Citizens Electoral Council of Australia

Media Release  8^th of November 2012

Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://cec.cecaust.com.au
 

Isherwood: Kill the $20 trillion derivatives cancer

Australia’s banks are now exposed to $20 trillion in toxic derivatives obligations, which can sink them as fast as derivatives blew up Lehman Brothers in 2008 and precipitated the GFC.

Citizens Electoral Council leader Craig Isherwood today said the only way to deal with the cancer of financial derivatives is through a Glass-Steagall banking separation.

“Derivatives are the cancer of the financial system,” he said. “Australia’s financial institutions are so riddled with these things, they are dead banks walking.

“Since the 2008 GFC, when the banks almost collapsed under their unpayable debts, they have gone on a derivatives binge, gambling at an unprecedented rate in order to artificially leverage their profits. In that time, their derivatives exposure has skyrocketed by $6 trillion, from $14 trillion to $20 trillion.”

Click here for graphic illustrations of Australia’s exposure to derivatives.

Isherwood ridiculed the proposal of Australia’s regulatory agencies, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and the Reserve Bank of Australia (RBA), to regulate the over-the-counter derivatives trade.

“You can’t regulate derivatives. Who are they kidding?” he said. “Regulating derivatives is as futile as regulating cancer. They are side-bets, and side-bets on side-bets. Derivatives gamblers will make even more side-bets on the derivatives they try to regulate.

“They often involve outright fraud, such as an Australian court recently found in its decision against Standard & Poors, ABN-Amro, and CBA, in the case of CDO [collateralised debt obligations] and CPDO [constant proportion debt obligations] derivatives sold to Australian councils. Or look at the financial scandal of the century, which revealed the London Inter-Bank Offered Rate (LIBOR) was rigged by 16 City of London banks—virtually all of the $1.4 quadrillion [thousand trillion] worth of derivatives contracts globally were shown to be based on fraudulently-set interest rates.”

Isherwood said the regulators were proposing to regulate derivatives because there is a growing panic over the state of Australia’s banks.

“Their panic is justified, but their solution is wrong,” he said.

“If they are serious about saving the banks, they have to go with a Glass-Steagall banking separation. The savings banks which service the community must be separated from investment banking, hedge funds, private equity funds and all other speculative financial activities. The two areas must have no interaction—no cross-ownership, no shared directors, and no cross-lending.

“Then, instead of regulators twisting themselves in knots to regulate side-bets, they must simply ban the savings banks from any involvement with derivatives or any other kind of financial gambling. As for the investment banks and the rest, they are on their own. Whatever losses they incur from gambling, they will wear themselves, and there will be no taxpayer bailouts ever again.”

Isherwood pointed out that Glass-Steagall was a much simpler way of protecting people from financial crises than copious amounts of regulation.

“The original U.S. Glass-Steagall Act was just 37 pages long,” he said. “By comparison, the global banking regulation known as Basel III is 616 pages long, and Obama’s pathetic and fraudulent act to regulate Wall Street, the Dodd-Frank bill, is 2,319 pages long.”

Isherwood concluded, “The derivatives cancer infecting Australia’s banks is a threat to all Australians. Successive governments of both parties since Hawke and Keating have consciously exposed Australians to this threat, through their corrupt dealings with the City of London-controlled banking system.

“The CEC’s fight for Glass-Steagall—the centrepiece of our Develop or Die resolution—is the only way to rescue our financial system, and once again make it serve the needs of the people and the real economy. It’s getting more and more urgent every day, so I urge all Australians to join us—now.”