Derivatives Industry Report Collapses

By Simon Johnson

The credibility of a major report commissioned by the “Derivative End Users Coalition” – run by big banks against implementing the Dodd-Frank reforms – just collapsed.

As Andrew Ross Sorkin reports in the New York Times, the report has no meaningful substance – it is destroyed by the critique of Joe Stiglitz – and the consulting company (Keybridge Research) behind the report sought misleading credibility through falsely claiming affiliations with substantive academics. 

At the end of Sorkin’s article is a remarkable admission by Mr. Wescott, the president of Keybridge, conceding these facts.  

“When I told Mr. Wescott of Keybridge about Mr. Stiglitz’s comments, he replied that ‘the client had asked us’ to put the report together. ‘It was a hypothetical study.’”

Mr. Wescott admits that it is a bogus study (“hypothetical”) that was “asked” for - and in exchange for a fee they delivered what was asked for, i.e., a report that has no basis in fact or credibility.  (See also my points about the report’s lack of substance from yesterday.)

This is lobbying for favor on the basis of misrepresenting what is in the public’s interest.  

Nowhere in this Keybridge “study” or the Chamber’s press release or in any materials put out by the Coalition of Derivative End Users was any of this disclosed. 

The industry is making completely baseless claims – and must resort to this kind of hollow chicanery.  This report is revealed as nothing other than a deliberate attempt to mislead the public and to fool people on Capitol Hill.

54 responses to “Derivatives Industry Report Collapses

  1. The report was “destroyed by the critique of Joe Stiglitz”? Stiglitz made a couple of vague, conclusory statements about the report — and his statement about the report encouraging the equivalent of “free fire insurance” was explicitly rejected by Professor Parsons in the post you linked yesterday!

    Sheesh. Why must you wildly over-dramatize every little thing, Simon? It’s getting really old.

  2. To fool people on Capitol Hill?

    Should we rather say “To provide a fig leaf for people on Capitol Hill”?

  3. Herbert Wetherby

    The same claim can be said of those whom want to endlessly extend the debt limit, and debt problem, well into mid-century. We now have found out that there is no plan ever to attempt to get to a balanced budget, in any year that has a planned budget. This is as insane as allowing politicians to pass bills and not be able to do their own taxes, or even think about addressing the unfunded liabilities issue.

  4. I’m glad Stigliz and others have questioned the validity of this study. What would not suprise me though is if people in Congress go ahead and quote it anyway. They done it successfully, in the past. Congress goes by the rule that if a study is printed on a piece of paper, has then name of a impressive sounding insitute on it and agrees with the point they want to prove then it must be a valid study.

  5. I’m surprised at the surprise: liars figger; it’s
    easy to do.

    I always do three projections, myself: Papa Bear, Moma Bear and Baby Bear.

    It would be interesting to see a study about how often the CBO, or the White House Budget Office, is correct in projections: jobs, costs, anything.

    One projects to achieve an objective: get a loan,
    pass legislation, etc.

    Of course, we all know that the CBO grossly underestimated the costs of America’s present entitlements, but has the CBO *ever* been correct?
    About anything? …..Lady in Red

  6. “To fool people on Capitol Hill?

    Should we rather say “To provide a fig leaf for people on Capitol Hill”?”

    Exactly. It is like tax loopholes that tax planners “find”. Most of them are written, not found.

    Nowhere is this more plain than in 1986:

    “But the real story of the 1986 Tax “Reform” Act became all the corporate tax exemptions written into the law, often in language so convoluted and arcane that not even trained tax lawyers could identify the beneficiary. One of the few decryptable examples gave a tax break to an unidentified “taxpayer who incorporated on Sept. 7, 1978, which is engaged in the business of manufacturing dolls and accessories.” In plain English, this loophole should have read: “We hereby give Xavier Roberts, the inventor of Cabbage Patch dolls, a personal tax break of $6 million.”7

    http://www.huppi.com/kangaroo/3Taxes.htm

    Don’t have to be much of an accountant to figure that one out.

  7. but has the CBO *ever* been correct?
    About anything? …..Lady in Red

    They do not deal with many 1 + 1 questions.

    http://voices.washingtonpost.com/ezra-klein/2010/08/research_desk_how_accurate_wer.html

  8. As much as we complain, we as a society buy into the larger framework of values. We anoint MBA’s and financial whiz kids as if they were divine and could do no wrong. Simon’s comment about Prof Stiglitz’s reflects the power we attribute to the anointed: with just a word he can destroy. The reality is that the kids on Wall Street were playing with matches, they set the house on fire and it nearly burnt down, and now they are saying, “We didn’t do anything wrong.” My response: “How human.”

  9. End User Coalition is not run by big banks – it’s the exact opposite. It’s run by endusers, who are corporates, insurance co.’s, pension funds, etc. That’s what an enduser is. Get your facts straight

  10. Dr Johnson says: “Mr. Wescott admits that it is a bogus study (“hypothetical”) that was “asked” for – and in exchange for a fee they delivered what was asked for…”

    This is true of virtually all so-called “market research.” I have worked in the field, and it’s great fun, but any relationship of the findings to reality is purely accidental.

    Yet all of the great corporations that run our government and the world do “market research” constantly, and make business decisions based on the results. The CEOs of these companies, of course, trumpet their own capabilities for making rational decisions based only on “the facts” about “the free market.”

    As I marvel at the capacity of those in Washington to choose only the facts that advance their favored scenarios, I try always to remember that they learned from the best: corporate America.

  11. A great job of reporting by Mr. Sorkin w/help from Mr. Johnson. Its a pity that there isn’t some way to let the American people know how the financial industry was trying to manipulate the new financial regulations so they could cut 150,000 jobs.

  12. ” The credibility of a major report commissioned by the “Derivative End Users Coalition” – run by big banks against implementing the Dodd-Frank reforms – just collapsed. ”

    That doesn’t mean it won’t remian credible and provide talking points for Glen Beck and Rush Limbaugh fans.

  13. To a person outside the USA “banana republic” is a defensible description of public policy as practised. There is a giant sucking sound emanating from USA as all oxygen is being depleted.

  14. No, it’s because when you shine light on the rats, they ‘break up’ and scatter, scheming their next b.s. opportunity to save their deriviative crack addiction.

    The Commodities Futures Mod. Act. is the problem, and the one they will fight to the death to keep.

  15. It’s a pity that there isn’t some way the let the American people know? How about if some of them picked up a newspaper once in a while?

  16. Herbert Wetherby

    I wonder if the collapse had anything to do with the M2 figures bouncing off the 8′S and now heading back down. Politicians are finally talking about the amount the country owes is approaching a years worth of work and life style for every man woman and child.

    Not to mention our total debt is approaching everything the country has serviced or produced since its founding. And if the readjusted #’s were ever accurately released the country might really be in the hole by a good margin. Its put on the blinders and dam the torpedoes, I’m an old politician/economist that CAN’T be wrong.

  17. Doc Hallenstein

    “… a deliberate attempt to mislead the public and to fool people on Capitol Hill.”

    Apparently that’s easily done.

  18. Simon plugging Sorkin again … hmmm

    At least this time there’s work worth plugging, i.e. investigative work that is readable and serves the public interest. Sorkin was able to avoid doing any of it while writing Too Big to Fail, which Simon plugged in the WaPo. So onward Mr Sorkin – there are stories out there to write! How about looking into whether Mubarek’s Rubinite advisors tried to put pressure on Facebook and Twitter to get the networks shut down in Egypt. Seems to me like they would try that sort of thing.

  19. Herbert Wetherby

    How about if a man has to choose betwwen his soul and his hyde to save, which do you believe he chooses? It turns out that in every case a man decided to save his hyde over his soul. So the same should apply to the artifacts of told stories and public interest cronies alike, be it political/economic or simply self serving.

  20. We never had a balanced budget under your hero Reagan or either Bush. Why do we need one now, Herbert? What disaster do you fear now that never happened under decades of deficit spending?

  21. This is pure chickenlittle-ism, Herbert. Get a grip.

  22. Herbert Wetherby

    I thinky you may be right.

  23. Herbert Wetherby

    Well, we can talk about our ability to service our debts, its abit lenghty and I have been over it on many occasions even here. No one disputes our inability to do so after I get done with them. And a guy who wanted to play put up or shut up went home without payin me as he promised. As for never happened under, I once again can tell your age and a warning to you: You seem to be a heart attack away from something, so just calm yourself and think of how we can’t service our debts soon.

  24. markets.aurelius

    You are seeing desperation here, Simon. It’s all good. The “Derivative End Users Coalition” has lost this war — they are fabricating “analysis” to support an apology that is indefensible.

    The only thing that will carry the day is outright misrepresentation and fraud, something not unfamiliar to the members of this group. When it becomes truly blatant — as it is now — there is only one alternative: take over the regulatory process. We are presently in that phase of the process.

  25. Bayard Waterbury

    I generally agree, Herbert, but where I differ is in the degree of the dispute. Obama put out the bait for the Republicans and they have bit. Now we’ll watch as the dance unfolds. My bet is that no politician will be willing to do the right thing, for many of the same different reasons (confused? then figure out that neither party is willing to risk either funding or votes, talk about being in a box!!). As to the national debt, I look for it to grow to mammoth proportions, followed by a currency collapse. The good news is that while China and India become the world’s financial and trade superpowers, we shrink to third world status and our labor actually becomes cheaper than theirs. I won’t live that long, but then the world, in fact, does turn, albeit slowly.

    Plutocracy is the answer to what our problem is and will be. And justices like Clarence Thomas don’t help things.

  26. Bayard Waterbury

    Simon, it’s such a shame that the public never asks about such things. Not only do they not understand, but few even pay attention at all. So, today’s fodder, regardless of how much in error it is, is just another lie that is perpetuated in an era of ignorance and apathy perhaps unlike any other in its vastness of scope. Anyone who actually pays attention to the arguments surrounding the fueling of our banking behemoths to greater and greater heights, must feel a state of continuous nausea as they watch and feel as helpless as we do in one of those dreams where we are falling or naked. It is so sad to see that so few care enough to ask serious questions.

  27. Bayard Waterbury

    Needless to say, valid market research done by corporations is rarely shared, since its content is, if leading to profits, essentially a “trade secret” and therefore, one can assume that if the “market research” is actually published, it must be either poor or intended as obfuscation or misdirection. Good market research is very useful to the insiders, and not to be shared. James had an article earlier this week on statistics and their relative importance, which applies here, no doubt.

  28. Bayard Waterbury

    How about if a newspaper actually printed something true, complete and meaningful? So few do. After all, the major media are all owned by about seven entities with interlocking boards. Whatever I read, I take with a grain of salt. Finding the truth these days takes lots of reading of diverse sources combined with a very large amount of criticism and a huge dose of cynicism.

  29. Bayard Waterbury

    You’re so right. But, Glenn and Rush don’t need anything to spring upon, they’re very satisfied to spout complete garbage because their believers are such toadies that they automatically agree with whatever these guys try to pronounce as truth.

  30. Herbert Wetherby

    I will simply say that if you can’t bite, don’t show your teeth. As for CT, its too easy for him to get choked up on his own hypocrisy to talk about anything other than those things he dearly cares about. And before a collapse we should, or have been seeing, price, and commodity inflation.

    And yes, I do know of the separation of powers. How do you know it was broken? they ask. Well just look at how they try to run things, albeit slowly.

  31. Bayard Waterbury

    Herb, anyone CAN BE WRONG. Regardless of experience, and I trust that you have lots, you are expressing a viewpoint. Don’t get carried away. I happen to agree with you, but that doesn’t make you right, nor me certain. What you say actually identifies a huge problem that we almost always have. Real numbers. I would simply point to what we are fed as employment-unemployment data (I hate to use the word “data” because it actually infers some reliability). The “real” numbers are so chilling that no one wants to mention them, even if they support an argument. This is really a kind of political terror movie we’re watching right now, where we are the victims yet to be gored. Oh, we may feel a little pain so far, but that ain’t nothin’ compared to what we’re gonna feel.

  32. Bayard Waterbury

    There is no need to even try to fool Capitol Hill. They live in such plutocratically protected cocoons that they might as well be aliens from another world in terms of their understanding of what they are governing.

  33. Herbert Wetherby

    Yea, I hate it too when I don’t a full bag of tools at my disposal, to do as I please and judge a bunch of others. Drawing the line at the slightest provocation, leading others to the same consequenual data. Nobody ever having enough, and toward the end you can’t really afford to get it wrong, as anyone can be, without the same not going to live that long scenero you mention earlier, and we all need to avoid that one, don’t we?

  34. Thankyou Simon once again for a highly informative, and timely post. :-))

    I’d like to add a sprinkle of empirical, rational, and abstract (yet harshly critical of our hindsight as a nation, where complacency may very well be our undoing?) thought – a tartly crusty flavored “gourmet-a-tistic’s” pragmatism is this chef’s dish of inane coziness left out in the cold of night?

    Think back too this dreadful infamous date “9-11″ *(2001)*?
    Approximately 10 years ago our “Gross National Debt (GND)” was ~$5.7 Trillion.
    Usama bin Laden is out to destroy “America’s Sovereignty” as the world’s eminent financial hegemony.
    Has he succeeded (please don’t get mad at the messenger!!!)?
    Tally Ho? – America’s GDP has approximately increased three-fold…from $5.7tn, upwards to $14.3 tn. – with the current debt ceiling to increase it another ~$2.3tn/ $2.7tn (#’s can be off just because current ambiguity fomenting in congress as I write – where to make cuts, if any?) within the next month.
    My question to you – “Is the Tail Now Waging the Dog”?, and at whose expense (the middle east?/ SE Asia?) and the sad tale of nervous laughter internalized within…this bellicose echo of mawkish remorse?
    JMHO

  35. So are we dealing with vested interests? People who want to avoid criminal charges? People who want to make money of sketchy activities?

    Or simply people who have no idea what they’re talking about?

    Whatever the answer, this is just another report in a million over the past couple centuries. What else is new.

    History repeats…and so will the financial crises:

    http://www.planbeconomics.com/2011/02/08/full-report-the-financial-crisis-of-2015-an-avoidable-history/

  36. @BW: who said corporations shared their research? That’s beside the point.

    When the “researchers” are paid to come to a conclusion, they know what they’re supposed to produce. They know who pays the bill, and they’re not going to bite the hand that feeds them.

    It’s just the same as the ratings agencies being paid by those whom they rate. It is impossible for them to render objective ratings.

  37. Well, BW, a radical leftist couldn’t have said it any better. (in case you couldn’t tell, that’s a compliment)

  38. Uhmm, in a true market research the researchers are not paid to come to a conclusion. Try again.

  39. One regards with an eye that is jaundiced
    Those lobbyists doing their darndest
    To convince you and me
    That risk should be free,
    A view of which Wall Street is fondest.

  40. Simple theory of trial practice … When you have the facts on your side, you pound the facts; When you have the law on your side you pound the law; and When you have neither you pound the table.

    Translation and application to politics … If you cannot win on an honest policy argument, then create a false policy argument; create false support for your argument; and/or attack the credibility of your opponent. Works like a charm until someone does the work to expose the fraud.

    Glad to see someone is actually examining the evidence. Next someone will realize that these are the tools of the class war, which only vast amounts of money can buy. Was it not enough to buy the politicians?

  41. @ Mark

    “History repeats…and so will the financial crises:”

    “The Reincarnation of a Post Renaissance through the Eye’s of a Reformed Nihilistic Zeitgeist”

    The “Epiphany” (Summary)

    “The suppression of thought leads to the cannibalization of creativity
    Instincts trump logic
    Logic prostrates to survival
    Existence capitulates to compromise
    Compromise flows from the foundation of thought
    Gifted intelligent rationale
    Time tested being no factor other than grading our wisdom naught
    Wisdom never tempered?”

  42. You mean they don’t know who the client is?

  43. You mean they don’t know who the client is and what the client’s interests are?

    That could be true in a few cases, but in my experience, very few.

  44. Herbert Wetherby

    True market research is simply an adventure, and yes the researchers come to a conclusion, and then the gvt decides if its in their best interest or not, and if not, it is rated not credible and discarded accordingly and more research is done to achieve the results that the gvt. did want. Case in point, the Laguardia report.

  45. I think a nice parallel can be drawn between the active ignorance and misdirection today that permeates Fox News, etc. on the one hand, and the rise of the popularity of the gladiators as the Roman Empire declined.

  46. The catch here is that the people on Capitol Hill don’t need fooling. Most are too stupid or ignorant to understand any kind of economic analysis — cooked or otherwise.

    The others who are intelligent enough are so delusional or deceptive that they just don’t care what any report says. They have decided that their job is to transfer wealth to the richest, ensure the long-term preservation and growth of that wealth, and keep the general population too docile to react.

  47. Why did this remind me of HBGary Federal. A coinkidink or are the engines of disinformation revving up for the season?

  48. I am involved in fighting natural gas drillers in PA. We decisively discredit their claims about the safety of that industry all the time, yet the politicians still site the “studies” and “reports” that are found to be baseless. Because the discredited “studies” support the arguments that the legislators want to believe.

    Do you think politicians won’t still site this report or use it to defend their votes when decision time comes?

  49. @ BradyDale

    Ref: “Clark River Associates (CRA’s)” – CRA Insights: Oil & Gas (10/2010)

    http://www.crai.com/uploadedFiles/Publications/OG_Insights_GasShale_1010.pdf

    PS. The Middle East is about to blow-up – oil and Gas will be scarce, and prices will be astronomical for these precious commodities. We will be paying $10/gal. minimum! What would you rather have – no fuel /no gas /no oil where *your/our* drug dealer[s] have left the crime scene forever?

    Canada’s “Tar Sand’s” (500k/bbl daily minimum), and the United States “75 year minimum” supply of natural gas (retrofit gasoline engines), Solar, Wind, and Superconductivity for our transmission lines power grids brought up to standards of “Critical Infrastructure Protection (CIP)”! Yes, our antiquated tone/deaf “North American Electric Reliable Corp. (NERC)” & “Federal Energy Regulatory Commission (FERC)”! Our current *Total Country-Wide Power Grid” doesn’t talk to one and others on most regional power grids. Why? We are setting ourselves up for demonstrative rolling blackouts (not since the 80′s) nationwide…with no defense against the dreaded “Stuxnet Worm” – with open arms seemingly willing to except our demise through complacency towards our mother land – while military spending approaches $825bn annually forever!

  50. Link up “Home” – Sidebar scroll

  51. Bruce E. Woych

    From Economy Watch: some details that not only turn heads but stomachs too:
    Wall Street’s Blatant Derivatives Conspiracy

    http://www.economywatch.com/economy-business-and-finance-news/
    wall-streets-blatant-derivatives-conspiracy.17-02.html
    Wall Street’s Blatant Derivatives Conspiracy
    17 February 2011. Economy Watch has long been concerned with the destructive power of derivatives — and their STILL yet-to-be-fully-felt impact on the world political economy — ever since their explosion onto the scene during the global financial meltdown of Black September 2008.People familiar with the derivatives nightmare are brutally clear as to why they are so dangerous — and also why the REALLY Too-Big-To-Fail bankers just had too much to hide and too much to gain…and not enough real time skin in the pain.

    Wall Street’s Blatant Derivatives Conspiracy
    http://www.economywatch.com/economy-business-and-finance-news/

  52. It is useful information and shows the lengths these organisations will go to to protect their interests.

  53. From Matt Taibbi, writing for Rolling Stone, a detailed look at the complicity of regulators in the collapse: Why Isn’t Wall Street in Jail?

    http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=2

    Here’s a sample:

    “… a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who’s in office or which party’s in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of non-enforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this non-jailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.”