good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. and european finance ministers are meeting today to try to avert disaster well we've seen u.s. president barack obama this week reportedly pressure european leaders to resolve the eurozone debt crisis here is. this is the future for a storm called. europe is constructed your reserve difficulties. it's much more difficult for us to create a good drug shergold. meanwhile though right under washington's nose fitch ratings agency downgraded as is the outlook on the u.s.

to negative in the wake of course of the super committee's failure to cut america's own deficit and will take a look at crony capitalism then and now during the financial crisis how did hank paulson then u.s. treasury secretary get away with warning hedge fund managers about a possible takeover of fannie mae and freddie mac. months in advance while telling the u.s. senate that intervention was probably not in the cards and now how did john for a sign of m.f. global get away with betting almost twice the amount of european sovereign debt that he disclosed to investors also take a look at how too big to fail has become even too much bigger to fail take a look at this football field of dollars ok that's what a trillion dollars of cash looks like imagine seven hundred of them and that is the amount of derivatives floating around the financial system now this is the most

reported ever to see this as a sop skyscraper take a look at that building and multiply that by seven ok that's what seven hundred trillion dollars looks like now imagine that that skyscraper actually all seven of them come tumbling down. we'll talk about the damage that could cause let's get to today's capital account. ok if you need evidence that the era of too big to fail is not only alive and well but is actually worse three years after the financial crisis look no further than these numbers seven hundred seven point five six eight trillion dollars represents the largest total amount of notional over the counter outstanding derivatives

reported in the financial world a viewer and when was that number reported well as for the first half of two thousand and eleven by world financial institutions to the bank of international settlements think of this is seven hundred eight trillion open bets that could go wrong at any moment now it's hard to imagine how much money that actually is so let's bring up those skyscrapers again because i want to hammer this home ok seven of those green skies great birds which is a skyscraper made out of dollars is how many outstanding notional droege is there are floating around to compare global g.d.p. is about sixty three trillion dollars so not even one of those buildings and one of those buildings one hundred trillion dollars was added in derivatives in just over six months the first six months of this year reportedly the biggest increase in history now in december two thousand and ten outstanding notional derivatives were

six hundred and one trillion six months later they were about seven hundred eight trillion now this beat the prior record in two thousand and eight of six hundred seventy three trillion so a lot of numbers to talk about why they've increased so much why so much lately and what kind of damage this could do not to mention why they are unregulated still springing nomi prins senior fellow at think tank demos and at the think tank demos excuse me and author of this book black tuesday and she is in l.a. to talk to us about this i know it's so nice to see you thanks for being in l.a. today. hi thanks laura yes so of course the public at large became acquainted with derivatives during the financial crisis in two thousand and eight but before we get to these numbers today and this report can you kind of bring us back and give us a really good example of why derivatives were harmful during the financial crisis. yes and it's again

a component but we're seeing to day derivatives are harmful because the way that they're evaluative has sometimes nothing to do with what's really going on economically so for example in the subprime crisis that the us experienced in the beginning of two thousand and eight actually going into the in two thousand and seven as well there was a lot of derivatives activity that meant there were just loans that people received for their homes that banks were holding and maybe rounding up together and packaging and using as collateral as chips to get money to have for new loans which is a very simple version of how finance worked it was so much more than that and in that process one and a half trillion dollars of subprime loans became first fourteen trillion dollars worth of package securities and then derivatives were sprinkled in and that allowed

fourteen trillion dollars of securities to become upwards of one hundred forty trillion and that led to a lot of fallout and a lot of bailout and a lot of subsidies of the banking industry because you can take a little bit alone and you can create from that a lot of risk and what we're seeing now with with these extreme growths in over the counter and nontransparent regulated derivatives is just the more international manifestation of what we saw happen in the united states or begin in the united states as part of the same problem a few years ago ok that's interesting and i want to show our viewers just how much the number of notional outstanding over the counter derivatives has grown so they can take a look at that while we talk because it's reached a record just in this year so given how much damage derivatives did during the two thousand and prices how concerned should we be know me that now they reached this number. i think we should be very concerned because not only have they reached

a number that's fifteen percent more than it was in just the beginning of the year we have to understand what those bets involve and what a lot of that number involves in the us the bank of international settlements that does that report on a midterm basis on twice a year doesn't even really dissect it into all the specific risks that are part of that seven hundred seven trillion a lot of it is on interest rates between countries for example in europe it's bets that are flying back and forth you know against italy today for germany against germany against spain for france and a lot of activity going on back and forth for sure how these sovereign countries are exposed and how their bonds are trading as well as adding to that credit risk whether any of them will default whether their banks will default whether companies inside their borders will default and so the betting on all of that has increased by that fifteen percent in just six months and what that means is any problems that

occur are magnified just in these six months by fifteen times more than they were before that and any problem that happens any one bank any one industry any one chain of several banks relying on each other and doing derivatives with each other which puffs up that notional amount can hurt that entire chain the entire process can cause a lot of damage and a lot of loss and with all of the. opportunity for that kind of damage and for that kind of failure and risk can we talk about the u.s. because now five banks account for ninety six percent of the u.s. to rivet exposure so with that amount of exposure does this mean that banks are basically assured a bailout if something was to go terribly wrong. not only are banks assured a bailout banks are betting on bailouts part of the increase in the derivative exposure globally is because banks having realized particularly us banks having

realized that our government our federal reserve our treasury department our president no matter which party promotes the idea subsidizing banks especially the biggest ones when they are facing losses and to basically support the risks that they take that idea that bailout economics has been exported to europe as sort of phase two of this of this global government subsidization of derivatives and of risk so the five banks in the united states that control ninety six percent of the derivatives amount which amounts to two hundred forty nine trillion dollars so about a little more than a third of that seven hundred seven trillion dollar exposure which are citi group j.p. morgan chase bank of america goldman sachs and actually h.s.b.c. those five also are a large stake in that seven hundred and seven trillion by being two hundred forty nine trillion of it and they know they've seen as have global big banks across the

world scene that governments will step in central into t's like the fed the e.c.b. is going to step in more the i.m.f. and so forth will find the money to print to lend to subsidize the risks that are behind all of this derivatives exposure so the u.s. banks started it they know it exists that mentality as well as the risk is just now being exported to europe and in a larger number a larger volume and it was even here in the united states and it sounds like you're saying that essentially banks are taking this risk because it perpetuates too big to fail now there's so much more i want to get into with you know me but i have to quickly explain to our viewers what exactly over the counter means if you could hold tight for just a minute and we will have more with prince and in just a moment.

all right time now for word of the day why break down a financial term or concept for our very smart viewer but just perhaps not the financial expert and and the spirit of the derivatives derivatives discussion that we've been talking about that i've been talking about with no me prince and about the report we've been discussing word of the day today is over the counter and here's a quote from a news story about the impact of trying to regulate over the counter derivatives so this is according to analysts and bankers existing back office bank infrastructure is not equipped to deal with the demands of shifting o.t.c. derivatives ok these are over the counter derivatives through clearing so what exactly does it mean for derivatives to be over the counter let's take a look at the definition so this refers to trades of financial instruments such as stocks bonds commodities or in our case derivatives that happen by laterally ok this means between two parties and this contrasts with exchange trading which

occurs via facilities constructed for the purpose of trading such as futures exchanges or stock exchanges like the new york stock exchange so the derivatives we've been talking about ok the seven hundred eight trillion derivatives those are traded on an exchange ok they're negotiated between two parties so the argument is that if they were traded on central exchanges you would mitigate counterparty risk and the likelihood of a freeze in credit markets as a result of investors freaking out about who is exposed and where that exposure lies now this was supposed to get cleaned up after the financial crisis ok part of the g. twenty commitments in two thousand and nine part of dodd frank was to. require large bank o.t.c. derivatives markets to be shifted onto formal trading platforms but implementation has been delayed reportedly but when and if this does happen or if it doesn't you

will know what it means for those derivatives to be over the counter. just ahead right here on capitol hill are on the rue texas about style why has one small business owner find it's to rum up plus dimmers from his roof and the first to closing stock numbers. you just put a picture of me when i was like nine years old until she told the truth. i confess and i am a total get over friends that i love driving hip hop music and for. that he was kind of the jester. i'm very proud of the will

without you she has played. oh oh oh oh oh. oh. you know sometimes you see a story and it seems so. you think you understand it and then you glimpse something else you hear or see some other part of it and realize everything you thought you knew you don't know i'm charged welcomes a big picture of. what drives the world the fear mongering used by politicians who makes decisions to break through it's already been made who can you trust no one who is you know view with the global machinery see where we had

a state controlled capitalism is called sessions when nobody dares to ask we do our tea question more. get the. welcome back derivatives are not the only problem facing the financial system we want to bring in some other stories bloomberg has reported that henry paulson when he was treasury secretary of the us told several hedge fund managers back in july of two thousand and eight that a government takeover of fannie mae and freddie mac. what was in the cards that this could happen now this is even though he had testified before the senate about a week earlier saying that government intervention was not likely in the cards now of course we know what happened the government came in and did take over freddie

and fannie back in september of two thousand and eight ok now fast forward what do we see we see the m.f. global's saga continue and now it turns out john reportedly bet eleven point five billion dollars on european sovereign debt trying to make his now bankrupt firm profitable and this is almost two times what he disclosed to investors so what are these stories have in common while crony capitalism ok what role though does it play and giving an advantage to big investors at the expense of everyone else i'd like to bring back and nomi prins to have this discussion she's a senior fellow at the think tank demos also author of the book black tuesday which you see there and she's in l.a. and know me i actually really quickly before we get to these stories today i just want to follow up with the derivatives conversation because there's so much to touch upon and i know our producer dimitri kovtun as wants to get to this discussion to ask you something about it you know my question of the do with your conversation with lauren before you were talking about the five biggest banks have about ninety six percent of the o.t.c.

derivatives market and to me that seems or rather me ask it this way how is that different than a racket because if the march is running a protection racket they basically go to a local store and they say give us this much money every month or we're going to light your house on fire how is it different when these banks are in such a position where they can continue to take risks like this expanding the size of the earth is the market by over one hundred trillion dollars but every time there's a problem they say if you don't bail us out or give us more money we're going to crush your economy. it's very like the mafia the thing that the banks have going for them the sort of local mafia bosses might might not is that they can throw in the fear factor definitely hold hold guns to the international community but they also have the knowledge that the government is going to subsidize them and being even before subsidization is needed to cover losses that might happen you know they have the f.b.i. see who is effectively ensuring the deposits that these banks hold goldman sachs

doesn't really hold deposits but i got to be call the bank in the fall of two thousand and eight anyway and have that protection so they even have protection into creating the risks they know they're going to get subsidized taken and so they're definitely like a government sponsored mafia in that respect and knowing it's not just subsidies you also have evidently government officials coming in to tell you what's going to happen i want to go back to two thousand and eight with this report that hank paulson was meeting with hedge fund managers wall street exact then telling them that there could be a takeover of fannie and freddie what the heck was he doing meeting with these people having this conversation during the height of the financial crisis. that specifically goes to the crony capitalism idea i'll say that the other commonality between a global leader john corazon and hank paulson when you're sort of your secretary is that they both goldman sachs so you know they're coming from a position where what they understand what they know what they're. what they are have soft spots for what they get money out of what they've got money out of is is

wall street is the way in which those financial opportunities come by them in which financial firms work and so. hanging around a bunch of head front and money market and private equity fund managers is with his people and his people are united states citizens his people are these people so when he is in front of them and sharing information that he should not be sharing as a public servant. a public servant to the united states population it doesn't even cross his mind and there is no legal framework to keep him from doing that so he specifically sharing what he knows with these people and as you mentioned is also withholding information from from congress so effectively definitely picking a side keeping the side that he was on before he got to the position of keeping his side of course in that position and it's no different with john corazon he didn't become the treasury secretary became a senator became a governor and now he's effectively being the money that he bet bets before

on european sovereigns and he hasn't even been arrested yet he doesn't even have to talk about the investigation behind this for another almost two or three weeks if anything comes of that which it may not so which on corazon end with this report eleven point five billion dollars was what he was betting on european sovereign debt which is twice what he disclosed to investors if this is true are you suggesting that he gets away with this kind of thing because the goldman sachs the political connections the crony capitalism. i'm going to say if he does get away with it is definitely because of those i mean he has. i continually be astonished how so many things that happen there are absolute criminal activities that are frauds that are that are grand large cities that are there are wrong by a c c rules get basically pardoned or swept under the carpet or or thrown little fines and sort of go away in little settlements and go away john poor zein mix

money within his firm hasn't reported money and he's committed fraud if he does get away with that fraud it will because he's been able to somehow confuse the extent to which the fraud was committed it's more simple fraud than what goldman sachs or the company might have created with their c.e.o.'s and other things that they also were in front of investigation committees for and got no punishment really except some settlements in relation to so if that happens it's because of his relationships with all of these people but he it's going to be harder for him hopefully to get away with it because it's so obviously criminal it doesn't require a whole lot of explanation as to why it's criminal it's like i have the money the money disappeared i said it was this launch now it's actually this launch i mean these are very clear. instances and clear actions so hopefully he will not get away with them but if he does it is because of those connections and of course we will see but i just want to ask you because you did bring up the goldman sachs connection because you did used to be a goldman sachs you know we often hear these reports of crony capitalism and you

know this connection of so and so worked at goldman with this with this person is it really like that is it really kind of a boys and girls club where you kind of support people from goldman or are you know more likely to kind of have these opportunities. it's very much a boys' club really i mean yes i was there and yes i'm not a boy but it tends to be a boys' club it tends to be you know relationships within the firm when these people leave the firm that are cultivated over years you know that started in universities it started with with family relationships i mean there's so much goes into this this combination of sort of crony capitalism and old boys' network all rolled up into one that starts at a level of international finance and sort of goes into international politics and back the other way so yeah it is definitely like that it's all very much you know you scratch my back i'll scratch yours if you're really out in the cold i might

ignore you because i don't want to get in trouble also but otherwise you know you're in my tent i mean there's a lot of that all the time ok great it's really great to have that expertise because of course you were in the trenches there and now you're connecting the dots for us that was no mean prince she's from the think tank demos also the author of many books. right so we've talked about crony capitalism derivatives and the benefits of being from goldman sachs but what you're not what if you're not a former goldman alum what if you're just a small business owner who's trying to make a living in this tough economy well to talk about this story i want to bring our

producer dimitri kofi anan us to hash this out because a small business owner in texas give us gives us an example of the lengths that people are going to ok he's literally trying to strum up business in these tough economic times take a look. fifty year old happy jack allen is living on the roof of his struggling north austin restaurant he's playing his electric guitar to try to drum up business . with the money for ever because it's just not there so i thought i would just get crazy it's a desperate measure. ok the poor guy is living on his roof other people in the shopping center said yes business is slow so demitri do you think these are the lengths that people are going to have to go to i mean is this as bad as it's going to get before you know it awakes it awakens someone to do something guitarists on the roof it's pretty sad but i don't know what the guy was thinking he opened up

the rest like a year ago so i think it was like a guerrilla marketing campaign where he's going on the roof and he's like you know playing guitar. on the roof he's living on his roof and desperately playing his guitar. i thought this is just so i would say that's that's the american dream right there and i do want to bring up that someone in that story when interviewed said that wal-mart had just opened up do you think that wal-mart has anything to do with the fact that these small businesses are struggling so much is this kind of the battle of corporations versus small businesses. i think look. ok minister all right well this country is in a frickin depression all right and you're going to see more of this and unfortunately you need more of this the problem is that you have banks and you've got people like john corps i have paulson who are don't have to do with it so they transfer the wealth from people like this guy and it's one of his roof playing guitar trying to direct marketing campaigns in austin texas where no one wants to

go it is already too fat so you know that's what i really think all right well i guess the more of the story is look for more guitarists on the roof and i can tell you they are not going to be the people that are going to be buying this now it's not that toyota has introduced a concept car that is basically got this touchscreen kind of i phone situation take a look. at. yeah. those are starting to go it moves in that are those old ideas how do you get it with ok so it works like a personal computer obviously very high tech now the funny thing is that actually it was suggested that an american car company do this not too long ago new york times columnist wrote and said that he thought steve jobs could do it back in two thousand eighty said somebody ought to call steve jobs who doesn't need to be bribed to do innovation and ask him if he'd like to do a national service and run a car company for a year i bet it wouldn't take

a much longer than that to come up with a g.m. i car now dimitri's any shocker that it's not g.m. that came up with this car but a japanese car automaker yeah well i don't want tom friedman said that i thought it was kind of ridiculous because he was basically trying to dictate you know what i mean i'm not surprised because all the innovations coming out of asia and you have the tech sector in the u.s. steve jobs but that's not g.m. g.m. got a bailout they were bankrupt you know so i'm not surprised if anyone would come out with maybe it's ford but g.m. and chrysler they were bankrupt government bailouts so i wouldn't be expecting anything like that come out of the more importantly would you drive a car. it was for me and was free yeah i don't if i pay for it which is the whole point which is why i don't know you know if it's really all that all that electricity is supposed to be a total disaster if you get in a car accident just ask anybody with a prius is that is all we have time for that's it for our show thanks so much for tuning in you can feel free to follow me on twitter at lauren lester to let us know

what you think give us feedback at youtube dot com slash capital account i'm lauren mr and from all of us and till next time have a great. assets . phone watches you know every single mom. and waiting for you to stumble. i saw a man with a video camera so i moved over and he phoned me some of the you know we realized there were following everyone from early in the morning. the only chance to get rid of him. is to reveal him.

me double operation on r g. wealthy british soil is not. the time to write. hi frank.