Financial Market Legitimacy Critical for Sustainable Global Recovery

Financial Market Legitimacy Critical for Sustainable Global Recovery
by Stephen Michael Apatow, Founder, Humanitarian Resource Institute and United Nations Arts Initiative

In 1999, with the support of the directorate level at the Federal Emergency Management Agency (FEMA), Humanitarian Resource Institute facilitated the formation of the International Disaster Information Network (IDIN) [1].  IDIN interlinked corporate, intergovernmental, non-governmental, United Nations, community action, interfaith leaders and media in 192 United Nations member countries, [2] for risk management and contingency planning for the Year 2000 conversion [3]. The focus of this effort, was critical infrastructure analysis and contingency implementation to prevent potential disruptions. [4,5]

The Year 2000 conversion was a historical event, with the knowledge that significant financial resources were needed to address potential technology challenges in every UN member country.  Central banks were to increase liquidity [6], prompting an opportunity to optimize exploitation of these funds.  In a well calculated move to eliminate regulatory controls, we observed the repeal of the Glass-Steagall Act [7,8] and deregulation of Over the Counter Counter (OTC) Derivatives market [9].  Brooksley Born, chairperson of the Commodity Futures Trading Commission (CFTC), warned Congress and the President of the need to regulate financial instruments known as over the counter (OTC) derivatives, but her warnings were disregarded and she was forced to resign. [10,11,12]

Following the market crash of 1929, the emergency infusion of central bank funds for stabilization, flowed directly into trading activities inflating another speculative bubble and a deeper collapse.  On July 8, 1932,  the Dow reached its lowest level of the 20th century and did not return to pre-1929 levels until November 1954. [13].  Glass-Steagall was the regulatory mechanism that closed the loophole that allowed banks and non-bank financial institutions to function as single entities,  facilitating exploitation of central bank liquidity for use in trading activities in the stock and commodities markets.  For 70 years, global financial markets functioned without a 1929 level crash, but in 1999 these protections were removed in conjunction the most advanced technological period in history, facilitating a systemic collapse of the global financial system.  

At the end of June 1999, the total estimated notional amount of outstanding OTC contracts stood at $81.5 trillion [14]. The repeal of Glass-Steagall and deregulation of OTC derivatives facilitated a leveraged expansion of outstanding OTC contracts to $1.4 Quadrillion ($1400 Trillion) in 2006:

As a result, we have become the largest post-trade infrastructure organization in the world with our three major subsidiaries receiving Standard & Poors’ highest credit rating, AAA/A-1+. Last year, just to give you some idea of the scale of our operations, the value of securities settled through DTCC was over $1.4 quadrillion, 26% growth from the prior year. In the American counting scheme, a quadrillion is a one followed by 15 zeros. To grasp how many parts there are to a quadrillion, take a shovel with you the next time you’re on the beach in Bermuda – they have nice fine sand. Dig yourself a trench in the sand one foot (or a third of a meter) wide, one foot deep and one mile (or 1,600 meters) long. Then stop and have yourself a big, cold drink, because you’ll have to dig 99 more just like that before you shovel a quadrillion grains of sand. (161 km x ⅓m x ⅓m) of sand = 1 quadrillion grains. — Remarks by Jill Considine: At the joint European Central Bank/Federal Reserve Bank of Chicago Conference on “Issues Related to Central Counterparty Clearing,” April 4, 2006. [15]

Infrastructure analysis and contingency planning for a sustainable recovery on the critical infrastructure level, encompasses nothing short of reversing the hyperinflationary systemic damage associated with $1.3 Quadrillion (of OTC derivatives instruments) that should  never been in the system.  To the extent that banks and non-bank financial institutions were allowed to combine operations, retroactive FDIC banking rules, that include capitol adequacy standards should be applied as our reference point for the identification of fraud and recovery.

The focus of the Global Glass-Steagall Restoration Initiative [16] is restoration of integrity and legitimacy to the global financial system, that includes reversal of the systemic hyperinflationary damage that has devastated the global humanitarian needs landscape, providing a compensatory mechanism to assist with stabilization and sustainable recovery.

In a publication released on 4 January 2010, the Association of Chartered Certified Accountants (ACCA) has come out in favour of dividing banks into retail and investment arms after the American model adopted in 1933. The so-called Glass-Steagall Act, adopted by the US Congress four years after the Wall Street crash, aimed to divert risk by separating companies that issue securities from those that engage in commercial lending. The act was repealed in 1999. – Global accounting body suggests splitting up large banks: Europolitics, 4 January 2009. [17]

References:

1. International Disaster Information Network: Humanitarian Resource Institute. Url: http://www.humanitarian.net/idin
2. Humanitarian Resource Institute: Url: http://www.humanitarian.net/
3. Year 2000 Problem: Wickpedia: Url: http://en.wikipedia.org/wiki/Year_2000_problem
4. Contingency Planning: Year 2000 Conversion: Global Infrastructure Analysis, Humanitarian Resource Institute. Url: http://www.humanitarian.net/contingency.html
5. Y2K options and the liquidity premium in Treasury bond markets: Url: http://ideas.repec.org/p/fip/fednsr/266.html
6. Critical infrastructure: Wickpedia: http://en.wikipedia.org/wiki/Critical_infrastructure
7. Banking Act of 1933: P.L. 73-66, 48 STAT. 162: : FDIC: Important Banking Legislation. Url: http://www.fdic.gov/regulations/laws/important/index.html
8. Glass–Steagall Act: Wickpedia: http://en.wikipedia.org/wiki/Glass–Steagall_Act
9. Derivative (finance): Wickpedia: http://en.wikipedia.org/wiki/Derivative_(finance)
10. Brooksley Born: Wickpedia. Url: http://en.wikipedia.org/wiki/Brooksley_Born
11. “The Warning“, PBS Frontline, October 20, 2009. Url: http://video.pbs.org/video/1302794657
12. The courageous Brooksley Born, By Henry CK Liu, Asia Times. Url: http://www.atimes.com/atimes/Global_Economy/KL04Dj01.html
13. Wall Street Crash of 1929: Wickpedia. Url: http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
14. The global OTC derivatives market at end-June 1999: Bank for International Settlements (BIS). Url: http://www.bis.org/press/p991125.htm
15. Remarks by Jill Considine: At the joint European Central Bank/Federal Reserve Bank of Chicago Conference on “Issues Related to Central Counterparty      Clearing” Frankfurt, Germany, April 4, 2006. Url:   https://www.ecb.int/events/pdf/conferences/ccp/Considine.pdf 
16. Global Glass-Steagall Restoration Initiative: Humanitarian Resource Institute, 19 November 2009 (Updated: 14 December 2009). Url:        http://www.unarts.org/news/gsteagall_11192009.html
17. Global accounting body suggests splitting up large banks: Europolitics, 4 January 2009.  Url: http://www.europolitics.info/business-competitiveness/global-accounting-body-suggests-splitting-up-large-banks-art258942-8.html