According to a new report, the big banks are looking to remake the derivatives contract “for a new generation,” a term that sounds like it belongs in a political campaign. But amidst this apparent “sales communication” is a little phase littered in reports, “financial innovation,” that might lead knowledgeable insiders to give some old school advice:   Watch your wallet when you walk through mid-town Manhattan.


Although the magic of the Disney has cleaned up the Times Square area, regulators and the US Department of Justice have sent a different message loud and clear: big bank executives will not be held individually responsible for what has been called “fraudulent” financial products that imploded the US economy in 2008.

So when this same general group says it created a brand new derivative product, excuse the raise of eyebrows that is similar to that when Wall Street eagerly structures tax inversions that encourage corporations to flee the US.

JPMorgan and Goldman Sachs offering a new SWAP

A Bloomberg report notes both JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group Inc (NYSE:GS) are offering a new SWAP contract linked to a risky loan index, which implies sub-prime mortgages.  The next sentence in the report said Goldman is offering structured investments that package debt into top rated investments.  The core of the 2008 derivatives crash was sub-prime mortgages being packaged and sold as prime mortgages.

The report seems to indicate that the big banks, which are to date defacto immune to mere US laws and regulations, could be heading back to the scene of the crime. “Wall Street is starting to return to the financial innovation that helped extend the debt rally seven years ago before exacerbating the worst financial crisis since the Great Depression,” the report says.

It is unclear if the structured products being offered provide transparent access into the investment’s sub-components, if they offer standardized product features such as common legal terms and definitions. Requests for comment from JPMorgan Chase & Co. (NYSE:JPM) were not returned.  Goldman Sachs said they may be able to comment in September.

Derivatives collapse – mistakes are being repeated

This toxicity of the assets is difficult to ascertain. But what is clear is those who witnessed the derivatives collapse from the inside are seeing the same mistakes repeated. Just like 2008 was predicted by insiders – and warnings were officially and unofficially given to officials – voices now are beginning to call for a market correction.  Exactly when it occurs is difficult to predict, but predicting the implosion itself isn’t much of a stretch, particularly if core market structure principles are violated.

“The true sign of a top is when you have these new structures piling up,” Larry McDonald said in the report. McDonald witnessed the last derivatives implosion up close and personal, penning a page turning account of opportunistic blindness titled “A Colossal Failure of Common Sense” about the 2008 demise of Lehman Brothers Holdings Inc.

This time around McDonald, now chief strategist at Newedge USA, chose to affiliate himself with the leader in the regulated derivatives industry, a firm that does not trade proprietary capital and generally avoided the 2008 derivatives. “At the top of the market in 2007, there were these types of innovation and many investors didn’t realize about it at that time. These products are a clear risk indicator.”

Neither “quotes” nor ital were used on the words “innovation.”

Stephen Blumethal: Emergence of new derivatives looks familiar

Stephen Blumethal, who oversees $600 million as chief executive officer of investment firm CMG Capital Management, said in the emergence of new derivatives has an oddly familiar look, like that leading up to the 2008 crash.

“Wall Street has always had a habit of piling on products when there’s an appetite for the asset class,” Blumenthal, who has been leading work on developing uncorrelated investment approaches, was quoted as saying in the report. “That’s under the Code Red category.”

While many questions remain, readers can read the available details here: