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October 11, 2011

Worse than a Monopoly

A monopoly is when one market player controls the market.  Everyone knows what that means and that it’s bad because the monopolist can charge basically whatever it wants for its products.  No competition, no restraint.  Gouging of consumers is a foregone conclusion.

An oligopoly is basically the same thing, but a few market players rather than one control the market. The gouging is the same.  The winners and losers are the same.

Add no transparency or regulation to the pricing or structuring of a product that is controlled by an oligopoly and everything just got much worse.  Shooting ducks in a barrel is difficult by comparison.  Gouging on steroids would be a predictable result.

That’s the state of the derivatives market today where just 4 megabanks hold about 95% of the market, which is now $250 TRILLION large.  These numbers come from the Office of the Comptroller of the Currency (OCC).  The New York Times has an article summarizing the report.  

The four megabanks are JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs.  They are all bank holding companies and all have full access to the so-called federal bank safety net.  That means that they won’t be allowed to fail and, if they get themselves into trouble like 2008, taxpayers are going to have to bail them out again. 

And, yet, they INCREASED their derivatives holdings by 11% in the last quarter.  As the article put it, “Even as federal regulators ratchet up scrutiny of the derivatives market, Wall Street is diving deeper into the $600 trillion industry, a new government report found.” 

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