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| The Major Forces Behind NCUA's Derivatives Rule... |
1) NCUA's "explanation and reasoning" as to the need for derivatives is facile, light-weight, and does not holdup to even the most superficial scrutiny or analysis - which will probably cause you and your members a financial loss in the future;
2) NCUA, in promoting the use of derivatives, appears to be defaulting on its fiduciary duty as the administrator of the NCUSIF - which will probably cause you and your members a financial loss in the future; and
3) Your "trade association", which ever one that might be, will, if recent history is instructive, once again fail the "backbone test" when asked to honestly and openly discuss and advocate on the derivatives issue - which will probably cause you and your members a financial loss in the future.
As we all eagerly await the actual publication of the proposed rule, it's hard to know where to wade in (just way too many "opportunities"!), but...
One place to start is to glance back at "the history" of NCUA's past stance on derivatives in general and the history of this rule in particular....
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| A Change in Direction? Or whichever way the wind blows? |
('course now if NCUA is finally admitting...
"We've been wrong all along.")
(... on many things...!)
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| L'il Red Riding Hood Credit Unions... "Grandma" was a derivative! |
2) But perhaps it is OK for NCUA to repudiate its long held prohibition because the risk in trading derivatives has changed, but... What has changed? One thing which has changed over the last several years is that the entire derivatives market has produced a widening global scandal. Why? Because it has been proved that the entire derivatives system has been "rigged" by the dealers to... ("insert your very own favorite vile word") ... the local governments, the churches, the non-profits, the pension funds, the smaller financial institutions - and in the future CUte little puppies - out of a fair rate by "fixing" the system in the dealers' favor.
No, I'm not making this up nor exaggerating. Much of the entire financial derivatives market uses "LIBOR" as its benchmark rate. LIBOR ( the "London Inter-Bank Offered Rate") was a supposedly "independent, impartial, empirically determined base interest rate" which is used as the starting point to price derivatives... rates/prices being determined as "LIBOR plus or minus" some additional interest spread to compensate for imputed risk (... sorry, that explanation didn't do much for 'ya did it!).
Here's just a sample of the scandal (from The Financial Times, "Fears Grow..." - 5/13/2013):
"Stung by the burgeoning LIBOR scandal, global regulators recently announced plans to examine and, where necessary, improve the hundreds of benchmarks that are used to set rates for everything from gold and natural gas purchases to interest rate swaps and home mortgages."
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| "LIE"-BOR !!! |
"To prevent a repeat of the global interbank rate rigging scandal, the International Organization of Securities Commissions task force said critical indices should, whenever possible, be anchored by observable transactions entered into at arm's length between buyers and sellers in the market"
"LIBOR was created in the 1980's precisely because credit traders and loan officers had no easy way of determining the market price..."
"But even benchmarks that use trades can be vulnerable to cherry picking and manipulation..."
So, while the rest of the world's sophisticated regulators wrestle with how to correct an admittedly rigged system, rotten to the core, the Wisest of Ones in Alexandria change direction and decide to put the credit union movement "in play".....
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| CUte l'il thang but we all know... what happens to Bambi! |
... which will probably cause you and your members a loss in the future.
(... don't you think you should ask some questions?)
2 comments:
The Regulation is out for comment. Several suggests that thoughtful commenter should consider and demand of NCUA in the final.
1. All expenses of the program be picked up by the credit unions asking for the authority. No credit union member should pay for the service of an irresponsible program that they neither want or need.
2. Risk of Loss should picked up by the credit unions participating in this program first. All reserves of all credit unions must depleted first. Then the credit unions that pick up the assets of the bankrupt derivatives trading credit union will be assessed an 2% annual fee on the acquired assets until the losses are paid back to the Fund.
3. If possible, the shares of the credit unions members doing derivatives should be be at risk first. Make the credit union disclose this to the members.
4. Require that the credit unions who invest in derivatives to do so in a way to restrict the loss to a finite dollar amount whose loss if taken would not bring the reserves below 8% Capital.
5. Require all directors and executive employees to sign a statement that they have done a substantial review of the derivatives and determined that they are in the best interest of the membership. That upon signing this they also present a personal insurance bond of a million dollars to be taken if they are wrong with their determination. Payment of the bond expense can come from the excess income gains for the derivatives until such time as they do not and the direct needs to maintain the bond.
Be very sure to note that the article on the scandal from last week's Financial Times (London's version of the WSJ) specifcally points out the vulnerability to the corruption and LIBOR "rig/fix" of ... INTEREST RATE SWAPS and HOME MORTGAGES.
The two principal focus areas of the safe, "plain vanilla" derivative transactions which the NCUA Board is pushing on CUs with their new rule...
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