For Paul Singer, the eerie feeling of knowing how the future is likely to unfold and not having his warnings listened to must be maddening. But it is also a feeling that has a historical precedent. In 2007 Singer and others officially warned central bankers about logical impending bank derivatives doom, but their accurate warnings were treated as if they were coming “from ignorant children,” he said Tuesday at the Institutional Investor / CNBC Delivering Alpha conference in New York City.

As history illustrates, the central bank elite ignored market practitioner advice and dismissed the logical, market-based explanation Singer and fellow hedge fund luminary Jim Chanos had laid out. What resulted was the financial crisis of 2008 – driven by derivatives, by far the largest negative financial impact felt during the crisis. Now Singer is back with yet another derivatives warning that has only grown in magnitude. Will the US Federal Reserve, charged in part with regulating noncleared bank derivatives, again ignore credible warnings?

Paul Singer Elliott Management
Screenshot – CNBC

Paul Singer and Jim Chanos accurately predicted the 2008 derivatives crisis along with Hank Paulson, but their warnings were ignored, “they didn’t listen”

In 2007 Singer, founder of the now $27 billion Elliott Management and one of the more respected economic voices among hedge fund managers, gave a derivatives warning to thecentral banking elite. At the G7 meeting in Europe, he and fellow hedge fund manager Jim Chanos were granted an audience with the central bank elite that included then-New York Fed President and soon to be US Treasury Secretary Timothy Geithner. The pair accurately warned of the derivatives catastrophe that was about to befall society to multiple central bank, economists and fellow market practitioners.

What struck Singer as odd when delivering the first warning was “the amazing arrogance of the policymakers. They didn’t listen. They treated us as if we were ignorant children. And, of course, they didn’t do anything,” he said. It was “practitioners, not academics and not policymakers, that had a deeper understanding of where the financial system was in terms of risks.”

To derivatives professionals the 2008 bank-designed derivatives had violated many long-standing and proven risk management principles of providing transparency into the product structure, using appropriate leverage and writing contracts in clearly understood terms.


Never before have so many warnings on derivatives been ignored — and resulted in economic catastrophe

Paul Singer points out the central bank PhD elite, who typically can’t stand to have their performance tracked, were responsible for overlooking derivatives problems for the third time since 1998, when the genius that was Long Term Capital helped damage the economy. In 1998 another derivatives warning was missed, this time when Commodity Futures Trading Commission Chair Brooksley Born warned as was ignored by the banking elite.

Never before in the history of preventable economic disasters have so many consistent warnings about derivatives been ignored by the banking elite. And now, Singer, like a broken record, says the faulty derivatives that he warned about during a 2014 trip to Davos are still a problem. A logical and pending disaster is likely to follow. Will the elite central bankers charged with regulating non-cleared bank derivatives ignore the warning again?

DB Derivatives

Singer delivers another derivatives warning in 2016

On Tuesday Paul Singer sounded a familiar tone when he touched on what government sources have termed a matter of world economic security. The non-cleared bank derivatives that underlie the financial system, now totaling $700 trillion in notional risk exposure, is a significant risk to the world. And central banks, once again, are squarely in the middle.

Little is technically known regarding the derivatives exposure. As previously reported in ValueWalk, even senior bank executives are unclear as to how the positions are accounted for in a bank balance sheet – the largest notional risk exposure on their books. As of reporting from April, 2015, the large bank’s derivatives positions – which have a defato government risk guarantee to various degrees – were not being tracked based on risk exposures. Many of the derivatives were in paper contracts and not even ISDA, the derivatives trade organization promoting safe industry practices, has visibility into the bank’s directional risk.

What is known, Singer pointed out in the presentation, is that 75% of the derivatives are tied to interest rates. With rates at historically unprecedented levels, there is a logical chance that the interest rate climate might change dramatically – lighting the nuclear fuse of bank derivatives again.

Not just central bankers, but their supporters and enablers are responsible

“In 5,000-ish years of history, there have never been interest rates remotely close to where we are now,” Singer told CNBC’s Kelly Evans, pointing a finger at not only central bankers but those “who apologize and support and cheer on central bankers.”

Paul Singer, for his part, has not only been the primary derivatives warning signal. In fact, he joins numerous luminaries including former US Treasury Secretary Hank Paulson who gave warnings that were ignored. But this warning could be different. With nearly $700 trillion of highly interconnected derivatives dotting the global terrain with potential to implode with land-mine chain reaction like efficiency, Singer is sanguine. Recognizing that economic growth can help avoid the derivatives / interest rate nightmare that has been predicted again not just by him, but in numerous regulated derivatives circles.

Here he gives central bankers a break, to a degree. It is time for fiscal policy accommodation, he said. “Isn’t it time for the central banks to hand over the job to others, Congress or policymakers? And I think that’s exactly the right question, because I think it’s unsustainable to have central bankers do the only job, job of supporting the global economy and certainly the developed world economy.”

Janet Yellen and her team are in the middle of delicate surgery. She didn’t put the world into this situation, but she is tasked with threading the needle of global debt. Singer notes the spider web:

The global financial system and economy is obviously so fragile because of debt, so fragile that all of this conversation about the next 25 or 50 basis points of interest rate hikes in the United States, the possibility that the Japanese and the European policymakers won’t make policy rates deeply — more deeply negative that these kinds of portents cause a ruckus, or the beginnings of a ruckus, or a pre-ruckus in global financial markets.

So I think with $15 trillion roughly on the major central bank balance sheets, with all of these rates at zero or, even crazily, below zero, you have a very delicate situation which cannot be solved by a sledgehammer. You need some finesse.

Thank you, Paul: “Central bank independence is overrated”

Paul Singer, not done hammering on the world’s whisper issues, tackles the myth of central bank “independence.” It is the big banking system itself that can be documented to control most of the appointments to its primary regulator, the central bank. Here Singer isn’t afraid to point to the truth:

I think central bank independence is overrated. It

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