Epilogue

A. Rashad Abdel-khalik

Chapter 35 in Brazen:Big Banks, Swap Mania and the Fallout, 2019, pp 427-437 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In 1982, the Student Loan Marketing Association (Sallie Mae) entered into an innocuous transaction with another financial institution to exchange interest dollars on a fixed-rate bond for interest dollars on a variable-rate instrument. Only one year earlier, the first known currency swap took place between IBM and the World Bank. Given the novelty and recency of these types of exchanges, officials at Sallie Mae did not expect this one-time transaction to be planting the seed that would grow at a rate faster than the growth rate of bamboo or mahi-mahi in the Pacific Ocean. It gave big banks and Wall Street merchants the idea of institutionalizing this form of contracting in a big way and kept on building it up until it grew to be several times the size of the U.S. Gross Domestic Product. It is overwhelming to think of the largest 25 U. S. Bank Holding Companies having derivatives contracts having face (reference or notional) amounts of over $250 trillion [$250,000,000,000,000] held by the largest 25 banks in the United States. This much level of OTC derivatives is neither needed nor intended to hedge the risks of an economy having Gross Domestic Product of $18 trillion [$18,000,000,000,000]! In fact, the statistics reported by the U.S. Office of the Comptroller of the Currency show that more than 98% of the financial derivatives, consisting mostly of interest rate contracts, held by the largest 25 U.S. banks are for “trading” purposes — i.e., profit making. Moreover, just like all betting instruments, interest-rate swaps are instruments for wealth transfer, not wealth creation…

Keywords: Swaps; Interest Rate Swap; Unconscionable Contracting; Termination Penalties; Embedded Costs; Paying for Nothing; Gambling; ISDA; Master Agreement; Deceit; Inadequate Disclosure; Hidden Costs; Zero Sum Game; Wealth Transfer; Paper Chasing Paper; Floating Rate; Synthetic Rate; Credit Risk; Demonstrations; Water Shut Off; Union Class Action Suit; The LIBOR Scandal; Non-Profit (search for similar items in EconPapers)
JEL-codes: E43 E44 (search for similar items in EconPapers)
Date: 2019
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