Remember when the world’s 3rd wealthiest man, Warren Buffet, called out the exotic financial product named derivatives as “a mega-catastrophic risk”, “financial weapons of mass destruction”, and a “time bomb”?
Over the next two weeks, our minority Green-Labor government is railroading a set of 19 new laws through the Senate.
They like to call those laws our Clean Energy Future.
And to date, no one in either the political class, or the media – including our “expert” economics media – have called out the ticking time bomb called derivatives that is buried carefully in the 1,000+ pages of our Clean Energy Future.
No one, except your humble blogger.
Here, dear reader, is proof positive that the government’s “carbon pricing mechanism” is not about changing the climate.
Nor is it, as the government claims, to “give effect to Australia’s international obligations on addressing climate change under the Climate Change Convention and the Kyoto Protocol”.
Nor is it to “take action directed towards meeting Australia’s long-term target of reducing net greenhouse gas emissions to 80 per cent below 2000 levels by 2050 and take that action in a flexible and cost-effective way”.
Nor is it to “to put a price on greenhouse gas emissions in a way that encourages investment in clean energy, supports jobs and competitiveness in the economy and supports Australia’s economic growth while reducing pollution.”
How can I be so sure?
Because not one of those claimed “Objects of the mechanism” requires laws that specifically permit bankers to create unlimited quantities of wholly unregulated “financial weapons of mass destruction” called derivatives (or “securities”).
They are completely unnecessary. Moreover, the ongoing GFC turmoil proves that unregulated derivatives markets represent a clear and present danger to our government-propped banking system, and thus are a sovereign risk.
And yet, this is just what our Green-Labor government is doing right now in the Senate.
Carefully buried in their Clean Energy Bill 2011 we find the ticking time bomb (underline added):
109A Registration of equitable interests in relation to a carbon unit
(1) The regulations may make provision for or in relation to the registration in the Registry of equitable interests in relation to carbon units.
(2) Subsection (1) does not apply to an equitable interest that is a security interest within the meaning of the Personal Property Securities Act 2009, and to which that Act applies.
In other words, while the regulations may make provision for registration of equitable interests in a carbon unit, they specifically (subsection 2) do not make provision for registering a “security interest” in a carbon unit.
[A "security interest in" a carbon unit is, quite simply, a derivative or "security" that is based on the underlying "value" of the carbon "unit"]
It is clear then, that the government does not want to record carbon derivatives creation and trading.
They want to permit it. Just not record or regulate it.
Indeed, they wish to ensure “avoidance of doubt” that banks are legally allowed to immediately pull the pin on creating and trading these (wholly unregulated) financial weapons of mass destruction (underline added):
110 Equitable interests in relation to a carbon unit
(1) This Act does not affect:
(a) the creation of; or
(b) any dealings with; or
(c) the enforcement of;
equitable interests in relation to a carbon unit.
(2) Subsection (1) is enacted for the avoidance of doubt.
And just in case you missed the point – and your missing the real point is, in fact, the whole point of their using such opaque language – then the truth is spelled out more clearly elsewhere.
Way down in the fine print, of course. In the Explanatory Memorandum tacked on to the end of the Bill (underline added):
3.36 The bill does not affect the creation or enforcement of, or any dealings with (including transfers of), equitable interests in carbon units. [Part 4, clause 110] This provision has been included for the avoidance of doubt. In addition, the bill does not prevent the taking of security over carbon units.
Now I ask you, dear reader.
How does the scheme’s granting permission for banks to create a secondary carbon securities trading market (ie, “security over” carbon units) help to reduce CO2 emissions?
Indeed, how does a wholly unmonitored and unregulated shadow banking market in carbon derivatives help to create a single cent in extra government revenue, for the Senator Milne-championed Clean Energy Finance Corporation to pour down the toilet of otherwise commercially unviable “green” energy projects?
Answer: It doesn’t.
The government will never see any of the profits generated by banks from their multi trillion dollar trading in wholly unregulated carbon derivatives.
But you can be certain that they (and we) will hear all about it when the banks’ multi trillion dollar derivatives betting on movements in the market price of thin air blows up too. Because that’s when – just as with the global mortgage derivatives trade that triggered GFC1 – the bankers will (again) come running to government for a bail out.
Did I say “trillions”?
As we have seen previously, according to the RBA our Aussie banking system already holds almost $17 Trillion worth of derivatives. Most of these are bankers bets on movements in Foreign Exchange Rates and Interest Rates. And these derivatives are all held Off the Balance Sheet:
In just 3 months from December to March, our banks’ exposure to Off-Balance Sheet derivatives “Business” has blown out by a whopping $1.99 Trillion, to a new all-time record total of $16.83 Trillion. That’s the biggest 3-month increase in our banks’ history.
By comparison, at March 2011 the banks have “only” $2.68 Trillion in On-Balance Sheet Assets. That’s an increase of “only” $19.9 Billion. In the same 3 months, their Off-Balance Sheet derivatives exposure blew out by 100 times that much ($1.99 Trillion)
[That's right. Derivatives are a toxic, wholly artificial and unregulated financial product, created and traded en masse by the banks; they are held Off Balance Sheet so that noone really knows anything about their real activities. It was toxic derivatives over mortgages that nearly blew up the world in 2008.]
We have also seen previously, that our Aussie banking system is not “safe as houses”, as we are led to believe. Instead, it is a huge disaster waiting to happen. Our banks are only staying afloat – and generating ever-increasing salaries and bonuses for bankers – because of the government wholesale funding guarantee introduced in response to the GFC. Indeed, Moodys Ratings agency recently put our government on notice that it will slash our banks’ credit ratings if the government guarantee is withdrawn.
What happens when banks blow up?
The government (ie, the taxpayer) panics, and bails them out. Putting both current and future generations on the hook to pay for it.
What we have with the Clean Energy Future legislation, is a scheme designed by bankers (and their cheer-leading economists). For the benefit of bankers.
That’s why a scheme that purports to be all about reducing CO2 emissions, has a ticking time bomb called “derivatives” hidden inside.
While ever the scheme lasts, banks will make a killing.
Not just on fees and commissions for their role in buying and selling “permits”.
Oh no, dear reader.
That trade is just the surface of the carbon pricing scam.
The fees and commissions on the straight trading in carbon permits … is peanuts.
The real monster action is in the unlimited, unregulated derivatives market, that sits on top of the basic carbon trading market. Just imagine an inverted pyramid, with the trade in carbon permits at the bottom, pointy end.
What the banks really want – and what this blogger predicted and forewarned of time and again leading up to the release of the draft legislation – is a mechanism that allows them to create and trade carbon derivatives.
In unlimited, unregulated quantities.
And that is exactly what the Greens, and the Labor Party, in cahoots with Tony Windsor, Rob Oakeshott, and Andrew Wilkie, have given the bankers.
In just a couple of little clauses. Carefully worded and buried in 1,000+ pages of bullsh!t legalese, so that noone will find it (or simply not understand it if they do).
If you want to do something practical to stop the bankers, then here’s my suggestion.
Call the Coalition Senators for your state.
Tell them that you want them to go into the Senate policy committee hearings next week, and demand that the government explain the following:
(a) WHY their Clean Energy Future legislation specifically includes clauses permitting bankers to create unlimited, unregulated “financial weapons of mass destruction” on the back of the carbon pricing scheme;
(b) HOW their permitting banks to create unlimited, unregulated carbon derivatives will reduce greenhouse gas emissions;
(c) IF the government will guarantee the public that no taxpayer funds will ever be used to bail out a bank/s that gambles in the carbon derivatives casino and later gets into financial difficulty.
[Senators contact information here]
We know that the banks are already gleefully gearing up whole new departments for their new carbon derivatives trading casino.
Indeed, they were publicly bragging about it within a few days of the draft legislation being released:
Australian banks are eyeing opportunities to cash in on the proposed carbon tax by developing new financial products and services that capitalise on a market seen to be worth billions of dollars annually, according to a report by the Australian Financial Review.
Australian financial firms that have experience in European carbon markets, such as Macquarie Group Ltd, Westpac Banking Corp Ltd and ANZ Banking Group Ltd are particularly keen to establish their presence in the Australian market.
The initial three-year fixed carbon tax period from 2012 will serve as time to prepare for the release of ETS permits by 2015, when opportunities will really open up for banks to capitalise on the carbon market.
ANZ’s head of energy trading said the value of the derivatives carbon market would dwarf the $10 billion initially raised by the government, according to the AFR.
What did I say about an inverted pyramid, with money/profit churn from the simple carbon permit trade being only the little pointy bit at the bottom … the thin end of the wedge?
The shadow banking casino in carbon derivatives is the huge bit at the top.
And just like every inverted pyramid, the carbon pricing
scheme scam is inherently unstable.
The Green-Labor Clean Energy Future is an epic financial disaster, just waiting to happen.
When it comes to pricing carbon, all you need to remember is two words.