Inventor of Credit Default Swaps is a Key Architect of Carbon Derivatives

[6.8SPC_DUMP]

Woman Who Invented Credit Default Swaps is One of the Key Architects of Carbon Derivatives, Which Would Be at the Very CENTER of Cap and Trade (http://www.zerohedge.com/article/woman-who-invented-credit-default-swaps-one-key-architects-carbon-derivatives-which-would-be)

I have written hundreds of articles documenting that unregulated, speculative derivatives (especially credit default swaps) are a primary cause of the economic crisis.

And I have pointed out that (1) the giant banks will make a killing on carbon trading, (2) while the leading scientist crusading against global warming says it won't work, and (3) there is a very high probability of massive fraud and insider trading in the carbon trading markets.

Now, Bloomberg notes that the carbon trading scheme will be centered around derivatives:

The banks are preparing to do with carbon what they’ve done before: design and market derivatives contracts that will help client companies hedge their price risk over the long term. They’re also ready to sell carbon-related financial products to outside investors.

[Blythe] Masters says banks must be allowed to lead the way if a mandatory carbon-trading system is going to help save the planet at the lowest possible cost. And derivatives related to carbon must be part of the mix, she says. Derivatives are securities whose value is derived from the value of an underlying commodity -- in this case, CO2 and other greenhouse gases...
Who is Blythe Masters?

She is the JP Morgan employee who invented credit default swaps, and is now heading JPM's carbon trading efforts. As Bloomberg notes (this and all remaining quotes are from the above-linked Bloomberg article):

Masters, 40, oversees the New York bank’s environmental businesses as the firm’s global head of commodities...

As a young London banker in the early 1990s, Masters was part of JPMorgan’s team developing ideas for transferring risk to third parties. She went on to manage credit risk for JPMorgan’s investment bank.

Among the credit derivatives that grew from the bank’s early efforts was the credit-default swap.
Some in congress are fighting against carbon derivatives:

“People are going to be cutting up carbon futures, and we’ll be in trouble,” says Maria Cantwell, a Democratic senator from Washington state. “You can’t stay ahead of the next tool they’re going to create.”

Cantwell, 51, proposed in November that U.S. state governments be given the right to ban unregulated financial products. “The derivatives market has done so much damage to our economy and is nothing more than a very-high-stakes casino -- except that casinos have to abide by regulations,” she wrote in a press release...
However, Congress may cave in to industry pressure to let carbon derivatives trade over-the-counter:

The House cap-and-trade bill bans OTC derivatives, requiring that all carbon trading be done on exchanges...The bankers say such a ban would be a mistake...The banks and companies may get their way on carbon derivatives in separate legislation now being worked out in Congress...

Financial experts are also opposed to cap and trade:

Even George Soros, the billionaire hedge fund operator, says money managers would find ways to manipulate cap-and-trade markets. “The system can be gamed,” Soros, 79, remarked at a London School of Economics seminar in July. “That’s why financial types like me like it -- because there are financial opportunities”...

Hedge fund manager Michael Masters, founder of Masters Capital Management LLC, based in St. Croix, U.S. Virgin Islands [and unrelated to Blythe Masters] says speculators will end up controlling U.S. carbon prices, and their participation could trigger the same type of boom-and-bust cycles that have buffeted other commodities...

The hedge fund manager says that banks will attempt to inflate the carbon market by recruiting investors from hedge funds and pension funds.

“Wall Street is going to sell it as an investment product to people that have nothing to do with carbon,” he says. “Then suddenly investment managers are dominating the asset class, and nothing is related to actual supply and demand. We have seen this movie before.”

Indeed, as I have previously pointed out, many environmentalists are opposed to cap and trade as well. For example:

Michelle Chan, a senior policy analyst in San Francisco for Friends of the Earth, isn’t convinced.

“Should we really create a new $2 trillion market when we haven’t yet finished the job of revamping and testing new financial regulation?” she asks. Chan says that, given their recent history, the banks’ ability to turn climate change into a new commodities market should be curbed...

“What we have just been woken up to in the credit crisis -- to a jarring and shocking degree -- is what happens in the real world,” she says...

Friends of the Earth’s Chan is working hard to prevent the banks from adding carbon to their repertoire. She titled a March FOE report “Subprime Carbon?” In testimony on Capitol Hill, she warned, “Wall Street won’t just be brokering in plain carbon derivatives -- they’ll get creative.”
Yes, they'll get creative, and we have seen this movie before ...an inadequately-regulated carbon derivatives boom will destabilize the economy and lead to another crash.

[Roguish Lawyer]

What a bunch of ignorant crap.

[6.8SPC_DUMP]

What a bunch of ignorant crap.

Want to elaborate?

[Pete]

I'm amazed that this information is out there and the MSM does not beat their drums.

Like Algore racking up millions in a business that makes money off trading carbon credits.

[Dad]

6.8--I think you are absolutely right that Wall St will find some way to profit from this and invent another way to suck money out of productive uses. It is in their soul and there is no moral hazard or political will to rein in their excesses.

[SkiBumCFO]

"6.8--I think you are absolutely right that Wall St will find some way to profit from this and invent another way to suck money out of productive uses. It is in their soul and there is no moral hazard or political will to rein in their excesses. "

Hey Dad - i know it may sound strange but there are a few of us QPs that spent a lot of time on Wall Street (or the London equivalent) and I think our souls are pretty intact. I would also argue that in a capitilist society Investment Bankers are critical - not really non productive (though my wife might disagree). A problem we will never be able to overcome is that it is impossible for a govt regulatory authority to completely understand and monitor Financial Derivatives. Congress didn't even bother to try but that's another matter. They are way too complex and you cant take a moderately paid govt regulator and ask him to figure out what a highly compensated MIT phd has designed. This stuff will happen as long as we live in a capitalist democracy and i gotta tell you there aint no better way to live even if we do have a little bit of volatility in our lives.

Best regards

[Dad]

9

[steel71]

Al Gore won't make millions because he's gonna make billions off his global warming fear mongering act. Instead of being a prostitute for the elite, finally he'll join their ranks.. :munchin

Al Gore: world's first carbon billionaire?
http://latimesblogs.latimes.com/washington/2009/11/al-gore-worlds-first-carbon-billionaire.html

http://www.nytimes.com/2009/11/03/business/energy-environment/03gore.html


Al Gore invests millions to make billions in cap-and-trade software

http://www.canadafreepress.com/index.php/article/11607

[nmap]

So...can we get put options...sold short on margin...on ETNs....based on futures...which are connected with carbon derivatives... :lifter

Seriously, I would think it would be a fairly good way to speculate on whether the overall global economy was expanding (more carbon, hence more expensive derivatives) or contracting (less carbon, hence cheaper derivatives).

[Roguish Lawyer]

Want to elaborate?

Not at great length, but people who blame derivatives, swaps and other financial instruments for the collapse of the economy typically don't even know what these things are. Generally speaking, people should be free to enter into whatever transactions they want to, subject to traditional common law restrictions like prohibitions on fraud.

Complex financial instruments are not boogeymen. They are just contracts entered into by big boys and girls. Discussions like the one you posted are irrational and a danger to our liberty IMO.

[Roguish Lawyer]

I should add that making money is as American as apple pie, and anyone who has a problem with that should move to Cuba.

[PedOncoDoc]

I should add that making money is as American as apple pie, and anyone who has a problem with that should move to Cuba.

They may not have to if the current administration keeps at it...:munchin

[CSB]

OK, here it is in nutshell.

Suppose I run a taxicab company. I know I need 20,000 gallons of 87 octane gasoline throughout the next year. I am damned uncertain what the price will be. I've got to set the meters on my cabs (and get approval from the city cab commission) for a fixed rate structure that I can't quickly change. The price might stay at $2.50 a gallon (where it is now), or it might drop to $2.25 (happy days for me), or it might climb to $3.95 a gallon (a sure road to bankruptcy). So what do I do to "hedge" or minimize my risk?

I can buy a "derivative" contract from an investment bank. I pay perhaps $2,000 up front, and receive from them this promise: "If the price of gasoline drops, we pay you nothing. If the price of gasoline stays the same, or climbs to $3.50 a gallon, we pay you nothing. But if the price of gasoline climbs to $3.51 or above, we will pay you $10,000 to help you cover the extra cost of the more expensive gasoline." My $2,000 fee to the bank is a known cost that I can budget, and incorporate into the rates I set on my cab meters and get approved by the city cab commission.

Assuming the bank is legitimate, and has the assets to pay the $10,000 when needed, no worries.

Here's the problem: THERE IS NO REQUIREMENT IN THE LAW THAT THE PURCHASER OF A DERIVATIVE CONTRACT HAVE A STAKE IN THE OUTCOME. AND THERE IS NO REQUIREMENT IN THE LAW THAT THE BANK SET ASIDE ANY RESERVE (LIKE AN INSURANCE COMPANY WOULD) TO PAY OFF THE DERIVATIVE CONTRACTS THEY WRITE.

In other words, a derivative contract is just like a Las Vegas bet. Actually, it's worse than a Vegas bet, since in Vegas the gaming commission requires the casinos to keep a sufficient reserve to pay off losing bets. Wall Street imposes no such obligation.

I don't actually have to have a taxi cab company to buy a derivative contract, I can be the owner of a brick factory, or even an unemployed drifter who got tired of betting on the ponies and decided for something a little different.

It is gambling, pure and simple. And the contracts can be bought and sold without regard to whether or not the purchaser has taxi cabs, or a fleet of lawn mowers, or any other real need to hedge against the rise in price of gasoline. It's just a bet, that may pay off if the price goes up.

And "carbon offsets" are going to be the same paper scam in which someone who owns a tree farm will be allowed to sell promises not to harvest a certain acerage of trees. Those trees -- which may or may not have ever been cut down -- would then "offset" someone elses coal fired power plant. Watch as the "offsets" get further and further from reality, just like the derivatives have become totally disconnected from the actual "insurable interest" that they are supposed to be protecting.

[nmap]

Here's the problem: THERE IS NO REQUIREMENT IN THE LAW THAT THE PURCHASER OF A DERIVATIVE CONTRACT HAVE A STAKE IN THE OUTCOME. AND THERE IS NO REQUIREMENT IN THE LAW THAT THE BANK SET ASIDE ANY RESERVE (LIKE AN INSURANCE COMPANY WOULD) TO PAY OFF THE DERIVATIVE CONTRACTS THEY WRITE.

I'm not sure that speculation - gambling, if you prefer - is such a bad thing. If I wish to speculate on gasoline, then I match my wits against whoever is on the other side of the trade. It is a classic case of the luckiest (or best) player winning.

However - the lack of reserves to perform under the contract is a problem. In stock or commodity speculation, the parties have to put up adequate money to cover the trade. Should prices move against them, more margin is required. So long as those involved are responsible for losses, all is well. But when the taxpayers or other innocent parties share in the losses (but not the profits), there is a problem.

I have another issue...or perhaps, just a concern...about derivatives. I am not at all sure these represent contracts between fully informed participants. The prospectus for a CDO is, as I understand it, on the order of 200 pages. In addition, there is the issue of ratings.

Credit rating agencies did not properly manage their conflicts of interests when assigning ratings to structured products such as mortgage-backed securities, a report by the Securities and Exchange Commission said on Tuesday. LINK (http://dealbook.blogs.nytimes.com/2008/07/08/sec-criticizes-ratings-agencies-conflicts-of-interest/)

This troubles me. If a large pension fund is told that Moody's and S&P have rated a security as AAA, they might not question the implicit assumptions within 200 pages of text. Let us consider the table at the top of page 5 of the linked discussion of CDO^2. LINK (http://www.math.ust.hk/~maykwok/courses/MAFS521_07/CDO-Squared_Nomura.pdf) It shows a default probability of 1%, referencing the underlying CDOs. I am not at all sure that the average (or even above average) pension fund manager fully understands the implications - nor would he (she) understand what might happen if the probability was a bit higher. (By the way - I don't understand those implications either. I suspect quite a lot of study would be necessary.)

There is another problem with carbon derivatives as a specific issue. I have to wonder just how vulnerable they are to governments world-wide concealing truth, falsifying facts, or making sudden, unexpected changes. If the market has lots of players with inadequate reserves, a sudden dislocation could trigger a new financial crisis.

I would like to see some assurance of adequate reserves, transparency, a regulated exchange with publicly reported pricing, and contract standardization. While such speculators may be big boys and girls, the present bailout environment seems to present us with the risk of sharing their pain - or, perhaps, even accepting all of their losses.

[Roguish Lawyer]

Counterparty credit risk is an ordinary consideration for parties entering into these transactions. It can be and typically is hedged. Pension money is subject to ERISA and, to my knowledge, can't be invested in these instruments. The government should mind its own business.

[Dad]

Not at great length, but people who blame derivatives, swaps and other financial instruments for the collapse of the economy typically don't even know what these things are. Generally speaking, people should be free to enter into whatever transactions they want to, subject to traditional common law restrictions like prohibitions on fraud.

Complex financial instruments are not boogeymen. They are just contracts entered into by big boys and girls. Discussions like the one you posted are irrational and a danger to our liberty IMO.

I would really like to hear your opinion on what caused the meltdown if all of the above mentioned are innocent financial instruments. Hell, senior management on Wall St didn't understand them. I believe it was either Fuld or Blankfein who publicly admitted it!

[Roguish Lawyer]

I would really like to hear your opinion on what caused the meltdown if all of the above mentioned are innocent financial instruments. Hell, senior management on Wall St didn't understand them. I believe it was either Fuld or Blankfein who publicly admitted it!

The instruments didn't cause anything, the investors did. I'm not an expert on this stuff, but I believe that investors put too much faith in the rating agencies, which failed miserably in assessing risk. People thought real estate values would go up forever, which made no sense.

People should not overreact to what happened. Markets correct these types of problems on their own. There was a need for intervention to prevent a complete loss of confidence in payment systems (like credit card networks), but we've gone far beyond what was necessary. Now all of this intervention and new regulation will have unintended consequences and make the situation much worse than it needs to be.

[nmap]

Counterparty credit risk is an ordinary consideration for parties entering into these transactions. It can be and typically is hedged. Pension money is subject to ERISA and, to my knowledge, can't be invested in these instruments. The government should mind its own business.

Yes, it is covered by ERISA. But note this: LINK (http://www.bloomberg.com/news/marketsmag/pensions.pdf)

Per Bloomberg, 2007, "Pension funds, others" took on 18% of the riskiest portion of the CDOs issued. (Table, page 3 of the PDF). Sounds like a problem of some sort to me; however, YMMV.

[Sigaba]

The instruments didn't cause anything, the investors did. I'm not an expert on this stuff, but I believe that investors put too much faith in the rating agencies, which failed miserably in assessing risk. People thought real estate values would go up forever, which made no sense. RL--

I'm just trying to follow your train of thought.

Is it your position that investors are solely responsible for doing their homework to decide if an investment is worth the risk and that if they take "short cuts" by looking at the data produced by third parties (such as credit ratings), that they are still responsible for their choices?:confused:

Under normal conditions, what role, if any, do you see the federal government playing in regulating the derivatives market?

[CSB]

Ah, but again, credit default swaps sound like a good idea, and they are, if the "counterparties" are required to:

1 - Have an "insurable interest" in the default, and;

2 - Are required to bank a reserve against losses.

For those just joining in: A credit default swap is little more than me selling you a contract on the order of "If Ford Motor Company goes belly up, I'll pay you one gazillion dollars."

Well, if you are a supplier of electronic ignition systems to the Ford Motor Company, that's the kind of "insurance" you may want to invest in. After all, if Ford goes into bankruptcy, they probably aren't going to buy a lot of electronic ignition systems (or pay for the ones you have already delivered).

But if Dad, Rougish Lawyer, NMap and others also decide to go to the investment bank and buy one of those "Credit Default Swaps," they aren't investing. They are gambling. They have nothing to do with electronic ignition modules. They are just placing a bet, as if they were in a Las Vegas casino, that Ford will file for bankruptcy. But unlike a true insurance company, the bank isn't required to keep a reserve ... they can sell credit default swaps and pocket the cash until the cows come home. Then, when Ford really does file for bankruptcy, they (the investment bank) can also file for bankruptcy, unless thay have a few gazillion dollars handy to pay up every purchaser of the credit default swap.

And when -- as some investment banks did -- the bank itself buys credit default swaps in case IT has to pay off on its contracts, you end up with the situation best described by the analogy:

Interlocking credit default swaps are like mountain climbers who rope themselves together. That way, if one fall off the cliff, the others pull him back up. The problem is what happens when half of the climbers fall off the cliff. They pull the rest off the cliff, too.

And since credit default swaps are "private contracts" between businesses, they are almost totally unregulated and totally undisclosed on the company books, despite the potential for huge losses if the particular economic situation they cover turns to shit. No one knows who has secret "credit default swaps" sitting in a desk drawer somewhere, requiring the XYZ bank to pay the National Bank of Whatifkastan billions of dollars if some (God only knows) event happens (the price of oil rises, the price of oil drops, the price of oil stays the same...).

[Roguish Lawyer]

Is it your position that investors are solely responsible for doing their homework to decide if an investment is worth the risk and that if they take "short cuts" by looking at the data produced by third parties (such as credit ratings), that they are still responsible for their choices?:confused:

Yes.

Under normal conditions, what role, if any, do you see the federal government playing in regulating the derivatives market?

None other than normal enforcement of contracts, fraud rules, etc. This stuff is all disclosed up the yin yang, and you're stupid if you make this type of investment without knowing what you're doing.

[Roguish Lawyer]

But if Dad, Rougish Lawyer, NMap and others also decide to go to the investment bank and buy one of those "Credit Default Swaps," they aren't investing. They are gambling. They have nothing to do with electronic ignition modules. They are just placing a bet, as if they were in a Las Vegas casino, that Ford will file for bankruptcy. But unlike a true insurance company, the bank isn't required to keep a reserve ... they can sell credit default swaps and pocket the cash until the cows come home. Then, when Ford really does file for bankruptcy, they (the investment bank) can also file for bankruptcy, unless thay have a few gazillion dollars handy to pay up every purchaser of the credit default swap.

The derivatives in the news are not the sort of thing Joe Sixpack buys at Schwab. They typically are hedges made by very smart people who know what they're doing -- the gambling analogy is completely out of context and unfair. Southwest Airlines, for example, hedged its fuel exposure and continued to do well when prices went through the roof. Banks making lots of fixed-rate loans have exposure to rising interest rates, so they have a legitimate interest in hedging that exposure. These are calculated business moves made by very sophisticated investors. It's not a game. The fact that investment banks trade in the stuff doesn't make it monopoly money -- that's what they do for a living, and they're not stupid people.



And since credit default swaps are "private contracts" between businesses, they are almost totally unregulated and totally undisclosed on the company books, despite the potential for huge losses if the particular economic situation they cover turns to shit. No one knows who has secret "credit default swaps" sitting in a desk drawer somewhere, requiring the XYZ bank to pay the National Bank of Whatifkastan billions of dollars if some (God only knows) event happens (the price of oil rises, the price of oil drops, the price of oil stays the same...).

This stuff is always disclosed by public companies -- go pick up a 10-K and you'll see it discussed. And the suggestion that it is "totally unregulated" is also false. All contracts and all business activity is regulated by the common law. There is no benefit to anyone if the government gets more involved in this stuff. If a company makes a bad investment, it eats the loss and management has to deal with shareholders. Nothing wrong with that, but there's a lot wrong with the government mucking up the markets.

[Dad]

The derivatives in the news are not the sort of thing Joe Sixpack buys at Schwab. They typically are hedges made by very smart people who know what they're doing -- the gambling analogy is completely out of context and unfair. Southwest Airlines, for example, hedged its fuel exposure and continued to do well when prices went through the roof. Banks making lots of fixed-rate loans have exposure to rising interest rates, so they have a legitimate interest in hedging that exposure. These are calculated business moves made by very sophisticated investors. It's not a game. The fact that investment banks trade in the stuff doesn't make it monopoly money -- that's what they do for a living, and they're not stupid people.




This stuff is always disclosed by public companies -- go pick up a 10-K and you'll see it discussed. And the suggestion that it is "totally unregulated" is also false. All contracts and all business activity is regulated by the common law. There is no benefit to anyone if the government gets more involved in this stuff. If a company makes a bad investment, it eats the loss and management has to deal with shareholders. Nothing wrong with that, but there's a lot wrong with the government mucking up the markets.

CSB is absolutely correct about theCDS's not being reported. My understanding is that is one reason it was so difficult to free up credit--one bank didn't know how much another bank held of that crap so wouldn't risk loaning them money. Please feel to correct me if I am wrong.

[The Reaper]

Exactly.

How do you know that your bank, mutual fund, or investment broker was dealing in derivatives?

That is buried way down in the fine print of the report, if you could decipher it at all.

Maybe a plain language disclosure statement should be required?

TR

[Roguish Lawyer]

Exactly.

How do you know that your bank, mutual fund, or investment broker was dealing in derivatives?

That is buried way down in the fine print of the report, if you could decipher it at all.

Maybe a plain language disclosure statement should be required?

TR

You read the report. It's in plain language. When people choose not to read legal documents, they are still charged with knowledge of the information that was provided to them. Caveat emptor!

[Roguish Lawyer]

From Bear Stearns 2007 10-K (just a few examples):

Second sentence of the entire document:

The Company is a holding company that through its broker-dealer and international bank subsidiaries, principally Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC"), Bear, Stearns International Limited ("BSIL") and Bear Stearns Bank plc ("BSB") is a leading investment banking, securities and derivatives trading, clearance and brokerage firm serving corporations, governments, institutional and individual investors worldwide.

Page 5:

Structured Equity Products. The Company offers to institutional customers, and trades for its own account, a variety of exchange-traded and OTC equity derivative products. These products are transacted, as principal, with customers for hedging, risk management, investment, financing and other purposes. These transactions are in the form of swaps, options, and structured notes, as well as more complex, structured trades which are customized to meet customers' specific needs. Derivatives enable customers to build tailor-made risk/return profiles, customize transaction terms, develop packaged solutions to a problem, implement trades that otherwise could not be executed and to transact
business with standardized documentation. The Company, through BSSC and other subsidiaries, provides, directly or through third-party brokers, futures commission merchant services for customers and other Bear Stearns affiliates who trade contracts in futures on financial instruments and physical commodities, including options on futures.

Page 7:

Credit-Related Securities and Products. The Company trades, makes markets and takes proprietary positions in both dollar and non-dollar investment-grade and non-investment-grade corporate debt securities, commercial loans, sovereign and agency securities as well as preferred stocks in New York, London and Tokyo. The Company offers hedging and arbitrage services to domestic and foreign institutional and individual customers, utilizing financial futures and other derivative instruments. The Company also acts as a dealer and participates in the trading of credit derivatives for customers worldwide and for its own account. These transactions are in the form of credit default swaps and options, total return swaps, credit-linked notes and additional structured trades which are customized to meet the specific needs of customers. In addition, the Company offers its domestic and international customers quantitative, strategic and research services relating to fixed income securities and credit derivatives.

Pages 15-16:

Item 1A. Risk Factors.
In addition to the other information contained in this Form 10-K and the exhibits hereto, the following risk factors should be considered carefully in evaluating our business. . . .

Our businesses may be adversely affected by fluctuations in interest rates, foreign exchange rates, and equity and commodity prices. In connection with our dealer and arbitrage activities, including market-making in OTC derivative contracts, we may be adversely affected by changes in the level or volatility of interest rates, mortgage prepayment speeds or the level and shape of the yield curve. Increasing interest rates may cause a decline in the volume of mortgage origination activity and therefore securitization activity. Declining real estate values could also reduce the level of new mortgage loan originations and securitizations. When we buy or sell a foreign currency or a financial instrument denominated in a currency other than U.S. dollars, exposure exists from a net open currency position. Until the position is covered by selling or buying the equivalent amount of the same currency or by entering into a financing arrangement denominated in the same currency, we are exposed to a risk that the exchange rate may move against us. We are also exposed to equity price risk through making markets in equity securities, distressed debt, equity derivatives as well as specialist activities. We may be adversely affected by changes in the level or volatility of equity prices, which affect the value of equity securities or instruments that derive their value from a particular stock, a basket of stocks or a stock index. Additionally we may be exposed to widening credit spreads and/or increasing interest rates which creates a less favorable environment for certain lines of business. Credit spread risk arises from the potential that changes in an issuer's credit rating or credit perception could affect the value of financial instruments. The markets for energy and energy-related commodities are likely to continue to be volatile. Use of standard commodity contracts (many of which constitute derivatives) can create volatility in earnings and may require substantial credit support, some of which may be in the form of cash collateral, increases to which may result in the event of an adverse change to our credit ratings. Wide fluctuations in commodity prices might result from relatively minor changes in the supply or demand for these commodities, market uncertainty and other factors beyond our control, including natural disasters and changes to the legal and regulatory landscape.

The current global credit crisis, inventory exposure, and potential counterparty credit exposure, may continue to adversely affect our business and financial results. During 2007, higher interest rates, falling property prices and a significant increase in the number of subprime mortgages originated in 2005 and 2006 contributed to dramatic increases in mortgage delinquencies and defaults in 2007 and anticipated future delinquencies among high-risk, or subprime, borrowers in the United States. The widespread dispersion of credit risk related to mortgage delinquencies and defaults through the securitization of mortgage-backed securities, sales of collateralized debt obligations ("CDOs") and the
creation of structured investment vehicles ("SIVs") and the unclear impact on large banks of mortgage-backed securities, CDOs and SIVs caused banks to reduce their loans to each other or make them at higher interest rates. Similarly, the ability of corporations to obtain funds through the issuance of commercial paper or other short-term unsecured sources was negatively impacted. As prices declined and delinquencies increased, investors lost confidence in the rating system for structured products as rating agencies moved to downgrade CDOs and other structured products. In addition, investors lost confidence in commercial paper conduits and SIVs causing concerns over large potential liquidations of AAA collateral. The lack of liquidity and transparency regarding the underlying assets in securitizations, CDOs and SIVs resulted in significant price declines across all mortgage-related products in fiscal 2007. Price declines were further driven by forced sales of assets in order to meet demands by investors for the return of their collateral and collateral calls by lenders. Many banks and institutional investors have also recognized substantial losses as they revalue their CDOs and other mortgage-related assets downward. During the second half of 2007, the economic impact of these problems spread on a global basis and disrupted the broader financial markets. The combination of these events caused a large number of mortgage lenders and some hedge funds to shut down or file for bankruptcy. The deterioration and recognition of substantial exposure through derivatives and policies written by monoline insurers resulted in the downgrade of certain of these monoline insurers. Several of these monoline insurers also reported significant losses. Further downgrades of these monoline insurers or their failure could result in additional significant write-downs at many financial institutions and could have a material adverse effect on the broader financial markets. Financial institutions have entered into large numbers of credit default swaps with counterparties to hedge credit risk. As a result of the global credit crises and the increasingly large numbers of credit defaults, there is a risk that counterparties could fail, shut down,
file for bankruptcy or be unable to pay out contracts. The failure of a significant number of counterparties or a counterparty that holds a significant amount of credit default swaps could have a material adverse effect on the broader financial markets. It is difficult to predict how long these conditions will continue, whether they will continue to deteriorate and which of our markets, products and businesses will continue to be adversely affected. As a result, these conditions could adversely affect our financial condition and results of operations. In addition, we may be subject to increased regulatory scrutiny and litigation due to these issues and events.

[Roguish Lawyer]

These types of disclosures didn't start after the credit crisis, by the way. I'm having trouble cutting and pasting from the Bear Stearns 10-K for 2005, but it totally lays out derivatives and hedging activity, including the specific nature of the trading and the dollar amounts of the holdings.

[Roguish Lawyer]

Can't cut and paste from this either, but if anyone wants to see how fulsome AIG's disclosures were on this stuff before the credit crisis, click here:

http://www.ezonlinedocuments.com/aig/2006/annual/images/AIG_AR2005.pdf

These claims of hidden stuff, nondisclosure, etc. are complete %^$^%$ made up by a bunch of pinkos and you guys are falling into their trap. Wall Street is the heart of capitalism and it should be left alone.

[6.8SPC_DUMP]

Not at great length, but people who blame derivatives, swaps and other financial instruments for the collapse of the economy typically don't even know what these things are. Generally speaking, people should be free to enter into whatever transactions they want to, subject to traditional common law restrictions like prohibitions on fraud.

Complex financial instruments are not boogeymen. They are just contracts entered into by big boys and girls. Discussions like the one you posted are irrational and a danger to our liberty IMO.
Well, if nothing else being labeled a threat to American Liberty is a hell of a motivator… I'll get started on going into some length on the issue after dinner.

It's ironic that criticism of the excesses of a derivatives market, which has grown by 600+ trillion in two decades, you call commie talk.

What's the result of our failure to maintain soundness in the financial system?

Commie talk: The global governance of world banking has been shifted from the G-8 nation’s to the G-20 as of the Pittsburgh G-20 Summit in 2009 Link (http://www.abs-cbnnews.com/business/09/26/09/emerging-nations-big-winners-re-born-g20)

These types of disclosures didn't start after the credit crisis, by the way. I'm having trouble cutting and pasting from the Bear Stearns 10-K for 2005, but it totally lays out derivatives and hedging activity, including the specific nature of the trading and the dollar amounts of the holdings.

Respectfully, you are glazing over the important differences separating different forms of derivatives, that are necessary to be an informed investor.

Over-the-counter (OTC) credit derivatives are forward contracts not futures contracts. They are not traded on open exchanges, to assure accurate valuation and competitive pricing, and there are no margin requirements.

Instead, the OTC derivatives are privately traded between two parties without going through a "clearing house" so the Counter-Party Credit risk is increased a great deal, because you are simply taking the company's word for their valuation.

From Bear Stearns 2007 10-K, Pages 15-16

We are also exposed to equity price risk through making markets in equity securities, distressed debt, equity derivatives as well as specialist activities. We may be adversely affected by changes in the level or volatility of equity prices, which affect the value of equity securities or instruments that derive their value from a particular stock, a basket of stocks or a stock index. Additionally we may be exposed to widening credit spreads and/or increasing interest rates which creates a less favorable environment for certain lines of business. Credit spread risk arises from the potential that changes in an issuer's credit rating or credit perception could affect the value of financial instruments.

IIRC Bear Stearns admitted to over $13 Trillion of derivative credit liability in 2007 and only maintained their AAA-rating through a counter party which they owned...

You don't see a problem with our country allowing a company to rake up close to a year's GDP in debt and then say there is zero risk of default because we own a company that will bail us out?

What's even more astounding is that their share price was frozen at $2.00 while the government continued to pump money into it, until JPMorgan Chase bought it, when they reported a derivative credit liability of close to $80 Trillion themselves.

I would also argue that in a capitilist society Investment Bankers are critical - not really non productive (though my wife might disagree). A problem we will never be able to overcome is that it is impossible for a govt regulatory authority to completely understand and monitor Financial Derivatives. Congress didn't even bother to try but that's another matter. They are way too complex and you cant take a moderately paid govt regulator and ask him to figure out what a highly compensated MIT phd has designed. This stuff will happen as long as we live in a capitalist democracy and i gotta tell you there aint no better way to live even if we do have a little bit of volatility in our lives.

Thanks for your POV Mr. SkiBumCFO. I am in 100% agreement with you that demonizing all Investment Bankers is counterproductive.

However, I don't agree that many of the "creative financial innovations” going around today are beyond the possible scope of Government oversight and regulation. Particularly, ones which stemmed from laws being scaled back that previously made them illegal.

IMHO many forms of derivatives are not the result of, or path to, real economic growth. Just my .000002

[Roguish Lawyer]

So 6.8, do you also believe we should regulate guns since they have been used to murder people? Sorry, but I am hearing nothing but calls for undefined government regulation of private transactions that frankly are none of your business.

[Dad]

So 6.8, do you also believe we should regulate guns since they have been used to murder people? Sorry, but I am hearing nothing but calls for undefined government regulation of private transactions that frankly are none of your business.

Sorry, because of people like you the taxpayers are on the hook for 23 TRILLION dollars. Be careful who you call pinkos. We don't take that crap in Texas.

[nmap]

Sorry, because of people like you the taxpayers are on the hook for 23 TRILLION dollars.

Although RL certainly doesn't need me to defend his position, I would like to point out that the lack of regulation is not the direct cause of the cost you mention; rather, it is the intervention by the government that caused it.

Had the government permitted the various entities to fail, thus letting those involved in the trades bear the costs, the taxpayers would not have been stuck with the bill.

[ZonieDiver]

Although RL certainly doesn't need me to defend his position, I would like to point out that the lack of regulation is not the direct cause of the cost you mention; rather, it is the intervention by the government that caused it.

Had the government permitted the various entities to fail, thus letting those involved in the trades bear the costs, the taxpayers would not have been stuck with the bill.

Thank you, nmap, for that clarity! When I hear the phrase "too big to fail," I want to puke. Money is like matter - neither created or destroyed. It is just altered and moved from place to place. (Lately - not MY place! :D)

Government creates a problem, often by "regulation," and when it doesn't work well, their solution is... you guessed it... MORE regulation.

I say it tastes like streptomycin, and I say, "the hell with it!"

[GratefulCitizen]

Not sure what to think about the "gambling" side of trading.

Have a close friend who was part of a programming team making stuff for statistical arbitrage.

During 2007 (IIRC--have to check the date), he was explaining what was being designed and how it was ultimately unstable.
Basically, the majority of trading was black-box, what his team and others were making would lead to increased volatility and collapse (unintended, but mathematically certain).

I joked with him that he always did want to destroy the world.

In the spring, 2008, his boss (there were 9 people on his team) had an emergency meeting with Bear Stearns.
Too late. Some things can't be undone.



Ian Ayres book: Super Crunchers, addresses this sort of thing and isn't overly technical.

From a math guy's perspective, it looks like gambling to me.
Furthermore, certain big players are "the house" and the odds are stacked in their favor.

YMMV.

[GratefulCitizen]

The instruments didn't cause anything, the investors did. I'm not an expert on this stuff, but I believe that investors put too much faith in the rating agencies, which failed miserably in assessing risk.

One has to wonder if they hired the appropriate people to assess that risk.
Perhaps they didn't like the answers they got and hired someone who would tell them what they wanted to hear.

Do ratings agencies hire lots of actuaries?
Can't just plug-and-crank some formula for something this complex.

[6.8SPC_DUMP]

So 6.8, do you also believe we should regulate guns since they have been used to murder people? Sorry, but I am hearing nothing but calls for undefined government regulation of private transactions that frankly are none of your business.
Yeah I love 10rd PRI mags in 6.8 and pre-ban Thermolds in 5.56. :rolleyes:

If you think Gov. regulation of the markets is none of the business of an investor (or citizen for that matter) you might be happier in a communist country.

Although RL certainly doesn't need me to defend his position, I would like to point out that the lack of regulation is not the direct cause of the cost you mention; rather, it is the intervention by the government that caused it.

Had the government permitted the various entities to fail, thus letting those involved in the trades bear the costs, the taxpayers would not have been stuck with the bill.
Article on this topic (http://www.slate.com/id/2199564/).
--------------------------------------------------------------------------------------------

Let’s look at exactly what was done - under which administrations’ - so we can better identify where we are, how we got here, and what can be done about it.

1. Clinton Administration

With the support of a Republican Senate, the Clinton administration passed the 1999 Financial Services Modernization Act (FSMA). Lawrence Summers played a pivotal role in lobbying Congress for its passage and was promptly appointed to Treasury Secretary in 1999 where the changes were immediately implemented.

The FSMA gave control of the entire US financial services industry (including securities companies, insurance companies, pension funds) to a handful of financial conglomerates and their associated hedge funds.

It effectively ended the Glass-Steagall Act (http://topics.nytimes.com/topics/reference/timestopics/subjects/g/glass_steagall_act_1933/index.html) which was created after the Great Depression in 1933/34 to separate the commercial banking business from the investment banking business.

After the Great Depression the Gov. saw that allowing a private corporation/s (the Federal Reserve) to control both the money supply of the country, along with being able to invest it, was just too much power.

It would be too tempting to slow lending to the public way down; let the price of stocks/land/businesses drop; then buy some up at the at a deflated price and sell it back to the public once they started to free up the money supply and prices inflated. Not only could you make a killing; you would have a choke hold on influencing American industries.

Now that dollars aren’t backed by gold, the reasons for maintaining separate commercial and investment banking are a little different, but just as important. Now that the Federal Reserve can print as many dollars as they want (they get paid for each one) the separation of these two functions can help better ensure the loans being given are reasonable and not predatory.

The commercial banks are supposed to make sure the loan isn’t too risky and they had incentive to do so because they made their money on the interest after they were paid back by the investment banker.

The investment bankers would have to invest responsibly because they wanted to get the loan in the first place and obviously wouldn’t have a job for long if they didn’t make money investing it. This logical arrangement was no longer.

What got us in really deep trouble was Clinton’s parting gift in 1999/2000: the legalization of credit derivatives or credit default swaps. There are many, many forms of derivatives and multiple types of Credit Default Swaps: but the underlying principal is that you are not investing in anything other than a fund that tracks the price of a good or asset.

2. Bush administration

Through out the Bush administration the derivative bubble exploded from a couple hundred billion to over 600 Trillion dollars that is listed (and many speculate that there are 100’s of Trillions more that are hidden by offshore accounts as was the nature of there inception). While many of America’s higher paying jobs were being off-shored, along with our manufacturing jobs and the productivity they created, a handful of Investment Banking companies were making record profits by creating entire market places based on nothing other than their guarantee of insurance which they knew they did not have the reserves to cover. This wasn’t hedging or speculation gone wrong – it was fraud period.

"To make money, the banks exploit two loopholes. The first -- overcharge customers by depriving them of the type of competitive pricing only possible on an exchange like the New York Stock Exchange or Chicago Mercantile Exchange.

And the second, exploit the lack of transparency to hide the fact that you are keeping little or no money to pay claims while selling insurance and collecting fees on every house and pension payment in America.
The key to success here is that when there is a default or claim against that so-called credit insurance -- the banks keep all the past payment -- and the taxpayer under threat of collapse pays off the claims while getting nothing in return." Link (http://www.businessinsider.com/dylan-ratigan-goldman-sachs-is-robbing-us-blind-2009-10)
Regulation of the validity of loans being made on Bush’s watch was non-existent because:


Internal checks and balances report to the CEO’s of the companies and they said nothing.


The Securities and Exchange Commission permitted investment banks and broker-dealers to use credit ratings from "External Credit Assessment Institutions" but didn’t even check the validity of some "Nationally Recognized Statistical Rating Organizations"


The Fed Bank of NY did nothing when warned when this was going on.


The CDO's were not processed through a “clearing house” which would monitor total amounts traded. Rather, they were off shored via an online commodities and futures marketplace (to avoid jurisdiction of US law and taxation) like 4+ Trillion was processed through InterContinental Exchange (ICE) with minimal oversight or investor accountability. With out being processed through a “clearing house”, like the Chicago Mercantile Exchange (CME), companies were free to report the volume traded with no verification other than the online commodities and futures marketplace records; which they created. The last scandal involved with this to get any news was regarding energy not mortgages and is still ongoing. Remember Enron? Read the Senate hearing transcripts yourself: Link (http://feinstein.senate.gov/03Speeches/engcr1081b.htm).

The former Director of the International Petroleum Exchange (which was bought by ICE), Chris Cook, explicitly details the process here saying (http://www.theoildrum.com/node/5606);
“During my time at IPE major investment banks were completing a transformation into “Wall Street Refiners” who provided liquidity to the end user producers of oil and consumers of oil products who use derivative markets to “hedge” the risk that prices may fall, or rise, respectively. Indeed, I unwittingly facilitated their emergence by introducing new trading tools such as “Exchange of Futures for Swaps”, “Volatility Trades” and “Settlement Trades” which became hugely successful.”

“Traders of the the ICE core membership (GS, MS, BP, DB, RDS.A, GLE & TOT) wouldn’t really have to put much money at risk by their standards in order to move or support the global market price via the BFOE market. Indeed the evolution of the Brent market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold oil they did not have. The fewer cargoes produced, the easier the underlying market is to manipulate.”

The President of the Federal Reserve Bank of New York is responsible for regulating most of the largest bank holding companies in America (the SEC plays no part). Many F.B.I white collar fraud investigators were moved to anti-terrorism details and not replaced. However, in September of 2004 they were still able to warn former President of the Federal Reserve Bank of New York Federal, Timothy Geithner, that there was an epidemic of mortgage fraud and that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. Geithner did nothing, gave the public no warning, and this continued for years.

Bank holding companies intentionally gave bad loans, to people who couldn’t afford them, through specialty lenders issuing sub-prime and Alt-A loans.

[6.8SPC_DUMP]

Continued...

Further fraud was perpetrated by pooling up toxic assets into Collateralized Debt Obligation’s (CDOs) and slapping a AAA rating on the (stating that there is zero credit risk of default) when they knew that was not the case. Blaming investors for getting duped by falling for our countries system of credit rating is no substitute for improving the system.

“In the OTC derivatives market, people who want to get out of their previous trades have to offset the obligations of that trade by creating a new instrument with a new counterparty. Take a credit-default swap, by which each party guarantees to accept the payout on a debt instrument held by the other party. It’s an insurance instrument, with some differences: The holder of the insured instrument can sell it, and the new owner becomes the beneficiary of the insurance. And the insurer may find someone who will accept a lower premium to take the burden of the insurance, allowing him to lay off his risk at an immediate profit. The one trade thus generates two new instruments, with four new counterparties, and as the daisy chain of reinsurance expands, the numbers become ridiculous: $41 trillion face value of credit-default swaps… Once you begin to remove individual flower girls from the daisy chain of credit swaps, you don’t know who will wind up with obligations they thought they had insured against and they can’t meet”. - Martin Mayer

The Community Reinvestment Act (CRA) has gotten a lot of heat for causing the mortgage meltdown, and it partially did, but not because it placed an undue burden on lending institutions.

Yes some people were irresponsible enough to take out six mortgages when they didn’t have a job or a dime in the bank – but the banks didn’t care. Lending was also largely predatory as “trusting” people were suckered into getting a mortgage with an artificially low adjustable interest rate, because they were told they could refinance when the interdictory rate ended. This was not put in writing however and was not true (i.e. fraud).

The CRA gave Bank holding companies the ability to shell out bad loans at 0% interest and then package up the toxic asset to be sold with, not only a bogus AAA rating, but the type of debt issued by "government-sponsored enterprises" (Fannie Mae and Freddie Mac).

Foreigners began to buy this debt like crazy because of perceived security of GSE’s. One-fifth of China’s 1 Trillion US holdings were comprised of Fannie Mae and Freddie Mac debt in 2008. This presented the problem of not being able to default on the foreign debt because China demanded full security on their investments. If we weren’t dependant on China to continue buy our debt it wouldn’t matter. Maybe we could have substituted the Fanny and Freddie CDOs with T-Bills (I really don't know if it would have made sense).

There is nothing in CRA that promotes banks giving risky loans: it was about the banks making short term profits and that’s what threatened to crash the global credit system.

"During the CRA examination, examiners assess an institution's performance within the context of all relevant factors, such as its business strategy, capacity and constraints, the overall economic conditions and credit needs in its assessment area2, and the availability of community development activities appropriate to the institution. This performance context recognizes that while insured depository institutions have an affirmative obligation to meet the credit needs of the communities in which they are chartered, they must engage only in activities that are safe and sound".
……

"As banks have significantly expanded their role in the broader financial services industry, overall competition in the marketplace has increased, and the lines between banks and nonbanks have blurred. Unlike in 1977, banks and holding companies now engage in interstate banking and nontraditional lines of business and thus provide consumers more choices from which to obtain financial services. Nonbanks offer many traditional banking services, including a full range of credit services, while banks have become sources for securities and insurance products. Further, mortgage banking has evolved into an industry in which a very large number of lenders operate independently from banking organizations and rely on worldwide capital markets for their funding".

Sandra F. Braunstein (http://www.federalreserve.gov/newsevents/testimony/braunstein20080213a.htm), Director Division of Consumer

You will probably get a lot out of listening to William Black’s POV on the bailouts because as a regulator during the Savings and Loan Crisis he knows the obscure laws and regulations so well and doesn’t pull any punches: Link (http://www.pbs.org/moyers/journal/04032009/watch.html)

(I’ll finish this off tomorrow.)

[Sigaba]

...[T]he important differences separating different forms of derivatives, that are necessary to be an informed investor. IMO, this comment is at the core of this discussion.

To what extent is the American government responsible for its citizens being informed about the consequences of a path of action?

Even if there were broad agreement that, overall, it would be better if the government played a role in the educational process, is the federal state acting as a "referee" the best way to go?

Or are there viable options in which the government is a steadying hand rather than an authoritative one? As RL points out, there's the existing function of enforcing existing laws. Would any of the following work?:confused:

Building a digital library of information that investors could use to educate themselves.
Encouraging educational institutions to offer classes to prospective investors.
Encouraging entrepreneurs to develop products that better empower investors to make prudent decisions. (For example, tools that help investors to assess the risk they're taking.)

I should add that making money is as American as apple pie, and anyone who has a problem with that should move to Cuba.
<<SNIP>>
The government should mind its own business.
<<SNIP>>

These claims of hidden stuff, nondisclosure, etc. are complete %^$^%$ made up by a bunch of pinkos and you guys are falling into their trap. Wall Street is the heart of capitalism and it should be left alone.
RL--

With respect, I would point out that even some of America's most successful and enthusiastic capitalists worried about the impact of unrestrained market forces on American society. For example, I would point to Thee Roosevelt. His concerns were internalized by his favorite son, Theodore, who sought to find a balance between Wall Street and Main Street throughout his political career.

Brahmins, who like money--a lot--have for centuries sent their offspring to academic institutions that acculturate students that what ever path they may walk in life and how ever much money they may make, they have a civic responsibility to their countrymen.

One such institution returns frequently to a refrain in its initial deed of gift that “goodness without knowledge is weak and feeble, yet knowledge without goodness is dangerous.” If there was any concern that students might loose focus on that institution's permanent message of the day as they went to class six days a week, they received plenty of supplemental reminders during mandatory assemblies and chapel services that became voluntary only in the latter half of the last century. (The requirement to study religion remains.) That school's chief rival, a second insistitution if there ever was one, has as its motto "Non sibi" ("Not for oneself") inscribed on its seal that was initially crafted by an obscure silversmith (http://www.cartage.org.lb/en/themes/Arts/painting/paintings/bigphotos/C/revere.jpg).

My point is that I do not agree that formulations in which the government plays some role in the economy or in the ordering of society is inherently un- or anti-American. Definitely, the less the government does the better. But I don't know if "less" should mean "none" or that calls for government intervention here automatically mean government intervention everywhere.

My $0.02.

[Slantwire]

From a math guy's perspective, it looks like gambling to me.

"Insurance" if you're personally vested, "gambling" if you're not? I can't speak for others, but I'm fairly comfortable with that labeling.

I tend to lean towards RL's position, too. "But it's boring and technical" is not an excuse for failing to inform oneself before investing. Neither is "everyone else is doing it." If you're investing your money in complex securities, do your homework first. If you're trusting your money to someone else to invest for you, do your homework on how they operate. If you don't trust their practices, go somewhere else. Big boy rules.

For my two cents, if people and companies want to gamble, so be it. Just don't be shocked if you lose the bet. And don't call for the government to appropriate billions of dollars of borrowed money to cover your losses.

I've been against all the bailouts. Arthur Anderson, Countrywide, and Bear Stearns died, GM went into bankruptcy, and life goes on. I would have let Goldman Sachs die. "Too big to fail?" Last I checked, the East India Trading Company and the Hanseatic League were defunct, but civilization survived. Let Beal Bank, Wells Fargo, BB&T, or whoever else pick up the pieces. There would be some turmoil, those who operated sanely would profit, those who were foolishly reckless would suffer.

Economic Darwinism.

The government's role should be to enforce laws, to prevent and punish fraud. Not to decide which entities get to survive. Not to prop up entities to save them from the consequences of their actions. Keep the marketplace fair, then let the marketplace run.

[Roguish Lawyer]

Although RL certainly doesn't need me to defend his position, I would like to point out that the lack of regulation is not the direct cause of the cost you mention; rather, it is the intervention by the government that caused it.

Had the government permitted the various entities to fail, thus letting those involved in the trades bear the costs, the taxpayers would not have been stuck with the bill.

Thanks bro, well put.

[Roguish Lawyer]

Be careful who you call pinkos. We don't take that crap in Texas.

LOL, when did I call you a pinko?

[Sten]

But surely we need some regulation and laws governing the financial markets and instruments.

To use the gun analogy we don't legally sell guns to felons or minors.

[Roguish Lawyer]

IMO, this comment is at the core of this discussion.

To what extent is the American government responsible for its citizens being informed about the consequences of a path of action?

Even if there were broad agreement that, overall, it would be better if the government played a role in the educational process, is the federal state acting as a "referee" the best way to go?

Or are there viable options in which the government is a steadying hand rather than an authoritative one? As RL points out, there's the existing function of enforcing existing laws. Would any of the following work?:confused:

Building a digital library of information that investors could use to educate themselves.
Encouraging educational institutions to offer classes to prospective investors.
Encouraging entrepreneurs to develop products that better empower investors to make prudent decisions. (For example, tools that help investors to assess the risk they're taking.)




RL--

With respect, I would point out that even some of America's most successful and enthusiastic capitalists worried about the impact of unrestrained market forces on American society. For example, I would point to Thee Roosevelt. His concerns were internalized by his favorite son, Theodore, who sought to find a balance between Wall Street and Main Street throughout his political career.

Brahmins, who like money--a lot--have for centuries sent their offspring to academic institutions that acculturate students that what ever path they may walk in life and how ever much money they may make, they have a civic responsibility to their countrymen.

One such institution returns frequently to a refrain in its initial deed of gift that “goodness without knowledge is weak and feeble, yet knowledge without goodness is dangerous.” If there was any concern that students might loose focus on that institution's permanent message of the day as they went to class six days a week, they received plenty of supplemental reminders during mandatory assemblies and chapel services that became voluntary only in the latter half of the last century. (The requirement to study religion remains.) That school's chief rival, a second insistitution if there ever was one, has as its motto "Non sibi" ("Not for oneself") inscribed on its seal that was initially crafted by an obscure silversmith (http://www.cartage.org.lb/en/themes/Arts/painting/paintings/bigphotos/C/revere.jpg).

My point is that I do not agree that formulations in which the government plays some role in the economy or in the ordering of society is inherently un- or anti-American. Definitely, the less the government does the better. But I don't know if "less" should mean "none" or that calls for government intervention here automatically mean government intervention everywhere.

My $0.02.

The question is what kind of "intervention" or "regulation" are we talking about? With all due respect to anyone on this board who disagrees with me, this entire discussion (and I am referring to the broader discussion in the media, not just this thread) is a bunch of hysterical screaming about how we need the government to protect us from the latest boogeymen -- derivatives, credit default swaps, CDOs, etc. There are rarely any specific proposals, and the ones I've seen in this thread (including yours) are nothing new. (For example, you already can get every public company's SEC disclosures on the Internet and there is plenty of free investor education stuff already available.)

The truth is that there is nothing inherently wrong with any of these financial instruments and they all can be used to achieve important business objectives. They are all private contracts. Regulation of them by definition will impair freedom of contract -- the most important economic liberty we have. There already are plenty of existing legal protections for contracting parties -- and they work.

As nmap correctly notes, the impact of the financial crisis on taxpayers was caused by government intervention, not by any of these instruments. Furthermore, the financial crisis itself was not caused by the instruments, but rather by underlying market conditions that caused certain companies to fail because of their exposure to such instruments without adequate hedging.

Make no mistake, the calls for "cracking down on Wall Street" are nothing more than a huge attack on American capitalism and our economic liberty. Anyone who supports such efforts ought to think long and hard about the consequences for themselves, their families and our country.

[Roguish Lawyer]

"Insurance" if you're personally vested, "gambling" if you're not? I can't speak for others, but I'm fairly comfortable with that labeling.

I tend to lean towards RL's position, too. "But it's boring and technical" is not an excuse for failing to inform oneself before investing. Neither is "everyone else is doing it." If you're investing your money in complex securities, do your homework first. If you're trusting your money to someone else to invest for you, do your homework on how they operate. If you don't trust their practices, go somewhere else. Big boy rules.

For my two cents, if people and companies want to gamble, so be it. Just don't be shocked if you lose the bet. And don't call for the government to appropriate billions of dollars of borrowed money to cover your losses.

I've been against all the bailouts. Arthur Anderson, Countrywide, and Bear Stearns died, GM went into bankruptcy, and life goes on. I would have let Goldman Sachs die. "Too big to fail?" Last I checked, the East India Trading Company and the Hanseatic League were defunct, but civilization survived. Let Beal Bank, Wells Fargo, BB&T, or whoever else pick up the pieces. There would be some turmoil, those who operated sanely would profit, those who were foolishly reckless would suffer.

Economic Darwinism.

The government's role should be to enforce laws, to prevent and punish fraud. Not to decide which entities get to survive. Not to prop up entities to save them from the consequences of their actions. Keep the marketplace fair, then let the marketplace run.

:)

[CSB]

The extreme Libertian position would be to simply allow market forces to swing into effect, and require, as enunciated by RL and others: Caveat emptor!
with respect to the regulation not only of the financial market, but also medical doctors and even lawyers.

Why should the government regulate doctors? Let each person conduct their own analysis of the medical skills of any person who holds themself out to be a doctor. The quacks will kill their patients, then we will know who the truly educated and competent doctors are and we can patronize them.

Same for attorneys. We don't need law schools, bar examinations, and licensing. Those who truly know the law and have education and talent will rise to the top, have success, and be patronized by a greatful clientele. Those who are incompetent will have their sorry ability made manifest as innocent defendants are sent off the jail (or death row) and then the rest of the population will know not to trust them.

We wouldn't allow the human bodies to pile up in the morgue, or death row, as a way of weeding out the competent from the incompetent in the practice of medicine or the practice of law. We should not allow the "dead bodies" of worthless 401k plans, pension funds, and even investment capital to be created by investment bankers who pocket fees and commissions selling contracts they cannot honor, all so we can do an autopsy and decide which ones have adequate reserves and prudent exposure to risk.

[Roguish Lawyer]

6.8, I apologize but I don't have time to go through everything you've posted. But I think most of your facts and conclusions are just wrong. Maybe someone else wants a shot at the title . . .

[Roguish Lawyer]

The extreme Libertian position would be to simply allow market forces to swing into effect, and require, as enunciated by RL and others: Caveat emptor!
with respect to the regulation not only of the financial market, but also medical doctors and even lawyers.

Why should the government regulate doctors? Let each person conduct their own analysis of the medical skills of any person who holds themself out to be a doctor. The quacks will kill their patients, then we will know who the truly educated and competent doctors are and we can patronize them.

Same for attorneys. We don't need law schools, bar examinations, and licensing. Those who truly know the law and have education and talent will rise to the top, have success, and be patronized by a greatful clientele. Those who are incompetent will have their sorry ability made manifest as innocent defendants are sent off the jail (or death row) and then the rest of the population will know not to trust them.

We wouldn't allow the human bodies to pile up in the morgue, or death row, as a way of weeding out the competent from the incompetent in the practice of medicine or the practice of law. We should not allow the "dead bodies" of worthless 401k plans, pension funds, and even investment capital to be created by investment bankers who pocket fees and commissions selling contracts they cannot honor, all so we can do an autopsy and decide which ones have adequate reserves and prudent exposure to risk.

I think that actually is an anarchist position. Libertarians believe in rules against force and fraud, enforcement of contracts, etc. And regulation is appropriate when there are externalities. There is a ton of SEC regulation out there now, which is why securities disclosures are so extensive. The issue is whether we need more regulation and, if so, what that regulation should be.

At that end of the day, I think people are so pissed about how screwed up the economy is that they want to blame someone. So why not blame Wall Street?

[GratefulCitizen]

The extreme Libertian position would be to simply allow market forces to swing into effect, and require, as enunciated by RL and others: Caveat emptor!
with respect to the regulation not only of the financial market, but also medical doctors and even lawyers.


I actually agree with this idea.
Modern information technology prevents people from misrepresenting their experience and training (or at least reduces the degree thereof...).
Don't think it would lead to anarchy.


The Teamsters don't dictate policy to various state DOT's (yet :rolleyes: ), why should various bar and medical associations wield such power.

Oh yeah.
It's for their own good (stupid ignorant masses).

I've heard that before.

[6.8SPC_DUMP]

I apologize for the delay. The house approved a financial reform bill on Fri. that I needed to read more about and I didn't include pertinent information on the Gramm-Leach-Bliley Act of 1999. Part of the problem w/ my posts here is that there might be too many topics covered, but I don't see a way around that.

My entire outlook on investing in the US has changed a great deal in the last year and a half and I think there is value in tracing changes of law during the last few administrations in order to show what transgressed through bi-partisan lines. None of what I'm writing is original though – I've always depended on sorting out the ideas and opinions of multiple sources more knowledgeable that myself – and it will continue as long as I can keep my head above water making 6% of profits from trying to pick winners.

IMO, this comment is at the core of this discussion.

To what extent is the American government responsible for its citizens being informed about the consequences of a path of action?

Even if there were broad agreement that, overall, it would be better if the government played a role in the educational process, is the federal state acting as a "referee" the best way to go?

Or are there viable options in which the government is a steadying hand rather than an authoritative one? As RL points out, there's the existing function of enforcing existing laws. Would any of the following work?:confused:

Building a digital library of information that investors could use to educate themselves.
Encouraging educational institutions to offer classes to prospective investors.
Encouraging entrepreneurs to develop products that better empower investors to make prudent decisions. (For example, tools that help investors to assess the risk they're taking.)

I don't think the Government is responsible for anything other than enforcing law on fraud and lending money responsibly.

I completely agree that many of the laws were in the books, but there was a total lack of enforcement by the Fed and the SEC was ineffectual. I'm not a believer in Government controlling industry. I feel strongly that it was the irresponsibility of the Fed's lending to banking / investing conglomerates which were under their regulation that resulted in such excesses from which we have yet to fully realize. I think the first step is to return investment firms back to pre-1999 power and then not make the bailouts permanent which is under proposal. Clearing derivatives through a clearing house is a must too, but we have so much toxic assets to clear that I think those who leveraged themselves to extinction will be better off going under rather than debasing the dollar to nothing to bail them out. Of course that will kill Japan and China from lending if we don't manage to not completely screw them over.

Really the only global "fix" I see is moving to a non-debt based monetary system - but that is unrealistic given the banking sectors influence. The sad fact is that profit has been largely privatized and it’s source: debt, has been socialized. It’s a hard pill to swallow but partisan politics, can not and should not be confused with or tied to sound financial regulation, given the intentional and spiraling fraud that has enveloped the nation.

The ideas of having Gov. inform the investors may sound good - but that is the role of the private company - and the Gov.'s role is to punish them for breaking any laws.

The best example I can think of is gold (GLD) and silver (SLV) ETF’s.

When you buy an Exchange Traded Fund (ETF) for gold: you are paying for the spot price of 1/10 an oz. of gold, but getting a “debt security” issued by that trust backed by its gold.

“Debt security” trusts get their measure of safety by having a principal amount that is returned to the lender upon the sale of the security. They are typically classified and grouped by their level of default risk.

So what is the risk of default with gold ETFs? You are not informed of the trusts total gold holdings; so they could very well only be backing your investment by 15% of actual holdings of gold. The Trustee can monitor the custodian or sub-custodian "up to twice" a year, but relies entirely on records maintained by the custodian, with no right to visit the premises examining the actual gold. The custodian can refuse to share their records and their auditor's “responsibility is to express an opinion on the Trust’s internal control over financial reporting.”

The risk of default is obviously huge and I am positive that gold ETF’s aren’t backed by a great deal more than the debt they are issued by the bank’s who insure them for the small investor. You needed to own 10,000+ shares to be able to get physical possession of the gold.

The only reason a bank holding company would insure such a sh*tty investment isn’t because they can profit on the small holding fee’s, it’s to invest the money you gave them elsewhere and profit on those returns. If every one was to sell there GLD shares today the fund would default and investors will be far down the list of creditors behind bank lenders, bondholders, preferred shareholders, and common stockholders.

The only thing GLD and SLV are good for is “shorting” to hedge the loss of value in your physical holdings or simply to profit from the speculation (or momentum) IMO. While this is certainly helpful at the time, it is based on the false premise of actual holdings, so it is destined to eventually fail. When it does fail there will be a backlash in the underlying asset as it is no longer artificially manipulated to the extent that it was.

The CME Group has announced, “In response to market needs, CME Group will offer a clearing service for the OTC London gold forward market beginning September 20, 2009 for trade date September 21, 2009.” http://www.cmegroup.com/trading/metals/cleared-otc-london-gold-forwards.html

They have shifted from Futures to Forwards. This is a clear signal in my eyes that the fund is ready for default. Investor beware. Just my .0000002

6.8, I apologize but I don't have time to go through everything you've posted. But I think most of your facts and conclusions are just wrong. Maybe someone else wants a shot at the title . . .
Do you typically determine the validity of facts and conclusions in someone’s writing before you read it?

If you had read what I wrote and fact checked it, which I encourage you and anyone else to do if you have the time, you would be aware that:

Generally speaking, people should be free to enter into whatever transactions they want to, subject to traditional common law restrictions like prohibitions on fraud.

Traditional common law restrictions on fraud were bypassed. "Let the buyer beware" is the point and now the US taxpayer is on the hook.

Libertarians believe in rules against force and fraud, enforcement of contracts, etc. And regulation is appropriate when there are externalities. There is a ton of SEC regulation out there now, which is why securities disclosures are so extensive.

The SEC doesn't regulate large conglomerates; the Fed Bank of NY does.

You slam "ignorant people" and "Joe 6-pack" as you talk with certainty on issues you have proven yourself to be completely uninformed in. Your insinuation that I'm lying to set a pinko trap is arrogant and pathetic. Extreme assertions with broadly stroked insults make a poor substitute for substantive rational backed by fact...

I'd normally PM a note like this, but you're a Mod, and I draw the line with getting my name slighted there.

My reason for posting news (and my interpretation of it) isn’t to bring down a Hero’s day, make a badass SF buddy and sure as hell not to get my ego stroked being viewed as an expert.

I’ve made an effort to share important info. with our best and bravest during a time of national crisis to aid the country I love. “I’m ineffectual and maybe they aren’t” is the rational. Definitely weird, possibly ineffective; but it comes from high hopes for restoration of principles that made this country great.

[Dozer523]

6.8SPC_DUMP posts: . . . You slam "ignorant people" and "Joe 6-pack" as you talk with certainty on issues you have proven yourself to be completely uninformed in. Your insinuation that I'm lying to set a pinko trap is arrogant and pathetic. Extreme assertions with broadly stroked insults make a poor substitute for substantive rational backed by fact...

I'd normally PM a note like this, but

No, no, no. Please, please. please. Don't don't don't!
This is one of the best threads I've ever read, here or anywhere else. The detail, expertise; research is outstanding. (Made only better by the depth of personal conviction.)
Please refrain from personal comment and hurt feelings. Don't stop this discourse. It is admirable from both sides. Thank you, RL, 6.8, Broadsword for your research, analysis and presentation.


Yeah, you too Sigaba. STFU about those snobby High Schools. $41,0000 per year -- I'd take out a CDS in case the kid ended up at McDonalds.

[Dad]

Earlier in this thread I stated financial institutions did not need to report CDS's on their balance sheets. I was finally able to talk with my favorite adviser on such matters, the family securities lawyer. He informed me I was technically wrong. They do not report the purchase, sale or any other information concerning them to any government regulatory agency. Nobody knows how much is out there, whether there are any reserves to back them, etc. Nobody knows what their value is so an institution can place pretty much any value they want on them on the balance sheet. A real danger is CDS's allow companies to take on more debt without raising capital. He is not at all happy with the senior management on Wall St and the politicians they own. He is very vocal about about it. He too, being a long time member of the Federalist Society, takes extreme exception to being called a PINKO.:D Also, thank you to SkibumCFO. He reminded me that many on Wall St are hard working people who had nothing to do with the current problems. In fact, they satisfy an economic necessity. When I, as I think most people, bash Wall St, we are referring to senior management. They bought government and in the name of "free markets" reduced regulations which only served their greedy self interest. One of the greatest espousers of the "free market" line was Allan Greenspan. I am pretty sure he has admitted he was wrong. Rules are not inherently bad things. Most of them actually arose from a need at some point.

[Roguish Lawyer]

Do you typically determine the validity of facts and conclusions in someone’s writing before you read it? . . .

That would be a nice trick. Look, I have not attacked anyone personally here, just expressed my own opinions which are worth what you paid for them. With all due respect, virtually everything you have written here is either factually incorrect, an illogical inference or an otherwise misguided conclusion. Writing more doesn't make the arguments better.



Traditional common law restrictions on fraud were bypassed.

Good illustration of my point above. What do you mean, "traditional common law restrictions on fraud were 'bypassed'"? You obviously don't know what the restrictions are, as the common law is enforced in the courts after the fact. There are tons of fraud lawsuits pending right now against banks, investment banks, rating agencies and other Wall Street "bad guys" based on the events we have been discussing. That means the restrictions have not been "bypassed." I could demonstrate similar flaws in your other claims and conclusions too, but there are just too many to deal with.


The SEC doesn't regulate large conglomerates; the Fed Bank of NY does.

Wrong again. The SEC and the Fed quite frequently have jurisdiction over the same companies. They regulate different things. And whether a company is a "large conglomerate" or not has nothing to do with the respective jurisdictions of the SEC and the Fed. I suppose I could post some links to their web sites to help you confirm that you are wrong, but I don't like your tone so you can find them yourself.


You slam "ignorant people" and "Joe 6-pack" as you talk with certainty on issues you have proven yourself to be completely uninformed in. Your insinuation that I'm lying to set a pinko trap is arrogant and pathetic. Extreme assertions with broadly stroked insults make a poor substitute for substantive rational backed by fact...

I'd normally PM a note like this, but you're a Mod, and I draw the line with getting my name slighted there.

My reason for posting news (and my interpretation of it) isn’t to bring down a Hero’s day, make a badass SF buddy and sure as hell not to get my ego stroked being viewed as an expert.


LOL, I don't believe I've attacked anyone personally here, but you sure have. Whatever, knock yourself out. Others on this board know what I do for a living, and they know that I have personal knowledge concerning these issues as a result of my work. Call me whatever names you want, question my motives, whatever. I really don't care. You're wrong and it doesn't matter to me whether you'll ever understand that or not.

[The Reaper]

Guys, I am enjoying reading the different opinions here, and the secondary discussion of the role of the government in regulating financial markets, but I would like to remind everyone involved to keep it professional and avoid the personal vitriol.

Name calling and ad hominem attacks have no place here in the discussion, and distract from the learning process. Calling a person you disagree with uninformed is one thing. Calling them stupid is another altogether. I believe that everyone posting has a viewpoint based on their individual perspectives and has a right to make their point, and to attempt to support them with facts.

I do not want to close this thread as it has a lot of great information in it, but if we cannot remain civil and respectful, and agree to disagree, I may have to.

Thank you for your cooperation.

TR

[Roguish Lawyer]

Earlier in this thread I stated financial institutions did not need to report CDS's on their balance sheets. I was finally able to talk with my favorite adviser on such matters, the family securities lawyer. He informed me I was technically wrong. They do not report the purchase, sale or any other information concerning them to any government regulatory agency. Nobody knows how much is out there, whether there are any reserves to back them, etc. Nobody knows what their value is so an institution can place pretty much any value they want on them on the balance sheet. A real danger is CDS's allow companies to take on more debt without raising capital.

I think you may have misunderstood my Federalist brother, or otherwise he is wrong on this one. Federally chartered financial institutions are regulated by the OCC, OTS or other agencies which have visitorial powers over those institutions. Those visitorial powers basically allow the regulators to come into the bank and look at whatever they want with a proctoscope. In addition, all public companies have to comply with federal and state securities laws which require, among other things, that financial statements be prepared in accordance with GAAP and independently audited in accordance with GAAS. Accountants and auditors look carefully at all of this stuff and take it into account in financial reporting. CDS risk is always disclosed expressly to investors, as I believe I demonstrated earlier. (If not, the company may have securities fraud exposure.)

[Roguish Lawyer]

Thanks, TR. My apologies to anyone who has misconstrued my remarks as attacks on anyone here. I've gone back through what I've posted, and clearly people are taking words out of context.

This stuff is all disclosed up the yin yang, and you're stupid if you make this type of investment without knowing what you're doing.

I am not calling anyone here stupid, I am saying that anyone who enters into a credit default swap without knowing what they're doing is stupid. I can't imagine that anyone on this board would have done so -- these are large transactions for large, sophisticated players.


The derivatives in the news are not the sort of thing Joe Sixpack buys at Schwab. They typically are hedges made by very smart people who know what they're doing -- the gambling analogy is completely out of context and unfair.

Not sure why anyone takes this as an attack on Joe Sixpack. The point is that the derivatives some have linked to the financial crisis are not simple options or other derivatives that individual investors might buy. Again, these are large, sophisticated transactions for big companies advised by qualified experts. Apologies to anyone who finds the term "Joe Sixpack" offensive, but I don't. Just a euphemism for the average Joe. The point here is that sophisticated investors can protect themselves. Saying that Joe Sixpack is not a sophisticated investor is not an attack on his intelligence, but rather a statement of fact used all the time in the securities world. Joe Sixpack needs more government protection than Bear Stearns does because he is less capable of protecting his own interests. That doesn't mean he's an idiot, just that he doesn't have a bunch of Ivy League geniuses structuring his portfolio.


These claims of hidden stuff, nondisclosure, etc. are complete %^$^%$ made up by a bunch of pinkos and you guys are falling into their trap.

"You guys" refers to people here. "A bunch of pinkos" refers to the left-wingers who originally generated and circulated these arguments. I have not called anyone here a pinko. But I do think that people who call for more government and less liberty are heading in that direction and I don't apologize for thinking that.

[Roguish Lawyer]

Representations from a $500 million CDS confirmation (35-page heavily lawyered agreement):

The parties hereto represent and warrant to one another that each party is a sophisticated party with respect to this Transaction, has adequate information concerning the business and financial condition of the Reference Entity and its Affiliates to make an informed decision regarding this Transaction, and has independently, without reliance upon the other party and based on such information its deems appropriate, made its own analysis and decision to enter into this Transaction. Party B acknowledges and agrees that (i) Party A does not make or will not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information provided by Party A to Party B with respect to the Reference Obligation and in any further information, notice or other document which may at any time be supplied in connection with this Transaction and accepts no responsibility or liability therefore and (ii) any and all information provided by Party A to Party B with respect to the Reference Obligation is not being furnished by Party A in the capacity of an underwriter or dealer of the Reference Obligation and Party A accepts no responsibility or liability therefore.

[Pete]

Representations from a $500 million CDS confirmation (35-page heavily lawyered agreement):

In English does that wordy thing say "I got your money, HaHa."?

:D

[Dad]

This is a link to an article by Gretchen Morgensen from last February. The writer was the press secretary to Steve Forbes when he ran for president

http://www.nytimes.com/2008/02/17/business/17swap.html?_r=1&pagewanted=2&emc=eta1

[Roguish Lawyer]

This is a link to an article by Gretchen Morgensen from last February. The writer was the press secretary to Steve Forbes when he ran for president

http://www.nytimes.com/2008/02/17/business/17swap.html?_r=1&pagewanted=2&emc=eta1

I am not understanding your point. From the article:

And last week, the American International Group said that it had incorrectly valued some of the swaps it had written and that sharp declines in some of these instruments had translated to $3.6 billion more in losses than the company had previously estimated. Its stock dropped 12 percent on the news but edged up in the days after.

A.I.G. says it expects to file its year-end financial statements on time by the end of this month with appropriate valuations.

This says that AIG disclosed a correction in its prior estimates and that those estimates are reflected in its financial statements. Companies revise their financial statements all the time.

[Dad]

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.


Did you catch the unregulated part above? Did you read the part about being resold and because no one regulates them it is unknown if claims can be paid? did you read the part where the values of the CDS's in the bandruptcy of Delphi was 10 times the underlying bonds? Or how about the comparison to having your house destroyed and not knowing who the insurer was and if they had the money to pay the claim?
To say AIG merely disclosed a correction in prior estimates is somewhat a huge understatement. A few months after this article the taxpayer bailed out AIG to the tune of, what?, $180 BILLION ? More than a mere revision of it estimates.

[Roguish Lawyer]

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.


Did you catch the unregulated part above? Did you read the part about being resold and because no one regulates them it is unknown if claims can be paid? did you read the part where there the values of the CDS's in the bandruptcy of Delphi was 10 times the underlying bonds? Or how about the comparison to having your house destroyed and not knowing who the insurer was and if they had the money to pay the claim?

I read the article and I still don't understand your point. Nothing in the article is inconsistent with anything I've said.

[Roguish Lawyer]

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.


Did you catch the unregulated part above?

My point is not that there is direct regulation of the transactions themselves, but rather that the participants in the transactions are subject to regulation. Banks are regulated for safety and soundness, for example. There is extensive regulation of financial reporting. Apples and oranges.

[Roguish Lawyer]

To say AIG merely disclosed a correction in prior estimates is somewhat a huge understatement. A few months after this article the taxpayer bailed out AIG to the tune of, what?, $180 BILLION ? More than a mere revision of it estimates.

Above you said that "no one knows." That is not true. The participants in the transactions (who bear the risk of loss) know. Their regulators know. And the participants, at least when publicly traded, are required to make disclosures to their investors. That was my point.

I think it would be folly to allow anger over bailouts (a separate issue as discussed above) to lead to a new regulatory regime and numerous unintended consequences. I should note that the many calls for regulation in this thread don't specify precisely what kind of regulation we need. There seems to be a belief that more "regulation" will prevent these problems from ever happening again without causing other problems we don't want. I submit that anyone holding that view probably has not had much experience dealing with regulators, or considered the likely negative consequences.

[The Reaper]

Was Glass-Stegall a bad law? Are we better off without it?

Please explain your position.

TR

[Roguish Lawyer]

Was Glass-Stegall a bad law? Are we better off without it?

Please explain your position.

TR

I tend to agree with this article.

http://www.forbes.com/forbes/2009/1005/opinions-glass-steagall-on-my-mind.html

[6.8SPC_DUMP]

I should note that the many calls for regulation in this thread don't specify precisely what kind of regulation we need. There seems to be a belief that more "regulation" will prevent these problems from ever happening again without causing other problems we don't want. I submit that anyone holding that view probably has not had much experience dealing with regulators, or considered the likely negative consequences.

On alternative trading systems?

Create a single venue to reduce fragmentation and avoid pegged orders.

Ban pricing models that favor proprietary traders.

Ban algorithmic and High Frequency Trading so Liquidity spreads don't get eaten up.

Dark pool traders could go back to Lit pool and global regulation for tick sizes could be created.

Give regulators a clearing house to identify, not only the real time of the Over the Counter derivative transaction, but the size, price and parties involved.

That would assure actionable indications of interest.

Ban dark pool.

Avoid trillions lost over time from fraud on commodities like "round-trip" oil swaps.

End the type of Gov. sponsored market manipulation that forces every dinosaur like me to be 1/2 a momentum trader.


Statement of Senator Dianne Feinstein: Energy Manipulation
http://feinstein.senate.gov/03Speeches/engcr1081b.htm

SEC's Plan for Real-Time Dark Pool Attribution Spooks Industry
http://www.tradersmagazine.com/news/sec-dark-pool-attribution-gaming-104767-1.html?pg=2

[Roguish Lawyer]

On alternative trading systems?

Create a single venue to reduce fragmentation and avoid pegged orders.

Ban pricing models that favor proprietary traders.

Ban algorithmic and High Frequency Trading so Liquidity spreads don't get eaten up.

Dark pool traders could go back to Lit pool and global regulation for tick sizes could be created.

Give regulators a clearing house to identify, not only the real time of the Over the Counter derivative transaction, but the size, price and parties involved.

That would assure actionable indications of interest.

Ban dark pool.

Avoid trillions lost over time from fraud on commodities like "round-trip" oil swaps.

End the type of Gov. sponsored market manipulation that forces every dinosaur like me to be 1/2 a momentum trader.


Statement of Senator Dianne Feinstein: Energy Manipulation
http://feinstein.senate.gov/03Speeches/engcr1081b.htm

SEC's Plan for Real-Time Dark Pool Attribution Spooks Industry
http://www.tradersmagazine.com/news/sec-dark-pool-attribution-gaming-104767-1.html?pg=2

Why?

[frostfire]

The Story of Cap & Trade
http://www.youtube.com/watch?v=pA6FSy6EKrM

Many good points, but if the entire global warming sham is exposed for good and people actually connect the dots, this video won't even exist on the first place.

[SkiBumCFO]

Repealling Glass-Stegall was stupid! I was an Investment Banker at the time and we knew the commercial banks would come in with cheap capital and screw up the industry. I watched the evolution from both inside the industry and then as a client of investment/commercial banks and i wish President Clinton had not allowed that to happen (along with a few other things he did :) ) It would be next to impossible to get something like that back in place without major disruption and the politicians dont have the stomach for the fight.

[6.8SPC_DUMP]

Repealling Glass-Stegall was stupid! I was an Investment Banker at the time and we knew the commercial banks would come in with cheap capital and screw up the industry. I watched the evolution from both inside the industry and then as a client of investment/commercial banks and i wish President Clinton had not allowed that to happen (along with a few other things he did :) ) It would be next to impossible to get something like that back in place without major disruption and the politicians dont have the stomach for the fight.

Thanks for your input Sir. :lifter What do you think it would take for legislation to be put in place to reinstate Glass-Stegall? What do you think the results would be if it was?

Why?

Because I demand an immediate end to all Government corruption - or permanent access to it.

All kidding aside, I'll be glad to explain my positions RL, but could you please be more specific as to what you are asking.

This is a good 10 minute video explaining the credit crisis IMHO:
The Crisis of Credit Visualized
by Jonathan Jarvis
http://crisisofcredit.com/

(still working on answering your question TR and I want to incorporate some of what RL has said)

[SkiBumCFO]

The European point doesnt really hold water as The Europeans did not have the same type of LBO and High Yield Markets that the US did. I moved to London in 98 and we basically started bringing those practices to Europe at that point in time and the market over their for HY Bonds etc expanded dramatically. The basic point is that banks which take depositors money should not have been allowed to lever up as far as they did and should not have been allowed to be full service investment banks. I Banks are high risk capital and were charging a premium for that risk but the commercial banks came in and did everything on the cheap and lowered their standards for loans, etc.. The I Banks should be allowed to fail but the commercial banks need to be rescued as they have depositor money in them. I dont think there is any possibility that we will be able to go backwards so now they will just need to make sure they regulate the big banks very closely - however, regulating these guys is hard as the smarter and harder working guys are at the banks and how does a low paid govt regulator ever keep an eye on what they are doing. Financial derivatives are so complex that the senior mgt of the banks sometimes cant understand them. its a conundrum!