The art of hiding multi-trillions of dollars of debt has found an eager accomplice, the businessman who once proudly proclaimed, "I love debt": Donald J. Trump.
The King of Debt is now in control of an obscure federal watchdog agency intended to prevent derivatives—complicate financial instruments that billionaire businessman Warren Buffett once described as "Weapons of Mass Destruction"—from causing the Great Recession of 2008. Intended is the keyword. The agency, the Commodity Futures Trading Commission (CFTC), was hog-tied by big money interests long before the first whiff of bank failure could drift from Wall Street's canyons.
This December, Trump's hand-picked CFTC members marked a decade of financial recovery by voting 3-2 in favor of leaving a giant hole in the regulatory framework known as Dodd-Frank. The vote leaves the Big Four—Too Big to Fail—U.S. banks free to slip the riskiest of their debt-deferring derivative trades through that defensive wall at will. And, this sleight of hand pushes an unsuspecting public onto the firing line of another possible multi-trillion-dollar U.S. taxpayer bailout.
Outstanding balances keep ballooning for car and tuition loans and credit cards. During 2016, banks opened 110 million new credit card accounts about 50% more than in 2010.
As in the 2008 meltdown, the weapon of choice for manipulating and moving piles of bank-owned debt around the world is a type of derivative called a "swap." A swap can be as simple as a contract between two parties or a contingency laden nightmare, such as a "naked" credit default swap (CDS) for trading unfunded payment obligations, some of which are used as "insurance" guarantees. That guarantee is what banks can continue now to switch on and off at will.
The Usual Suspects
Instead of home mortgages, this time consumer debt holds our fate. Outstanding balances keep ballooning for car and tuition loans and credit cards—greatly enlarged by exotic trading on the debt itself. During 2016, banks opened 110 million new credit card accounts about 50% more than in 2010. Citigroup, JPMorgan Chase, Bank of America and Wells Fargo reported a combined loss of $12.5 billion from credit card loans in 2017. In June that same year, the Federal Reserve valued outstanding credit card loans at $1.02 trillion. Yet banks continue to shower subprime borrowers with fresh lines of credit.
Despite the efforts of a severely hobbled CFTC, the swaps markets continue to grow and without the depth of transparency promised. Consider that the four big U.S. bank holding company swaps dealers: Citibank, JPMorgan Chase, Goldman Sachs and Bank of America handle close to 90% of U.S. swaps trades, representing a combined notional value of $300 trillion, while consumers stagger under debt and defaults mount higher than pre-2008. The big picture reveals "a financial infrastructure that mimics the failed financial engineering created in the mortgage markets leading up to the 2008 financial crash," says Professor Michael Greenberger, former deputy to the Clinton-era CFTC Chair Brooksley Born.
Greenberger, a former director of the Division of Trading and Markets, and current law school professor at the University of Maryland Carey School of Law, contends that "dealers have engineered a way to evade Dodd-Frank, by helping banks transfer trillions of dollars in liability in risky unfunded trading, by turning the regulations off at will." The world's debt burden is being "financialized," he says, as were mortgages in 2007. The tool this time is "dark swaps"' sold by the banks' foreign subsidiaries, into increasingly complex instruments. These are the very exposures from which the CFTC and Dodd-Frank were charged with protecting us.
"The CFTC is totally controlled by Trump," Greenberger tells DCReport.org. Until another administration takes office the only recourse may be a state by state solution. Greenberger means the state attorneys general, "since the president can't fire them," he says. Short of that, since a chain of attempts to plug the loophole have been tried, undermined or overturned, Greenberger's last hope is the new administration, whose CFTC board could vote to close the loophole and spare the world another multi-trillion meltdown the U.S. taxpayer will suffer to pay.