understands the banking system’s corruption, and the ‘real’ truth of what is going on. In this article, she exposes more of it in a way we can all understand. I hope that people like Ellen Brown and Catherine Austin Fitts will step forward when the whole system crashes and help us to right it.  ~J

Posted: 09/18/2013 1:25 pm

Increased regulation and low interest rates are driving lending from the regulated commercial banking system into the unregulated shadow banking system. The shadow banks, although free of government regulation, are propped up by a hidden government guarantee in the form of safe harbor status under the 2005 Bankruptcy Reform Act pushed through by Wall Street. The result is to create perverse incentives for the financial system to self-destruct.

Five years after the financial collapse precipitated by the Lehman Brothers bankruptcy on September 15, 2008, the risk of another full-blown financial panic is still looming large, despite the Dodd-Frank legislation designed to contain it. As noted in a recent Reuters article, the risk has just moved into the shadows:

[B]anks are pulling back their balance sheets from the fringes of the credit markets, with more and more risk being driven to unregulated lenders that comprise the $60 trillion “shadow-banking” sector.

Increased regulation and low interest rates have made lending to homeowners and small businesses less attractive than before 2008. The easy subprime scams of yesteryear are no more. The void is being filled by the shadow banking system. Shadow banking comes in many forms, but the big money today is in repos and derivatives. The notional (or hypothetical) value of the derivatives market has been estimated to be as high as $1.2 quadrillion, or 20 times the GDP of all the countries of the world combined.According to Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, investment banks as well as commercial banks may conduct much of their business in the shadow banking system (SBS), although most are not generally classed as SBS institutions themselves. At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.

The Hidden Government Guarantee That Props Up the Shadow Banking System

According to Dutch economist Enrico Perotti, banks are able to fund their loans much more cheaply than any other industry because they offer “liquidity on demand.” The promise that the depositor can get his money out at any time is made credible by government-backed deposit insurance and access to central bank funding. But what guarantee underwrites the shadow banks? Why would financial institutions feel confident lending cheaply in the shadow market, when it is not protected by deposit insurance or government bailouts?

Perotti says that liquidity-on-demand is guaranteed in the SBS through another, lesser-known form of government guarantee: “safe harbor” status in bankruptcy. Repos and derivatives, the stock in trade of shadow banks, have “superpriority” over all other claims. Perotti writes:

Security pledging grants access to cheap funding thanks to the steady expansion in the EU and US of “safe harbor status”. Also called bankruptcy privileges, this ensures lenders secured on financial collateral immediate access to their pledged securities…
Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral.

This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. Critically, it ensures immediacy (liquidity) for their holders. Unfortunately, it does so by undermining orderly liquidation.

When orderly liquidation is undermined, there is a rush to get the collateral, which can actually propel the debtor into bankruptcy.

The amendment to the Bankruptcy Reform Act of 2005 that created this favored status for repos and derivatives was pushed through by the banking lobby with few questions asked. In a December 2011 article titled “Plan B – How to Loot Nations and Their Banks Legally,” documentary film-maker David Malone wrote:

This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies… allowed a whole range of far riskier assets to be used… The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get [their] money back before anyone else and no one could stop them.

Burning Down the Barn to Get the Insurance

Safe harbor status creates the sort of perverse incentives that make derivatives “financial weapons of mass destruction,” as Warren Buffett famously branded them. It is the equivalent of burning down the barn to collect the insurance. Says Malone:

All other creditors — bond holders — risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company — perfectly legally — as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.
The collapse of… Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those institutions suddenly stopped trading and ‘looted’ them instead.

The global credit collapse was triggered, it seems, not by wild subprime lending but by the rush to grab collateral by players with congressionally-approved safe harbor status for their repos and derivatives.

Bear Stearns and Lehman Brothers were strictly investment banks, but now we have giant depository banks gambling in derivatives as well; and with the repeal of the Glass-Steagall Act that separated depository and investment banking, they are allowed to commingle their deposits and investments. The risk to the depositors was made glaringly obvious when MF Global went bankrupt in October 2011. Malone wrote:

When MF Global went down it did so because its repo, derivative and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well. . . JPMorgan allegedly has MF Global money while other people’s lawyers can only argue about it.

MF Global was followed by the Cyprus “bail-in” — the confiscation of depositor funds to recapitalize the country’s failed banks. This was followed by the coordinated appearance of bail-in templates worldwide, mandated by the Financial Stability Board, the global banking regulator in Switzerland.

The Auto-Destruct Trip Wire on the Banking System

Bail-in policies are being necessitated by the fact that governments are balking at further bank bailouts. In the U.S., the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivative activities. That means the next time we have a Lehman-style event, the banking system could simply collapse into a black hole of derivative looting. Malone writes:

… The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can…. I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system.

The weaker banks may be the victims, but it is we the people who will wind up holding the bag. Malone observes:

For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Fed, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with…. … [T]he banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months, not even days. It could happen in hours if not minutes.

Crisis and Opportunity: Building a Better Mousetrap

There is no way to regulate away this sort of risk. If both the conventional banking system and the shadow banking system are being maintained by government guarantees, then we the people are bearing the risk. We should be directing where the credit goes and collecting the interest. Banking and the creation of money-as-credit need to be made public utilities, owned by the public and having a mandate to serve the public. Public banks do not engage in derivatives.

Today, virtually the entire circulating money supply (M1, M2 and M3) consists of privately-created “bank credit” — money created on the books of banks in the form of loans. If this private credit system implodes, we will be without a money supply. One option would be to return to the system of government-issued money that was devised by the American colonists, revived by Abraham Lincoln during the Civil War, and used by other countries at various times and places around the world. Another option would be a system of publicly-owned state banks on the model of the Bank of North Dakota, leveraging the capital of the state backed by the revenues of the into public bank credit for the use of the local economy.

Change happens historically in times of crisis, and we may be there again today.

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7 Responses to The Armageddon Looting Machine: The Looming Mass Destruction From Derivatives, by Ellen Brown

  1. Sock says:

    What does everyone here think about the economic model proposed by David Martin?

    • Jean says:

      I’ve only had a moment to take a quick look at it, and there is much written about it. It looks very interesting, and I’ll be looking to what some Readers think. This looks to be the sort of info we need here, and I thank you for sharing . . . Hugs, ~Jean

      PS Here’s David Martin’s bio link:

      Let me warn you not to jump to throw the baby out with the bathwater . . . and please do have a look . . . ~J

  2. Trisha says:

    Seems to be ‘open season’ on all us citizens. It is not only the bankers’ greed fueling this downward spiral but their selfish, hateful, intent on not wanting us to survive at all.

  3. Vickie, if you have a moment, search these key words, “The Guernsey Monetary Experiment”, and read up on how the people on the island of Guernsey, who have had enough of the games the London banksters were playing with them thus causing calamity after calamity and problem after problem, took it upon “their collective selves” to design a financial system to serve their island and their needs and make their life better, much better, without debt.
    In doing so, the first item in their agenda was the “decapitation” of the London banksters – it worked fully – and it is working again now.
    Admittedly they have spread their tentacles globally, but they are even more vulnerable given the abuses they have committed.
    Admittedly, the scam that the bankster cabal has spread globally by corrupting, bribing, undermining, and thereafter intimidating, blackmailing, threatening, and killing everyone in its path that threatens their scam, has run its course…(Ganhdi said…”they cannot kill all of us”…and destroyed in the British tyranny in the process)
    History is repeating itself, and you only need to go back some 5000 years, and recap the dialogue between King Kroisos of Ancient Lydia and the Philosopher Solon who, despite having viewed and reviewed an incredible number of huge warehouses filled with “true wealth” was not cowed in the least to inform King Kroisos “that despite all your wealth do not count your self before your end”.
    Nationalization of each country’s ability to issue and manage its own financial resources is the key to the cabal destruction and it is already underway.
    As it relates to the comments by Ines re : “which group will free the world” : “ALL OF US will..each and every one of us, who has had enough with the scam, games, lies, and inhumanity that has been played on the backs of humanity by sub-human monsters.
    You can reflect back on what 300 Spartan did to XERXES some 3000 years ago, and the people of the world still talk about it, and live it, everyday, or, what a handful of Greeks did to the Evil Ottoman Empire, and people still talk about it today, or, what Alexander the Great did with an insignificant number of soldiers and went up the Evil Persian Empire, and the entire world still talks about it today.
    Which is why, Ines, if you are one of us, “join the 300 Spartans against evil”, and it is you, and me, and Vickie, and all others like us who will free the world from tyranny.
    Aristotelis Ellinas.

  4. Vickie Acklin says:

    If the financial system is cleaned up and fixed we will still never be free. We will continue to pay and pay to live on the planet we were born on. We will continue to work harder and harder to buy what is needed and we will still always live in this cast system. Proverty will continue. Greed and crime will always be a part of our lives. We will have yet more leaders that believe they deserve more than anyone else because they have too much power. No matter how the new financial system is setup it will eventually always come back to greed.

    Any monatery system will assure that we are never free human beings. Instead we must do away with the monetary system and have the technologies that have been denied us. Just free energy alone would change the world.

    It’s been said that Earth is the only planet where a monetary system exists. This system was designed for the purpose of making us slaves. It doesn’t matter how its setup – its a slave system and must be completely eliminated if we are to be free.

    • kibitzer3 says:

      Well said, Vickie. Maybe some half-way measure, with gold-backed currency, will have to be engaged in for awhile, until we really get where we are at in our spiritual evolution on this planet.. And then we need to move, just as soon as possible, up: to a system of exchange that recognizes our divinity (and the reincarnational process that keeps us learning our lessons until we get them); wherein people share goods and services with one another – and give of their best in the process – out of a higher motive than the horse-and-buggy-era one of profit. Out of the highest motive there could ever be: out of gratitude to our Creator for life with meaning. Out of, in a word: Love.

      And from there, it’s only a small step to entering the consciousness field of the 5th Dimension; where we will begin to leave the need for ‘things’ behind, anyway. For inheriting our Light bodies, and the abilities derived therefrom, in the way of travel, and communication, and so forth.

      Getting there. Slow. But sure.

  5. Ines Radman says:

    So which one of these groups are going to free the world? N.E.S.A.R.A, OPPT, ITCCS, Divine Province, and how many others claim they know and can?

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