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The Achilles' Heel of Global BankingOne has to wonder what would happen if this "house of cards" based on derivatives finally collapses.by Mario SeiglieThe Asian economic crisis has brought to fore a dangerous new way of making money which has recently been developed by the banking system-derivatives. "In just three decades," reports Newsweek, in the May 25, 1998 edition, "the volume of derivative contracts with U.S. commercial banks exploded, from practically zero in the early 1970s to more than $25 trillion today, an amount exceeding the size of the U.S., European and Japanese economies combined. Bankers quickly, and appropriately, point out that this figure really represents just the 'notional' amount, or face value of the derivatives, and not what they could potentially lose. But the amount due, or at risk, is derived (hence derivative) from those vast notional amounts. Parse the language and it means many banks have a new sideline: gambling." The article continues: "Derivatives are a kind of nuclear financial instrument. They are powerful and highly complicated agreements designed to offset certain financial risks. Under steady conditions they work well. But in derivatives, like nuclear mishaps, there are no small accidents. And as the Asian economic crisis worsens-and in Indonesia's case near catastrophe-the financial Geiger counters are beginning to buzz. "'Derivatives have turned the financial markets into a hi-tech, international 24-hour casino,' notes Richard Thomson, a former merchant banker. 'Right now you have a small number of banks sharing a very large risk. But this could turn out to be a serious problem if these banks are in the wrong place at the wrong time.' Thomson points out that if one or two large Asian parties default on their derivative contracts, computer screens around the world can be hit within seconds and instantly threaten other contracts. 'It's like a bunch of climbers on a mountain all tied by a rope. But if one climber slips and falls into a crevasse, he can quickly drag the other climbers to their end with little chance of time for rescue.'" Unfortunately, as the Asian financial crisis worsens, these "climber banks" have to carry more weight and the possibility of slipping increases. "And now comes the bad news," says the same Newsweek article. "Some $10 trillion (yes, $10,000,000,000,000) in derivative contracts are set to mature this year for U.S. bankers, and the U.S. bankers are holding their collective breath to see which of their Asian clients will pay up. Many won't.... Credit risk is the problem that American banks are facing. Buried deep within the arcane bank statements...is evidence of a potential chain reaction of derivatives heading toward an explosion.... The 25 American banks with the largest position have more than $350 billion in credit exposure to derivatives-that's more than enough to wipe out the $250 billion in equity capital that the same banks keep on hand as a cushion to absorb losses." The article concludes: "In Asia, governments stung by currency speculators, who often use derivatives, are beginning to turn on their foreign bankers. 'The bottom line in this whole derivatives issue is if I'm a trader, I'll take the biggest bets that I can because if I win, I'll go home a millionaire,' says Charles Peabody, of Mitchell Securities, a brokerage firm in New York City. 'If I lose, then the central banks or the IMF will bail me out. So you've created a moral hazard.' "With Indonesia aflame, a virtual depression in Japan and both Malaysia and Thailand still struggling, the Asian economic crisis is far from over. In the worst-case scenario, one or more large derivatives defaults from Asia and sets off a chain reaction of failures. In the meantime, Howard Greenspan [an investor in the Canadian Imperial Bank, which is a big player in the Asian derivatives market] still awaits information to see if his bank will suffer from the fallout. 'In the final analysis, this has to do with Asia,' says Greenspan. 'It's derivatives themselves. We are into the age of global financial risk.'" One has to wonder what would happen if this "house of cards" based on derivatives finally collapses, with the U.S. in the center of the mess. This could produce enormous resentment from the rest of the world community. Perhaps a new player will have to enter the economic world scene to avoid such damaging speculation, much of it fueled by greed. In a recent interview with Rudiger Dornbusch, a world-renown economist from MIT, a leading newspaper asked him, "Who do you think will be the economic leader in 10 years?" Dornbusch answered, "Ten years ago, it was Japan: they had money, technology, everything. They were going to be the owners of the world. Today, we Americans are the leaders, and in 10 to 15 years, I believe it will be Europe." A present crisis in a U.S. driven world economy could possibly bring this change in leadership even faster, if events continue to worsen. To bring this into a balanced perspective, it is needful to clarify that much has been learned about avoiding a world-wide depression since the last one in the late 1920s. Economic laws are better understood, and a number of safeguards have been built into the system. Insurance for deposits is available, and governments intervene when necessary to keep money in circulation. No economist has said the entire system could collapse because of a crisis based on derivatives, but it could be an important factor if the present economic system suffers a considerable loss of prestige with the world sinking into a prolonged and costly recession. Many nations would become impoverished and inequality would increase between the have and have not nations. Certainly, the economic system which is described in Revelation 18 gives the impression of a world which is relieved by a more stable and equitable manner of redistributing the planet's wealth than the present system. Oscar Arias, Nobel Peace Prize winner in 1997 warned, "This is a world where 400 multimillionaires have more wealth than half the world's population. It is an open invitation to conflict" (Newsweek, May 19, 1997, page 58). All nations have drunk of her wine and the merchants of the earth have become rich through the abundance of her luxury (Revelation 18:3). Yet at the same time, the disparity between the rich and the poor is increasing even in America. Multinational capitalist corporations continue to exploit laborers around the world. Thousands are getting wealthier, while millions are struggling to make ends meet. The cries of these laborers come up into the ears of the Lord of Sabaoth. Their cries play an important role in God's intervention in world affairs at the end of the age (James 5:1-7). WNP |
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