How Treasury Auctions Work

09:15 am : Though typically overlooked, participants will take note of a $24 billion 7-year Treasury Note auction, which is scheduled for this afternoon (1:00 PM ET). Given the weak showing in Wednesday’s 5-year Note auction, participants speculate that investors’ risk appetite may be changing.

Last night’s Frontline interview with Paul O’Neill:

Can the United States government go bankrupt?

Not in the classical sense, but we could get ourselves into a position where people won’t take our paper anymore. And that’s a really desperate position to be in when we’ve killed the idea of good faith and credit of the United States. That could destroy our society as we’ve known it.

Can’t we just turn the printing press on?

Nope, because at some point people will prefer to have broken pieces of glass than federal money. … Look at the German economy in 1923. People got paid twice a day in Germany in 1923, because if they waited to spend the money that they were paid at lunchtime at dinnertime, the money wouldn’t be worth anything.

And so people were actually willing to pay all of their money, a wheelbarrow full of money, for a broken piece of shiny glass, because the broken glass was worth more than a wheelbarrow full of money. We don’t want to get there, but semi-modern societies have gotten there.

You imagine we could get there?

No, because I think we’re smarter than that, and I don’t think we’ll let it come to that. But the answer to your question is, if we don’t do something, we could get there, yeah.

The United States has a AAA rating, just shines in the night. Could we lose that?

Eighteen months ago Citigroup had a AAA rating. Could they get there?

A bank isn’t the United States government.

No, I know, but you’re asking a very radical question: Could the federal government lose its AAA rating? And the answer is yes. We dare not let that happen, but the answer is yes.

If we keep going in a straight line, the answer will be yes?

Yeah. I don’t know how we dodge the bullet if we don’t change where we’re going. …

U.S. One-Month Bill Rate Negative for First Time Since December (Bloomberg):

Treasury 10-year yields have risen for the last five days as the U.S. sells a record $98 billion in securities this week to revive the economy. The note pared earlier losses after a government report today showed the world’s largest economy shrank the most since 1980.

For the time being, fears of supply have pushed up longer- term yields despite the Fed’s buyback program. The 10-year yield has retraced more than half of last week’s 47 basis point decline when the Fed said it would buy Treasuries.

The Treasury is selling $98 billion in notes this week as part of President Barack Obama’s efforts to boost government spending to revive economic growth. Debt sales will almost triple this year to a record $2.5 trillion, Goldman Sachs Group Inc. forecast. The firm is one of the 16 primary dealers required to bid at government auctions.

UK government bond auction comes up short:

Britain experienced its first incomplete auction of government bonds in almost seven years on Wednesday, potentially dealing another blow to Prime Minister Gordon Brown’s plans to resuscitate the faltering economy.

The bank has been buying bonds from banks to provide liquidity to the financial system.

Brown was further undermined on Tuesday by King, who warned that Britain may not be able to afford new expensive stimulus plans, noting that the country’s budget deficit is expected to swell dramatically due to the economic crisis.

Shore Capital analyst Tim Morgan said the government’s overall cash requirement, including the money needed to redeem previous gilt issues, could hit 240 billion pounds.

Morgan said that Britain was running a risk of a “debt vortex” in which markets lose confidence in the ability of the UK taxpayer to meet future obligations.

“It is by no means clear that this required sum can be realised, less still that it can be raised in sterling and at current low interest rates,” he said. “The only sure way to avert debt vortex risk would be to unveil major cuts in future public spending.”

My speech to Gordon Brown goes viral:

“Every British child is born owing around 20,000 pounds. Servicing the interest on that debt is going to cost more than educating the child.”

Last night’s Frontline interview with David Walker:

Let’s start with public debt. … Give me a sense of just how bad this is.

The national debt, as we speak, is about $10.5 trillion. But the real problem is not that number. … The number that we need to be focusing on is the total federal financial hole; that’s the total liabilities in unfunded promises for Social Security and Medicare. As of the end of 2007, which is the latest set of financials that we have right now, it was $53 trillion. That’s $455,000 per household. Median household income in America is less than $50,000 a year.

What’s clear is that, while the numbers aren’t final yet for the year ended Sept. 30, 2008, for the first time in the history of the United States, the federal financial hole exceeded the total net worth of all Americans. … So we could confiscate every dime of the net worth of every American household — including Warren Buffett, Bill Gates and every other billionaire — and we wouldn’t fill the hole.

And guess what? The hole is getting deeper more rapidly than our net worth is going up. In fact, net worth has been going down because of decline in home values and because of decline in the markets. So we’re in a deep hole, and we’d better start figuring out a way that we’re going to climb out.

Conclusion

The sobering reality is even if the U.S. manages to avoid a serious depression the looming unfunded anvil of Medicare and Social Security entitlements hangs over the country.  This may keep some of you up at night, but this is not a problem that lacks solutions.  If it is not dealt with before it becomes another managed crisis then it’s a massive problem.  What is clear is the U.S. has mastered the art of instant gratification while ignoring future threats to stability. What Americans seem to have forgotten is we own the country. This is our money and our future. No child should be born a debt slave. And no one deserves to be a slave at the expense of their education.

Many of us right now want to be “realistic” and believe the financial system will correct itself. The optimist in us, with a lifetime of programming, thinks things will get back to normal. The market will right itself over time, like it always has. The truth is our financial system has been so fundamentally damaged we will never return to what we once thought was normal. Watch the following three documentaries and you’ll better understand why this is true.

Reliance on Foreign Capital
Before we get to the films I’d like to expand on a few ideas to ponder while you watch. One is reliance on foreign capital. During the election the issue of the United State’s reliance on foreign oil was hammered over and over. None of us heard scripted speeches on the reliance of massive foreign capital. A reliance that drove Americans to fight England and its corrupt banking system in the American Revolutionary War. Guess what country is #1 in external debt right now. So how did the US fall so far of the path of its national heritage?

Part of it is blind disregard to fundamental systemic threats. The threat of $150 oil has been well known for decades. Only once $150 oil became a reality was the threat real. Do we have to wait for a total collapse of the global financial system in order to deal with a $53 trillion U.S. national debt. Many people want to know, “How can this be happening to the richest country in the world?”

Here’s one theory. In 1972, during his first year as director of the Council on Foreign Relations, Zbigniew Brzezinski wrote:

Nation state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.

Just How Much Money Can They Print?
The documentaries do an amazing job of explaining how money creation works. Everyone knows the U.S. Treasury has been printing money 24/7 for years. What no one really knows is just how long they can add dollars to the system. What is the ceiling to debt creation? Fundamentally, there is a limit based on bank reserve requirements. Also, print too much and hyperinflation enters the system.

During one of the financial crisis grill sessions Congressman Ron Paul asked Chairman Bernanke:

So my question boils down to this. How in the world can we expect to solve the problems of inflation, that is the increase in the supply of money, with more inflation?

Here is a possible answer. The U.S. Treasury with the backing of the Federal Reserve and World Bank are on the path to bailout the entire system. For the U.S. the plan is: Nationalize all debt that is a systemic threat or go bankrupt. The Fed is on the verge of eliminating minimum bank reserve rates. So basically taking them from 10% to 0%. We touched on this issue in a prior story.

Theoretically when 10% of a bank’s credit is held in reserve there is a limit to how much they can loan. When this rate goes to zero there is no limit. The final stop is thus bankruptcy. So this means an all or nothing push to preserve the fiat money system backing the dollar. It’s rally or fail time.

Films and Quotes
The following three videos do a masterful job at explaining the banking system. They explain how fiat currency works, how a reserve banking system functions, and the problems with these systems. Included are some amazing quotes from each film. Look for future articles here at GTM about the Bank of International Settlements and some more solid numbers addressing the theory of “Rally or Fail.” This concept will be expanded upon for sure!

Video Number One: I.O.U.S.A.
Made by David Walker / Jan. 2008

“Many are starting to ask: Where would the U.S. Government turn if it needed a bailout?”

“The only issue that is more severe than this would be the idea that an Islamic fundamentalist would get his or her hands on a nuclear weapon and use it against us. Beyond that there is nothing that is more severe than this. This issues represents the potential fiscal meltdown of this Nation. And it absolutely guarantees, if it’s not addressed, that our children will have less of a quality of life than we had. That they will have a government that they can’t afford.” -Sen. Judd Gregg (Senate Budget Committee)

“We are trying to consume more than we produce. We can do that in the short run, but over the long run it is of course impossible. Without savings there is no future.” -Alan Greenspan (Fed Chairman 1987-2006)

“The Vice President basically told me, ‘We don’t have to worry about deficits.’ Which I got to tell you was really a shock to me… I think we only need to look at the fate of other countries that lived beyond their means for a long time. You inevitably get into trouble. When you get extended to the point that you can’t service your debt you’re finished.” -Paul O’Neill (Sec. of the Treasury 2001-2002) [mentioned in a prior story]

“The first Baby Boomer will reach 62 and be eligible for early retirement social security Jan. 1, 2008. They’ll be eligible for Medicare just three years later. And when those Boomers start retiring in mass, then that will be a tsunami of spending that could swamp our ship of state, if we don’t get serious.” -David Walker (U.S. Comptroller General 1998-2008)

Video Number Two: Money Masters
Made by Bill Still and Pat Carmack / 1996

Prior to his death published in the NY Times:
“These International bankers and Rockefeller-Standard Oil interests control the majority of newspapers and the columns of these papers to club into submission or drive out of public office officials who refuse to do the bidding of the powerful corrupt cliques which compose the invisible government.” –Theodore Roosevelt

On the day the Federal Reserve Bill passed:
“This act establishes the most gigantic trust on earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized. The people may not know it immediately, but the day of reckoning is only a few years removed… The worst legislative crime of the age is perpetrated by this banking bill.” -Rep. Charles August Lindbergh

One year after the passage of the Federal Reserve Bill:
“They know in advance when to create panics to their advantage. They also known when to stop panic. Inflation and deflation work equally well for them when they control finance.” -Rep. Charles August Lindbergh

“Increased capital requirements put an upper limit to fractional reserve lending.” -Bill Still

“Our banks cannot loan more and more money to buy more and more time before the next depression, as a maximum loan ratio is now set. It means those nations with the lowest bank reserves in their systems have already felt the terrible effects of this credit contraction as their banks scramble to raise money to increase their reserves to 8%. To raise the money they had to sell stocks, which depressed their stock markets, and began the depression first in their countries.” -Bill Still [refering to Japan which we'll cover in the next article]

Video Number Three: Zeitgeist Addendum
Made by Peter Joseph / Oct. 2008

“We were seeing how very important it is to bring about, in the human mind, the radical revolution. The crisis is a crisis in consciousness. A crisis that can not anymore accept the old norms, the old patterns, the ancient traditions.” –Jiddu Krishnamurti

“Society today is composed of a series of institutions… Yet, of all the social institutions we are born into, directed by, and conditioned upon there seems to be no system as taken for granted and misunderstood as the monetary system.” –Peter Joseph

“The real deception is when we distort the value of money. When we create money out of thin air. We have no savings, yet there is so called ‘capital’.” –Rep. Ron Paul

“New money is always needed to help cover the perpetual deficit built into the system, caused by the need to pay the interest. What this also means, is that mathematically defaults and bankruptcy are literally built into the system.” –Peter Joseph

“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.” –John Adams (President of the United States)

“The majority of the people in the United States have no idea that we are living off the benefits of a clandestine empire. That today there`s more slavery in the world than ever before. And then you have to ask yourself, ‘Well if it’s an empire, then who’s the emperor?’… We do have what I consider to be the equivalent of the emperor, and it`s what I call the Corporatocracy… At the very top of the corporatocracy you really can`t tell where the person`s working, for a private corporation or the government, because they’re always moving back and forth. So, you know, you’ve got a guy who one moment is the president of a big construction company, like Haliburton, and the next moment he’s Vice President of the United States.” -John Perkins

“We can either have Democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both. ” -Louis Brandeis (Supreme Court Justice)

“It’s not politicians that can solve problems. They have no technical capabilities. They don’t know how to solve problems. Even if they were sincere, they don’t know how to solve problems. It’s the technicians that produce the desalinization plants. It’s the technicians that give you electricity, that give you motor vehicles, that heat your house and cool it in the summertime. It’s technology that solves problems, not politics. Politics cannot solve problems, because they are not trained to do so.” -Jacque Fresco

“This tendency to blindly hold on to a belief system, sheltering it from new, possibly transforming information, is nothing less than a form of ‘intellectual materialism.’ The monetary system perpetuates this materialism not only by its self preserving structures, but also through the countless number of people who have been conditioned into blindly, and thoughtlessly upholding these structures, therefore becoming ‘self-appointed guardians of the status quo.’ Sheep, which no longer need a sheep dog to control them, for they control each other by ostracizing those who step out of the norm.” -Peter Joseph

What we are trying, in all these discussions and talks here, is to see if we cannot radically bring about a transformation of the mind. Not accepting things as they are! But the understanding, to go into it, to examine it, to give your heart and your mind with everything you have. To find out a way of living differently. But that depends on you and not somebody else. Because in this there is no teacher–no pupil. There is no leader. There is no guru. There is no master–no savior. You yourself are the teacher and the pupil. You are the master. You are the guru. You are the leader. You are everything! And to understand is to transform what is. -Jiddu Krishnamurti

References:
http://www.iousathemovie.com/
http://www.themoneymasters.com/
http://www.zeitgeistmovie.com/
http://abcnews.go.com/Politics/Vote2008/Story?id=3839318&page=1

The following story was first published here at GTM in July 2008 when no one heard of Tim Geithner. He’s now about to take control of the U.S. Department of the Treasury. It is important to understand some of his past history. This is a history beyond tax evasion and public lies, even though his weasel-like behavior is consistent. The point is, Tim Geithner knew a market crash was coming and kept silent. Perhaps it was to allow his connections in JP Morgan and Goldman Sachs to profit and gain power. If I personally knew such things I’d be dead or too compromised to publish this.

There is one man who knows:

Last September The Washington Post showed how Geithner will become Paulson 2.0: In Crucible of Crisis, Paulson, Bernanke, Geithner Forge a Committee of Three

The media is now beginning to blame President Obama for socializing the monetary system. This is a myopic diversion from the truth. The system was designed to fail before Obama had any power. The U.S. financial system was gutted when Phil Gramm, his wife, and Tim Geithner (along with their minions) removed safety measures built into the financial matrix. In a few short years they tore down what took decades to build. See story.

Regulations used to be in place to prevent exactly what has happened. Gramm re-wrote the law and UBS made a quick buck, along with Gramm as their chief lobbyist. Geithner’s job when he took office at the NY Fed was to supervise counterparty risk in the derivatives market. That was five years ago. This man had oversight of a market twice the size of the U.S. economy. Can he now be trusted with your retirement money?

Using Crisis to Monopolize Fed Control [July 2008]

One topic retail investors hardly read about is the over the counter derivatives market. Credit default swaps between banks and hedge funds is one of the prime drivers causing the Wild West scene in financials. There is a ton of paper floating through the system with unknown market value. The results of this practice can be read on the front page of any financial paper today.

There is a theory that the PPT is fighting for their life against naked short selling and similar tactics used in the OTC market. It must be infuriating for them to pump nearly a trillion dollars of liquidity into the market to see it driven lower.

Enforcing the law to ensure proper short selling isn’t the only way the PPT is attacking the market and hedge funds that drive it. The New York Fed is pushing forward on July 31, 2008 with the next leg of a master plan. They are working to completely reform global OTC derivatives markets into a single central counterparty (CCP). This will put market control in the hands of 17 banks. Two prime brokers in the US market are Morgan Stanley and Goldman Sachs. Both are firms tightly linked to Washington.

Why OTC Paper Have Vast Unknown Values (See Chart!)

What is the Derivatives OTC Market?
“Credit derivatives have been perhaps the most important and successful financial innovation of the last decade.” (Acharya and Johnson)

Markets for credit derivatives have helped banks create synthetic liquidity in their otherwise illiquid loan portfolios. For example, Citigroup had distributed a large portion of its exposure to Enron through issuance of credit-linked notes at regular intervals (in the two-year period preceding default of Enron). The final effect of Enron’s collapse on the balance sheet of Citigroup was as a result small compared to the size of its loan exposures to Enron.

[This is a simple explanation of course. The real explanation is this market is so complex it’s beyond the comprehension of many insiders.]

Who Benefits? (from Gary Aguirre 2006)

Hedge funds execute up to 50% of the daily trading on the New York Stock Exchange. They also do 70% of the trading in the US distressed debt market, US exchange-traded fund market, and the convertible bond market.

Who also profits from hedge funds? The people they pay above market commissions to. Investment banks collected $15 billion either directly from hedge funds or because of them, producing $6 billion in profits.

Aguirre states, “For individual firms, hedge funds were critical to last year’s [2005] performance. They produced one-quarter of Goldman Sachs’s profits, estimates Guy Moszkowski of Merrill Lynch, and only a slightly smaller slug of Morgan Stanley’s returns.”

Times Change But Tactics Do Not

There is a potentially a predatory form of trading by hedge funds in the credit derivatives market: “It was the hedge funds creating a credit event by forcing the bond price down and trying to get the rating agencies to downgrade the company to benefit themselves: they were scaring everyone into selling.” (Henry Snedel, December 5, 2002, in Deals and Deal Makers, Wall Street Journal)

J.P.Morgan was offering $209,000 to buy credit default protection on a $10 million loan to Altria Group Inc.’s Philip Morris tobacco unit and was offering to sell that same contract to anyone for $221,000 – a difference of 5 percent – according to Bloomberg data. On the same day, J.P.Morgan was offering to pay $9,000 to sellers of protection on $10 million of newspaper publisher Gannett Co.’s debt while charging $21,000 to anyone who wanted to buy the same protection, a difference of more than 100 percent. (Bloomberg Markets “Credit Swaps, High Risks Few Rules” June 6, 2003)

Fed Preps for a CCP (from the NY Times –> Feb. 2007!)

Timothy F. Geithner took the helm of the Federal Reserve Bank of New York in 2003. High on Mr. Geithner’s to-do list is understanding and monitoring the $26 trillion credit derivatives market — twice the size of the United States economy — the fastest-growing financial market there is.

Even the heads of some of the world’s biggest banks seem overwhelmed by the size and complexity of credit derivatives. “It makes my head swim,” said Kenneth D. Lewis, the chief executive of Bank of America.

Mr. Geithner’s job, when he is not working on monetary policy, is to make sure they are prudently managing that risk.

When Mr. Geithner arrived at the New York Fed, E. Gerald Corrigan, a former Federal Reserve president himself, suggested that he look at the conclusions of the Counterparty Risk Management Group Report, the report compiled after Long-Term Capital. Mr. Corrigan thought it might be useful to look at those risks in the context of the rise of private money and the rapidly transforming credit markets.

In 2004, Mr. Geithner’s staff conducted an extensive review of counterparty risk. But rather than dump its conclusions on the industry, he chose to stay behind the scenes while encouraging Mr. Corrigan to reconvene the group. In January 2005, Mr. Corrigan brought together a group that included some of the most senior executives on Wall Street. Six months later, the group produced a report that made 47 recommendations on issues from the very technical to the philosophical.

Central to the report’s findings were shocking weaknesses in the way credit derivatives were being assigned and traded around without any sense of who owned what. The so-called “assignment issue” was simple: credit derivatives were negotiated by two parties, say JPMorgan and Goldman Sachs. But banks were “assigning” the contracts out to others — like hedge funds — without telling each other. It was a little bit like lending money to a friend who is really rich who in turn lends it to her deadbeat brother and fails to mention it.

“It violated the first and most sacred principle of banking: know your counterparty,” Mr. Corrigan said.

Standards were set, and backlogs came down sharply…The industry felt triumphant about being part of the solution. It was a classic “collective action” problem solved: the industry had set an abysmally low standard and no one would budge for fear of losing business, so someone had to move everyone.

Improving the processing of credit derivatives was only the first step. Soon after, he initiated a comprehensive examination of stress-testing, looking at how banks measure and test exposure to certain market players and market risks in different kinds of conditions, like the failure of one major firm.

When Long-Term Capital Management tottered on the brink of collapse in 1998, the credit markets in the United States were controlled by such a small number of institutions that the New York Fed had to make calls to 14 Wall Street banks to try to resolve the crisis. Today, the number of institutions would be vastly higher.

“The fact that the banks are stronger and risk is spread more broadly should make the system more stable,” Mr. Geithner said. “We can’t know that with certainty though. We’ll have a test of that when things next threaten to fall apart.” Regulators struggle to imagine what the shock could be, but do know that the reaction will be far different from crises of the past.

[Odd the Fed had no idea they would soon be swamped with debt obligations from mortgage backed securities after spending so much time on OTC market mechanics?]

What the Last CCP Meeting Determined (from Reuters)

Among the issues agreed upon were more automation and standardization of derivatives trade processing, and the development of a central counterparty, or clearing house, for credit default swaps, the Fed said. Central clearing houses, which backstop trades done by all participants, lower the risk that the failure of a single major market player can have a domino effect on markets and thus pose a systemic risk.

The proposals would cover a range of OTC markets, from equities, interest rates and foreign exchange to commodities. The 17 firms at Monday’s meeting represented more than 90 percent of credit derivatives trading.

Who Are Some of the US Banks?

[Two years after “problem solved” the Bank for International Settlements in March 2007 warned of the following Bear Stearns scenario.]

Glaring Weakness (BIS report)

The report concludes that, since 1998, the clearing and settlement infrastructure of OTC derivatives markets has been significantly strengthened. But further progress is needed in some areas:

• market participants should identify steps to mitigate the potential market impact of replacing contracts following the closeout of one or more major participants.

In addition, as the market infrastructure moves further in the direction of centralised processing of trades and post-trade events, several issues will assume greater importance:

• providers of essential post-trade services for OTC derivatives should provide open access to their services and should aim to achieve convenient and efficient connectivity with other systems

Markets for OTC derivatives are generally are less liquid than markets for exchange-traded derivatives, and traditional procedures for a CCP to handle a default may not be effective. When a participant defaults, the CCP terminates all of its contracts with the defaulting participant. The traditional procedures for handling a default, which are used by CCPs for most exchange-traded derivatives, call for the CCP to promptly enter the market and replace the contracts, so as to hedge against further losses on the open positions created by termination of the defaulter’s contracts. But if the markets for the contracts cleared by the CCP are illiquid, entering the market may induce adverse price movements, especially if the defaulting participant’s positions are large. Consequently, the application of traditional default procedures to illiquid OTC contracts may entail significant risk to the CCP.

Prime brokerage is a service offered by banks and broker-dealers to buy-side investors (typically hedge funds), and is built around financing funds’ positions and facilitating clearing and settlement of their trades. Traditionally, prime brokerage involved financing and securities lending services used by market participants taking long or short equity positions. Over time, the services extended to fixed income and foreign exchange markets. Most recently, a form of prime brokerage known as OTC derivatives prime brokerage has been developed and marketed almost exclusively to hedge funds.

Potential Fallout From a Fed Driven CCP (from RGE Monitor’s London Banker)

One such plan that strikes me as worrying is a master plan for reforming global OTC derivatives markets toward a single central counterparty (CCP). The planners are the big institutions that provide leadership to these markets – the New York Fed and its core constituency of top tier derivatives dealers. They have been meeting for some time, at least four occasions that have been disclosed, and are now rolling out their plan for centralized clearing of OTC derivatives.

One doesn’t have to be a conspiracy theorist to see that it is sensible for this small coterie to plan and execute a long term strategy that promotes their collective self-interest. It stands to reason that they would rather be more powerful than less powerful, more profitable than less profitable. It is not unreasonable to suggest that one means of preserving power and profits requires imposing “solutions” to each “crisis” that institutionalize their influence over markets they dominate.

Tim Geithner, president of the New York Fed, is the godfather of this plan. Geithner recently hosted a meeting for the chosen seventeen shareholders of the CCP at the New York Fed to push the plan into realization, setting a deadline for proposals of July 31st that leaves no scope for opposition or alternatives.

While I am happy to concede that there are real risks that are unaddressed in OTC derivatives markets, I am less happy to embrace a solution which would institutionalize huge power to manipulate these markets in the hands of banks which are themselves core dealers and prime brokers in these markets, accounting for 90 percent of trades.

If these seventeen banks, or a smaller subset of these banks, were to collaborate rather than compete, then they would be in a position to manipulate prices, manipulate credit, manipulate leverage, and manipulate margin calls for every traded commodity and every market counterparty. That would allow them to dictate who gains and who loses over time in these ill-transparent and under-regulated markets. If that manipulation were only exercised periodically and unpredictably, they would have very little risk of ever being challenged, investigated, prosecuted or sanctioned.

Think of the possibilities if such infrastructure were in unscrupulous hands. A target country would find their export commodities devalued until their resources were sold at bargain prices to the “right” multinational owners. A target counterparty would find their credit constrained at just the time when margins were raised or collateral devalued, making them a takeover patsy at a knockdown price and guaranteeing a swift profit to the lucky acquiror.

The Geithner CCP proposal strikes me as mandating a casino where the seventeen dealers at the seventeen tables own the casino, control credit, control the odds, control the deal and can determine who wins and loses. If your only choice is to go from one rigged dealer-owned table to another rigged dealer-owned table run under common management, that isn’t much of a choice.

Sources:

More CCCP Than CCP – Danger of a Rigged OTC Casino
by London Banker
Jul 11, 2008
NY Fed: dealers, regulators agree on OTC reforms
Reuters
Mon Jun 9, 2008 6:06pm EDT
Calm Before and During a Storm
New York Times
by Jenny Anderson
February 9, 2007
ISDA 23rd Annual General Meeting
International Swaps and Derivatives Association, Inc.
Vienna
April 15-17, 2008
New Developments In Clearing And Settlement Arrangements For OTC Derivatives
Committee on Payment and
Settlement Systems
Bank for International Settlements
March 2007
Insider Trading in Credit Derivatives
Viral V. Acharya and Timothy C. Johnson
May, 2005
Pass the Parcel-Credit Derivatives
The Economist
January 18, 2003
Testimony of Gary J. Aguirre, Esq.
Before the United States Senate Committee On The Judiciary
June 28, 2006
http://www.ny.frb.org/aboutthefed/orgchart/geithner.html