The (new) Financial Tsunami thread

[Aman A.K.A. Ahamburger]

(O&G)Post 129)
To regroup and continue on thoughts of the present economic condition: At this point, it's worth noting or restating that all the legitimate purposes of financial devices were subverted to serve purposes for which they were never intended.

Derivatives had a healthy original intent which might be illustrated by an example (source of which escapes me at this time) which demonstrated the advantage of derivatives in avoided unfavorable consequences of fluctuations in foreign exchange rates. If a company were to commit to purchasing equipment or supplies from a foreign entity, but could afford them at today's exchange rate, they could purchase derivatives to insure against an unfavorable swing. Thus, when purchase time rolled around, derivatives would fill in for the margin of change, and the transaction could be consummated. Obviously, this is good for both parties to the trade and good for the economies of both nations. So exchange rate derivatives are basically sound.

The subversion of intent appeared when self-serving financial institutions decided they could insure insurance on insurance, or employ derivatives to bet on the foreign rate changes while not in support of any transactions. It's the same as walking into a local bookie's office and betting on number five in the fifth. Hardly considered ethical ventures of a legitimate financial institution.

Conduits were intended to facilitate a bank's handling (storage an disbursal) of some fund, not-for-profit or personal, in a trust or fiduciary capacity. Since the funds were not bank assets which should not have appeared on the balance sheet, the conduits had a legitimate off-balance sheet use.

The subversion entered into the picture when conduits served the purpose of disintermediation (cutting out the middle man) and served to distribute the shady, suspect, CDSs, MBRs, CDOs and derivatives directly to other institutions and entities. Off balance sheet, it was harder for regulators to trace, and through GLB enactment, it was effectively hidden from scrutiny. Shady practice was made ethical but eventually regained its deserved notoriety.

And so you can again make a distorted case for justifying the late arriving Credit Risk models being ignored when the contagion of "toxic paper", tranches, and suspect investment vehicles contaminated the global financial scene.
Commercial Credit Risk models appeared on the scene in the early '90s. Credit derivatives had been hinted at in Adam Smith's work, not new, but not proliferating.
Swaps, first dedicated to interest rates, were born a few years after the US dropped the currency tie to gold. First intent was to couple two parties with opposing views on the interest rate direction. Some thought rates would rise, others that they would fall and to protect positions, they were willing to contract to secure positions. Swaps are another form of derivatives.

Originally intended as a business tool, again, swaps became a game for its own sake.

(O&G)Post 130)
Two things in my experience stimulated an early interest in computers. In the early '60s, before the advent of PCs, a friend of mine, Philadelphia boy, graduate of Temple, migrated to the west coast, at that time one of two "hotbeds" of computer growth, the other being the 128 loop in Boston. His prime addictions in life were two things: Computers and a local delicacy he couldn't get on the west coast, TastyKakes! Since I sent him one periodically, he fed me plenty of information on the second and since he was a founder and high ranking officer of a computer service dealing with firms nationwide, we had more than one mutual interest. In the early 60s, in comparison with today's hard drive capacity, storage was large, cumbersome and physically sensitive. Special earthquake-proof buildings, with massive back-up power sources were essential. CPUs were banks and banks of magnets strung on wire matrices, flipping over on electric impulse, generating tremendous heat and in need of constant air conditioning. The machinery was sensitive, often shutting down and backup devices would crank up and run while repairs were made. Hollerith cards were the norm. The smallest computer was the IBM 1620, about the size of a medium sized office desk. Those were the early days.

So computer modeling was a difficult task with the awkward , sensitive devices. The first PCs, mine was called a Sinclair, if memory served was hooked up to the family computer, everybody groaned and dad experimented. Limited to 64K ram and a simple program developed by Gates, who considers that program the best he ever developed. It was hardly of the capacity to deal with risk calculations in business circles.

First credit risk program was introduced March 1991 by KMV. The next year, Credit derivatives emerged in full. Another two years and the credit derivative market began to evolve. 1996 the first collateralized loan obligation (CLO) was issued in England.

Then in 1997, the biggie, JP Morgan's Bistro introduced the first synthetic securitization whose intent was to shed credit rather than adjust regulatory capital, a boon to banking(?) or to their bookkeeping. They could conduct more business with less capital. (The birth of a dangerous situation.) This was enhanced in 1999 when the credit derivatives market was given a boost with new definitions released and the market jumping to $586 billion for the year.

The point of this last bit of history was that derivatives were around for nearly twenty years before they were linked with more powerful computers and became a viable weapon. It was about that time that Brooksly Born detected the danger and sounded the alarm that resulted not in corrective or regulatory action, but her demise as a Washington force. It's difficult to imagine that Greenspan and Rubin did not have the nefarious role in mind for derivatives that they eventually attained.

Once Ms. Born was silenced, the move was on. They switched to high gear and the flood that followed was exponential.

What I see as most cogent in this recount is the tie-in between increased use (or is that mis-application?) and distribution and the computer.

We addressed the issue of e-money, the reduction of demand for currency and the obsolescence of money or currency formulae. The speed of electricity trumps the speed of mathematical scientists every time. I'm sure they'll be brought in line again, but I'm equally sure, the mathematically proficient economists have not yet developed an approach to the problem, or whether they have even decided there is a problem at this point. There is! And, the longer we delay in addressing it, the more complexity will evolve.

[Virgil Showlion]

PaleoAmerican
Message #133 - 03/12/09 05:50 PM

Very interesting discussion full of insight. I agree with most of what I see here.



But did any here know of me and my cold motor long in prototype that Jim Jubak trashed to avoid their discussion?



And that newer more useable units I have designed this last few years are being considered by many of my own network's scientists? Few if any from America?



He deletes me for a reason.



Not invested in green machine alternate energy forms is my guess...but then, I refuse to know him either.



Not a builder of anything, let alone new products that will overwhelm his own best bets.



As ignorant of me, let alone William Beebe and his water examples, he particularly avoided all references through ignorant dislike inherent in himself.



But then again, I don't know any of you either.



I am busy doing those things he disregarded, and yes, on your behalf I'm sure.



Rest easy...it floats upwards all can see.



CD's will prevail and as for me, I want cash backing...not Jim-type opinions from the halls of the totally detached.



Guthrie, David W.


digital age
Message #134 - 03/12/09 06:22 PM
PaleoAmerican your sillyness has worn thin. There are too many serious problems in this economy for childish games right now. Please find another venue for your entertainment.


Defining Quality
Message #135 - 03/12/09 08:34 PM
The effect of internal and external forces, industry and market challenges, and local and global influences and fluctuations in constant play must be considered.

O&G -

We are where we are because we all have clearly learned all the really really "smart" guys on Wall Street and " the good Christian men of Congress" were actually criminals all conspiring to figure exactly how to "game" the economy for personal gain, of the already "Rich". The GLBA was an act of a special kind of Criminal Genius only a large group of criminal minds could have the "Vision" to pull off.

From wide spread misuse of predictive analytics - en.wikipedia.org/wiki/Predictive_analytics - by companies like McKinsey & Co - www.mckinsey.com/aboutus/whatwedo/index.asphttp://www.mckinsey.com/aboutus/whatwedo/index.asp

to the detriment of the consumer: to Monte Carlo simulation - en.wikipedia.org/wiki/Monte_Carlo_method - in finance - en.wikipedia.org/wiki/Monte_Carlo_methods_in_finance being used to replace "common sense" and rational analysis by all levels of academia and government - it has been and will continue to be for one purpose and one purpose only - to profit and benefit the Rich and powerful.

The industrial revolution has ended. Technologically caused efficiencies have caused labor productivity to make quantum leaps. The criminal leadership of our country forgot one very salient point as "Good" jobs evaporated, and the real reason why the US in now in so much trouble.

They all forgot about labor and the fact the consumer is 70% of the GDP. They forgot to insure the American Consumer was sharing in the bounty so he would have the kind of "cash flow" necessary to pay his debts.

Because the consumer has left the building, they now must steal from the Treasury to save the extortionists and criminals on Wall Street, and perfect the crime.


AgentXYZ
Message #136 - 03/12/09 09:16 PM
Maybe the only way out is to have hyper inflation so we can just wash away our national (and other) debt...and in that case the market should go way up too......


Old and gray
Message #137 - 03/12/09 10:45 PM

Defining Quality

Checked out your links. . . summarily.

#1 is used by "bean counters" and actuaries - good for its purpose.

Credit Risk Analysis is slightly more involved and also includes setting up a sequential control program. As you probably understand, risk is wide spread, including the borrower, his industry, domestic and world economies, the future, developing technology, etc., etc. That's why, in prior posts, I described the Risk program as a top down operation, emanating from the board with never ending board involvement, even through the constant review, evaluation, and modifications needed. Risk must be kept in line with the capabilities as well as the goals of the individual institution.

#2 Mc Kinsey is interesting if you need outside help. But, banks have Basel, the Bank for International Settlements, the Basel Committee of Banking Supervision, the BIS Senior Supervisors Group (SSG), the OECD and other extremely specialized groups. There are also a host of private companies who supply developed and proven mathematical models of nearly every description for banks in need who are without internal staff to develop proprietary programs.

#3 and #4 I'm familiar with. Some banks used the statistical methods to assemble their bundles, when they could determine how to represent them in the program. They also used them when they didn't know how to do an adequate job and therein lies the problem inasmuch as most of the distributors did a sloppy job in that respect, with little help from senior management or the board.



I like your "Industrial Revolution is over" observation. I hadn't thought of that, but true from our national point of view. What would you label our current adventure, which is liable to be in its death throes at this time? Something comparable to "Industrial Revolution"? The age of Credit? The E-Age? The Dark Ages?


Old and gray
Message #138 - 03/12/09 10:45 PM

HeyJoe

We're not safe from hyper-Inflation yet!!!


_RF
Message #139 - 03/12/09 11:25 PM

Old and gray,

Thank you for sharing your insights. I have had to read through your messages several times, but I think your ability to so cleanly compose your thoughts is allowing me to follow along.


Duffminster
Message #140 - 03/13/09 01:08 PM
Conduits were intended to facilitate a bank's handling (storage an disbursal) of some fund, not-for-profit or personal, in a trust or fiduciary capacity. Since the funds were not bank assets which should not have appeared on the balance sheet, the conduits had a legitimate off-balance sheet use.
I'm not quite certain I understand the example. Most likely a total lack of experiential context. If you have time I'd be grateful if you could elaborate the detail in layman's terms. Thanks again. I'm working my way through the last few posts you made and will have more questions.


Old and gray
Message #141 - 03/13/09 10:45 PM

Duff

You're right it was a "quick and dirty" explanation. My apologies. Allow me to try again with a little more patience.



An example might be a bank trust department committing to a good client to handle income and outgo of his charity foundation. The Bank has no claim on the funds. The fund is neither asset nor liability. However the transactions will be administered by bank personnel using the bank's facilities, for a fee, of course. To record the transactions on the balance sheet would be improper since it is neither bank's money nor business. They need not even know where the money originates. So, an off balance sheet entity is created, the conduit. It is separately administered and the bank discharges the responsibility over the agreed upon period and the client has a steward willing to accept the fiduciary responsibility for the duration.

This is similar in setup to a trusteeship a bank accepts which is neither a bank's assets nor liabilities.

I hope this is clearer.


Ytrue
Message #142 - 03/14/09 12:36 AM
Unwinding the credit default swaps to correctly reflect the value of the CDOs may be in the best interest of the country. The original model to price CDOs may have seemingly been flawed but there is a chance that the margin of error was completely understood the person who invent it.


Old and gray
Message #143 - 03/14/09 08:51 AM

Ytrue

Thank you.



The only thing I'd underline (which I'm confident you know) is that this entanglement is more than a one nation web. The international banking organizations have been pointing this out for more than a decade. They've emphasized it over the past ten years for no other reason than self-preservation. Unfortunately, our bankers', politicians' and economists' myopia won't allow them to recognize anyone else's rights or relevance. They're making too much money to be wrong! The recovery of the global systems hinges on a rededication to those principles espoused by OECD, BIS, BCBS, and others. If we don't wake up and respond to the prodding, we'll be sitting here cold, wet and hungry for a long time, eventually all alone.

Put bluntly and more directly: basic management skills are suppressed for the sake of ego. After all, if Brinks delivers weekly wages, there's an obligation to walk the walk no matter how close to the edge it takes the rest of the world. Gotta have that $50 million mansion! Now, that's basic!

Nothing wrong with making money, but there is something wrong with taking everybody down to get it.


Veteran_Lender
Message #144 - 03/14/09 09:11 AM

Duffminster, Defining Quality and Old & Gray... would you like a Diary (Stuck Thread) to post into for an on going conversation? You have a significant reader audience, my apoligies for the ocassional nut case.



Veteran_Lender- Moderator

[olderstill]

Defining Quality
Message #145 - 03/14/09 04:24 PM
What would you label our current adventure, which is liable to be in its death throes at this time? Something comparable to "Industrial Revolution"? The age of Credit? The E-Age? The Dark Ages?
"The Race to the Bottom"
Previously I posted about the use of technology's futile and ill advised attempt to make science appear it can accurately "crystal ball" what Rumsfeld was once trying to elude to, but instead made him look like a slimy "Snake Oil Salesman", the unknown.
The Unknown
As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.
Predicting the unknown always requires assumption of variables that can effect the outcome, but no one can predict the effect those assumptions will have on unknown variables because they are not part of the equation. Pseudo science replacing "Common Sense".
The boys who run the show clearly know that there are these "unknown unknowns" that effect all forecasting and all forward focused prognostication. But to survive, have and keep their jobs and social status, they all need to believe their own Bull @#$%, as they steal from the consumer.
Banking failed because their models ignored numerous variables and risks which they knew would have made their risk "uninsurable". Instead, they traded a known uninsurable risk in the OTC market, in the form of Credit Default Swaps, to make everyone believe they had the risk covered. They lied. The rest is / will be history.
Unwinding the credit default swaps to correctly reflect the value of the CDOs may be in the best interest of the country.
They ignored the rules established to insure adequate capital reserves while supposedly "never expecting" a "Financial Tsunami" to strike.
The same consumer who was providing their cash flow, at the time they were hyper leveraging and breaking all the rules, is the same consumer without a job now, who is also now forced to provide them "cash flow" from the Treasury, so the consumer's checks will clear.
"Too Big to Fail' - "Too Big to Manage" - "Too Big to be Criminals"
Big business and big government have nothing but contempt for the citizens and consumers they continue to steal from, and we are living that reality.
Old and gray
Message #146 - 03/14/09 07:15 PM
VL
I don't know about the occasional "nutcase". I'm sure there are folks out there willing to declare Duff and me the "nut cases". Who am I to say?
Not meaning to speak for Duffminster (he can speak for himself, I'm sure), but, when Duffminster rerouted this "conversation", he expressed the idea that others might be able to join in.
From my perspective, I prepare my text to address issues and do so in a setting where others don't have a chance to disturb me. I read reactions posted and, if they fit into the subject matter, I respond, if not, I go on with my thread of thought, with no intent whatsoever to ignore or belittle anyone. We all have entitlements.
So, if you decide that one or another setting is suitable, I can live with it. I do know that on the principle subject I do have more matter to introduce and discuss relative to banking, regulations, principles, best practices, etc., "trade matters" which may be of interest to others. . And, you know that Duff has the inquiring mind and the questions.
But, Duff will have to speak for himself. He may have other and better ideas. He's more of the guiding hand behind this. He did start the original thread and this one, too. He might be persuaded to retain editing function of some kind to see we stay on track. I'd defer to the judgment of the two of you. After all, you do have the experience to make the decision. This is all new to me.
Thank you for the flattering concern.
Veteran_Lender
Message #147 - 03/14/09 09:04 PM
You are hardly a nut case O&G... I will wait for all 3 replies. My offer is simply to "stick" a thread much like the Shorting Diary where all of this and other relevant data is encapsulated. I am fairly busy just keeping up with the Code breakers on MT, but always a fan!

V_L
neohguy
Message #148 - 03/15/09 03:03 PM
Thanks for the detailed explanation. It should be required reading for congress. These exotic instruments were not necessarily bad, but the way and speed they were executed and traded were. Regulation, private or public, was not available and combined with a mindset "if its not illegal then its ok" and the chance to make quick profits allowed these instruments to be traded in an irresponsible manner. The short term reward potential was so massive and great that upper level managers were not as concerned as they should have been about the long term survival of their companies. Combine all this with many members from almost every level of society wanting instant gratification without considering the consequences, well, we predictably got a big mess. So while we must try to correct these current problems, it is very important not to make the same mistake again.
I read reactions posted and, if they fit into the subject matter, I respond, if not, I go on with my thread of thought, with no intent whatsoever to ignore or belittle anyone. We all have entitlements.
Good advice. I think I'll try it.
Defining Quality
Message #149 - 03/16/09 01:05 PM
VL - A stuck thread would be OK by me - but I for one believe this discussion needs to include "Insurance Fraud" in its title - because the economy melted down when the Swaps used to insure loss became near worthless, because AIG held what it could not honor.

Duffminster
Message #150 - 03/16/09 01:48 PM
It might be nice to have the thread stuck for a period of time. My intent is to continue studying and researching what I have learned to this point and then making further inquiries both to previous and new material. This subject is critical in my opinion to understanding the larger context of the investment environment we face. The factors impacting us are different from any we have ever faced before and the topics and thinking in this thread are authentic and in my personal opinion, well thought out and sound both economically and technically.

VL, its your call now. I'm on board for a thumbtack.

Duffminster
Message #151 - 03/16/09 03:54 PM
Old and Gray,

There is so much attention being paid to AIG and how the money is flowing to the likes of Barclay that it might be useful to put in a brief side bar explaining how and why the bailout money if flowing through AIG to the likes of Goldman Sachs, and Barclay's in the UK in relations to the topics we have recently been discussing in terms of Risk Transfer and Management derivatives CDS/CDO and other issues. I think examples make the best teaching instruments in view of the intense interest and focus on AIG especially. Just a thought.
Defining Quality
Message #152 - 03/16/09 07:06 PM
I have witnessed first hand the devastating effect Insurance Corruption has when you have a catastrophic loss. The insurance company's simply refuses to pay the claim, because the rules allow them to reserve the funds during the pendency of the claim. Insurance companies love to be sued because of that fact. The longer the suit the better for guys like Buffet, who actually took the asbestos litigation after the fact from Lloyds of London for Billions in cash.
uk.reuters.com/article/UK_SMALLCAPSRPT/idUKN0958448820080109
Credit Default Swaps were private insurance contracts the parties never intended to honor.
End of story! End of Global Finance! That is simply the truth.
The banks needed their claims paid now and AIG had no money to pay the claims.
The bankers were not innocent parties - because they sought to leverage-up using the Swaps to move loans off book. Off Balance Sheet Accounting was criminally motivated and became the prime focus of the RICO Enterprise running the Banks and Insurers.
Old and gray
Message #153 - 03/17/09 01:36 AM
I'm having trouble accessing the money threads via my MSWindows Partitions. I'm now online through Linux, SUSE, and am not as familiar with the OS as I am with Windows, so bear with me.

My next post is in process and picks up at the point where Volcker raised interest rates and major banks attempted to rearrange their books to bring their balance sheets into compliance by moving the CDSs and derivatives off-balance sheet. I intend to work through a very short historical reprise of the '80' toward the point where banks eventually altered their nature by turning from bank/depositor relationship to dominant preoccupation with their Trade book and derivatives. Its short, and follows the line suggested by DQ's reply above though his response is considerably rendered. I'd like to explain how and why. Judging from his line of thought, he and I are in tune and synchronized.

When the swaps began to develop, I was still active and in touch with the large banks in NYC, working with high echelon management, It was obvious what was transpiring. And, there's a tie in between the then developing swaps market, the eventual Gramm Leach Bliley legislation and the international banking committee studies released immediately prior to the enactment and immediately following the promulgation of the GBL Act. I'd like to make that presentation to shed a little light on that sequence before diverging to another subject. But, again, in sum total, I don't believe my thoughts will be much different than what DQ has hinted at.

I'd differ from DQ's fatalistic dismissal of the global financial system. I don't believe the rest of the world is a herd of lemmings. They have been trying to warn the US to do something about the banks conversion from banking to investment houses but as I said elsewhere, our major house bankers were too impatient to settle for the pay rate of ordinary bankers. The conversion surprised many and some of us actually tried to redirect them back to banking business. The incentive pay they received with their new activities is not the level of compensation for credit-grantors! Nor are they about to give that up. I already said,, "If they wanted the compensation brokers receive, they should have been brokers" instead of converting the major banks to the undefined entities they've become. Which means that larger banks will likely continue operating what is currently defined as "shadow banking", meaning until its worked out, there is no definition for what they are doing. Nor, is there a definition for what AIG has been doing.

Short statements, more like references, I made back in the beginning of February, near the beginning of this thread, are now falling in line ready for the definition.

If I can continue at a reasonable, and productive pace, you'll see how much alike we think, although I wouldn't invoke RICO. . . I don't believe. Maybe when I arrive at the final thrust, I might be tempted to do so. And along with the banks and insurers, might as well go all the way and include the brokers and the intermediaries who have been displaced by the banks (always anxious to get the last buck out of the venture). There's your disintermediation, Duff.
Old and gray
Message #154 - 03/17/09 01:46 AM
I'd like to know why I've had to struggle for the past two days, unable to get to the MSMoney and the Message Boards. I get on the net, have access to everything else on the net: wikipedia, FDIC, Thomas.gov, BIS, but I can't get to the Message Boards. My "Favorites" links won't work either. I'm starting to get paranoid about this!

This Suse and Mozilla Firefox is much slower than Internet Explorer.

reverendbarb
Message #155 - 03/17/09 09:16 AM
O&G: I didn't used to be so paranoid and cynical, but with each passing day, I become more so. I haven't had any trouble accessing the boards through Internet Explorer, using MSN as my homepage, then clicking into "Money" from the top menu selections on the homepage. Is this what you've been trying?
I don't blame you for being paranoid...with your level of knowledge and expertise, it wouldn't surprise me if some "people" wanted to shut you up for daring to try to educate us common folk!!

[olderstill]

Old and gray
Message #156 - 03/17/09 10:52 AM
I didn't used to be so paranoid and cynical,
I used to joke with my wife that I was a professional parnoidal skeptic in describing some of my earlier career. Her reply, "What do mean 'were'?"'
Good to hear from you, reverendbarb. . .
Would you prefer a stroll on the deck today, lounging around on a deck chair or a game or two in the lounge?
I never asked if you play bridge. . . . ? Doesn't matter, really.

I prefer a laugh or two to being paranoid. Laugh a little and everyone's your friend; paranoids have a lonely life.
There's always Woody Allen's line (one of my favorites!), "Just because everybody's against you, doesn't mean you're paranoid."
But, there are times when the stakes are too high to take things lightly.
I intend to scrub that partition with every cleaning program I have and I'll try it again later.
Old and gray
Message #157 - 03/17/09 10:57 AM
To add to the line of thought:
Banks suffered in the early eighties with the high interest rates the Fed invoked, under Volcker, in response to the prevailing high rate of inflation. The 20% rates did them no service other than to curtail their speculative ventures. They were trying to find a new path ever since we dropped the tie-in to gold and the unsettled dollar that resulted. They were in a holding mode, mostly with loans, mortgages and bonds. In search of new investment opportunities, they spent a few years looking for some promising venues were they might put their remaining assets to work with a yield that would improve their situation. Longer memories might recall the syndication of bonds, bankers¡¦ acceptances, commercial paper used to stimulate activity. In all, banks were pressed. And, if someone would have walked through the doors to help banks rid themselves of risk to free up capital, he would have been deified on the spot.
Then, when the Fed lowered it rates slowly, banks found themselves trapped with long term, high interest rate commitments, and forced to issue credit at increasing lower rates and less and less favorable terms. Those were not good days for banking. They needed help in a market so unsettled the only way out was through a brand new series of investment frauds: junk bonds, swaps based on currency or interest rates; and loans extended to third world banks and countries. They were so confused that when the undesirable third world loans expired despite the dislike for them, they were renewed anyway. All of this was the beginning of the change in banks¡¦ structure and the emphasis on major involvement with investment and a changing attitude toward depositors.
Through the next ten years or so, as some might recall, banks contemplated all kinds of charges and fees. They tried to impose charges if a depositor so much as walked through the door. $3 to conduct a transaction at the counter, $5 to sit at a reps desk, and so on. We¡¦re undergoing the same class of charges now with the exorbitant fees on charge cards, and a list of fees on an unbelievably long list of services which were once considered merely the incidental cost of doing business. Nowadays, all of these charges are calculated to discourage clients from showing up at the bank and asking for banking service.
By the end of the ¡¥80s, all those loans to South America, Mexico and emerging countries began to fall through the weak floor, and the poor decisions of just a few years prior came back to haunt them.
Around the middle of the 1980s, banks hit on the idea of applying fiduciary media more liberally. First successes with CDSs and CDOs emboldened them to adopt a concept of "unlimited capital" which, of course, then allowed them to think boldly of more new capital structures. With altered accounting procedures, they began believing they were sloughing off risk, and increasing leverage. But, instead of ridding themselves of risk, they were actually slowly increasing their exposure, something they wouldn¡¦t be able to see for a few years yet. To combat the unpredictable high inflation rates, banks were searching for ever higher yields. Some trace the birth of derivatives to Citibank in the late 1980s. Others claim the first credit default swaps and collateralized debt obligations appeared mid-1990s. Dates vary, some assign the derivatives¡¦ birth date to 1998, some say three years earlier, but the mid-wifery is always credited to Blythe Masters at JPMChase.
In bank accounting, it¡¦s interesting to note, fiduciary media is a debt of the issuing body. It¡¦s entered as a liability on the debit side of the balance sheet, not as an increase in capital or income. Payment is entered on the credit side in order to balance it off eventually. So, if banks did not want to show a negative transaction, the generation of fiduciary media had to be accounted for off-balance sheet.
Old and gray
Message #158 - 03/17/09 10:59 AM
Thanks to the Gramm-Leach-Bliley Act, banks were blessed with the ability to shift the credit to that favored spot. And, Eureka! Debt was wrapped in faux gilt paper, tranches were peddled, and by 2000, banks didn¡¦t want to hear anything from customers in search of a loan or personal service. They were now converted into trading institutions, credit-granting, once the principle reason for a banks existence, was taking on less and less importance. Bank transformation was underway, big time.
Look at it this way: bank incentive bonuses are now in the 8 and 9 digit brackets. Is there any way granting credit backed by depositors¡¦ accounts can reach the atmosphere that would warrant such compensation? In order to get to that height, something has to be created out of nothing. Such is the nature of fiduciary media.
There were two bits of activity on the side line at the time, one a gift that helped them over the hump and the other a persistent thorn in the side. The helpful boost came from Gramm-Leach-Bliley Act which had a variety of different names (which I won¡¦t bother with), all depending on where your sympathies rested. The greatest help came from allowing the activity of creating the derivatives to remain off-balance sheet. It was a gift and could not have been more accommodating. . . . and., it passed both houses by an extremely comfortable margin. So it was not a partisan bill.
It originated in the two houses in early spring and went through the ritualistic procedure that had a vote, I believe in September and was signed into law in November.
The interesting part of this time sequence is that from late spring through late fall, BIS (The Bank for International Settlements) through its BCBS (Basel Committee on Banking Supervision) initiated a number of "consultative papers". "Best Practices for Credit Risk Disclosures" was first published in July, 1999 (before GLB was approved by both houses), "Recommendations for Public Disclosure of Trading and Derivatives Activities of Banks and Securities Firms" was published October, 1999. "Principles for the Management of Credit Risk", a "consultative" paper was published July 1999 by the BCBS and issued for comment to be returned by the end of November, 1999. "Sound Practices for Managing Liquidity in Banking Organisations" was finalized February, 2000. January, 1999 saw the BCBS report on Banks¡¦ Interactions with Highly Leveraged Institutions, which was then followed up in March, 2001 with "Review of Issues relating to Highly Leveraged Institutions (HLIs)".
Each of these papers was produced by committees on which the US had ample representation, in some cases a US representative chaired the committee. So, there¡¦s no reason to assume US banks were unaware of the flurry of activity on the continent. The rash of studies leads one to believe that banks world-wide, if they hadn¡¦t participated in the distribution of these marvels of self-serving ingenuity, were certainly aware of the toxicity they were steeped in. They must have heard the one lone voice leaking out from Washington before it was squelched. Nevertheless, our peddlers of profit paid little attention to the publications.
The calls for disclosure asked for accounting on the documents distributed to depositors, counterparties, shareholders, investors, creditors, and market participants should contain enough information so that risks involved could be understood. One paper, the Recommendations for Public Disclosure of Trading and Derivatives. . had this sentence in the "Executive Summary":
"While decisions on the levels of disclosure on the items listed in this report are largely a matter for the firms concerned, it is recommended that institutions make the maximum disclosure consistent with consideration of materiality and confidentiality."
Old and gray
Message #159 - 03/17/09 11:01 AM
Note that it was never the intention of the banking committees to attempt to regulate conformity or pressure banks to adopt the proposals in the papers. But, they were anxious that others in the market place should know what precisely was happening to the market by way of the banks¡¦ new business.
Later in the same location, this appears:
"The disclosure recommendations may also be useful to other financial and non-financial companies with significant trading and derivatives activities. Accounting standard-setters, regulators and other bodies responsible for setting disclosure standards may also find the document helpful as they continue working on developing improved and more harmonized public disclosure standards."
To me this sounds as if the committee members were concerned and would have appreciated action on the part of our major banks. If not ratcheting down activity, then, letting everyone know just what was being put out on the market.
Of course, the all-powerful US banks did not slow down in any appreciable way. And, if they released any disclosure, it certainly was a well-guarded, protective "proprietary" secret. And we all see now how this stance benefited everyone concerned.
Full disclosure is not about to come to be. The first reaction will probably be a twofold defensive posture, one, disclosure would reveal too much of their strategy and destroy their advantage, and, two, what they do in the way of disclosure will be determined by their own all-powerful boards.
Whether they reveal any of their derivatives¡¦ activity to regulators is doubtful given the reach of GLB. So, regulators have been rendered impotent in this matter.
Responsibility for the matter of disclosure as well as the matter of Credit Risk both of which failed not only the market but the bank-issuers themselves, falls squarely on the shoulders of the upper management, the board and the senior managers. Once again, they chose not to do what was expected of them. They were either untrained for their position, or uncaring for either the health of the economies effected or the people victimized by the collapse. What kind of incentive pay they are entitled to is not even debatable. And, these same people expect to sit in the chair to guide us out of the mess they¡¦ve dropped on us.
Given the fact that the best minds in international banking foresaw problems, and offered solutions beforehand, it hardly seems possible that an alternate solution can be offered from any other source. I certainly wouldn¡¦t presume to second-guess the best minds in the field.
One matter of casual interest: in a CNNMoney article by David Goldman covering Paul Volcker¡¦s reaction to the crisis in October, 2008, Volcker was quoted as saying, "The financial system has raised considerable question about its stability in the future. . . It is evident that a number of countries need to revise and reform financial regulatory structures."
This is followed with a quotation from Mr. Roger Ferguson, vice chairman of G30 and former vice chairman of the Fed, in discussing different regulations and safety and conduct regulators throughout the world, concluded, "None of these structures by itself has proven to be optimal. . . and no one model has appeared unambiguously superior."
Considering the changed nature of the major banks, the new currency unleashed on the world, and the new banking construct and strategies, nothing held over from any prior time will apply. Very basically, we are not dealing with banks, or money, or transactions as we knew them!
I said before that it looks like an old dusty, rusted out clunker, but when you lift the hood and look inside, it¡¦s a whiz-bang technological marvel, faster than the speed of sound and completely unharnessed.
Entirely new definitions are called for. Economists and the few well-intentioned people not under the thumbs of those controlling the industry are facing many nights of hard work over the next few years until the industry is sorted out and put in operating order.
Duffminster
Message #160 - 03/17/09 01:15 PM
Old and Gray,
I'm having trouble accessing the money threads via my MSWindows Partitions. I'm now online through Linux, SUSE, and am not as familiar with the OS as I am with Windows, so bear with me.
Your cable or DSL service may be blocking or having issues with these sites for some reason. A work around is to use an alternative DNS like OpenDNS. Go here to learn more:

www.opendns.com/start

You will need to still obtain your IP address dynamically through the dhcp server but you'll need to change your dns servers to these addresses. If it doesn't work, just return the settings to obtain DNS automatically. Let me know if that makes a difference. I recommend spending the 5 or 10 minutes to read through the site.

Here are the DNS IP address for OpenDNS:

208.67.222.222 and 208.67.220.220.




Defining Quality
Message #161 - 03/17/09 02:24 PM
Its short, and follows the line suggested by DQ's reply above though his response is considerably rendered. I'd like to explain how and why. Judging from his line of thought, he and I are in tune and synchronized.
Which means that larger banks will likely continue operating what is currently defined as "shadow banking", [common name used by a society in denial to describe the RICO Enterprise controlling Financial Holding Companies and their Boards IMO]meaning until its worked out, there is no definition for what they are doing. Nor, is there a definition for what AIG has been doing.
If I can continue at a reasonable, and productive pace, you'll see how much alike we think, although I ...wouldn't... invoke RICO. . . I don't believe. Maybe when I arrive at the final thrust, I might be tempted to do so.
Responsibility for the matter of disclosure as well as the matter of Credit Risk both of which failed not only the market but the bank-issuers themselves, falls squarely on the shoulders of the upper management, the board and the senior managers.
Nell Minow: It's Fair to Blame Boards, CEOs for Financial Meltdown

amlawdaily.typepad.com/amlawdaily/2009/03/minnow.html
Is it fair to blame CEOs and their boards for the subprime meltdown and the subsequent fall of the financial institutions? Weren't these the result of what, in retrospect, were bad business decisions and a very unusual set of circumstances that were missed by [former treasury secretary] Hank Paulson, [Federal Reserve Bank chairman] Ben Bernanke, and virtually everyone else?
Of course it's fair to blame them. I would go so far as to say that if the majority of people missed predicting the problem, it was because [the CEOs] threw sand in their eyes. The whole reason why we pay them the big bucks is that they have unusual vision and leadership and understanding. And there's an upside and a downside to that. It is always the fault of the board and the CEO when there is a major catastrophe like this.
The meltdown of the worlds economy is the direct result of the World Wide corruption of Banks and Insurance Companies and Brokerages caused by manipulation of the LAW for the benefit of the already wealthy, by "shadow banking" a global RICO Enterprise.
Wealth destruction [aka cost shifting] - was the goal of the corruption.
Too Big to Fail - Too Big to Regulate - Too Big to Prosecute.
The RICO Enterprise's record of success on that matter is painfully obvious to all who can think, as $Trillions of personal wealth by the average Joe is destroyed and $Trillions more are paid to the RICO enterprise by Joe the Plummer / Taxpayer.
Vulture Capitalism is in full swing.
Old and gray
Message #162 - 03/17/09 03:01 PM
Duff
Thanks. I ran a number of cleaners and scrubbed a lot of files and everything seems to be working fine. This is being communicated through my revamped system.
Believe it or not, some time ago I found an obscure program from the University of St Petersburg, Russia (a Freebie!) which is better by far than anything on the market today for poking into the far reaches of OSs and straightening them out. Only problem: you must be able to read Russian. And, secondly, MS knows about it and is trying to batter my (and others like me, I'd conclude) doors down because it puts a crimp on MS's intrusion into installed Windows OSs. (Chalk that up to my list of paranoid symptoms.)
Who knows? It could be the CIA at work because my PC has foreign language capabilities and I receive many messages from abroad. It may upset their coffee breaks to have me posting on the net.
This should be a warning not to get too friendly with me. A contrarian view may be safer.
Old and gray
Message #163 - 03/17/09 03:09 PM
DQ
In re this line:
Is it fair to blame CEOs and their boards for the subprime meltdown and the subsequent fall of the financial institutions?
I'm looking for relevance not necessarily fairness in my analyses. "They" are not now, nor have "they" been playing fairly with the entire world and I don't intend to put myself at a disadvatage by playing by rules "they" don't recognize. I post only what I have experienced or what I can substantiate and I draw conclusions from those inputs.

Duffminster
Message #164 - 03/17/09 08:24 PM
Old and Gray,

A correction in regard to the Grahm Leach Bliley Legislation which killed the depression era reforms of the Glass Stegal laws and put derivatives off balance sheet and set up the conditions which have lead to the current financial Tsunami.

You said:
it passed both houses by an extremely comfortable margin. So it was not a partisan bill.
The Senate passed it along party lines, all but one Democrat voting against and all Republicans voting for I believe. Clinton signed the bill into law. Here is the legislative background:

en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
The banking industry had been seeking the repeal of the 1933 Glass-Steagall Act since the 1980s, if not earlier. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.[1]
The bills were introduced in the U.S. Senate by Phil Gramm (R-Texas) and in the U.S. House of Representatives by Jim Leach (R-Iowa). The third lawmaker associated with the bill was Rep. Thomas J. Bliley, Jr. (R-Virginia), Chairman of the House Commerce Committee from 1995 to 2001. On May 6, 1999, the Senate passed the bills by a 54-44 vote along party lines (53 Republicans and one Democrat in favor; 44 Democrats opposed).[2] On July 20, the House passed a different version of the bill on an uncontested and uncounted voice vote. When the two chambers could not agree on a joint version of the bill, the House voted on July 30 by a vote of 241-132 (R 58-131; D 182-1) to instruct its negotiators to work for a law which ensured that consumers enjoyed medical and financial privacy as well as "robust competition and equal and non-discriminatory access to financial services and economic opportunities in their communities" (i.e., protection against exclusionary redlining) [3] [4] The bill then moved to a joint conference committee to work out the differences between the Senate and House versions. Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act and address certain privacy concerns; the conference committee then finished its work by the beginning of November.[3] [5] On November 4, the final bill resolving the differences was passed by the Senate 90-8 [6] and by the House 362-57.[7] This legislation was signed into law by Democratic President Bill Clinton on November 12, 1999.[8]
Duffminster
Message #165 - 03/17/09 08:43 PM
Anyone following this thread would probably find this article beneficial and the graphics are a hoot!

www.financialsense.com/fsu/editorials/kirby/2009/0317.html
The Real Ponzi Scheme:
This means that the obscene, explosive growth in interest rate derivatives was all about overwhelming the long end of the interest rate complex to ensure that every and any U.S. Government bond ever issued had a buyer on attractive terms for the issuer. Concurrent with the neutering of usury, the price of gold was also ¡§capped¡¨ largely through Fed appointed banks ¡§shorting gold futures¡¨ as well as brokering gold leases [sales in drag] sourcing vaulted Sovereign Central Bank gold bullion. The gold price had to be rigged concurrently because historically, according to observations outlined in Gibson's Paradox ¡V lowering interest rates leads to a higher gold price. Gold price strength is historically synonymous with U.S. Dollar weakness which leads to higher financing costs or the possibility of capital flight.

Metaphorically, this meant the extinction [or assassination, perhaps?] of the fabled ¡§bond vigilantes¡¨ who, in conjunction with a rising gold price, historically acted as the bond market¡¦s conscience whenever rampant monetary debasement reared its ugly head.
Alan Greenspan was more than aware of the obscene growth in derivatives activities at J.P. Morgan and was complicit in a litany of contributing events providing cover for this charade to develop and continue:
„X During his tenure as chairman of the Federal Reserve, in November 1999, Congress repealed the Glass-Steagall Act¡Xthe culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. In one feel swoop the repeal of Glass-Steagall meant that future financial abuse would be ¡§systemic¡¨ in nature instead of isolated.
* Also on Greenspan¡¦s watch, in April 2004, the Securities and Exchange Commission succumbed to intense lobbying chiefly by Goldman Sachs¡¦ Hank Paulson allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities. This further inflated the housing bubble and made our already-casino-capital-markets even more RECKLESS.

Additionally, to think that Mr. Greenspan was not aware or may very well have had a hand in this development is unthinkable. First reported by Dawn Kopecki back in 2006 when she reported in BusinessWeek Online in a piece titled, Intelligence Czar Can Waive SEC Rules,
"President George W. Bush has bestowed on his [then] intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye."
What this means folks, if institutions like J.P. Morgan are deemed to be integral to U.S. National Security - they could be "legally" excused from reporting their true financial condition.
The entry in the Federal Register is described as follows:
The memo Bush signed on May 5, which was published seven days later in the Federal Register, had the unrevealing title "Assignment of Function Relating to Granting of Authority for Issuance of Certain Directives: Memorandum for the Director of National Intelligence." In the document, Bush addressed Negroponte, saying: "I hereby assign to you the function of the President under section 13(b)(3)(A) of the Securities Exchange Act of 1934, as amended."

[olderstill]

Old and gray
Message #166 - 03/17/09 09:20 PM
On November 4, the final bill resolving the differences was passed by the Senate 90-8 [6] and by the House 362-57.
This was the vote I consulted when posting on the passage. Sorry to be misleading about the unanimity leading up to the final vote. This just demonstrates again how the Dems are unable to hold onto an idea to present a unified and determined strength.
Your second post is much more threatening than any vote is as any unilateral declaration that skirts the provisions of what we presume to be Constitutional government. I would think that once this is outed, steps should be taken to prevent anyone, from the President on down to circumvent law on a dictum basis. If it can be done so easily, what's the sense of legislating anything? I'm sure to add credibility, he had a first year law student give him a rendition of an opinion that it was legal to do as he wanted.
Old and gray
Message #167 - 03/18/09 12:36 AM
It's time for two issues to be addressed: first, a close-out on disclosure, what is being proposed and what won't work; and secondly, a reprise of the repairs needed for the global financial system.
Disclosure has been addressed by economists and international financial organizations. After finishing the papers and studies, you're left pondering the overview: What is being disclosed, and to whom?
In message # 158, I listed approximately half a dozen papers, studies, Principles, etc. dealing with Disclosure. Credit risk, Liquidity, Management, Derivatives, Trading, all that and more has been worked over and over and after reading it all, one might be tempted to conclude that none of it brings us any closer to explaining or understanding how this can help, present or future. You'll find that most of these studies strongly recommend disclosure of details to select people as I mentioned. If shareholders know, it's not the same thing as sitting down across from your banker and looking him square in the eye and asking, "Bill! What the hell is going on?" And, as I mentioned before, he doesn't have to say a word for you to learn whether you should be concerned or not.
Disclosure to shareholders, counterparties, depositors, creditors give me absolutely no assurance that a suspect banker will be anymore forthright than he has been in a situation leading up to anything like the current crisis. A clever accountant can make anything believable. There was a local case of a woman embezzling several million dollars over a couple of years without detection. The books looked perfect, balanced and, unbelievably, auditors detected nothing. She just carried it too far, kept feeding her impulses until her greed could no longer be concealed. She was the bookkeeper of a moderately sized company. I don't recall if it was three or five million dollars. But if it were five dollars in my company, I'd know it as soon as I reconciled the check book.
I already told of the client of mine who allowed absolutely no one else to open the mail. He did it himself along with his trusted, long-time executive assistant. And he handled every check by himself, she couldn't touch them! Rest assured there never was a chance for embezzlement in his enterprises, seven corporations with licensees from Eastern Europe to the orient. And, yet, on top of that, he was as expansively open as a man could be about his business with his management team, his customers, licensees and creditors (which were few and far between).
As for counterparties, by the time they get around to asking for disclosure, in effect they're asking, "What are you guys doing in there?" It's probably too late.
The "Public" disclosure the BIS supports is to people on the inside. Our principle concern is not the insiders, but what has been done to the global economic system, the "outsiders". If we are not shareholders, depositors, or counterparties, they couldn't care less what we think about their business methods or strategies. Outsiders are of no concern to the banks or investment houses that created the problem. They can always defend their secretive ways by maintaining that to release the figures or facts would have been revealing proprietary information that could have compromised their market advantage. There's an old Chinese proverb that I like, There's gold out in the streets, but you have to get up early in the morning to find it. That's the guiding maxim for entrepreneurial spirits. And, don't tell anyone what you're up to or they'll steal your market away from you! Get the idea and beat every one else to the punch. I'm sure there's validity to the argument against complete disclosure. So, who's to disclose, what, and to whom?
Old and gray
Message #168 - 03/18/09 12:37 AM
I would think that the person sitting at the books, making the entries has an obligation to tell the regulators/supervisors what's taking place. And, in turn the supervisors have the moral obligation to pass this along to authorities who can then inform the public and the market what they perceive as right or wrong. Isn't that what Andrew Cuomo does? I respect that. But, to pass the balance sheets out is hardly a disclosure that would fulfill the needs of the public by people untrained in forensic accounting techniques. They'd be lost.
So, disclosure! Full Disclosure, yes! But, integrity, full integrity in the authorities, also! GLB was not integrity, though it was the law of the land. If Congress is now ashamed of their participation, if they were duped into passing the law and want to make restitution tot he people, they should do their job and repeal the provisions in the bill that allowed the handlers of the derivatives, swaps and "structured vehicles" to poison the global financial system. The disclosure should be to the regulating authorities. Without fail.
One thing very important in any attempt to regulate, alter regulations or enforce regulations: coming down on any one, two or ten banks is not going to solve the global problem any more than feeding bailout money to one, two or ten banks. So, if we are staffed with six hundred examiners or a thousand examiners to keep tabs on 10,000 banks and half of them are assigned to the top ten megaliths, how are they keeping tabs on the rest of them? We need the staff to take care of the disclosure and if those top ten or twenty banks need more attention, they also need stricter regulations. Pick a threshold and above that mark institutions are subject to more thorough study and control.

Old and gray
Message #169 - 03/18/09 01:43 AM
Which thought brings up a second issue: if regulating ten banks or so is not going to solve the global issue, how will regulating one nation's banking system rescue the global system?
Notice, in referring to the "drunken cowboys" back in message #52, nationalities were not mentioned. It was a sweeping indictment, omitting no one who participated in this world-wide scam. Wherever the fraudulent paper went, it was received in the same spirit with which it was offered. Disclosure can be singled out for a share of guilt, but the recipients were professionals and had access to the same papers that called for assessing risk, exercising good management skills and careful investment practices. Just as the domestic cowboys came riding into town raising hell on Saturday night, the rest of the worldly cowpokes rode out equally wild on Sunday morning.
The crisis is too big to have been distributed world-wide by a dozen banks or investment houses. Any economist worth his salt knows that. It's recognized as a systemic problem. . . and that's a GLOBAL systemic problem. So corrective action, as pointed out before, must include all banks, brokerages, investment house worldwide who were complicit. As pointed out above, it's as pointless as the Paulson/Bernanke plan to feed a couple of ailing friends and hoping that the entire food chain is sated and will be brought back to health. Not a chance!
If the US comprises 1/3 the total market effected and the remainder is not treated, they'll collapse and bring down our end of it, no matter how it's been shored up. If the "stress test" does not include the likelihood of world wide failure of banks, even if only selected banks were involved, The well-known GIGO will result: garbage-in-garbage-out. Any solution requires a global approach, global unity in attacking the issue, and global corrective action. BIS and the G20 may be the closest to globally active organizations the world has, and as of now, all critical input seems to be coming from Europe. It's past the time when we needed to get involved with the rest of the world. We do send people over to Europe to attend conferences, work with study groups, publish papers, but none of group activity deals directly with corrective action, they are focusing on long-term restoration.
The urgency felt when #52 was posted has not diminished in the least. Disclosure, liquidity, solvency, credit risk, capitalization are for the restructuring not for correction. If we do something in the US, corresponding and complementary action is needed anywhere the problems exist. To expect the US to handle this alone is folly.
In mid-February, a young NYT columnist (name?) being interviewed on TV, concluded his interview analyzing the crisis with the suggestion that the US should be moving from a "consumer based economy" toward an "investment based economy". Ludicrous! Everyone is supposed to become an investor or broker. Turn 70% of our people around to accommodate what small percentage? Five percent? And, we eat certificates? Build our houses out of toxic paper? What's left to wear?
Duffminster
Message #170 - 03/18/09 01:45 AM
Old and Gray,

From what I can tell Bernanke, Summers and Geithner want to make sure the off balance sheet derivatives game can just keep going and that "Full Disclosure" is never allowed as it seems the game the banks are playing (far more profitable than the traditional business model of previous times) is allowed to persist. If the growth in derivatives over the last year are an indication, the game is still going ahead full speed even as the global banking system totters on the edge of insolvency.

What is truly befuddling is that no one seems to have any sense of responsibility, ownership or in the end integrity to anyone but their own interests. Will human's ever evolve in this regard. This is a rhetorical question and I have for lack of a better word "faith" that somehow the human race will pull it together. I also want to apologize for post #165 because while the content is related to this thread, it is a distraction and with 20/20 hindsight that it is too subjective and somewhat sensational, which is not the tenor of this analysis. I will attempt to restrain myself going forward and focus on querying you on all that has come before as that will be to the highest benefit of all reading this thread.

I am reading every word again over the next week and will formulate a new series of related questions.
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Old and gray
Message #171 - 03/18/09 10:36 AM
No apologies, Duff. The site and article do have relevance. This paragraph from that article, referencing Bush's transfer of power, may have as much weight as others quoted.

That this transfer occurred at all is highly suggestive that The Powers That Be were acutely aware that systemic financial problems were already manifesting themselves [likely at Fannie, Freddie and J.P. Morgan] or soon would be ¡V and - they were going to attempt to fraudulently COVER IT UP in the name of National Security.
A case can be made that no one in that period knew what they were doing to the system. Not to imply in any way that they were all of the mind that it was an innocent game, but since there was nothing which they could relate the ploy to historically, they were unable to assess the degree of damage waiting ahead.
Derivatives and swaps were just gaining momentum, their increase fairly flat on the chart accompanying the article. Compare that with the 2008 increase of very roughly $70 trillion dollars, the balloon was still in early stages of fairly innocent expansion.
Unfortunately, due to the lag time of collecting, calculating and publishing data, we have no idea whether the gaming is slowing at this time, or grinding to a halt, or has already ceased. Taking notice of the disrespect the players show for the taxpayers' money, and hearing nothing to the contrary, I have no option but to assume the game is still on and the situation is worsening. They may be trying to take out loss coverage on the already failed operation by issuing more derivatives.
To my limited knowledge, BIS first began addressing the issue of disclosure, credit risk and their regulation as early as 1995, almost about the time JPMChase was getting wound up to unleash the assault. To literate bankers, that should have been a warning, if not a highlighted caution. But, at that point they were not even warmed up for the big charge, the brass ring was in view and they were not about to be distracted.
The more evidence emerging from an historical perspective, the less respect can be granted to the managements (all of which, even currently operating, are still implicated) that perpetrated the swindle. They should not to be trusted to weed garden beds, much less assume stewardship of anyone's funds or assets. Current financial leaders can't be separated from those at the helm when the big push was on.
Senator Grassley's comments echo what appears to be prevailing majority public opinion on the incentive bonuses and bailout money, contract law or no. One of the provisions for abrogating a contract legally is: if the contract is built on an illegal provision, the entire agreement can be vacated. What is deception, fraud and betrayal of fiduciary responsibility if not illegal? It goes beyond unethical.
At the very least, licenses should be pulled. . . punitive action should be under way at this moment, or the public should resort to the rail, the black sticky stuff and poultry molting. Too many people are in need of demotion from respectability spawned from fraud to the ignonimity of complete disdain.
The Enron scandal was childish innocence in comparison to the scope of this monstrous, callous disregard for the entire world and people are serving time for that venture. To treat bankers/brokers involved at start-up or those currently involved with the guilty firms with respect, is revolting. And, our government is going to protect and sustain them? It's the outrage of all American outrages, Teapot Domes, vicuna coats of whatever. Madoff should be an example of what the public believes is due for the rest of them.
It's difficult to watch any of them appear on TV and strut majestically through distracting claims and posturing as though they are unstained and only serving the purpose of leading us to a better place.
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reverendbarb
Message #172 - 03/18/09 10:45 AM
Hi O&G: Sorry to interrupt your train of thought...which is fascinating by the way - along with Duff's - but it's time for us to take a little stroll along the deck and breathe deeply the fresh ocean air.

I really do learn a GREAT deal by reading these posts!!
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reverendbarb
Message #173 - 03/18/09 11:52 AM
I also want to apologize for post #165
NO! It was exactly what I've been looking for - a short, but concise summary of the political actions that really were the "foundation" of this current mess. Thank you Duff!!
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Defining Quality
Message #174 - 03/18/09 02:26 PM
The more evidence emerging from an historical perspective, the less respect can be granted to the managements (all of which, even currently operating, are still implicated) that perpetrated the swindle. They should not to be trusted to weed garden beds, much less assume stewardship of anyone's funds or assets. Current financial leaders can't be separated from those at the helm when the big push was on.
"They" are not now, nor have "they" been playing fairly with the entire world and I don't intend to put myself at a disadvantage by playing by rules "they" don't recognize.
O&G - your views of how we got here and what might be done to "fix" this economic disaster has a moral foundation that can only developed by someone in possession of a conscience.
Things will not change because our society has been run by "Malignant Narcissists".
... An absence of conscience, a psychological need for power, and a sense of importance (grandiosity) are often symptomatic of Malignant Narcissism... en.wikipedia.org/wiki/Malignant_narcissism - [BTW a perfect description of what we are now witnessing from our "Gang" of leaders] who are incapable of seeing the plight of others human beings because they were incapable of developing a conscience.
Our leaders now hang together as a "Gang" and continually prove they only care about defending the "Gang" [what I allege is in fact a "RICO Enterprise"].
They don't care about us because they have no conscience. Criminal minds defending criminal acts by members of the RICO Enterprise.
That is observed reality.
Everyone in power is trying to put "lipstick on a pig" that does not exist.
The fact is the "Banks and Brokers and Insurers" were the pig that Congress and Wall Street slaughtered and ate. The money has been stolen!
There is no more pig, and his parents [the consumer] are dying a slow death as the blood letting continues for the benefit of the criminals.

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Goofy Goober
Message #175 - 03/18/09 02:59 PM
Talk is cheap and declaring "this and that" should have happened but didn't is pretty much a waste of time and energy. I favor bringing back the Old Western style of justice where a length of rope and a good sturdy tree takes care of any B.S.. We could start at the root of the problem, which is the Federal Reserve with their monetary policies and go from there.
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AgentXYZ
Message #176 - 03/18/09 03:23 PM
Well the cat is out of the bag (or box)...now pretty much even all the joe six packs know how badly the game is rigged...from top to bottom, and from the inside out...(and believe me this is a very, very (very) important hump to have gotten over, because knowing the gravity of this all, we all live our lives at least a little differently each and every day)...so step zero is over, but I'm not smart enough myself to know what step one should be yet...maybe we'll see by the time the next elections roll around...(and no, I will never ever forget the things that have happened so far, and each day they will, in their own little way, serve as my guidance going forward into the future)....
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Duffminster
Message #177 - 03/18/09 05:29 PM
Old and Gray,
Taking notice of the disrespect the players show for the taxpayers' money, and hearing nothing to the contrary, I have no option but to assume the game is still on and the situation is worsening. They may be trying to take out loss coverage on the already failed operation by issuing more derivatives.
I concur and I believe this is why "FULL DISCLOSURE" remains an anathema to the new team (Geithner, Summers, Bernanke) same as the old team (Paulson, Boskin, Bernake) and that until those who are so tightly connected with the good old boys of Wall Street Banks, Brokers and Insurance companies are calling the shots, they will try to keep the same ponzi scheme afloat as long as possible.
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Defining Quality
Message #178 - 03/18/09 07:44 PM
the good old boys of Wall Street Banks, Brokers and Insurance companies are calling the shots, they will try to keep the same ponzi scheme afloat as long as possible.
I wish that wasn't True.
Nothing left to do but wait for our society to implode.
- A Nation in Denial. -

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cYbird2
Message #179 - 03/18/09 07:55 PM
Well with today's FOMC announcement, seems to me that these guys are not interested in offering up solutions to change and that they are only offering solution to extend the current game. Perhaps they can get 3/4 more years of run? The final and desired outcome it seems will be match over then reset, when; only "who knows" and he/she are not telling?

FOMC says they will expand the sheet another 1.1T, so that will put it at around 3T, approximately 2T expansion in as many years. Even though the Fed said it would play in 2/10 year instruments, look for them to actually load off the 2/7 years, leaving the 10/30's to steepen.
The real kick in all of our teeth will come should/when Fed looses control of the short term rates (bills), as I do not believe the Fed can purchase both Bills and Notes simultaneously and still accomplish the end they are seeking (a ranged steepened curve)?

This seems to me to be bullish for equities, with Fed in the picture the weekly roll process should come off as less volatile (Fed taking auction responsibility away from the primary dealers by guarantee of purchase if need be, thus allowing PD monies that were tied up into the auciton process to be routed differently)?

Also the devaluation of the USD (which in the whole scheme of things may not be that much overall due to the race by major currencies around the world to play the same devaluation game is on)?

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Duffminster
Message #180 - 03/18/09 08:14 PM
Also the devaluation of the USD (which in the whole scheme of things may not be that much overall due to the race by major currencies around the world to play the same devaluation game is on)?
Overall buying power of all currencies should drop even if the dollar maintains a temporary lead over other currencies. On the other hand, all non-indebted assets (not tied laden with large derivatives and debt obligations) should rise as you suggest and they should do in all currencies IMO.

We are about to witness global quantative easing gone wild and the probability of global hyperinflation increases with each step in that direction.

In my opinion, once a certain tipping point is reached, the Fed will never be able to put the Genie back in the bottle, the amount of liquidity created through the global QE efforts will have long range momentum. Japan has never been able to get their debt to GDP down since the 90's and the global situation is likely to be worse in my opinion.

On the upside, we'll probably avoid a deflationary depression short term. Could get a hyper inflationary stagflation/depression instead. Hopefully not. I'm guessing not but I'm preparing for global currency devaluation.
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Old and gray
Message #181 - 03/18/09 11:58 PM
It's not deflation of currency as much as it is adding in the credit generated through the fiduciary media. It's so widely spread throughout the global scene that some means is needed to fold it back in with the real currency. Because if it is done on the inflated valuation currently assigned to it, hyperinflation would be an unavoidable certainty. Since there's such a variety of vehicles based on fiduciary media, it compounds the difficulty of a uniform, globally accepted valuation to an impossibility. Given current secretive, fractionated practices for a variety of reasons, be they personal, sovereign or industry based, value probably will not be established soon. The above messages may be right on target.

A while back Duffminster inquired whether we could gain anything from studying the Swiss problem and I dismissed it casually by saying that the Swiss were too smart. We'd never be able to do what they did. And, then, someone who really knew what he was talking about came online and corrected us both by saying, it wasn't the Swiss who had the problem it was Sweden. I should have known. Banking, the Swiss and problems do not go together. The Swiss banking system is the soundest in the world and when the rest of civilization crumbles to the point where currency is no longer recognized or even remembered, Swiss banks will still be holding strong positions.
In my wanderings through the global think tanks, (the net is a marvelous tool) I stumbled onto voxeu.org in the UK. It's an outlet for economic thoughts and research, and publishes papers and studies. On the front page, down just a tad from the top was an article by a Swedish writer, I assume to be an economist. Sweden has had some outstanding economists among them Wicksell, Myrdal and Ohlin, the last two were Nobel Prize winners, and the first reputed to be the impelling force behind Keynes later theories.
The title of the article was "The Swedish model for resolving the banking crisis of 1991-93: Is it useful today?" dated 14 March 2009.
Interesting paper which started a train of thought that may yield some worthwhile fruit. The author was Lars Jonung.
Mr. Jonung listed seven items that defined the Swedish policy approach to resolving the crisis they experienced as a result of a lending boom which began to collapse and could not be restrained due to monetary policy. Six banks were threatened. The seven pronged policy included the following:

1. Political unity
2. Blanket guarantee of bank deposits and liabilities
3. Swift policy action
4. An adequate legal framework based on open-ended funding
5. Full information disclosure
6. Differentiated resolution policy to maintain the banking system and prevent moral hazard
7. The role of macroeconomic policies in ending the crisis.

Number 1 was possible because everyone recognized the severity of the crisis. Party differences were set aside to address the issue for the good of the nation. Admitting ignorance of Swedish political practices, there's no way I could compare our political parties with Sweden's. But I'll venture that they would be less confrontational. We lose on this point.
Number 2 fully protected depositors and counterparties of Swedish commercial banks against future losses on claims. That was assuring to foreign investors. We'd loose out here, too, since our debt is pegged at such an unrealistic level, how could we back up such a guarantee?
Number 3 moving quickly is always a plus. We dilly dallied while the G20 set up the framework of a plan and England formulated and promulgated a plan in five days. We're still not sure we have a plan, much less something workable.
Number 4 Open-ended funding is a fright, but we seem to headed in that direction since every call to session that congress heeds results in more money for the open pits of the bleating herd. Sweden set up something similar to the RTC, but not with the idea of dissolving banks. They would fund banks and the open-ended clause promised that there would be adequate support to complete the job.
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Old and gray
Message #182 - 03/18/09 11:59 PM
Number 5 Disclosure meant that the books would be thrown open completely for study of everything financial. This was reassuring to everyone.
Number 6 The intent was stated to save the banks, not the owners or the managers. To this end, banks were advised if they could raise the capital privately to continue operation, they'd be allowed to do so outside the new Authority. If they could not raise capital privately, the authority would assume control and ownership. One bank elected to remain private. Two banks were so weak, they eventually folded, their healthy assets combined into a new bank and the other three were taken over by the authority.
Number 7 Macroeconomics follows the monetarists' theories, meaning controlling money volume and interest rates to achieve an effect. They released their currency (the krona) and allowed it to fall, simultaneously raising interest rates to encourage new money to enter the system from foreigners. By 1996, the crisis had eased and the government was able to back off from their commitment. Three years from introduction to mission accomplished.

Besides our confrontational political atmosphere, there are a number of other reasons why such policies would not apply to today's situation, not even if corrective efforts could be restricted to the US.
In the first place, trying to isolate the US from the rest of the global system is a useless exercise. Our debt, and currency, is distributed throughout the world, through every developed country and on into the emerging countries. Any claim to guaranteeing depositors and counterparties would be laughed right off the planet. It would more likely cause a run than a burst of confidence.
Swift policy enactment? In excess of a year and a half into our dilemma and we still don't know which way to go. I heard some confidence being expressed on the TV today that Bernanke was finally doing something right. I must have missed something. I didn't see any splashing headlines on the msn homepage. Were they using the Market's rise as an indicator that we're climbing out of the pit? We've a long way to go. It wouldn't be unreasonable to assume that the authorities may be waiting for the situation to correct itself.
Where Sweden used an arm's length approach to establish an independent Authority to handle the situation, we have the same people responsible for the collapse handling the recovery!
And open-ended funding is not even a remote dream. This is probably due to the over-inflated valuation of our banks worth. In order to justify their own opinion of their worth, the managers have to inflate the value of the enterprises they head. Therefore, they've most likely added in their estimate of the value of the non-money money in to the value of their real currency to arrive at a valuation that is totally unreal and out of reach of any government, entity or global combination of governments and entities. It's doubtful they ever were worth what they claimed to be.
It's for this reason that they resisted full disclosure, opening their books as the Swedish banks did to verify their claims.
We're being taken in by the gamers who are still trying to play the nation for all it's worth. For that reason I wouldn't trust the government's taking over the banks for even a day. No matter how politicians bleat in Washington, they still have not done anything beyond feeding the enormous beast at our expense.
For this reason, plus the fact that the monetarist policies coming from the Fed only deprive the public and place no hardships whatsoever on the bloated financial sector, I am not in favor of monetary policy that strengthens their position at public expense.
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Old and gray
Message #183 - 03/19/09 12:01 AM

Three paragraphs from Mr. Jonung's summary are worth quoting here.
The Swedish bank resolution policy was faced with a financial system that was much less sophisticated and much less globalized than the financial systems of today. There were no structured products, no sophisticated derivatives, hardly any hedge funds, less securitisation, and so on. Indeed, the ongoing crisis has been difficult for the the authorities to manage, in part, because some traditional central banking tools - especially in the UK and the US - are not well suited, either legally or architecturally, to provide liquidity for the institutions most in need, including investment banks and insurance companies.
In addition, Sweden has a tradition of substantial public confidence in its domestic institutions, political system, and elected representatives. Such social capital made it easy for the government and opposition to reach swift and stable agreements on policy actions.

Later he admits:

The Swedish formula cannot be fully imported by other countries due to institutional differences. Still, its guiding principles are applicable outside Sweden today, most prominently in four areas. First, the Swedish experience demonstrates that the threat of public receivership or nationalisation should be a real one as it forces the private sector to find private solutions. Second, the Swedish record suggests that banks in distress, nationalised as well as in private hands, should be split into a good and a bad bank, in order to get the financial system swiftly working again - more precisely, bad assets should be taken off the balance sheets of banks to prevent them from becoming "zombie" banks. Third, the bank resolution policy credibility is significantly enhanced by an open-ended financial commitment by the government. Fourth and finally, policy action should be swift and decisive to arrest negative feedback loops arising during financial crisis.
In all it was a worthwhile paper, short and with a realistic assessment of its limitation when the policy is applied to the current global crisis.

[olderstill]

Aleuicius
Message #184 - 03/19/09 02:27 PM
Very enlightening. I've learned much just reading this single thread and hope I am understanding the half of it.

Still, there is generally much more color and texture to a story than any single man can grasp (nor could a small group). I read (and will continue), but still see business practices such as manipulation of business to reach indicators and milestones in the quest to attain the ever-more-lucrative bonus playing a part.
I also see the hand of government meddling far more than is essential - resulting in a perceived need to meddle further. We must all be aware by now that - in a crisis - government is generally a faster to way "fix" the problem than the right way.
Then there is my personal belief that - regardless of the "experts", et al, - banking (especially in light of derivatives), like government money distribution, is little more than Ponzi schemes (albiet legal) taken to the most incredible heights imaginable. Actually, until now, I had government in first place.

None of that has changed, yet
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Aleuicius
Message #185 - 03/19/09 03:21 PM
A short while ago, I was in a discussion that considered a 'run' on banks; to get and hold money, on up to pushing this 'over-the-top' as a means to accelerate correction.
At one point while reading this, I was beginning to think a run might not have the effect one would think. Since so little was actually underwritten with physical assets - of which there is quite little, anyway.
Now I'm thinking this would severly disrupt the smaller banks that are actually (or mostly) responsible and this would basically just hit the industry (and 'our economy') with another whammy - from the bottom up - without really changing a thing.

Let's see how tomorrow goes.
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Old and gray
Message #186 - 03/19/09 04:32 PM
OpenDNS doesn't work for me?
No working access to post. . No post. . . No spell check! I've switched back to default and I'm posting.
Well, interesting concept.
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Old and gray
Message #187 - 03/19/09 05:12 PM
Aleuicius

We've put ourselves into the hole by trying to be clever. We judge ourselves to be too smart to be caught up in old ways, old methods for solving problems. Since we're smarter than past generations, we couldn't possibly be doing the same foolish things that tripped them up, or using antiquated means to deal with modern problems. So, convinced that our problems are of another species entirely, we look for fresh, modern approaches, fresh fields to plow and we end up with. . . what else? . . problems of another species! Ten times more difficult to solve and more resistant to solutions dreamt up by humans. Then, we sit back and crow, "See! I told you it was different. We need more intelligence and more learning than the old folks had."
The problem we're facing now could have been handled much simpler from the beginning with the devices and structures we had in place. . and a lot less expensively to boot.
If they had allowed the fouled up banks and brokers to fail and declare bankruptcy, the courts would have taken over, appointed people to go in, clean up the mess, reorganize and with new management, we'd have a new start.
BUT!!!!
That was too simple. The folks in Washington were sitting around with nothing to do, waiting for a catastrophe and the opportunity to demonstrate their smarts. So, they did. They fouled it up so badly, it'll take us longer to get out of this than what was needed to get out of the Great Depression, with changes to the system that may take another fifty or a hundred years for adjustments.
Washington didn't do it without outside help. People all over the world went through a lot of education, accumulated many degrees, wrote a lot of confusing papers to demonstrate their high degree of intelligence. They were just waiting for the chance to pitch in and make the grand gesture that led to greater glory in tackling the marvelous mess. . . And, they all contributed to making it messier and lasting longer, which adds to their glory. . provided they get us out of it!
The fed's FOMC announced they are injecting more money into the system. . not real money, mind you, just more of the funny money, the "non-money money" that got us into the mess in the first place. . . the electronic variety that floats through minds and never enters the cash drawer. . . the kind we've been discussing here.
It works something like this:
The Fed says, we're buying Treasuries;
They go to the computer and punch in a few numbers and turn away, gloating, "There, we've got another trillion dollars."
Later, they come back to the computer and punch a few keys, turn away with a big smile and say, "Those banks now have another hundred billion in their accounts."
They square that up by punching a few more keys and have the US Treasury owe somebody (usually the Fed) interest on the two bursts of twenty second effort performed by an untrained operator who has no idea what havoc he/she has wrought.
Don't believe for an instant that printing presses are working night and day. Presses couldn't print fast enough to keep up with the way they're throwing credit around. Figure it out yourself. The FOMC said they were enriching their accounts by $1.3 trillion and the largest bills in circulation are $100! How many tons of $100 bills is needed to make up a trillion? Hint! Several billion dollars were lost in Iraq a while ago that they are not even looking for anymore and they're not sure how much it totaled, but they can give you the weight in tons!
To the big boys, it doesn't matter if there is a run or hyperinflation. That only hinders little people who don't carry their money in computer databanks. Important people just send electronic signals and their powerful computers can handle all the zeros you can imagine.
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Old and gray
Message #188 - 03/19/09 05:16 PM
All things are relative, aren't they?
I believe it was still in the 1920s that Babe Ruth was amazed that he had a check for $50,000 and ran around showing it to everyone who'd look for months. Catfish Hunter signed a contract for a million dollars! Who's the better player? Now, how many $200 million contracts are there in baseball today? Which one of them is better than Babe Ruth?
From fifty thousand dollars to hundreds of millions!!!!! That's not hyperinflation?
We're in the middle of the forest and all we can see are trees.
We don't recognize it because we don't have to carry it around with us, but imagine what a bundle of $100 bills you'd need to carry around to pay your ordinary expenses in cash, the car, the mortgage, food, clothing, common expenses for the family.
Now, that's a bundle!
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Old and gray
Message #189 - 03/20/09 10:12 AM
Duff has been busy culling out a number of blogs and articles that are expanding on the line of thought we've laying down. I'm sure others have been thinking about this for some time and have finally gathered and arranged their thoughts into presentable context. It's good! It's like the AIG debacle and the public response needling the politicians into a conscientious position for a change.

A little retrospect might help continuation of this thread.

One means of disposing of derivatives and swaps, as well as other "structured instruments" has been suggested earlier. Their clutter cries for the need to be cleared out. They were generated and distributed so rapidly from the primary source that a case might have been made that the recipients didn't have sufficient time to turn them around, dispose of them, for a safer, balanced portfolio. The result was an over commitment to one vehicle. It's the same as an ill-advised investment in just one company. Something happens in the one company and your total investment is down the drain, so to guard against such loss, we diversify.
Had they diversified, the impact of the sudden market contraction would not have been as severe, the difference between a strong storm and a tsunami, something easily handled with normal reflexes. But, that didn't happen, and those companies who committed and retained, were the worst hit. That was the reason for Lehman's meltdown. Other sentiments may have contributed to the abandonment, but basically they had too many eggs in one basket. When we hit the bump, there was a predictable mess.
The net result was a slow-down, a devaluation of the instruments, and then a shut-down of the market for swaps and derivatives. Liquidity evaporated to the point where central banks could not provide enough help; and, a few non-bank institutions ended up holding too many units beyond their ability to support. The glut then found no market whatsoever and "fire sales' brought the valuations plummeting to the basement floor. This may be a point raised in defense of the Credit Risk Agencies (CRA). Had the market not reacted so suddenly, many of the "structured instruments" might have been laid off and the impact moderated. As it was the management decision to lay back and delay reducing their concentration of derivatives and swaps, contributed greatly to the collapse. It's a moot point akin to the chicken or the egg conundrum, but like most everything else, this is not a cut and dried one-party-takes-all-the-blame situation.
Once all the internal operational deficiencies were locked into one perspective (generate as many vehicles as possible and push them out the door as fast as possible all for the sake of the next bonus) the glut had its effect on the market pipeline. The fact that regulators were rendered powerless to follow the flow or gauge the market's ability to absorb the vehicles (more convenient designation as SIV), worked against the scheme. Had they been able to detect the flaws, the originators could have metered their pace and the market would have had a chance to catch up and proceed at a manageable pace. But, their ability to observe or control, as Ms Born tried to warn, was an ill-advised disadvantage to all.
So, Lehman, AIG, Merrill Lynch, JPMChase, Citi, along with other domestic and some foreign institutions, some of which have failed or been folded into others in order to save them, were no more than bloated repositories for swaps and derivatives to the point their trading was clogged with the unmovable, devaluating instruments. The economy hit the bump unexpectedly and there was no time to unload.
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Old and gray
Message #190 - 03/20/09 10:15 AM
The fact that JPMChase is still the holder of record of a large cache of these SIVs raises some questions. Merrill Lynch managed to get a bundle of derivatives off to Singapore (or wherever) for an estimated 22 cents on the dollar before they were taken over. And, though Bear-Stearns was reputed to be on the verge of collapse, JPMChase was willing to take them over when they were bundled with a gift package from the Treasury. With very little effort, I could easily be persuaded that by pairing up the three entities, JPM actually improved its position rather than saving the other two. Their heavy exposure and the fact that Merrill Lynch cleansed itself somewhat would provide a hole to accept some of the toxic paper to dilute the concentration. Bear Stearns problems might have been illiquidity of another nature. So, again, their acceptance into the fold might have been of more benefit to JPMChase. It was quick, surreptitious, if you recall -- not quite the dead of a Sunday night, but close to it, and overall a rather stealthy move.
With the combined re-distribution of assets of the merger, JPMs ration of SIVs to assets could conceivably have been reduced to considerably less. . say, from 30:1 to 15:1, a much healthier position. For that they received something around $30 billion from the Treasury before the additional $25 billion of bailout assistance. Total valuation of JPM slipped from an estimated $234 billion of the three entities prior to merging (Jan, 2007) to $74 billion after merger. They retained 32% of their value. Not bad in view of the fact that despite also receiving $25 billion of bailout support, Citi, during the same period slipped from approximately $273 billion to $10.5 billion as of Feb, 2009, a drop to 4% of its previous valuation. This because they did not manage to find any merging partners despite their desperate attempt.
My impression, as might be easily guessed, is that all the banks had overvalued themselves, using for assets, tainted, suspect SIVs. Notional value or no having decided the actual amount to report, SIVs turned out to be so fragile that they couldn't stand up to the first heavy wind. If that were the case, what gave the banks the idea that they were worth as much as was reported or that the drop was so severe other than the fact, that if they reported a higher value, it would allow the board and senior manager to award themselves higher compensation. After all, if I'm chauffeured around in a $300,000 Maybach, my compensation should be more than the poor fellow being driven around in a mere $200,000 BMW.
Overseas, an English bank and a German bank were absorbed and a few large banks were wounded, but not fatally. They'll survive, but when the system is resuscitated, it will be appreciably changed as we all realize. Economists are busy at work formulating new architecture for the global community. Although to date I have not read anything as drastically revisionist as I suspect it may have to be.
We may get into that.
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AgentXYZ
Message #191 - 03/20/09 11:00 AM
A few weeks ago I didn't know what a Maybach was...now I'm thinking that this whole thing needs a nice name like maybe the Great Maybach Competition....

Edit:

...
There's just one thing I've got to know
Can you tell me please, who won
....
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Duffminster
Message #192 - 03/20/09 06:18 PM
Math has a constant problem dealing with projections, principally because we don't know what the future brings and how that will effect our lives, our choices, our functioning.
Yes, and in the case of calculating risk in a highly interdependent set of financial entities, objects and systems, with many degrees of freedom, the chances of accurate projection are not anywhere withing the realm of the current math of the human race.

Issac Asimov speculated about the eventual evolution of such math that could project events centuries into the future and since that time, even weather forecasting hasn't evolved much.

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Duffminster
Message #193 - 03/20/09 06:40 PM
continuing message # 1:
www.wallstreetwatch.org/soldoutreport.htm
12 Key Policy Decisions Led to Cataclysm
Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:
1. 1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
2. Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.
3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.
4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."
7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.
Financial Sector Political Money and 3000 Lobbyists Dictated Washington Policy
During the period 1998-2008:
 Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying:
 Accounting firms spent $68 million on campaign contributions and $115 million on lobbying;
 Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying;
 Securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying. Included in this total: private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; and hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle).
The betrayal was bipartisan: about 55 percent of the political donations went to Republicans and 45 percent to Democrats, primarily reflecting the balance of power over the decade. Democrats took just more than half of the financial sector's 2008 election cycle contributions.
The financial sector buttressed its political strength by placing Wall Street expatriates in top regulatory positions, including the post of Treasury Secretary held by two former Goldman Sachs chairs, Robert Rubin and Henry Paulson.
Financial firms employed a legion of lobbyists, maintaining nearly 3,000 separate lobbyists in 2007 alone.
These companies drew heavily from government in choosing their lobbyists. Surveying 20 leading financial firms, "Sold Out" finds 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the Exe
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Duffminster
Message #194 - 03/20/09 07:46 PM
My impression, as might be easily guessed, is that all the banks had overvalued themselves, using for assets, tainted, suspect SIVs. Notional value or no having decided the actual amount to report, SIVs turned out to be so fragile that they couldn't stand up to the first heavy wind. If that were the case, what gave the banks the idea that they were worth as much as was reported or that the drop was so severe other than the fact, that if they reported a higher value, it would allow the board and senior manager to award themselves higher compensation.
Old and gray, I would like to know if after reading the article below you believe we are heading forward or back in regards to the question posed in your statement above?
Accounting Brothel Opens Doors for Banker Fiesta: Jonathan Weil
www.bloomberg.com/apps/news?pid=20601039&sid=aGdxdLHUVGrs&refer=home
March 19 (Bloomberg) -- The banks demanded that the accountants give them leeway in how they report losses to investors. The accountants responded by giving away their souls.
This week, the Financial Accounting Standards Board unveiled what may be the dumbest, most bankrupt proposal in its 36-year history. If it stands, the FASB ought to change its name to the Fraudulent Accounting Standards Board. It’s that bad.
Here’s what the board is floating. Starting this quarter, U.S. companies would be allowed to report net-income figures that ignore severe, long-term price declines in securities they own. Not just debt securities, mind you, but even common stocks and other equities, too.
All a company would need to do is say it doesn’t intend to sell them and that it probably won’t have to. In most cases, it wouldn’t matter how much the value was down, or for how long. In effect, a company would have to admit being on its deathbed before the rules would force it to take hits to earnings.
So, if these rules had been in place last year, a company that still owned shares of American International Group Inc. or Fannie Mae, for instance, could exclude those stocks’ price declines from net income entirely. It would make no difference that the companies were seized by the government last year, or that both are penny stocks. The loss would get buried away from the income statement, in a balance-sheet line called “accumulated other comprehensive income.”
Desperate Bankers
These are the earnings we get when the people who write accounting standards give in to desperate bankers. And it’s no mystery why the three FASB members who voted for this -- Leslie Seidman, Lawrence Smith and Chairman Robert Herz -- did so. (The two who opposed it were Tom Linsmeier and Marc Siegel.)
Since the credit crisis began, the board’s members have been under assault by the banking industry and its wholly owned members of Congress. The most recent display came last week at a House Financial Services Committee hearing, where Democratic Representative Paul Kanjorski and other lawmakers beat Herz like a dog. Herz declined my request to be interviewed. A FASB spokeswoman, Chandy Smith, confirmed my understanding of how the rule change would work.
The banks want unfettered license to value their assets however they see fit, and to keep burgeoning losses out of their earnings and regulatory capital. The FASB had been holding its ground, for the most part. Now, though, the board has assumed the fetal position.
Differing Treatment
Under the current rules, securities get differing accounting treatments depending on how they are classified on the balance sheet. When labeled as trading securities, they must be assigned marked-to-market values each quarter, with all changes flowing through to net income. Otherwise, changes in value don’t hit the income statement, unless the securities have suffered what the accountants call an “other-than-temporary impairment.”
While the term may be cumbersome, the idea is that companies need to show losses in net income once they no longer can pretend that
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Duffminster
Message #195 - 03/20/09 07:47 PM
One Important editing Tidbit I have learned today. We can edit our posts even after we post them by clicking on "Edit" below.
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Duffminster
Message #196 - 03/20/09 11:11 PM
After reading message # 194, try reading this article from the Rollingstone which deals with the ongoing scam dealing with these subjects:

The Big Takeover
The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution

www.rollingstone.com/politics/story/26793903/the_big_takeover/7

Just the last page:

"...
The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama's Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide.
In fact, most of Geithner's early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called "bad bank" that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed's new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.
God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. "This is exactly what the financial system needs," said Andrew Feldstein, CEO of Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren't many people who don't run hedge funds who have expressed anything like that kind of enthusiasm for Geithner's ideas.
As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.
The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.
"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"
But before you even finish saying that, they're rolling their eyes, because You Don't Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet th
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Old and gray
Message #197 - 03/21/09 12:45 AM
The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution

About 7-8 months ago I proposed an equation which explained what bankers/brokers and their cohorts in Washington are up to. Simple and graphic.

Money -------------> Power ---------------> CONTROL!!!!!!

One is only a stepping stone to the next. Beyond "control' may be re-installation of the Divine Right of Kings.
Was it ever anything else? Is it likely to be? I was nurtured on that diet. My family did what they could without my knowledge or cooperation so that I would achieve whether I wanted to or not! Everyone was in on it, parents (even though they divorced early in my life), sisters, aunts, uncles, grandparents, cousins (close and remote). Eventually, my father explained why he went his separate way and chose the path of the black sheep. . . and some degree of contentment, even though he didn't want that for me!
They did everything from helping me into the "right" schools, to meeting the "right" people, having the "right" people volunteering to help me. The reason? Simple enough. They couldn't tolerate underperformance that would dishonor the family. Maternal and paternal sides! It wasn't favoritism, they set the same high standard of expectation for all children in the families. Though they might have had higher expectations of males at that time.
Fate and good fortune outfoxed all their plans. This wonderful, absolutely gorgeous, rebellious beauty who cared not a whit for them and their plans and just swept me off my feet. And, in looking back, it could have been a comedy scripted by some divine sense of humor, with a fairy tale ending.
So, the Rolling Stone thought-line is not new.

[olderstill]

Old and gray
Message #198 - 03/21/09 01:02 AM
The FASB ruling can be interpreted as being neither more nor less than what banks (and others) have been capable of doing all along. There was no real need for an additional accounting approach, except that it's another twist on the same ploy as GLB, or the conduits. All auditors had to do was OK moving whichever instruments they chose not to report off-balance sheet into something like a conduit under the pretext that they had a buyer waiting in the wings who'd already submitted a bid, or something to that effect, claim it was no longer their property and assign value to make it a wash, gain or loss whichever they preferred.
In view of what auditors have been doing all along, there'd be no problem persuading them to do as management pleased. Look at all the scandals that blow over. Arthur Anderson supposedly was disbanded, but all they did was change the name temporarily until people forgot, continued to operate, and they're back again, building to the same strength they were before the fiasco.
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Old and gray
Message #199 - 03/21/09 02:13 AM
Forward or backward!
I believe it's up to the individual. Each of us make our own decisions, visualize our own goals. Whichever we choose, it's a bumpy ride. Be prepared to laugh or do something enjoyable. Some folks like to work 25/8 and cultivate ulcers. Some folks like beer, some champagne. Some like caviar, other say it's too salty.
The world's spinning at a tremendous speed yet gravity pins us to the surface. We can't really just get off. Maybe we should just realize that this is the way we are and continue doing what we do.
I suppose you can construct something on another side of that CONTROL!!!! equation and fill in contra-measures to arrive at the same place. Or, set up your own equation. The most successful psychotherapist made his name with a simple statement he claimed explained everything:
"Man's wish and will to be superior".
However, I do and I know you also have a conscience along with a wish for improvement. And, we seem to be headed in the same direction. Who's to judge whether we're right or someone else is?
Several generations ago a TV raconteur, Alexander King, described an ant colony as studied by an Austrian or Hungarian scientist.
King said the scientist discovered that inside the colony there were a small percentage of ants who would not behave as the others did. When the others went foraging for food, these aberrants would lag behind and do different strange things, movements, or building things. When the rest of the colony plodded along the trail, back and forth between the food source and the nest, the aberrants were off to the side doing more strange things. They were given leeway for a while and then one ant would approach the rogue and try to nudge him into line or get him to do his share of work. The persuasion might have been successful or not. If it was and the rogue went off again, the same ant would go back and nudge him back in line. If the single emissary was unsuccessful, he reported back to the main group and a party of emissaries would go out to try to persuade the rogue to join in the community action and so on. There would be a limited number of tries, all depending on the degree of success achieved. But, once it was determined by the committee that there was no hope of converting the rogue to behave as the rest did, he was steered off to the side into a community of rogue ants who had been declared incorrigible, living away from the colony. The colony supplied food and whatever else ants need to survive, but left them building their strange buildings or doing their strange little dances and that was their fate.
I don't know just where you and I fit, Duff. Whether we are rogue ants, partially rogue, partially colonized, or colonized with controllable rogue tendencies, or just bored, colonized ants. Or, perhaps, rogues fearful of being recognized for what we are so we appear to be fully colonized unable to deny our roguish nature.
I always wanted to "know". Just for the sake of "knowing". Eventually I knew enough that I could apply some of that knowledge. But, I kept searching for more. I have no idea why I keep doing it or what kind of pleasure I derive from it. My wife was a psychologist, and she could never offer a satisfactory explanation or diagnosis. People paid me to know things and I obliged. All my life I was rewarded for knowing or "finding out".
Yet, for all I've mentioned above, all I've gone through in my long and satisfying life, I don't know which way is forward or backward. I don't know if I'm making progress or not. I won't give up, but I don't know that one thing.
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Old and gray
Message #200 - 03/21/09 02:24 AM
People will be people. Some want to help; some want to build; some want to destroy or cause trouble. Some need to accumulate things to make it seem like they're doing something during their years here. And, then, for some just accumulating isn't enough. They have to accumulate more or better. Or, they have to accumulate by depriving others of something, otherwise nothing is proven for them. Others don't care for anything. And, we fill the infinitely wide variety in between.
If you're asking if there's any hope of changing the nature of people, just understand what you see and live by your standards and your belief. None of us can do much better than that. Except. . . there's always hope and ideals.

My intention was to post something about derivatives. . . that's for tomorrow or later.

One thing does grant some satisfaction, more and more people are expressing opinions that parallel ours in the media, in politics. There's a certain amount of gratification in that.
There was also an encouraging tone from Ben Bernanke today. No idea how sincere he is. . As mentioned on the other thread, he talked the talk, now let's see him walk the walk.
One speech doesn't make a man. But, it's added to my folder of Bernanke speeches just to keep tabs on him. It may become useful.
The derivatives message will wait for another day.
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BRENTEFS
Message #201 - 03/21/09 02:00 PM
O&G; Where do you suppose we are going to get the necessary manpower to oversee whatever evolves into "regulation" to better arm the SEC. Compensation on a government level will never get the personnel that has the education IQ and balls (terrible choice of words), to go after those suspected of violating the SEC. I see this somewhat like a football game except one side (greed) has unlimited resources and the other team can't even afford uniforms. You can't regulate unless you can enforce.
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Maestro 101
Message #203 - 03/21/09 02:55 PM
Hey Duff, Have you ever thought about writing "THE GREAT AMERICAN NOVEL"?
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Old and gray
Message #204 - 03/21/09 05:33 PM
BRENTEFS

Where do you suppose we are going to get the necessary manpower to oversee whatever evolves into "regulation" to better arm the SEC.
The same folks who are supposed to do it now and the same folks who are now footing the bill. . . The Government and you and I.

It will be a necessity. They already have the cannons lined up and aimed at our banks and businesses. If we don't toe the line, they won't want to do business with us.
No way we can support ourselves either from the production point of view or the financing aspect, our big guy geniuses have seen to that. We can barely grow enough food to support ourselves. We now import more than we export, which means net deficit. Look at the labels: frozen fish from China and Malaysia, frozen vegetables from Mexico and Chile, fresh vegetables and fruits more frequently labeled from Central and South America, beef from South America. If we depended on our own production, you wouldn't like the diet.
If they decided not to trust us, we'd have riots in the streets. They got us by the shorts. And, it's all a matter of our own doing. Maybe not you and me, we don't stand to profit much from depending on foreign sources, but those who do profit, have profited and said to the devil with the rest of you.
Back in the 1800s, an economist said there would be wars and riots over these issues. I don't know why it's so important to bring it on, but those in charge are trying to prove him right. As a last resort, we'll become a nation of armies and set out to conquer our food sources just as the Romans. So, using their civilization as a gauge, we might be good for a hundred and fifty years, at most, if the rest of the world is slow to respond to our invasions. If the objectignnations pick up the pace, their response might have us more inthe time frame of the Napoleonic Wars. With modern munitions and tactics added into the mix, two years, maybe. Then what? Slave labor to pay for the reparations. They won't take a charge card!
The reason the Romans established an empire, their people were too refined to do physical work, too. Pretty much the same as the English Empire.
So, that door being shut to us, we're going to have to work out the little details you bring up.
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Maestro 101
Message #206 - 03/23/09 08:41 PM
I heard rumors that multi-billionaire Warren Buffett might buy out Delphi Inc.; any truth to this?
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Old and gray
Message #207 - 03/23/09 10:20 PM
A history of Credit Derivatives is posted on
www.financial-edu.com
I've seen other histories of the financial times and there's several dates that might be disputed. However, you gain a quick overview of how derivatives evolved and what contributed to development.
There'd be trouble convincing me that the economic situation since we moved off the gold standard in 1971 was much different than it was while our currency was tied to gold. We've tried about every ploy always with the hope that this time the results will be better. We'll handle the situation and we'll have stability again. Of course, we all know what happens. Somebody wants a bigger slice of pie and when they lift their piece off the plate, they offset balance, and we tip over into another recession. Boom/bust, boom/bust we're still looking for a way out ever since the first explorer set foot and gave us an identity. The cycle is so constant, I could even be persuaded that the Indians suffered boom/bust before the first white man appeared.
But, on almost every occasion, some specific item, be it act, instrument, technique or group of people, is assigned responsibility for the downturn. Reason would tell us that decoupling the dollar from gold could not be that single disastrous step since every one else did it at the same time and every balanced equation, using the same constant in all the expressions, ends up the constant not being a factor. Most such equations we can remove the factor and develop a much simpler equation just as valid.
But even though we can say the tie into gold should not have been a factor in the period since the decoupling, the nature of the boom/bust cycles we've had in the last 35 years or so seems to be one of people searching for something. The unfavorable resolution indicates that whichever path they took, did not help in the quest. So, back to work and find another path.
Derivatives was one of these excursions. Seven years after veering off from gold support of our currency, we were in deep inflationary problems and experiencing conditions of another deep recession. Oil prices up, dollar declining, people turning away from stocks to money markets and mutual funds. Someone asked me at that time about a good mutual fund and I mentioned one, but then added that in the then current market funds could experience a downturn. He heard the first part and paid no attention to the second, bought in and a week and half later came back tome with a vengeance. I suggested patience, that was just a temporary drop. And, of course the response was, "How much should I lose before I pull out?" He sold and about a year later, he would have been in a good, safe position, but, by then, it didn't matter.
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Old and gray
Message #208 - 03/23/09 10:21 PM
Banks at the time were running a commercial banking enterprise, not a trading post, not a gambling house, not generating funny money out of thin air and peddling it world-wide. They were dealing in bonds in one arrangement or another (syndications and such), in for the long term, and turning a stable, smiling, receptive face to the depositors they serviced, that was banking at that time. "Relationship banking" it was called. To a degree the man with the vest and gold watch chain was still in style, although prior to that the young "go-go" bankers were showing up, enlisted in the credit training programs, already looking for something to break the monotony.
Bankers responded to the conditions du jour and the high inflation were bringing on problems whose consequences were yet to be experienced. They were issuing long term CDs at high rates that would come back to haunt them when the inflation cooled and the rates they could charge were significantly lower. They had that nightmare to look forward to, they knew it, and wanted to work out something that would give them a leg up on the implosion skulking down the road, waiting for them. In addition to the interest rates, there was an unstable market in foreign exchange rates when nations couldn't decide which way trends were leading them.
This situation led to the birth of interest rate and foreign exchange rate swaps. A reasonable reaction to the economic events of the times. Would that it were not as successful as it was at the start. It was encouraging and banks began to generate more swaps. Two things resulted, banks started working together so that no one stepped on anyone else's toes and they found the rate of return to be much higher than what was gleaned from smiling at depositors and handling their piddling sums. Suddenly, "relationship banking" was abandoned in favor of "trader banking"! Now, banks began looking for new products to step up the new action, developing markets and providing investment vehicles for the market. It was reminiscent of the development of Rock 'n Roll back in the fifties, when the electronics firms developed high fidelity recording and playback equipment. The older set had their music, bought once and played it for the rest of their lives. Not much of an active market, so the electronic firms invested in some raucous music that would catch the fancy of the younger set who spent with more abandon to satisfy less developed sensitivities. Hence, Rock 'n Roll was born and the electronics firms were happy, the rock 'n rollers were happy and a new market flourished. Bankers wanted the same degree of success in what had been until then a fairly mild career opportunity with few ups and downs except for how their commercial service was influenced by the boom/bust cycles created by someone else.
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Old and gray
Message #209 - 03/23/09 10:23 PM
With the interest rate swaps they were onto that something new. Currency swaps were next in line. What made it easier was the lack of controls or supervision that dealt with this utterly new family of instruments. The entire market from originator to final distribution had to be set up. Contributing for the need for something like these new instruments were the failure of national economies which saw high inflation rates, currency spiraling out of control and sovereign defaults threatening to become common.
Once the trade pipeline was set up, a wider range of instruments were introduced. Mortgage Backed Securities (MBS) made their appearance, other Asset Backed Securities (ABS) appeared, followed by junk bonds, and a spiraling high yield debt resulted. Then the idea that there was no limit to the capital that could be generated and, assisted by leverage, could yield profits previously undreamed of. Overlooked in this dream sequence was the added risk and limits of generating new funny money from the extended leveraging.
The S&L scandal leaked out and a moderate deflating of the prospects of the new instruments followed.
South American, Eastern European and Asiatic loans were defaulting. S&L crisis intensified, so the holders, large domestic banks, hit on the idea of transferring risk, and, probably on the grounds that comparing the defaulting and the S&L collapse hanging over the nation with the artificial investment instruments, made swaps look good. Credit rating agencies finally listed them at a moderate rate.
The first default attributed directly to derivatives came out of Orange County, California in '92. They didn't understand the leverage and the risk. It frightened funds into shunning derivatives temporarily. Then came the re-energizing of the derivatives market with JPMorgan's entry into Credit Default Swaps (CDS) and Collateralized Debt Obligations (CDO). That gave JPMChase the baton and they started the bank parade out of the doldrums into the brave new world of trading credit. Make something out of nothing, put it out on the market to sell quickly, your credit risk (so they thought) and improve the appearance of your balance sheet.
So, there was a need to fill a void. Not necessarily a need for the instruments, but since they were new, uncontrolled, misunderstood and glamorous, the new instruments fulfilled the banks' wish to embark on a new adventurous activity where the grubby little depositors were no longer important and bankers need no longer smile in their direction and make a lot more money in the process since they made and controlled the market. By the end of the century they were bundling and selling off anything they could lay their hands on or generate themselves, more of the latter than the former. Fiduciary media triumphs again! Banking pays.
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Old and gray
Message #210 - 03/23/09 10:24 PM
We all know how the various new instruments were developed and proliferated, then spread out to capture the global financial industry¡¦s imagination and corrupted the banking business. Now, the industry is in search of answers. They¡¦re not particularly interested in unveiling how we arrived at our position, nor are they thirsting for a return to the old days of working with depositors. What they need is a way out of the blame, a means of restoring some capital measurements consistent with their current status quo and their intention to continue dealing with these rewarding instruments.
The burning question is, just what do derivatives or swaps do, or what are they intended to do besides making the originating banks rich?
From a banker¡¦s viewpoint: First, they filled a void when the high inflationary pressures stole the profitability of credit granting from commercial banks. Then, they created a need for a new market which banks could control. Then, they fulfilled a wish for greater profitability with less intrusion and less bother in dealing with depositors. And finally, they carry the promise of continued luxury based on no money and limitless leveraged capital. Any other function they serve during the process would be incidental.
From a viewpoint outside the industry, they promise nothing but more of the same kind of slide we¡¦ve experienced, a series of serious downturns after an exhilarating run for the bankers and dealers handling the will-o-the-wisps and hell for the rest of us.
Derivatives have evolved into three main activities for banks: as hedges; making the market and dealing derivatives; and, the gambling aspect, play enough chits and some of them will come down on the right side one of these times and the jackpot will be our reward.
The hedging is from two aspects, first, covering the risk of default of some event, and second, passing the actual risk onto someone else, who doesn¡¦t mind, because they intend to pass it on to someone else before the actual default occurs.
The dealing and gambling is obvious, banks make documents out of nothing and spread them through their own network of trading benches. In this respect, some of them are retained for their own benefit, if the risk is right. So, they can issue a derivative based on fiduciary media and sit on it waiting for the payoff, if their risk management group is on target.
Derivatives cover (as mentioned before) interest rates and foreign exchange rates, interest rates being the less volatile of the two. Since those two, coverage has been extended to include equities, commodities and almost anything else being held whose price is subject to market fluctuations. In 2003, an FDIC published paper pointed out that almost 81% of all derivatives dealt with interest rates at five dealer banks.
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Old and gray
Message #211 - 03/23/09 10:25 PM
Risks can be attributable to internal factors, external factors, or a combination of the two. Internal factors are the risk management team and the strategies they employ. This would include whether staff and management have adequately assessed the limits of the banks tolerance for the kind of derivatives they issue (often referred to as the qualitative aspect) or the limits their portfolio would prudently suggest they observe (quantitative). If they lack the experience to deal with a certain issue, the risk involved increases. As they approach the limit of what their loss capital would cover, the risk increases. These are often referred to as Operational Risks.
External factors are market risks. What¡¦s out there and how is it being handled? Overload the market and circulation stops and someone who does not want to be holding the instruments at that particular time has no where to go with them. Sort of a musical chairs situation. Just so many chairs available. If someone is overloaded they might panic and sell at a lower price and the market might respond unfavorably. Or, if they are near overloaded and refuse to buy, pressure may be exerted on the originator/dealer to the market¡¦s detriment. Also, if one of the dealers or holders runs into problems, the domino effect may deploy. That¡¦s one of the obvious factors in Market Risk considerations.
And the remainder of serious consideration in Market Risk rests in pricing fluctuation and the change in the status quo due to events that bear on the issue addressed by the derivatives, unfavorable turn in interest rates, foreign exchange rates, equity or commodity prices, etc.
In evaluating risk, among the factors considered, some have already been mentioned -- credit risk, operational risk, market risk, and concentration. One other has been alluded to, the risk of dealing with issues and with derivatives of a nature new to the dealer. These are particularly dangerous. If there is any supervisory oversight, too often they rely on the tables of experience of the issuer. If there is no experience, both the supervisor and the Credit Rating agencies are at a disadvantage. But, if the items are off-balance sheet and opaque to supervisors, there¡¦s actually little they can do to correct the situation.
So, now monitoring the derivatives is left.
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Old and gray
Message #212 - 03/23/09 10:30 PM
March, 2003, the FDIC published a paper entitled, "An Update on Emerging Issues in Banking" written by Allen C. Puwalski, a Senior Financial Analyst in the Financial Analysis Section of the Division of Insurance and Research, FDIC.
FDIC included a disclaimer to the effect that the views expressed were those of the writer and does not necessarily reflect those of the FDIC. That might mean the FDIC had no official position on matters covered, or, hadn't yet formulated an official opinion, or, the GLB Act prevented them from doing so, since there was an opaque veil concealing precisely what was taking place in the derivatives field. Considering the overall competence that Sheila Bair has exhibited during her distinguished continuing tenure, it's difficult to believe anything but the last.
Nevertheless, Mr. Puwalski tried to define the activities taking place with derivatives and as usual in such papers, offered a series of conclusions of some interest in view of what has eventually transpired since 2003.
His Conclusions:
Conclusions
Most significant derivatives losses to date have occurred because of rogue traders or because investment policies were either ignored or not appropriate for the institution involved.
Credit exposure from derivatives amounts to a concentration for several dealer banks; but concern is mitigated by the credit quality of the counterparties and the nature of the transactions.
Significant differences in the positive and negative values of derivatives at a few major dealers suggest that these banks are managing market risk using risk management techniques other than matched trading. Extensive use of other techniques requires a high degree of confidence in the reliability of the banks' models, and these techniques should be approached particularly cautiously in thinly-traded markets.
Derivative contract types that are well-understood by risk managers do not pose significant risk unless circumstances dictate that a dealer's positions in these contracts change more quickly than market liquidity can bear.
An erosion of confidence in any one of the major dealers could result in a rapid change in its risk profile and cause market disruptions because of the influence that any major dealer has in the derivatives market.
Troubles at one major dealer also may transmit to other dealers because of the volume of inter-dealer transactions.
A dislocated market may make hedging more expensive and less effective for a number of institutions at least temporarily.
Extensive dealing in less well-understood derivatives should be pursued only when the bank's risk managers develop the ability to reliably quantify the associated risks, even if this requires sacrificing higher potential margins in the interim.
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Old and gray
Message #213 - 03/23/09 10:31 PM
These are interesting inasmuch as every caution he includes has evolved as more than a simple threat. Each of them has contributed to cave in the flimsy pushcarts the derivatives were piled on and trundled through world markets which, it turned out, were as flimsily constructed as were the primitive pushcarts.
We could be picky about each one of these line items, but that would be time consuming and might prove a bore. Better to claim that Mr. Pulawski was careful in depicting the market at the time of the writing. Generally, everything he warned against became reality and the market for derivatives plunged and dried up and now the financial world formerly so enlivened by this new discovery is little more than a shadow of its former self. Barely enough skin to drape over the bones.
So, how could a simple "Structured Investment Vehicle" have so eviscerated a supposedly "robust" system?
First thought is that inanimate objects, be they contracts, documents, or statement of ideas, don¡¦t spring into being and attack physical reality. People who manage those inanimate objects can attack by one means or another. So no matter what its nature, an inanimate object is benign. What people do with these benign objects is another matter entirely. And, where derivatives are concerned, people did too much!
Every rational explanation of derivatives¡¦ values is plausible. Whether they hedge interest rates, cover fluctuations in foreign exchange rates, act to prevent loss from commodity or equity holdings seems a credible claim. But, when they cover a notional value of more than four times the world¡¦s GDP, somebody was busy trying to stretch the use of derivatives beyond reasonable limits. Who on earth did they expect to cover the derivatives if they came due?
It¡¦s beside the point that they say the contracts cancel out and the real values are a fraction of the notional value. There is not that much business going on in the world¡¦s economy to justify such coverage.
All the constructs of risk management, markets for the instruments, dealers, etc., mean nothing in view of this excess permitted to run rampant. Nobody kept track of what anyone else was doing and they did the same thing over and over again. This was all allowed by the legislation put in place to do precisely that. If they did keep track of it, all the cautions raised by domestic or international organizations went un remarked, unheeded, with less attention paid to it than to the wind.
I posted a list of publications, a list of organizations concerned about monitoring and supervising the derivatives, risk, best practices, guidelines, enough to have covered every situation. Not only were these ignored, but all calls for internal prudence and controls were ignored. The people, again did not do their jobs.

[olderstill]

Old and gray
Message #214 - 03/23/09 10:32 PM
To repeat: Classical theory claims banks¡¦ principle function is credit-granting, making loans one way or another. The nature of derivatives in commercial banking are: hedging to protect holdings susceptible to changes in markets or subject to vacillating valuation for one reason or another; acting as a broker to fulfill needs of their customers present or anticipated; and/or, plain old speculation, trying to profit by guessing which way the value of something or other will change. None of these fit the classical theory.
The monster banks are not banks anymore. They don¡¦t belong in the same category with the medium and smaller banks, and they¡¦re doing everything to grow even larger. In 2005, JPMChase merged with Bank One. There is a method of evaluating "Absolute value of Net Position as Percentage of Tier 1 Capital". In 2003, JPMChase was calculated at 55%, meaning 55% of its activity was devoted to derivatives. Bank One had a reported 5% Absolute Value percentage. It appears that JPMChase was interested in acquiring Bank One for the sole purpose of giving them a little more breathing room to issue more derivatives. With the additional Tier 1 Capital of nearly $17 billion commingled with JPMChase¡¦s nearly $32 billion, that brought the aggregate Absolute Value percentage down to 37.4%. And, it gave them the moral basis to continue issuing more derivatives before reaching the 55% mark again.
It¡¦s anyone¡¦s speculation as to what that figure might be today since the derivatives are put into a "trading " portfolio and commingled to the point no one can separate out how much is derivative action and how much other activity.
As of 2003, Mr. Pulawski reports, "The largest derivatives losses to date have been because of operational risks." Which means again that management had not been tending to the internal processing of the derivatives. Is there any reason to believe that they changed their ways?
Another break and the conclusions will follow in another post.
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Old and gray
Message #215 - 03/24/09 09:31 AM
It was pointed out previously that the new structure of the amalgamated banking, investment, insurance entities would present problems. New definitions would be needed in order to permit adequate regulation. One of the immediately visible problems is the commingling (and/or concealing or inflating) of funds. Also, the range of functions and services of the new constructs exceed anything regulated by specific current supervisory legislation or authorities. And, then a list of questions pop up whether the examiners or regulators would be able to identify the nature of the operation or whether specifics would fall under their purview. Whether they had the skill or training to probe into different areas of services and functions of the new megaliths is another issue. Undefined entities hardly lend themselves subject to regulation.
This is not a new problem. Authorities have already been confounded by derivatives. Even without GLB, examiners and regulators have been unable to exercise authority due to problems of definition and categorizing. Separating them out of the trading portfolio is impossible. Derivatives have been considered not subject to one or the other regulation because they do not wholly fit into any separate category. They are not insurance policies since in most circumstances they do not cover something wholly owned by the holder or trader of the derivative. Who owns interest rates or foreign exchange? For the same confusing consideratins, they are not equity shares, nor certificates for futures, nor stock certificates. Before they can be adequately regulated, the definition, classification and an entire set of regulations need to be developed.
The same confusion exists in the agglomeration of the massive new structures. To my knowledge no domestic or international authority or study group has addressed this issue. Until they do, and identity is established and defined, regulation will be exactly where the players would want, in a netherworld of its own, controlled by nothing more than the players' whims and wants. And, the world will be subject to the wild swings of influence they'll exert on global systems. This should be considered a disturbingly intolerable prospect. We've already seen the damage they can effect. Would we, again, entrust global financial stability to the the self-serving proprietary instincts of the new "bankers/brokers/insurance" world? So, we're now looking at something that is neither fauna, nor fish nor fowl and we don't know whether we should hook, shoot, or net him to bring him under control. We shouldn't bother to question "if", the answer is too obvious and even that small, implied delay is unthinkable. We should have been busy at this ten-fifteen years ago when the papers and studies were first offered and the complexity of the issues was unveiled. We've already waited too long to get started.
Granted, those who studied the situation were involved in or representing the banking industries and were probably deferential to the other disciplines involved, but already the insurance industry represented by IOSCO and banking represented by BCBS have worked in tandem in addressing issues. They need only draw in representatives of the securities industry to complete the triangle and begin the studies well-overdue. And, none of that studied academic respect should have hindered or delayed the regulating authorities. If they haven't already begun the work, they should be getting underway.
The other side is busy at work to protect the unstable status quo. It's been posted above that the Accounting authorities are at work trying to provide the procedure to conceal the deflated, devalued (or non-valued) toxic items by keeping them off the balance sheet, not reporting them at all. The proposal is that if an investment vehicle is not maturing immediately and an exact value cannot be determined, just push it aside. All, no doubt, for the sake of making a more impressive, but still misleading balance sheet. I was taught to value such items with no market value as zero without hesitation.
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Old and gray
Message #216 - 03/24/09 09:32 AM
The issues of how to define the new structures, who should regulate them, and what needs control, banishment, definition, or full disclosure has been implied throughout the approach offered here. The next step is up to the authorities and organizations involved. . . And, is urgently demanded to preserve what's left of our system. Left to their own devices, there are just enough players of the voracious variety out there to rip to shreds everything it has taken generations of hard-working, well-intentioned, civilized people to develop.
What we now have is beyond the understanding, capabilities, enablement or empowerment of the current regulating set-up.
Where is a good legislator when you need him?
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Defining Quality
Message #217 - 03/24/09 12:28 PM
The pillars of the American banking system in particular acted as direct descendants of Charles Ponzi,16 and they have bankrupted the American financial system as effectively as Ponzi bankrupted himself. The system should be temporarily nationalised, and during that (potentially lengthy) interim, compelled to do what should be the main activity of finance¡Xprovide working capital for non-financial firms.
www.debtdeflation.com/blogs/wp-content/uploads/papers/NotKeenOnBailoutsFinal.pdf
The Ponzi Driven Economy has collapsed.
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Duffminster
Message #218 - 03/24/09 08:11 PM
Defining Quality.
This article does a good job of treating the Geithner plan in my opinion:
www.financialsense.com/Market/daily/tuesday.htm
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cYbird2
Message #219 - 03/24/09 09:00 PM
www.ustreas.gov/press/releases/tg65.htm

Also look at the mark these folks are carrying this paper at

2.bp.blogspot.com/_FM71j6-VkNE/Scka7JcKKeI/AAAAAAAABkA/pS34gaIK1jY/s1600-h/toxic+assets.jpg




IMHO, the only way they will get that high of a bid is to "Rig the Bid", by use of offsore entities who the sellers themselves have funded. 100B face with an 80 bid, the private investor puts up what 6B and taxpayer puts up 74b, so all in all the bank writes down 20b for a total cost of 26b. The PIP investor (bank) looses their 6b, and the taxpayer ends up with paper worth 30/40 and thus a loss of 44/34b.

The FDIC is looks to be the watchdog in all this, I do not know if I should throw my hands up in joy, or start running as fast as I can for the hills.
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Old and gray
Message #220 - 03/25/09 08:17 AM
I have a question for the crystal ball readers out there.
It may be a matter of opinion or a matter of understanding the direction official thought is leaning.

What should I do with my Lehman Bros. Handbook on Credit Derivatives? Will either of them rise again? Or, is it safe to toss the book?
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reverendbarb
Message #221 - 03/25/09 10:30 AM
What should I do with my Lehman Bros. Handbook on Credit Derivatives?
LOL! I don't know for sure....but me thinks it's safe to toss it!

Toss it O&G, and then we'll take a leisurely walk along the deck, soaking up the sunshine.....
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neohguy
Message #222 - 03/25/09 12:21 PM
What should I do with my Lehman Bros. Handbook on Credit Derivatives? Will either of them rise again?
The book might be a valuable collectors item someday.
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Scared_Shirtless
Message #223 - 03/25/09 12:43 PM
What should I do with my Lehman Bros. Handbook on Credit Derivatives? Will either of them rise again? Or, is it safe to toss the book?

ROFL

Thanks O&G. I needed that.
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Message #224 has been deleted.
Duffminster
Message #225 - 03/25/09 01:13 PM
What should I do with my Lehman Bros. Handbook on Credit Derivatives? Will either of them rise again?
Perhaps under Geithner's new plan, the tax payer backed hedge funds will be able to write a new series of derivatives options based on the old Lehman derivatives and float them to Iceland and get a short term bump in the price before they crash and the tax payers bail out the bet?
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reverendbarb
Message #226 - 03/25/09 01:49 PM
Hmmm, yessss, there are some interesting ideas posted regarding that book O&G....I take back what I said....now I think you should keep it!!
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reverendbarb
Message #227 - 03/25/09 01:51 PM
Scared-Shirtless: Love your screen name - LOL!!
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Duffminster
Message #228 - 03/26/09 01:40 PM
This thread is more vital than ever to the discussions taking place in Congress today with Geithner. I think we should compare what has been suggested by Old and Gray to what is being suggested by Geithner. I'll provide an article as a talking points document.

Geithner to Seek Power Over Hedge Funds, Derivatives
www.bloomberg.com/apps/news?pid=20601068&sid=a5.8MffHdmGU&refer=home

"...
Unchecked Risk-Taking
¡§Thoughtful and effective measures to prevent a repeat of the type of unchecked risk-taking that has currently put the system at risk are absolutely essential, and must be coordinated globally,¡¨ said Kirby Daley, senior strategist and head of capital introductions at Newedge Group in Hong Kong.
The Treasury secretary will also call for stronger protections against financial fraud for consumers and investors, an elimination of the gaps in oversight among regulatory agencies and stepped-up coordination with international counterparts. Details on those plans will be unveiled in coming weeks, the officials said.
The people also said Geithner will offer broad outlines and purposefully won¡¦t get down to specifics, such as which agency should police credit default swaps. The swaps are a type of derivative that allows traders to bet on a company¡¦s creditworthiness.
Wrong-Way Bets
AIG sold billions of dollars of the contracts with little money held in reserve in case the bets went wrong, helping seal the insurer¡¦s downfall, Federal Reserve Chairman Ben S. Bernanke told lawmakers earlier this week. New York-based AIG also exposed the lack of federal powers to take over a non-bank financial firm and allow an orderly process for liquidating it.
Geithner¡¦s framework would set up an independent overseer for systemically vital firms. While the Bush administration had proposed that the Federal Reserve take on that authority, Geithner won¡¦t specify which agency should have the job. Bernanke has also called for a systemic-risk regulator, and said the central bank should have some role.
President Barack Obama will discuss the need for stronger global financial regulation at the summit of Group of 20 leaders in London on April 2.
Fed Bills
Separately, Fed officials are aiming to win authority from Congress to sell debt, a move that would, once the crisis abates, bolster efforts to raise interest rates. The central bank typically raises rates by selling Treasuries from its balance sheet, draining reserves from the banking system. The task is tougher with the Fed¡¦s commitment to buy more than $1 trillion of mortgage securities, which are harder to sell.
The administration¡¦s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency¡¦s staff.
Once registered, the investment firms would also have to reveal to the SEC -- but not to the public -- information about their trades and counterparties. The SEC would share the data with the systemic-risk regulator, which could restrict the funds¡¦ reliance on short-term financing and limit how much money they can borrow to maximize trading profits.
The investment firms would only fall under the increased scrutiny if they were deemed to pose systemic risks to the economy, the administration officials said.
Trigger for Oversight
Geithner plans to tell lawmakers today that the decision on which firms should be labeled systemically important should be based on characteristics that include a company¡¦s size, its interdependence with the financial system, its leverage and how much it relies on short-term funding.
Other criteria would be whether the firm is a critical source of credit for households, businesses and governments or whether it¡¦s a source of liquidity for the financial system, the officials said. Capital requirements for these c

[olderstill]

Old and gray
Message #229 - 03/27/09 03:57 PM
At this time, there's no shortage of suggestions being generated by economists globally. In the past 3 to 6 weeks, a wide ranging spectrum of well-known personas, somewhat familiar names, and still unknown, budding economists have put their ideas to paper.
I don't doubt that in their own assessments of the current crisis they instinctively understand what has been discussed here about the new form of money and the altered character of banks, both of which are in desperate need of prominent attention. But, two totally different facts are like that sore thumb wrapped in a hundred yards of gauze IMO.

1. Their training has been so regimented and uniform that it's difficult for them to look beyond their ivory colored box at the real world; and,
2. They have everything to lose in credulity and employment opportunities if they come down too hard on the side of the needed changes.

The first, they can't help, and the second, you can't blame them for trying to earn a living. As for me, what do I have to lose considering my situation.
Saying they can't help it, means they have all studied out of the same books, with the same professors, read the same Nobel Prize Laureates, and have become addicted to the universal language and mode of thought. Assembled, the noise they generate is usually due to arguing over the definition of terms and whether item three should be considered as item two or whether item seventeen should be included in the proposal at all. Otherwise, there's not enough difference between their thoughts to stir the slightest dissent among outsiders (who probably can't realize the miniscule difference in semantics being argued). They're organized along the lines of 38-42-20, percentagewise. Forty percent (or less) monetarists, forty percent (or more) realists, and twenty percent (maximum) Austrian School. Otherwise, all of it is from the same book, the same professor, the same school. And, it usually doesn't matter if they work in Hong Kong, Malaysia, Japan, Paris, AbuDai, or New York, or were taught in London, Chicago or Cambridge.
Wherever they are, economists are acutely aware of the impact any statement or announcement has on those who sign the paycheck. They might escape retribution for a slip of the lip or two, but persistent attack on an issue from a direction other than where the main authority is coming from or against where that authority wants to go, calls for a backup employment plan. Henry Hazlitt was working as a NYTimes reporter for about 11 years, and was suddenly terminated when he published a series of articles that challenged the wisdom of the Bretton Woods agreement even as it unfolded. Suddenly, he was an independent, ex-reporter/economist in 1946.
Economists are all aware of the potential in confrontational situations.
So, when it comes to diagnosing the current crisis and prescribing steps to correct deficiencies, woe unto he who proposes changes that will upend the cart with all the profitable paper on it, regardless of how contagious, infecting, or toxic it is. And, analyzing the complete alteration, conversion, or replacement of basic concepts such as the definition of currency, its nature and its character, is unthinkable. So, too, is challenging the nature of the gigantic, multi-functional, undefined, unlimited, generators of limitless and uncontrolled credit, risk and debt instruments. These new institutions have currently been assigned the designation of "Large Complex Financial Institutions" (LCFIs). They defy regulation, they threaten sovereign states, transcend national boundaries, and, as we've seen, can ruin global financial systems, markets, institutions and balances.
Now, picture a staff economist approaching the CEO of one of these institutions with the pronouncement that things have to change. It wouldn't matter if he was backed up by a half dozen or a hundred friendly fellow economists with similar convictions.
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Old and gray
Message #230 - 03/27/09 03:58 PM
The first response would be, "What are you proposing? Do you want to upset the entire global system again?"
"But, consideration of the new currency and the new banking is essential to long term stability."
If not a simple termination of conversation at that point, it could be the termination of a career.
Has Geithner shown even a suggestion of analytical skills that might allow him to understand the nature of our crisis? What is at the bottom and what needs attention long-term? I believe he's just beginning to learn how to walk! "Revealing to the SEC", but "not to the public"? How will that generate public confidence in the broker? How many posters on msMoney would rush over to that brokerage, yelling, "Good! That's the broker for me"? Geithner doesn't know with what or with whom he's dealing. Or, like the economists mentioned above, he's interested in job security and a place in a history book.
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Duffminster
Message #231 - 03/27/09 04:22 PM
I hate to repeat myself, but I must say Old and Gray "I concur." Here is a nice quote put in plain language from an interview on Democracy Now with Economist James Galbraith, which I think puts the Geithner plan in terms most non-economists or financially immersed folks can understand.


www.democracynow.org/2009/3/27/geithner_outlines_plan_to_overhaul_nations
Well, we hear this expression that credit flows are blocked and that there is a need to get credit flowing again. And it really is¡Xit¡¦s a metaphor. And I think it¡¦s a revealing metaphor, if it in fact reflects the way in which high officials of the government are thinking about the problem. The idea of a flow, of course, is something that comes from on high and goes down below. A blockage is a kind of plumbing problem.
The difficulty is credit isn¡¦t like that. Credit is a bilateral contract. It¡¦s a relationship between a lender and a borrower. And the problem is not that the lenders don¡¦t have money to lend. The problem is, in very large part, that there are no prospects or very few prospects for profit in the economy, and therefore, borrowers, business borrowers aren¡¦t coming in to ask for loans for economic expansion. And secondly, on the residential and household side, households are strapped. They¡¦re desperate to hang onto the cash that they have. They¡¦re trying to pay down their debts, not to get into new debts. For that reason, they¡¦ve stopped buying cars and stopped buying houses for the time being. And then, even if they did want to come in, in many cases, they don¡¦t have the collateral that they had last year or the year before, because the value of their houses has fallen. So those are the problems of the underlying economy, the consequences, to be sure, of the collapse of the housing¡Xof the subprime housing bubble.
But they¡¦re not problems that can be solved by simply adding new reserves, new capital, to the banks. And, in fact, we¡¦ve seen that the banks are flush with cash. They¡¦re largely sitting on it. And to the extent that they¡¦re not sitting on it, they may be using it for things like acquisitions, acquisitions of other banks, for instance. So the effect of the program is actually to expand the market share and the market power of the largest institutions. And again, to me, that is deeply problematic, because we¡¦ve got banking institutions that are so large at this point, they¡¦re so complicated, so opaque, so deeply involved in offshore tax havens, shell corporations and complicated derivatives, that they can¡¦t be managed, let alone regulated.

JUAN GONZALEZ: In his column in today¡¦s New York Times, Paul Krugman raises similar points, but I guess in a different¡Xfrom a different perspective. He raises the question that the administration is attempting basically to put Humpty Dumpty back together again, to restore this process of securitization that became so prevalent among banks, securitizing mortgages and auto loans and credit card debt. And he says that they¡¦re not confronting the fact that that method, that has reigned now in banking for decades now, has collapsed and is a failure, and something else must be done. Do you agree with that?
JAMES GALBRAITH: Well, I would take a modest exception to it, by way of going a bit further. It is not the case that the securitization of subprime mortgages is a long-term phenomenon. It is something which has been a practice, prevalent practice, for about eight years at the maximum. Before that, the markets would not have contemplated the massive securitization of loans which are subprime.
What does the subprime mean? Subprime means loans that do not meet the standards for a normal mortgage loan that could be taken up by the secondary markets, by Fannie Mae and Freddie Mac. And so, those loans are characteristically loans that don¡¦t have documentation, that don¡¦t have proper credit histories on the borrowers, and where the appraisals seem a little funny. And in the case of the subprime loans in the middle of the decade, there was systematic fraud in the appraisals, systematic overstatement of what th
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Duffminster
Message #232 - 03/27/09 04:24 PM
continued from message 231 above:
And so, these are markets that should never¡Xhistorically didn¡¦t exist and should not have been allowed to develop. They¡¦re intrinsically unsafe. And so, from that point of view, Paul, of course, is exactly right, that the¡Xtrying to restore these markets, trying to go back to the normal of two years ago, is really trying to go back to a situation that is historically abnormal and intrinsically unstable.
And in some ways, you can say what the Treasury plan actually is is a way of creating a new derivative, a new bond, if you like, which the Treasury has half the capital and provides 85 percent of the value of the purchase in the form of a low-interest, non-recourse loan that¡¦s designed to make the purchase of these so-called assets from the banks a highly profitable proposition for hedge funds and private equity investors and others who are in a position to risk their capital without having to face fiduciary consequences.
I added the bold for emphasis.
And so, you know, it¡¦s something which¡XI suppose there may be investors out there who think that they could make money off of this, but I¡¦ll tell you who it would be particularly attractive to, if they could get away with it, and that is the banks themselves or people acting on their behalf, because what it would mean is that, in effect, the banks can transfer¡Xsomeone acting on behalf of a bank could arrange for the transfer of a dollar¡¦s worth of these bad securities at face value for seven-and-a-half cents of risk. And that means that you¡¦re really, in effect, creating a conduit, which would just take these losses off of the books of the banks, put them on the books of the Federal Deposit Insurance Corporation. And I would say that would solve the problem for the banks, but it wouldn¡¦t solve the problem for anybody else.

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Old and gray
Message #233 - 03/28/09 05:36 AM
Another link of interest. . . . to Krugman's 3/27 column discussing a Larry Summers' comment and Krugman's recount of developments and banking's transformation through the years.
I'm beginning to get the impression that we're travelling with some distinguished companions this trip, Duff.

www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=1

We should have a motto attached to the title: "Read this thread and everyone else is playing catch-up". Or, the road we set out on has become quite well travelled. I see our language everywhere. Or, there may not be that much variety in language to begin with.
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danshirley
Message #234 - 03/28/09 06:23 AM
I once gave a talk to a group of physicians (my specialty then was biophysics) on my favorite topic at the time: 'modeling integrated organ systems'. After my talk a physician came up to me and said two words: 'sterile knowledge'.

He, of course, was right. In his world all of that esoteric crap was moot. All he cared about was how he was going to treat his sick patients. To this I had nothing to contribute.

This thread is about the same: 'Sterile knowledge'. There's not a thing any of us can do about any of it even if we really did know anything more than anybody else...which the probabilities are distinctly against.

What has any of this to tell me about how to keep my money safe and to grow it if I can? ... probably nothing.

Next topic.
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rjslrs
Message #235 - 03/28/09 08:00 AM
It is unfortunate that China turns out to be our biggest ally in our own governments dubious schemes, of course they do it for their own reasons, but those reasons do benefit us common folk. Hopefully they can moderate the outlandish schemes that Geithner, Summers and the rest can come up with.
I would like to be a fly on the wall at the G20 next week. Could be quite a show.
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Falling Sky - Not
Message #236 - 03/28/09 08:07 AM
This thread is about the same: 'Sterile knowledge'. There's not a thing any of us can do about any of it even if we really did know anything more than anybody else...which the probabilities are distinctly against
What a defeatist attitude!
What has any of this to tell me about how to keep my money safe and to grow it if I can? ... probably nothing.
You are probably correct, with your mind set .... probably nothing. Sometimes it's just about sharing knowledge and learning from others, if it doesn't have meaning for you then why comment?
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Veteran_Lender
Message #237 - 03/28/09 08:35 AM
The issues of how to define the new structures, who should regulate them, and what needs control, banishment, definition, or full disclosure has been implied throughout the approach offered here. The next step is up to the authorities and organizations involved. . . And, is urgently demanded to preserve what's left of our system. Left to their own devices, there are just enough players of the voracious variety out there to rip to shreds everything it has taken generations of hard-working, well-intentioned, civilized people to develop.
What we now have is beyond the understanding, capabilities, enablement or empowerment of the current regulating set-up.
Where is a good legislator when you need him?
With the enactment of GLBA, banks became similar to the Finance Companies of the late 1940s. When you consider the depth of data available to JPMorganChaseManhattanBankOne, you realize the intent was to be able to decision before sale and "slot" borrowers into multi-product situations. What they didn't consider is the impact of anti-marketing sentiment and an exposure issue similar to that of Toyota... too big to be any good because they're too big. We all know GLBA has to go. What needs to replace it is a schism in industry factions. Lenders lend, banks gather deposits and provide participation lines to lenders, servicers invest and market securities, insurers actually provide product and keep their noses out of lending banking and servicing credit products. There is no all-in-one. I actually believe these industries could become self-regulated with defined responsibility. That would cause the market to set price and popularity, forcing the players to focus on precision over windfall profit.

Recall the bail-out monies, require Full Disclosure and define the core dynamics. Notably, it would require a massive recruitment of labor to recover every player to operating capacity, solving more than one crisis in the process. I'm still not sure why it's taking so long to execute on the obvious.

Lastly, I'm a Lender not a Lawyer and thus have no chance of winning an election. I can't even get my own legislators to respond to me. If reduced to fundamentals and managed by priority, 99% of this crisis may be mitigated toward resolve in months not years. Not a single legislator has the core capacity to engage the process, no bank CEO needs to while profiting from position. We The People cannot win until this imbalance is fixed.
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Duffminster
Message #238 - 03/28/09 04:12 PM
I'm beginning to get the impression that we're travelling with some distinguished companions this trip, Duff.
When Geithner and Summers are on board we may be having the required influence. Lets keep at it.
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Message #239 has been deleted.
Old and gray
Message #240 - 03/28/09 06:52 PM
As most of the readers are aware, this post is not about investment advice. But, it is about what would make a stable and long-term secure investment base. Neglecting the issues addressed here is tantamount to tossing off the importance of stable markets which enable investors to buy in anticipation of appreciated value, or, at the least, maintaining value, and being able to return to the market at some future time to find your investment still has value.
If an "investor" is interested in immediate returns, short term volatility may better serve that purpose, then, of course, establishing stability is least likely to serve such interest. Nor would I classify that as investing; it's closer to gambling.
I, for one, do not expect everyone to either agree with all that's posted here or to even believe that the preoccupation can bear fruit, or that the method suggested is the only possible route. I'm too old and have experienced too many failures to be that blindly self-centered. If some people find it of use as a compass, nothing more could be hoped for.
The hope is that more contributors participate and ideas flow for the good of all.
Since the start of this thread, in view of the development of ideas throughout the economic world, some facts, views and thoughts have come to attention that might have caused some modifications to the presentation. Maybe not enough to change direction, but enough to mitigate or supplement some ideas. Some of these ideas have been acknowledged along the way, others not yet properly addressed. Limitations plague us.
The fact that the attention of the entire world is focused on the issues is all the encouragement needed that the subject is of an importance of the first order. Which only means that not enough interest can be piqued.
One thing we don't want, as seems to be the popular thought, is to have those who brought us to this grotesque aberration of economic abuse escort us back home. They're parading on TV now as the champions of the financial universe, preparing the stage for a repetition of the last dance. Better to treat them as the English have, them! If they can't maneuver their way out of the trap they created, get rid of them, bring in fresh talent. And, let's get on with the job at hand.
Bringing the same over-inflated egos back into the picture only results in repeating the same mistakes. Once is enough!
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flag_usa
Message #241 - 03/28/09 08:56 PM
Dear old and graycreating a new derivative @http//www.you tube.com/watch?v=n-ArbfLtc+I e feature=player embedded from cybird2 thank you for any coment
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flag_usa
Message #242 - 03/28/09 09:26 PM
I don't know how to paste a url this you tube video in regards to Geithners plan 1 AND 2 HOPE YOU FIND IT? KIND REGARDS
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flag_usa
Message #243 - 03/28/09 09:56 PM
This topic was found at a post started buy Duffminster at a previous recent posting regards geithners plan cybirds2 link page 4 sorry I cant pull it up but I hope you can find his post?
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Scared_Shirtless
Message #244 - 03/29/09 12:50 PM
In regards to sterile knowledge... I couldn't disagree more.

I find this thread and some others very beneficial in helping me assess - for myself - whether we are being led on the right road to recovery. I am not so dependent on other people for that judgement. Never mind MSM. This in turn has obvious impact on my financial planning.

I am not optimistic by the way. In my profession there are patchers and there are fixers. After 40 years I can spot one from the other from a mile away. We are patching - not fixing. Not yet anyway.

Old & Gray?

As an economist, this has to be a fascinating (or more likely horrifically fascinating) chain of events unfolding in the global fianancial system. It is obvious the professional side of you is busy analyzing in ways I can't even fathom. And rightfully so - I don't have your decades of background and insight.

Now here's a loaded question because I don't know how else to ask it. Are there things you see - either good or bad - that might not be apparent to the rest of us? Are there signs we can look for that might signify good or bad paths? Do you have some thoughts on outcomes? Where we might end up based on probabilities? Do you see any future trouble spots coming and what their signs might be? This thread has already done that in some regards. And we thank you (and Duff of course) for it.

On a clear disk - you can seek forever...
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Scared_Shirtless
Message #245 - 03/29/09 01:51 PM
Quote: "Scared-Shirtless: Love your screen name - LOL!! "

Thank you! Its pretty accurate.

I'm not making light of anything. Ya just have to lighten it up when ya can!

The bare chested one here. Or is that bear?

[olderstill]

Duffminster
Message #246 - 03/30/09 05:25 PM
One thing we don't want, as seems to be the popular thought, is to have those who brought us to this grotesque aberration of economic abuse escort us back home. They're parading on TV now as the champions of the financial universe, preparing the stage for a repetition of the last dance. Better to treat them as the English have, them! If they can't maneuver their way out of the trap they created, get rid of them, bring in fresh talent. And, let's get on with the job at hand.
Bringing the same over-inflated egos back into the picture only results in repeating the same mistakes. Once is enough!
Old and Gray,

This is true not only because of the problems of ego but because of the fixidty of their paradigms and possibly that they have financial and political motivations which are tied to a particular club of Wall Street and Federal Reserve peers, who as you have pointed out previously, went to the same schools, read the same books and go to the same conferences and simply can not and will not think outside of their own sand box.

This problem is so huge and so complex and so different from anything anyone has ever dealt with that it needs to have creative thinkers whose job is to think outside the box working and managing experts in the sand box and other experts outside the sand box and finding systems of quality control, cross training, learning organizations, and decision making that will solve the problem in the optimum manner without bias towards a pre-existing paradigm in my opinion.


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Duffminster
Message #247 - 03/30/09 06:01 PM
Old and Gray,

One other note for further study from your post on message #240 and its best captured in this article. I highly recommend the article from the Atlantic called the Quite Coup, which is linked in article below.
The fact that the attention of the entire world is focused on the issues is all the encouragement needed that the subject is of an importance of the first order. Which only means that not enough interest can be piqued.

Peter Brimelow: Popular magazines meet financial crisis
Submitted by cpowell on Mon, 2009-03-30 15:15. Section: Daily Dispatches
By Peter Brimelow
MarketWatch.com
Monday, March 30, 2009
www.marketwatch.com/news/story/popular-magazines-meet-financial-c...
NEW YORK -- Out of the mouths of ...? Two very fashionable non-financial magazines have just published powerful analyses of the current financial crisis. The implications are grim.
Although radically different in tone, both articles -- "The Big Takeover" by Matt Taibbi in the April 2 Rolling Stone ...
www.rollingstone.com/politics/story/26793903/the_big_takeover
... and "The Quiet Coup" by Simon Johnson in the May issue of The Atlantic ...
www.theatlantic.com/doc/200905/imf-advice
... reach remarkably similar conclusions.
As Taibbi puts it in his brilliant but unquotable-in-MarketWatch Gen X style: "People are [expletive deleted] about this financial crisis, and about this bailout, but they're not [expletive deleted] enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'etat. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations. The crisis was the coup de grace: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess."
Paranoia? Taibbi supplies devastating detail about the way the subprime mortgage crisis metastasized through American International Group Inc.'s promiscuous use of "credit default swaps," the central role of Goldman Sachs Group Inc., and the opaque nature of the consequent bailouts.
He quotes an unnamed congressman: "I think basically if you knew [Bush Treasury Secretary] Hank Paulson, you got the money."
Still antsy? Well, the Atlantic magazine's Johnson is a professor at the Massachusetts Institute of Technology, former chief economist at the International Monetary Fund -- and a British immigrant! How much more respectable can you get?
Yet, comparing the U.S. crisis to previous developing-world crises, Johnson says: "The advice from the IMF on this front would again be simple: Break the oligarchy."
Both Taibbi and Johnson are obviously writing for liberal readers. Yet both make it clear that the catastrophe is bipartisan. What perhaps was the pivotal moment -- Commodity Futures Trading Commission Chair Brooksley Born's attempt to regulate credit default swaps -- was frustrated by Fed-head Alan Greenspan, SEC Chairman Arthur Levitt and Treasury officials Robert Rubin and Lawrence Summers in 1998, during the Clinton administration.
Of recent policy, Johnson writes in his Atlantic essay:
"But these various policies -- lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership -- had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector."
I'm happy to say this isn't news to MarketWatch readers. Edwin S. Rubenstein and I charted the financial sector's alarming elephantiasis last summer:
www.marketwatch.com/News/Story/unprecedented-debt-not-only-proble...
The tacit China-US alliance was noted nearly five years ago:
www.marketwatch.com/News/Story/end-bretton-woods-ii
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Old and gray
Message #248 - 03/30/09 10:14 PM
Duff;

Went to The Atlantic site, Read Simon Johnson's article and all I could think of was: Been there, done that.

It's fine to see them all facing up to some degree of reality. At least a little more so than three or four months ago. The European organizations are publishing an astonishing number of papers by economists from all centers, universities, research groups, as well as bank and management overseers, many from the US (Princeton U, Boston College and NYU-Stern among them, and from Europe: Berlin, Bonn, Barcelona, Vienna, Genoa, Naples, Milan, it's becoming and endless list!) all directing their attention to the crisis. This is the trend as of a month ago or so.
Economists live for the day a crisis such as this comes along and they can put on their thinking caps to respond. It took them a while to get in gear, but they're finally at work.
Prof. Johnson is one of the few who has gone more than half way on his diagnosis of the problem. No one to date has made the slightest reference to the new nature of currency and the new media and technology for banking. Until they do, the problem will not be solved. Instead taxpayers will stoke the furnace with their unending supply of "money-to-burn" and the same bankers, using the same technology and system for fabricating more leveraged "money" will heat up and tear through the next economic tier and create a greater magnitude of damage. Through the next few generations of robber-bankers, the multiplier effect will consume every asset on the face of the earth if they are not stopped.
As mentioned before, it is not derivatives doing this, nor any other item separated out for special treatment. Economists are approaching the problems of "credit risk", "liquidity risk", the "Large Complex Financial Institutions", "mismatch", "solvency", "pro-cyclical risk","systemic risk", "capital requirements", or, (as some are busy proposing) "insurance" for capital, liquidity, or anything else.
They're dealing with the tools used by those hard at work destroying everything financial. It's a people problem, pure and simple.
When we wake up and make undermining the economy of a single country or an international economic alliance a crime, or, a single bank punishable by incarceration and steep fines (steep enough to make it unprofitable to do so), then we'll have the situation under control. AND, ONLY THEN!!!
We've already covered this. At home, I'm getting a flood of literature delivered lately from contacts, mostly from three separate sources but a few from sources I haven't heard from for years. All of it literature dealing with the crisis from Europe, the UK, Hong Kong. Unfortunately, the papers all call for the same halfway approach. Common to them all is the fact that bankers are never held up as the target for reform.
I repeat: inanimate objects do not attack. The people who use inanimate objects such as derivates, swaps and obligations as WMDs are the attackers. My claim is a turn on a widely disseminated political argument, but it is true.
As Prof. Johnson writes in his article in the Atlantic, "The Quiet Coup", "Wall Street's seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes." The criminal bankers have the politicians and professors under their spell. When they show up with their entourage, and take the professor or politician out to the most exclusive and expensive club in the neighborhood wrapped in the luxury of the finest of trappings and speaking in those low seductive tones that ooze money, there is no resistance. The situation pits a seven or eight figured income against a six figured income and there is nearly no defense against it.
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Old and gray
Message #249 - 03/30/09 10:16 PM
You may be amazed (on the other hand, maybe not) how that gets the head nodding woozily with a sycophantic yes, yes, yes. And the next paper that comes from the economist's office extols the beauty of the banker's next scheme to defraud the world, all financed, of course, by a couple of hundred thousand dollar grant, and the lure of an offer for a permanent position as a consultant.
Match that and you can have an economist, maybe even a Nobel Laureate, championing your cause.
It may be an offer some of the economists are waiting for that causes them to stop short of addressing the total problem we face and the effective attack we need to resolve the issues at hand. On the other hand the economists may be truly fearful of the chaos it would cause to inform people that this is not a matter of money, because there is not enough money available to clear up this mess. That behind it all is a vacuum, a void filled with no more than belief, or, at best, hope that it is money, that has caused the problem.
The only thing that will cause Washington and the academicians to change their allegiance and break up the alliance is fear of people united in anger. When those same angry people came home from WWII, they had not yet calmed down, so their presence was felt for a couple of decades beyond.
That anger was the standout impression I have of the Great Depression, more so than the poverty. (I may be tempted to tell the story of Uncle Frank, the bank robber some day.) We may yet see the anger again if the perpetrators keep at it. I never thought it would return during my lifetime. I still hope not. . . even if I'm not directly effected.
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Duffminster
Message #250 - 03/30/09 11:27 PM
No one to date has made the slightest reference to the new nature of currency and the new media and technology for banking. Until they do, the problem will not be solved.
I'd like your take on all the new talk about Special Drawing Rights at the IMF and what kind of currency (if that is what it is) SDRs are?
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Old and gray
Message #252 - 03/31/09 04:19 PM
I claim no expertise in current IMF procedures, even though I receive a publication of IMF news issued quarterly, Finance and Development.
To my limited understanding, countries are evaluated on a number of factors and as a result of the evaluation on acceptance as members, a quota is assigned to them which determines their eligibility for loans.
The "valuation" (or eligible SDRs) of the applying nation is made in terms of a "basket" of currency consisting (I believe) of the Yen, euro, Pound Sterling and dollar. If memory is correct, this has been the standard since the early or mid-70s when they abandoned the gold/dollar standard following the US and British release from the tie-in. Prior to that, the unit of measurement was based on gold/dollar values. (Although, the IMF still has a reserve of gold somewhere less than $90 billion to my last understanding.)
When a loan is granted, it is extended for a medium term (I believe up to 5 years currently) in currency of their choice. Thus, South and Central American member nations would probably be interested in receiving their loan in dollar credits, EU nations (or nations conducting the better part of their commerce with EU nations) would prefer the euro, eastern countries the yen, and so on.
So, SDRs are not a currency, but a unit of measurement to determine how much of a loan a member nation would qualify for. Even so, depending on their economic circumstances at the time of the application, they might apply for more or less than their "quota".
Again, I claim no expertise on this matter, just a residue of a few years ago.
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Duffminster
Message #253 - 03/31/09 05:46 PM
Thanks Old and Gray
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Duffminster
Message #254 - 04/01/09 11:33 PM
Old and Gray,

This seems like big news related to this thread. I'd deeply appreciate your thoughts on this announcement. From my limited knowledge of the subject it seems at first past to be a step in the right direction although its not full disclosure.

New York Fed to Push Banks to Open Credit Clearing to Clients
www.bloomberg.com/apps/news?pid=20601103&sid=afSgjzTRIBxM&refer=us
April 1 (Bloomberg) -- Federal Reserve Bank of New York officials will today urge Wall Street banks to offer hedge funds and other clients access to clearinghouses that protect against losses in the $28 trillion credit-default swaps market.
JPMorgan Chase & Co., Deutsche Bank AG and Goldman Sachs Group Inc. are among nine banks that last month began using Intercontinental Exchange Inc.¡¦s New York-based clearinghouse for the credit derivatives. Bankers are meeting in New York with Fed officials today to discuss the timing of expanded market access, according to a person familiar with the agenda.
The push follows the collapse of Lehman Brothers Holdings Inc., one of the largest credit-swaps dealers, and the U.S. rescue of American International Group Inc. after it made bad bets using credit-default swaps. The privately traded, unregulated contracts complicated government efforts to assess systemic financial risk because no one knew how interconnected the banks had become.
¡§I support the Federal Reserve wholly in this,¡¨ New York Insurance Superintendent Eric Dinallo said in an interview yesterday. ¡§When they urge it, it comes close to a requirement¡¨ because the Fed sets capital requirements for banks to get what it wants.
Since March 13, $50 billion of credit-default swaps have been cleared by Intercontinental in a system that is open only to the nine banks. Credit-default swap clearinghouses created by Intercontinental competitors CME Group Inc. and NYSE Euronext haven¡¦t attracted any customers from the banks.
Buyer, Seller
Capitalized by its members, a clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the default risk between parties to a trade. It also allows regulators to assess market positions and prices.
The Fed isn¡¦t necessarily demanding that the clearinghouses grant broader access to funds to become full members. Dealers and Intercontinental Exchange already plan a framework in which funds would be granted protections against counterparty default, such as segregated collateral accounts. The lack of segregated accounts led to losses for funds that had posted excess collateral with Lehman after the securities firm filed for bankruptcy protection.
¡§Every credit-default swap should be on some clearinghouse or exchange or get an exemption so we know where all this is,¡¨ Dinallo said.
Fifth Meeting
Today marks the fifth meeting between the Fed and the banks since Timothy Geithner, then the New York Fed¡¦s president and now the Treasury Secretary, almost four years ago started pushing dealers to clean up trading in the privately negotiated market, in which outstanding contracts ballooned about 100-fold to as much as $62 trillion at the end of 2007.
Fed officials want to promote a system for credit derivatives clearing modeled on how futures exchanges are organized. There, a bank acts on behalf of its client to make a trade backed by a clearinghouse so the hedge fund is exposed to the bank and the bank is exposed to the clearinghouse.
The system also has bankruptcy protections built in so that if the bank goes into default, its client funds, which are segregated, are protected and not lumped in with other creditors.
At this point, Fed officials aren¡¦t convinced that bankruptcy protections are strong enough and will ask the banks to clarify their positions so regulators can map out how the clearinghouse structure develops.

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Old and gray
Message #255 - 04/02/09 02:13 AM
Internationally, central and major banks, more and more admit the need for a clearinghouse to establish order in the disorderly "market". Europe is more active, as well as more sympathetic to the concept than is the US. The president of Bundesbank, Axel Weber, whom I quoted previously, not only favored, but called for the establishment of a Central Counter Party to act as a clearinghouse, I believe, in December, 2008. The NY Fed is a late-comer to the game. And, nine banks alone are not going to cut it, either.
The faculty at the NYU-Stern Business school, over two dozen strong, authored a book with a scheduled publication date in March attacking the problems of the financial world in depth. Many of the ideas advanced in the book are the same we have been posting since the beginning of February. Which only proves that we were not that far from the parade route.
Someone crept in on this thread and posted a notice back a few pages that two US firms, DTCC and ICE had the Central Clearing house idea underway, ready to begin operation in April. Intercontinental Exchange has beaten everyone out of the gate with their $50 billion activity already in hand. Not nearly enough to make a noticeable dent in the world-wide market, but it is a start.
What is called for are clearinghouses linked together, scattered throughout the world. The US, Europe, Asia, South America, wherever the CDS, CDOs, and derivatives game was played, help is needed. The rules of that game were absurdly complex to the point where no one could make sense out of any of the options, terms and conditions. The devices were designed to provoke failure, losses and a glut of indigestible proportions. Now, the players who thought they could outsmart those who orchestrated and controlled the rules of the game have no where to go for help in disposing of their contagious merchandise.
The sooner those clearinghouses are set up and operating, the sooner we'll be able to clear a view over the mass and find which is the quickest way out.
Next order of business is breaking up those monstrous, unmanageable, "Too-large-to-fail" LCFIs. They are a threat to everyone who owns a cent or a blade of grass on the face of the planet.
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cYbird2
Message #256 - 04/02/09 03:20 AM
Seems kind of fitting that the exchange set up to deal in toxic assets (ICE) is also the slang name for crystal meth. It can only be hoped that the effect of the exchange is one of a drug counselor and not one of "party on dudes".


www.drugfree.org/Portal/Drug_guide/Crystal_Meth
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dr puma
Message #257 - 04/02/09 08:39 AM
I'm waiting for the other shoe to drop. Where is the Chase Manhattan Bank in all of this? Tell us what's been going on with them and we'll know more than we want to know. As I said a month or two ago, The bigshot bankers, etc. are not stupid. They may be a lot of things, but stupid is not one of them. Many of them are of genius grade, whether good or evil in their bent. Consequently, I cannot believe that what has happened to the global economies is some kind of accident or big mistake. As the saying goes, follow the money, and one might also follow the true powers which decide all money matters: past, present and future. Now tell us about the Chase Manhattan Bank and we can all go home, if we have one. Okay, okay...it's called the Chase Bank now. Let's find out.

Okay, JP Morgan Chase....hard to keep up with these boys. They had assets of 2.2 trillion dollars. Where are they now?
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Old and gray
Message #258 - 04/02/09 10:35 AM
The assets that put JPMChase up to wherever they priced themselves were all off books, concealed, and over-inflated, a complete misrepresentation that allowed the "geniuses" at the top to over-compensate themselves and prove that their way was the path to riches, attracting more sheep to be shorn.
JPMChase was one of the two houses originally defining the complex, impossible-to-understand rules of the game. Reading their conditions and terms of the markets they created, one wonders why anyone in their right mind would jeopardize themselves by participating in the dizzying fraud. Avoiding risk was impossible for all, buyer or seller. At inception, the weakness of the WMDs was experienced. There were failures, but at a small level. Everyone believed the incidence of failure was tolerable. Besides, it wouldn't be the holder who lost, it was the other fellow.
So, they kept blowing air into the balloon. $600 trillion is a sizeable balloon. 1% failure rate is $6 trillion dollars, and the failure ended up considerably more than 1%.
I believe I saw world-wide GDP reported at $53 trillion in 2007. That, too, because of the balloon activity, was an over-inflation and lulled people into believing there was no end to "growth", which was no growth at all, simply a matter of deceptive bookkeeping.
Now, FASB has bowed to the needs of the banks and allowed them to do as they please with their books on an open basis by not reporting the questionable assets they hold if they choose. Just seems like another demonstration of the same kind of never-ending arrogance. "You-know-what-we've-been-doing-so-we-might-as-well-do-it-in-the-open" line of thought. In the meantime, with all the deception going on, the "Genius-magicians" are telling you to watch the left hand and ignore the one that's dipping into the Treasury funds. The store of private funds has been depleted.
If it was indeed $2.2 trillion dollars, it was only so because they printed that number on paper and claimed it was so. Where I came from, that was called patent fraud.
I believe Andrew Cuomo resurrected the "fraudulent conveyance" label by applying it to AIG. How he can leave out the others in this criminal game is a puzzle. But, you can only fight one foe at a time, or the focus will be lost. We all know how concentrating on one entity at a time leaves the field open for everyone else to establish their game and walk away into a golden sunset unscathed. None of the executives of Lehman Bros., AIG, Bear Stearns, JPM, Citi, WaMu, Countryside or any of the others walked away from the wreckage in poverty and disgrace.

Young folks, take a good look at what has come to be considered "successful people"! At what cost? Some goals are in need of drastic revision.
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Defining Quality
Message #259 - 04/02/09 12:59 PM
O&G - I believe Andrew Cuomo resurrected the "fraudulent conveyance" label by applying it to AIG. How he can leave out the others in this criminal game is a puzzle. But, you can only fight one foe at a time, or the focus will be lost. We all know how concentrating on one entity at a time leaves the field open for everyone else to establish their game and walk away into a golden sunset unscathed. None of the executives of Lehman Bros., AIG, Bear Stearns, JPM, Citi, WaMu, Countryside or any of the others walked away from the wreckage in poverty and disgrace.
The truth behind the global corruption in the trading of derivatives and the direct culpability of governments is something no one will face.
Investors world-wide have been stolen from on a magnitude never before possible because of the ease by which the US government could be bribed to repeal Glass-Steagall and look the other way.
Great continued and honest analysis.
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neohguy
Message #260 - 04/03/09 08:05 AM
www.mises.org/web/4016#pg68
When Money Dies: The Nightmare of the Weimar Collapse
by ADAM FERGUSSON
WILLIAM KIMBER ¡X LONDON, 1975

A friend of mine recently sent me this. I've only read the chapter on hyper inflation. Might be useful and interesting reading to members (like me) that haven't seen it.
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Message #261 has been deleted.
Duffminster
Message #262 - 04/07/09 05:47 PM
Neoguy,

The Weimar incident is in some ways as close a parallel to what is happening today as we can find in history. However, the key difference is that all the computations are changed by the influence of increasingly more efficient and complex technology and shadow currencies created as a result of push button monetary inputs.

As Old and Gray has discussed frequently the folks in the ivory banking towers simply don't analyze how the entire monetary, financial and economic systems and all the previous modeling are in many cases no longer applicable due to the advent of technology and the new financial instruments that have grown out of this technology.
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Duffminster
Message #263 - 04/08/09 05:05 PM
FDIC¡¦s Insurance Commitments 34% Higher Than Reported


[Reader note: I thought it useful to add commentary around the FDIC data. Those that would prefer to skip straight to it, see the chart and read paragraphs 4-9].
Conventional wisdom says that financial companies are having trouble borrowing because credit markets are broken. This is dangerously wrong. The credit market itself is fine. It¡¦s balance sheets that are broken. They have so little equity relative to their assets, there¡¦s no cushion to protect creditors from losses. With few good borrowers available and with the price of credit being capped by government, naturally creditors have little inclination to lend. Washington¡¦s solution is to ¡§guarantee¡¨ all manner of risky investments, to use the public¡¦s balance sheet to absorb trillions of dollars worth of private sector losses. We¡¦re told this will ¡§restore confidence¡¨ in borrower balance sheets, leading to increased lending. But this policy is dangerously misguided and may very well lead to economic Armageddon.
In point of fact, our fractional reserve financial system is just a gigantic Ponzi scheme. It can only survive as long as it expands, which is to say, as long as new debt is flushed through the system to finance old debt. But like all Ponzi schemes, the larger it grows the more unstable it becomes. Eventually, it collapses of its own weight.
With this in mind, government should be concerned with paying down debt, not expanding it. Deficit-financed bailouts and stimulus only increase the size of the Ponzi. The bigger it grows, the harder it will crash.
My thoughts came back to this recently when I looked at FDIC¡¦s 12/31/08 balance sheet. Note at the bottom of that link the estimate for total insured deposits: from Q3 to Q4 it increased only a smidge, to $4.8 trillion from $4.6 trillion.
(click chart to enlarge)
Odd, no? Why such a small increase even though FDIC dialed up deposit insurance limits so significantly during Q4? FDIC Senior Banking Analyst Ross Waldrop told me during an interview last week that it¡¦s because so-called ¡§temporary¡¨ increases in deposit insurance are excluded. If included, these would boost total insured deposits from $4.8 trillion to $6.2 trillion.
FDIC¡¦s total commitments would increase an additional $224 billion to $6.4 trillion if you include debt issued prior to the new year under FDIC¡¦s ¡§Temporary¡¨ Liquidity Guarantee Program.*
In early October, FDIC boosted deposit insurance limits for individual non-retirement accounts to $250k, which, according to Waldrop, added $713 bilion to total insured deposits. He also noted that new insurance on non-interest bearing transaction accounts added $684 billion to the total.
Waldrop wouldn¡¦t comment on the validity of excluding temporarily insured amounts from the total.
It seems intellectually dubious, if only because there¡¦s little chance FDIC will actually allow the temporary increases to expire. Doing so would risk sparking depositor panic, precisely what FDIC is trying to avoid.
What does this have to do with Ponzis? When Bernie Madoff¡¦s scheme collapsed, he owed somewhere north of $50 billion to his investors but had only a tiny fraction left in the bank. FDIC¡¦s potential liabilities as of Q4 were $6.35 trillion. It has but a tiny fraction of that amount¡X$19 billion¡Xin the Deposit Insurance Fund. Readers might argue that comparing the two is unfair; FDIC has an open line of credit on the U.S. Treasury. So FDIC¡¦s credit is as good as Uncle Sam¡¦s.
But how good is his? Already, the federal government has committed $12.8 trillion to fight this financial fire (a figure that doesn¡¦t include FDIC¡¦s $6 trillion worth of insurance commitments). Then there¡¦s the trillions of unfunded liabilities for private and public pension schemes that Uncle Sam may be forced to absorb. Also there¡¦s Obama¡¦s budget deficits, which will commit us to borrowing trillions more over the next decade. Finally and most importantly, our unfunded liabilities for Medicare and Social Security surpass $50 trillion.
At the end of the day, after

[olderstill]

Old and gray
Message #264 - 04/08/09 11:14 PM
With interest rates dragging the bottom, it's senseless to extend credit long term today then try to cover operating expenses with short term loans they'll need at rates 2% to 3% higher than the returns they'll realize from today's loans. We can't stay at this level forever, and the sooner the Fed begins to raise rates, the sooner we'll find banks willing to loan.
For this imbalance, the difference between collection and obligations, the ride up again from the impossibly low interest rate is more daunting than the drought banks face today. Ask Japan. This is the obstacle they can not climb out of going onto 16 or more years. Uncle Ben put us deep in the tank.
Banks know this is why they aren't lending, the Fed knows it (maybe after the fact. . . they seem to be so slow-witted these days), and the politicians are well aware of it. Any complaints about banks' reluctance to lend from the people administering to them is pure histrionics.
Already, banks have lent at a negative net present day value during the glory days when the CDS and Derivatives blossomed. Banks believed these WMDs were so profitable and the market so insatiable, they took their eye off the ball and began watching the will-o'-the-wisp promise of a golden future. They were more interested in extending loans wherever they could, under any terms manageable, to convert every bit of cash they could into the toxic waste products. So confident were they that if reserves were inadequate, they could pass on the moral hazard to the government, their depositors, their creditors, or anyone who walked in through the door, that they couldn't resist following the lucrative path of CDS and derivatives! The pot of gold glistened and to heck with tomorrow. . . We're too big to fail and we're growing even bigger with each passing day.
So, we're here. exactly as everyone expected, working with a policy which is exactly as they hoped.
Take another look at my posts starting at message #207. Then, ask Vet Lender to comment on the sequence he faced when he found things cooling off. See if he can't fit his experience in there between 1980 and today. These things really started to take off late 1980s and hit their stride around 1998. He should be able to, since lenders were engaged in the developing policy of "disintermediation". . . cutting out the middle man. If they didn't care whether the loan had positive present day value, why should they care if it had no future value? So, they were aware they needed no expertise at all to extend faulty loans.
To this day, I can't be convinced that the housing market collapsed without the collusion of the banks based on my aforementioned observations. They knew perfectly well what they were doing, what they were causing, but they wanted to run all the money they could in the front door so they could shoot it out the back door in the lucrative off-balance sheet activity that allowed them to drain the remaining money out of the bank vaults. And, when that was all gone, the government came to the rescue and gave them billions more to divvy up before the regulators arrived. Back in the nineties, banks ran to their allies' open arms in Congress and the White House, told them precisely what they wanted, had the necessary laws put on the books, had the White House and The Fed shilling for them to get people out there buying things they couldn't afford so that more dough could come in through the banks' front door.
Too many people in responsible positions had warned, investigated and proposed plans to counter the threatening dangers. DTCC announced January this year that they were netting $50 billion notional value of derivatives and swaps. On their website, they have set a target date for their Central Clearing Party function to be up and running August the 7th, 2009! Originally they intended to run the CCP only for nine banks using their domestic CCP and their affiliate EuroCCP. The call has become so loud from economists that they now say that they'll be handling everyone's netting. That will be within limits, of course.

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Old and gray
Message #265 - 04/08/09 11:15 PM
On one of the other threads, Duff, you had a link to an article dealing with derivatives which in turn led to another site which showed exactly what DTCC was including in their reporting. They were reporting only what was clearing through their "warehouse". . . which is not yet fully functional! That writer was astonished at the totals mentioned. What will it be like when it really gets underway along about the end of August, 2009?
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Old and gray
Message #266 - 04/10/09 04:50 PM
I forgot to point out, when I posted the following in message #264. . .

With interest rates dragging the bottom, it's senseless to extend credit long term today then try to cover operating expenses with short term loans they'll need at rates 2% to 3% higher than the returns they'll realize from today's loans.
. . that this is precisely what helped the S & L explosion during the '80s. They had issued all manner of paper while the rates were up in the stratosphere, long term CDs leading the way in an effort to pull in funds the needed desperately. So, they ended up paying out high rates long after the rates subsided and the mismatch killed them.
This is one of the reasons "monetary policy" calls for stability. When rates bounce up and down all across the spectrum, nothing is dependable. Banks are trapped in half a dozen ways "over-paying" and "under-collecting". In addition to that unprofitable situation, they begin to try working miracles with reserves, putting them to use as surplus making up for deficits in their normal transactions. Then when things improved, they're lacking funds to cover the need for larger reserves.
The more imbalance in the system, the worse it is for individual banks. And, at this time, economists are trumpeting the call that the system should not be concerned with solving problems from the individual banks' point of view, unless they are among the elite, too-big-to-fail class.
It's easy to see why a lightweight like Tim Geithner seems to be hemming and hawing. If he's depending on Bernanke, Summers, et. al. for something to lean on, they haven't shown the fortitude or convictions needed at this time.
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Old and gray
Message #267 - 04/11/09 12:45 AM
Paul Krugman's Friday, April 9 New York Times column was interesting, addressing two items that appeared here March 23rd and April 2nd. Not meaning to imply anything by that assertion other than it's flattering to have a Nobel laureate in our corner.


Much of the seeming success of the financial industry has now been revealed as an illusion. (Citigroup stock has lost more than 90 percent of its value since Mr. Weill congratulated himself.) Worse yet, the collapse of the financial house of cards has wreaked havoc with the rest of the economy, with world trade and industrial output actually falling faster than they did in the Great Depression. And the catastrophe has led to calls for much more regulation of the financial industry.

Message #258, April 2, mentioned that JPMChase had inflated values contributing to their reported wealth at the apex of their glory days. And, I still believe this to be so. They kept everything off the books to guile the regulators but implied it was wealth when it came to reporting their status.
The title of Mr. Krugman's article is "Making Banking Boring".

March 23rd, we had a description of the historic development of swaps and derivatives and how the banks hopped on the bandwagon with fervor after young "go-go" young bankers found themselves bored with the industry and took us all for a ride, just to break the monotony, more or less.


After 1980, however, as the political winds shifted, many of the regulations on banks were lifted ¡X and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits.
As these changes took place, finance again became a high-paying career ¡X spectacularly high-paying for those who built new financial empires. Indeed, soaring incomes in finance played a large role in creating America¡¦s second Gilded Age.
Needless to say, the new superstars believed that they had earned their wealth. ¡§I think that the results our company had, which is where the great majority of my wealth came from, justified what I got,¡¨ said Sanford Weill in 2007, a year after he had retired from Citigroup. And many economists agreed.
IMO Paul Krugman's articles are always worth reading. To enjoy the entire article, here's the link

www.nytimes.com/2009/04/10/opinion/10krugman.html


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Old and gray
Message #268 - 04/11/09 01:50 AM
Scared Shirtless;

Now here's a loaded question because I don't know how else to ask it. Are there things you see - either good or bad - that might not be apparent to the rest of us? Are there signs we can look for that might signify good or bad paths? Do you have some thoughts on outcomes? Where we might end up based on probabilities? Do you see any future trouble spots coming and what their signs might be? This thread has already done that in some regards.
That's a frightening subject: what's coming at us down the road? Not so much from the point of view of how bad it might be, but how do you anticipate what people in the position of authority will do. They'll take one step, find out it works or doesn't, and then take another. One thing you know from your own experience, it's never a straight line. It's a crazy zigzag with false steps and retracing footprints, etc.
Politicians are at the helm. What they do depends on who they are trying most to impress or satisfy. The money people who finance their run for office? Or, the voters with the power to put them in or out? Which of those factions is more committed to needs or wants?
My fear is the politicians will try to be diplomatic and end up with a showpiece, ineffective, empty program that will simply allow the players to get back in their soap box scooters and try another downhill run, bringing us back to the same situation again.
The economists are laying the groundwork now. Yes, the same economists who are looking for another lunch at that exclusive country club and a handful of another grant and a hire as a consultant. Their papers are riddled with pros and cons, carefully crafted so that there's a balance, as much good as there is bad in every evaluation, every proposal, every consideration.
Their proposals are all loaded with hedges. Too many considerations end up with the suggestion to "do nothing in that area". Supposedly, the market will take care of it. Well, truth of the matter, the market didn't take care of it last time and won't take care of it the next.
If you really want to prevent a recurrence of the events, draw up a chart of offenses against society, put some jail time alongside some of them, fines along others, and a combination of both beside the worst! That way the players will know what's waiting for them. They'd be on notice.
Too much coddling of the worst of the worst going on right now. The government managed to get rid of the head of GM, why can't they do the same for those who led us down an even more treacherous, twisted road into something even worse than the auto industry dumped on us? That is an innocent act in comparison. GM, Ford, and Chrysler made bad business decisions; the banking industry viciously and knowingly stripped value out of everything on the face of the earth. Out and out stole! And they were aware all along of precisely what they were doing.
Now, what's worse, the domestic auto industry mess or the world-wide financial mess? And, why should
financial people be handled gently, or be given another turn at bat? They've had six strikes already and I'd say the rules of the game shouldn't be stretched for anyone. I think someone a way back last year posted an opinion that we should have a colony to ostracize these bankers, keep them away from banks. . like a leper colony. . . lifetime banishment.
What do I see in the future? Good or bad? I believe the modification of regulations or the resulting legislation will be as tepid as can be managed. The false anger and indignation we see the Congress people parading before the TV cameras, will have scored their points, prepared the people for something that will not be forthcoming and what we do get will not prevent the same thing or anything similar from happening again.
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Old and gray
Message #269 - 04/11/09 02:01 AM
Consider first, that we've had boom/bust for millennia, had opportunities to work out solutions and have never done so. Because there's always an authority or a person whose emotions might be shocked or strained, a president, a king, an emperor, a Pope, the rich, the powerful, you name it. They reign, they influence.
Secondly, even if we do get new regulations legislated, the players are shiftier, faster, more resourceful than the lawmakers. In no time at all they'd find a way to circumvent. Come to think of it, the lawmakers in Washington may be thinking that very thought at this moment, asking if it's worth the effort to slap anything together and going through the gesture.
Whatever does happen will not be the end of it. The plague will come back and strike again. It doesn't mean we shouldn't be vigilant or that we shouldn't hold the perpetrators in contempt for what they've done. But, at the very least, if we're going to have it happen again, I don't think the same crew should have another go at it.
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rjslrs
Message #270 - 04/11/09 09:02 AM
Too much coddling of the worst of the worst going on right now. The government managed to get rid of the head of GM, why can't they do the same for those who led us down an even more treacherous, twisted road into something even worse than the auto industry dumped on us? That is an innocent act in comparison. GM, Ford, and Chrysler made bad business decisions; the banking industry viciously and knowingly stripped value out of everything on the face of the earth. Out and out stole! And they were aware all along of precisely what they were doing.
This serves as an indicator of who is really calling the shots/who wields the power, all future decisions or actions are going to be enacted for their benefit, the trick is to make it look like it isn't being done for them.

It's a crazy zigzag with false steps and retracing footprints, etc.
That seems to be the problem, there is no retracing of footsteps, if there was, we would be looking to dispose of Gramm's bill and reenact G-S.
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Scared_Shirtless
Message #271 - 04/14/09 11:04 AM
Thank you O&G;

You said pretty much exactly what I expected.

Your future take is what I also fear. Its called - sweep it under the carpet.

Obama's choice of people on his financial team is nothing less than terrifying!!! Change??? Hardly. Its the same old politician's first rule - get me re-elected!

Did I see where he wants Volcker to work on revising the tax code? Is that a joke? Or a way to shuffle him aside. These moves by politicians and banks are becoming more and more blatant in their self serving interests.

I have two questions that have bugged the dickens out of me for months now. Two questions that I would think any person who can think for themselves would ask.

1) Why will no one show us the banks books?

Not the banks. Not the fed. Not the treasury. Instead its all about hiding. Hiding what? Crime? Heck - they won't even share with Congress from what I read. My opinion? If you are spending MY MONEY, I deserve to know where and how THAT MONEY is being spent!!! This appears an incredibly obvious question to me and requires no big background or understanding of finance.

2) Question 2 kinda gets a lead from question 1. Why is it OK to give TRILLIONS to banks and not a few measly billion to the automakers?

As I recall the automakers may well have been the very foundation of the middle class. Wasn't it Henry Ford - an honest days pay for an honest days work. (Paraphrased) The automakers decisions have not always been brilliant but a good case can be made that they are also victims (this time) to the financial devastation wrought by the banksters. And its NOT just our automakers! Its ALL automakers world wide in trouble! I must say we treat our automakers a lot worse than any other country treats theirs!

I also recall that the initial injection into the banks COULD NOT have ANY strings attached. Why? We were told that banks that NEED it won't take it if we attach strings! (I'm sorry - but I know a LAME excuse when I hear one.) Now... How did we treat the automakers?

So - I also know a double standard when I see one and here it is before us. My question again - why is trillions OK to the banks and a few billions NOT OK for our auto industry? In my mind - it points out clearly to me that Congress is nothing but puppets and the strings are in the bankster's hands.

Can you draw any other conclusion? I can't. And I do a LOT of reading. (Thanks Duff - you help with that.) I've asked my congressman to advise where I'm wrong in my logic. He sends me a post card proclaiming why he's against AIG bonuses...

Again - MANY THANKS to O&G and Duff. I appreciate the education.

On a side note to Duff. I saw a link to Mark Hansen's new web site in one of your other posts. I have been dying for him to get back on-line. Follow him! I have for a long time now. His finger is on the very pulse of housing. And what he misses, his readers quickly fill in. After this thread I consider him to be my next most informative source.
www.fieldcheckgroup.com/blog/

And like him - this ain't turning around until housing turns around. (IMHO)

I wish everyone good luck and good fortune - Scared Shirtless...

Start each day with a plan.
End each day with an accomplishment.
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Old and gray
Message #272 - 04/14/09 08:15 PM
Scared. . .
Two European economists, Donato Masciandaro, a Prof. of Economics at Bocconi University, Italy, and Marc Quintyn, with the IMF, (both prolific writers) coined a couple of phrases to describe authorities in charge of financial sector supervision. There is the HH and the GH. The HH is the Helping Hand, centered on concern for the general public; GH is the Grabbing Hand, interested in serving the wants of the Financial sector.

Masciandaro has written extensively about central banks, financial regulation and supervision, and illegal financial markets.
Quintyn concentrates on monetary and financial sector issues and has written on almost every phase of banking policy, governance and supervision. Both have extensive credentials. The point being that they are not a couple of smart-alec, young kids out in front mouthing off just to get a rise out of everyone. They recognize and call a spade a spade.
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Duffminster
Message #273 - 04/14/09 08:16 PM
Old and Gray,

You probably know of the Counterparty Risk Management Group. For those who don't a little background:
www.reuters.com/article/pressRelease/idUS184364+14-Apr-2008+BW20080414
Responding in part to the guidance provided by the President's Working Group on Financial Markets, E. Gerald Corrigan, Managing Director, Goldman, Sachs & Co., and Douglas Flint, Group Finance Director, HSBC Holdings Plc, today announced the formation of CRMPGIII which will be Co-Chaired by Messers Corrigan and Flint. The organizational meeting of the Policy Group was held on April 8, 2008.
Basically the largest Bullion Banks in the Federal Reserve task team working at the Behest of the Working Group on Financial Markets (PPT, Plunge Protection Team).

Today the Counterparty Risk Management Policy Group released their report dealing with derivatives and the rest of the shadow currency / shadow banking world.

I was hoping you might glance over the report and give us your thoughts on whose interest their report serves and if their advise is likely to resolve the problems. Thanks in advance.

I found this paragraph from the executive summary to be at best good for a laugh.
Precept V: Enhanced Oversight
The Policy Group recommends arrangements whereby the highest level officials from primary supervisory bodies should meet at least annually with the boards of directors of large integrated financial intermediaries. The purpose of the meeting would be for the supervisory authorities to share with the board of directors and the highest levels of management their views of the condition of the institution with emphasis on high-level commentary bearing on the underlying stability of the institution and its capacity to absorb periods of adversity. This recommendation may have to be adapted to accommodate local legal and cultural considerations.

www.crmpolicygroup.org/

[olderstill]

Old and gray
Message #274 - 04/14/09 10:29 PM
I was aware that Dr. Corrigan was involved with an organization assessing risk for a a few years past. He has been concerned with Risk for most of his career at the Fed (for a couple of decades) serving there and elsewhere on committees studying risk. He has that experience. You know, of course, that he is a past President of the NY Fed Reserve Bank and is a member of the G30 committee along with Volcker. He was enlisted (at an early age. . about thirty) by Volcker during the '80s crisis.
Mr. Flint has equally impressive credentials. So, the organization is under two well-qualified people. As for the rest of the April, 2008 list of "Policy Group Members" . . . from Lehman Bros (!!), Morgan Stanley, Goldman Sachs, Blackrock, Merrill Lynch, Citi, JPMChase. . . . sounds like the old familiar faces are back at work to protect the innocents like you and me.

As for the subject, I can predict which side they'll come down on: the recommendation will be that supervisors should end up independent of the Fed.
It's rather traditional that smaller countries with compact banking systems under strict government control usually incorporate their regulatory/supervisory people under the central banking system with government control. By that, I don't mean to infer that only countries ruled by iron-fisted governments follow that policy. Several things result from this arrangement: monetary policy is strictly controlled by the central bank (which usually means by government authority); there is stricter control of the entire financial sector in the country; fewer foreign banking institutions are established in the country, and so on. Financial protection and control are usually synonymous with the political objectives of the country which, unfortunately does not necessarily mean that they are not subject to the disappointments of boom/bust activity.
In the larger countries, the prevailing policy is one of an independent, meaning not governmentally controlled, regulating/supervisory administration. Judging from the composition of the policy group as I've indicated above, there's no question where this group is headed. Not one politician among them. Even though the list was in effect as of April, 2008, I believe they should have revised it to remove reference to the defunct institutions to convey some confidence in their timeliness. To be fair, even though they've been around for ten years or so, they may not yet have a current "Policy Group" assembled.
From my prior post recommending incorporating the supervisory function into the Fed, you know where I stand on that issue. BUT, even if the supervisory function were to be put under the Fed's wing, in order to guard against self-serving regulating procedures, I also would reorganize the Fed and place it under the jurisdiction of a special committee composed of Congressional people and private citizens, empowered with a lot more clout than a simple, ineffective "oversight" function.
If the Fed is supposed to oversee monetary policy so vital for the public's well-being, they've proved by allowing the policy to get out of hand, they've earned the need for control from the public. I wouldn't trust them to reorder themselves into an organization interested only in the welfare of the country. And, no matter what your leaning is on the subject, it must be admitted that the Fed was largely instrumental in allowing this entire situation come into being. Hear no evil, see no evil. . .
It remains to be seen whether this will be a committee composed of disempowered, ex-executives of failed and flawed institutions serving only the interests of the industry, or will be re-constituted as a vibrant, honest attempt to serve the well-being of the country. Goes along with the HH and GH of the tandem referenced above (Message # 272).
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Old and gray
Message #275 - 04/14/09 10:39 PM
My opinion stands as expressed in the above post despite the first two paragraphs of the transmittal letter for the CRMPGIII Report entitled: "Containing Systemic Risk: The Road to Reform" dated August 6, 2008.

On behalf of CRMPG III we are pleased to convey to you our Report entitled ¡§Containing Systemic Risk: The Road to Reform.¡¨ As the title of the Report suggests, the Policy Group considers the financial crisis of 2007 and 2008 to be the most severe we have experienced in the postwar period. While this turn of events had multiple causes and contributing factors, the root cause of financial market excesses on both the upside and the downside of the cycle is collective human behavior ¡V unbridled optimism on the upside and fear ¡V bordering on panic ¡V on the downside.
As history tells us in unmistakable terms, it is virtually impossible to anticipate when optimism gives rise to fear or fear gives rise to optimism. The last twelve months have been no exception to this sobering reality. It is this sobering reality that, for centuries, has given rise to the universal recognition that finance and financial institutions must be subject to a higher degree of official oversight than is necessary for virtually all other forms of commercial enterprise.
I added the bold as my emphasis. I don't know if that phrase is a sign that gives us hope or not.

Link for the above quotation and the report,

www.crmpolicygroup.org/docs/CRMPG-III.pdf

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Duffminster
Message #276 - 04/15/09 04:50 PM
Old and Gray,

I would say that human behavior is the root cause of the problems, especially in systems where unlimited concentration of money and power are not only allowed but promoted with compensation measures that push short term gain over good long range planning and the holistic health of an organization and the clients and society it serves.

I believe that the concentration of power among the top 5 banks (sorry bank holding companies) is responsible for their concentrated influence at the Fed and its why (until that changes) your desire to see the changes embodied in your thoughts below is unlikely in my opinion:
even if the supervisory function were to be put under the Fed's wing, in order to guard against self-serving regulating procedures, I also would reorganize the Fed and place it under the jurisdiction of a special committee composed of Congressional people and private citizens, empowered with a lot more clout than a simple, ineffective "oversight" function. If the Fed is supposed to oversee monetary policy so vital for the public's well-being, they've proved by allowing the policy to get out of hand, they've earned the need for control from the public. I wouldn't trust them to reorder themselves into an organization interested only in the welfare of the country. And, no matter what your leaning is on the subject, it must be admitted that the Fed was largely instrumental in allowing this entire situation come into being. Hear no evil, see no evil.
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Old and gray
Message #277 - 04/17/09 01:20 AM
In the Introduction to my 1995 edition of John Kenneth Galbraith's The Great Crash of 1929, the author notes,

That we are having a major speculative splurge as this is written is obvious to anyone not captivated by vacuus optimism. There is now far more money flowing into the stock markets than there is intelligence to guide it. There are many more mutual funds than there are financially acute, historically aware men and women to manage them.

. . . And, we see the result of that uninformed dabbling. Cornell economists of some forty years ago studying the race tracks (among other human ventures with currency) and betting were previously mentioned. Their conclusion: between the fifth and sixth race the fans remaining have exhausted all the funds they brought to the park. The same could be said about those who show up at the brokers office and ask for advice. Along about the fifth or sixth churning session, the funds are exhausted. I know of more than one such case of sudden wealth meets the stock market. The broker goes home wealthier, the speculator is out of money and the stock market goes on.
A notable observation in Galbraith's book drawn from studies of the factors leading up to and through the great depression is that tax cuts do not encourage economic growth by means of stimulating investment at the hands of those who most benefit. But, it does encourage wild speculation in the stock market. The extra, new found wealth is free so the upper echelon might as well gamble on enlarging the unexpected and newly acquired poke. They consider the new found funds expendable. Of course, JKG notes, the speculation takes the economy in a direction opposite to that intended.
It seems we always claim the best possible result from whatever we champion, when in truth we're discussing neither honest beliefs nor intentions. Applying JKG's observation to the current situation we can say it's due to the fact that some people had (or thought they had) too much money but what they lacked was enough smarts to know what to do with it.
That kind of oversight, or wishful thinking is quite common in most honest evaluations of our pitfalls. We seem to know the quick way out, concentrate on the obvious, when the obvious will not save us from what we've earned.
Another report, Resolution of banking crises: a review, by three gentlemen with whom I am not familiar, Glenn Hogarth, Bank of England, Jack Reidhill of FDIC, and Peter Sinclair of the University of Birmingham, gives a very good picture of what has transpired in world-wide banking over the past quarter of a century as of somewhere around 2003 or 2004. (This guess is based on the last dated citations in the bibliography of 2003.)
They have compiled an eminently readable document, published by the FDIC (?) inasmuch as the usual FDIC disclaimer is the first footnote on the first page. In the space of about 24 pages they give a complete rundown on how banks fare in recovery from "distress", or failure, given a number of programs in which the private sector operates on its own, is assisted by a government, or a government alone handles the situation; whether assets are insured or not, guaranteed by a government or not, banks are nationalized or not, and whether a central bank gets involved or not.
No need to reprise the US program with its freebies, doling out Christmas gifts for months before and after Christmas, or coddling the piranhas who ran the US economy into the ground. The Fed is in this report following the least effective method.
In one chart taken from OECD, IMF, World Bank, and other Bank calculations, four other teams: Caprio and Klingebiel, Hoelscher and Quintyn, Hoggarth and Saporta, and Monohan and Klingebiel list a string of startling statistics. To spare the reader the trials of the expanded charts, this is a summary of some of the pertinent facts.

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Old and gray
Message #278 - 04/17/09 01:21 AM
In 33 systemic banking crises in the period 1977-2002, the following considerations enter into the setup of the chart:
„X The Length of the Crises
„X Whether there was a lender of last resort (LOLR) such as our Fed
„X Whether there was insurance or government guarantee of deposits and for creditors
„X Non-performing loan averages (as opposed to all loans).
There's more, but it becomes a little burdensome and taxing. These figures appear to apply to our domestic situation.

The average length of the crises
4.3 years with a simple banking crisis, and,
4.2 years with an accompanying currency crisis.

With a LOLR (assisting for a year or more) crises lasted an average of 4.8 years
Without a LOLR, crises lasted 3.4 years.

It made no difference to length of crisis whether government provided a blanket guarantee or not. Crisis lasted an average of 4.3 years.

However, if there was a currency crisis accompanying the banking crisis:
with a blanket deposit guarantee, crisis lasted 3.9 years, and,
without a blanket deposit guarantee, crisis lasted 4.9 years.

The average percentagewise non-performing loans, simple banking crisis, with and without LOLR participation and with and without deposit guarantees

with deposit guarantee, 29.3%,
without deposit guarantee, 17.3%
With an accompanying currency crisis
with LOLR participation, 32.9%.
without LOLR participation, 17.5%

with deposit guarantee, 29.7%
without deposit guarantee, 19.5%
The conclusions seem to lead to the fact that banks are managed or patronized more judiciously if there's no government or central bank support at the end of the rainbow. That loans are extended more judiciously (or borrowers are more careful in applying), and that if the government and/or the Fed had stayed out of it we would have been facing the likelihood of a shorter term until recovery. And, that recovery is between 3 and five years off.
That 3-5 years had been expressed elsewhere, probably due to the fact that this report was in one of those deceptively concealed memory recesses.
Had the government not been involved, the managers who brought this on us would probably be ousted by now, the stockholders would have insisted on a new team to run things, the shareholders would have ponied up the dough to salvage their investment, kept things running, the "too-weak-to-succeed" banks would have been properly disposed of, and we might be on our way to recovery at this time. As it is, the stock market is reveling in hope that everything will be overlooked and forgotten and we're on our merry way to the Land of Oz again, in technicolor with the happiest music imaginable.
Admittedly, there must be some give in a viable program. There is the question of systemic risk and runs on banks. But, an astute head of state could have discussed the situation sincerely with the people and enlisted their cooperation by appealing to their undertanding. It was done before in an even more disastrous setting, successfully, and runs were avoided. It took a while to climb out, longer than even the informed folk back then anticipated. But, that should have been our lesson. As it is, today's crop of Washingtonians is dealing with the rest of the country as if the citizens are incapable of understanding. Not true! Not if it's explained to them properly. But, in order to do that, we must have facts which are not forthcoming. That's out number four against the bankers and brokers. They should be out of there and another team should be at bat now.
First, the same engineer and conductor only know of one way to run this train. They don't deserve the keys to restart the motor. And, secondly, we'd have been much better off if the Fed had acted on "tough love" principles and the Treasury had kept their hands in their pockets.
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Old and gray
Message #279 - 04/17/09 01:23 AM
If they truly believe in "Free Markets", then let the free markets do their work.
"Systemic Risk" theoretical studies aside, the above is what observations of reality conclude. We're worse off for the intervention we've suffered to this point. I would predict that instead of the shorter duration, we're going to suffer the longer period. . at a minimum!
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Old and gray
Message #280 - 04/17/09 10:20 AM
BTW, the review which supplied the figures used in the above posts begins with this statement:

"Over the past quarter of a century, unlike the preceding 25 years, there have been many large bank failures around the world. Caprio and Klingebiel (2003), for example, document 117 episodes of systemic crises and 53 cases of borderline or non-systemic crises in developed and emerging market countries since the late 1970s. Moreover, cross-country estimates suggest that output losses during banking crises have been, on average, large - over 10% of annual GDP - and that bank lending and profitability have often remained subdued for years afterwards."

"Systemic crisis" was defined in a footnote as "cases where all or most of the capital in the banking system have been exhausted".
Also, the estimated 10% or our GDP would put the total cost for a clean-up in the area of $5.3 to $6 trillion dollars. But, acknowledging how our domestic pirates operate, we'd have to tack on something to compensate them for presiding over the venue which sees such a sum of money rolling through the turnstile. . . say another 10-20% for bonuses and celebrations.
So, when JJ maintains that things have not been cleaned up in the banks to the point where the economy is ready to roll again, this report provides support. We still have a few years to go before banks are clean, the balance sheets are reliable and the financial sector is operating on a self-supporting basis again.
I'll see if I can dig up a link to provide the original text. There are some charts, graphs and statistical analyses, but they can be by-passed without losing the gist of the report.
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Virgil Syonid
Message #281 - 04/17/09 10:39 AM
Had the government not been involved, the managers who brought this on us would probably be ousted by now, the stockholders would have insisted on a new team to run things, the shareholders would have ponied up the dough to salvage their investment, kept things running, the "too-weak-to-succeed" banks would have been properly disposed of, and we might be on our way to recovery at this time.
In short, if the "free market" was actually a free market.

Thanks for the stats. It's not everyday that one can prove that the Fed has outlived its usefulness.
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Fallen empire
Message #282 - 04/17/09 10:55 AM
The market is a scam,I'd rather take my extra $250.00 dollars a month and go to the (boat) at least that way I can have some free food and drinks while they rip me off.
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Old and gray
Message #283 - 04/17/09 11:27 AM
Should have been suspicious all along! This report was not published by FDIC as I thought, but by the Bank of England, Centre for Central Banking Studies. They issue a Financial Stability Review semi-annually. The link:

www.bankofengland.co.uk/publications/fsr/2003/fsr15art6.pdf

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Defining Quality
Message #284 - 04/17/09 11:39 AM
Your future take is what I also fear. Its called - sweep it under the carpet.
The Global Nature of this enormous Financial - Social and Governmental Fraud was conducted with the blessing of the Worlds leaders - Wall Street and Congress. Nothing will change our collective futures, because those with the "Gold" are making the rules and are incapable of prosecuting themselves and their friends and family who were the criminals who skillfully ran this vast Racketeering Enterprise.
Political power and corruption is always and everywhere an essential element to this type of social fraud.
We are powerless and the "Wall Street MOB" and the "MOB in Congress" know that to be a fact.

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Scared_Shirtless
Message #285 - 04/17/09 12:07 PM
Quote:
Political power and corruption is always and everywhere an essential element to this type of social fraud.
We are powerless and the "Wall Street MOB" and the "MOB in Congress" know that to be a fact.

We are not entirely powerless. Almost but not quite.

Thanks to all -

I can and will still vote. I can and will share what I know with all who will listen. (That is a group getting larger and listening closer. I am humbly surprised by that.)

I can and will still write letters to the editor.

I can and will write letters to my congressmen.

I will strive to get others to join in.

My personal values require that of me because - I have NO right to complain if I don't try to do something! If I don't do something - then I deserve my lot I live with.

To err is human.
To really screw things up takes a bankster.... (Used to be computer.)
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Defining Quality
Message #287 - 04/19/09 04:27 PM
...the Titanic is still sailing full speed though the icebergs, but for how long now....
I've been telling anyone who will listen that the Derivative Securities Fraud is the Iceberg that has sunk the World's economy. We are just in the beginning of the end to the sinking of the World's economic Titanic.
The only solution is to save the people. Instead they are trying to fix the "ship of state" and throw money at the criminals who built the ship in such a way as to intentionally cause its total failure.
Enter Gramm Leach Bliley Act and Commodities Futures Modernization Act and the rest is just history in the making. One government sponsored R.I.C.O enterprise.

[olderstill]

Old and gray
Message #288 - 04/19/09 11:54 PM
DQ
The gamers are not yet finished.
Duffminster provided a link in message # 273 to the CRMPGIII site, where a list of recommendations on the future of the derivatives, and CDS, and ABS, and CDOs, and whatever, were to be extended additional consideration in a document entitled "Containing Systemic Risk: The Road to Reform" dated August 6, 2008 (before the resounding thud) and directed to Secretary Paulson. This, of course, is in anticipation of continuing their issuance and distribution (with which they have proceeded).
Last seen, summary figures of world-wide total derivative and related instruments distribution as compiled by BIS and dated 12/31/08 (as I recall) was in the neighborhood of $683 trillion (more than ten times the total world GDP)! The instruments have proven to be ineffective. Instead of bolstering credit risk, they pose additional risk threats. This is of no consequence to the issuers. By releasing more of these useless "structures", more fees and bonuses can be distributed from the banks' vaults so generously restocked by rich taxpayers. This is now the ordained raison d'etre of "banks" and they will not be denied.
Therefore, the instruments are destined to proliferate. CRMPGIII had provided a "reasoned document" (which I mean to discuss in detail in due time) the sole intent of which was to provide a screen behind which no one was expected to see the truth except as presented to them by designated authorities such as CRMPGIII.
What makes the document so superficially gratuitous is the unfavorable truths which do not deter the favorable conclusions.
In Section III, entitled High-Risk Complex Financial Instruments, three salient weak characteristics of these instruments are listed: leverage, being prone to "periods of sharply reduced market liquidity", and "lack of price transparency" (meaning nobody knows what they are worth). All of this adds up to the conclusion stated beforehand in the document's strange sequence: ". . there is almost universal agreement that even with optimal disclosure in the underlying documentation, the characteristics of these instruments and the risk of loss associated with them were not fully understood by many market participants." Nevertheless, The Policy Group offers a report of 128 pages which they proposed would have offered conditions and protections which would have helped the market understand what they were getting into when they engaged in the game.
If anyone had read the previous primers on derivatives and related instruments from Lehman Bros. (now defunct high priests of the issues which brought them down) and/or JPMChase, (indisputable master of derivatives, still not out of the woods) and understood what derivatives were about and how they operated and the benefits they offered, need not bother themselves with this latest epic tome. Those looking for answers they have not found to the lot of puzzling questions, are not likely to find them here either. However, some notable people went to great lengths to prepare the document and it should be examined outside the inner sanctum in the clear light of day. And, it will be done, eventually, by bloggers if not the press.
As far as is understood, none of the adjustments or corrections proposed in the document seven months ago have been put in effect. Yet, total suspect instruments issued continues to grow. Same rules, same game, with the same results anticipated, I'd suspect.
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Old and gray
Message #289 - 04/20/09 12:18 AM
BTW, catch Paul Krugman's April 19th Column. It starts with a great humorous turn.

¡§What,¡¨ asked my interlocutor, ¡§is the worst-case outlook for the world economy?¡¨ It wasn¡¦t until the next day that I came up with the right answer: America could turn Irish.
He then discusses Ireland, its financial problems and the similarity to our own difficulties. Worth a read.
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newgame
Message #291 - 04/20/09 05:29 AM
Remember mip? Private mortgage insurance? Why was it created? To cover defaults, over the last six months I haven't heard one word about it have you? Where oh where did all that money go?
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Falling Sky - Not
Message #292 - 04/20/09 08:51 AM
Remember mip? Private mortgage insurance? Why was it created? To cover defaults, over the last six months I haven't heard one word about it have you? Where oh where did all that money go?
I believe you are referring to PMI - This question has been brought up several times - While not one single person seems to be able to answer the question the best I can tell is that it never really existed, it appears that it was a phony charge made up by the banks to levy on individuals and was at best an attempt at "self insured". There is a PMI website but it gives no facts and talks in circles so it doesn't provide any answers either. This is just one of the many items the government is failing to address in this whole financial mess.
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neohguy
Message #293 - 04/20/09 09:58 AM
Private mortgage insurance? Why was it created? To cover defaults, over the last six months I haven't heard one word about it have you? Where oh where did all that money go?
I believe AIG is/was the largest provider of PMI insurance (they're not doing well).
I bought my first house in the 80's. The loan was FHA and required PMI since I only had 10% for a down payment. I had to go FHA with PMI because:
1. I was a first time homebuyer with only 10% down
2. I had a 2yr gap in my employment history while I was being retrained after losing my job in the early 80's recession.
3. Lenders and insurers were responsible back then. Writing risky loans was bad business.
The previous 25 pages of this thread pretty much explains what happened when institutions decided big bonus's were more important than good business practices because the market was godlike and would regulate themselves. Another false god b-i-t-e-s the dust.
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Duffminster
Message #294 - 04/20/09 09:39 PM
neo-guy,

I think this thread also promotes some of the most sane and sound ideas on what we could do to begin tackling the problem. The only problem is that we have the school of Perceptual Economics and Finance running the show now and they want to use perception and psychology to change the market rather than doing the difficult, painful work of straightening the mess out, bring Full Disclosure, providing civilian and congressional oversight to the Fed, acknowledging and changing the economic and financial models to deal with all the changed definitions around currency that technology would demand in a truly rationale debate and impacts greatly ideas in use such as "velocity of money," and a host of other factors that need to be dealt with a new paradigm.

there is a lot to be learned reading through this thread in my opinion. hard to summarize in a paragraph or two.
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Defining Quality
Message #295 - 04/21/09 01:05 PM
www.crmpolicygroup.org/
O&G - Very interesting - this reports was put together by active members of the "Wall Street MOB", who have now circled the wagons around their R.I.C.O. enterprise - legitimized by MOB lawyers and a corrupt government.
This is one huge Social Fraud designed to transfer financial risk of loss to the poor from the money changers.
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Old and gray
Message #296 - 04/21/09 05:37 PM
DQ

Part of my impressions were posted elsewhere. I should have kept it here, probably more appropriate. So, I believe I'll copy and transfer it. Part of it is reprise, part of it my visceral response to the CRMGIII Aug 2008 report.
No way leading banks can be reconstituted as the commercial banks as they were known before the '80s. Everything that's happened in the financial and economic sectors since then, has been mined to provide ever more new speculation and compensation for banking execs.
This is a unified attack on the gullibility of depositors, "mom and pop" little investors, pension funds, and extended as far as local government funds and assets. They've turned Willie Sutton's "I-rob-banks-because-that's-where-the-money-is" into a role reversal. The operative warning is now, stay away from the leading banks because that's where the robbers are.
They are still in the ongoing process of carrying legalization of formerly illegal activities by coordinating banking, accounting, and legislation into a venue that provides no checks or balances, and provides no protection for anyone doing business with banks on the old-fashioned normal bases. One of these areas, not well-known to the general public is "consolidation" an accounting process through which subsidiaries' operations are included in the balance sheets of the parent company. The rules were originally defined back in the '50s, codified in 1959. It was originally straightforward, unequivocating. But, with one opportunity or another popping up through Enron activities, the development of derivatives, securitization, conduits and such, the gold strike was too tempting to be ignored. That's the same gold rush that steered banks away from being banks and lured them into being LCFIs (Large Complex Financial Institutions). In effect, it allows them to lie about the risk or rewards of inventing all those "structured investment vehicles". Off balance sheet can be interpreted as "out of sight out of mind."
All through the eighties the NY banks were turning their backs on the small business man and he was finding himself more and more on the outside struggling to find funds not only for expanding and normal growth, but for simple day to day operation. At a news conference, it was labeled abandonment, and the city government, banks, and brokers all came down on me with a vengeance. It hit a sore spot. Must have been true.
They were redefining the activities during that time and are still doing so to allow themselves the freedom to divert from the limited path bank charters provided and turn toward the sleight-of-hand innovations whereby a document is composed out of thin air, called an investment vehicle and passed off to someone who had no idea what they were buying. Purchasers pretended to know, that qualified them as "sophisticated", but when push came to shove, they were out in the cold, trying to make something solid out of vapor.
The banks did this on the basis of standards still being changed.
"Consolidation", they'll tell you, can't be understood by the layman. Too complex! Requires skilled and specially trained experts to explain it, and a great deal of experience to engage in the practice. So don't try to understand voting entities, variable interest entities, qualifying special purpose entities or disclosure rules or frameworks. Having put you at that disadvantage, they then proceed to issue these tissue paper documents, pawn them off to the untrained and totally unprepared and use "new age" bookkeeping to tint everything in a rosy color. Don't bother to try learning the rules of the game, because they change frequently. And when they've run up against an unyielding brick wall, they invent new vehicles that plunge right through into uncharted areas.
For thirty years, the international banking and economic communities have been addressing the threatening issues with solutions in anticipation of the difficulties with which we're now overwhelmed. For thirty years, banks have been squirming out of responsibility by turning to yet another "structured investment vehicle
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Old and gray
Message #297 - 04/21/09 05:42 PM
. For thirty years, banks have been squirming out of responsibility by turning to yet another "structured investment vehicle" still uncovered by rite or writ. In 2003, following the Enron scandal, accounting introduced the concept of variable interest entities, so that they could escape the scarlet letter which put Enron out of business and forced Arthur Anderson into a subterfuge. In 1996, they expanded definitions with the concept of Special Purpose Entities, by acknowledging a refinement through the new "qualifying special purpose entities". One word addition and a new definition. All of these moves allowed the creation of new, off-balance sheet activities so they wouldn't show up on the balance sheets and embarrass the bankers/brokers. Of course, all of you informed people here know of the latest ploy by the FASB, allowing entities to ignore "temporary" situations in which value cannot be established. At this time so many of those questionable documents have zero value, banking is in a lather. The solution is to provide banks/brokerages with the option of not reporting the item of questionable value. That's a sure way of changing the color of the ink, isn't it? Could it be the reason for all the sudden solvency in the still shaky bank community?
I hope you all saw Representative Grayson from Florida, suggest that the unit of height measurement be changed. He's 6' 4" tall and is constantly banging his head on low flying objects. When he heard of the latest accounting changes, he wanted a little favoritism thrown his way. If they could change the standard of measurement, they might help him with his accidental encounters and head bumping. He'd like the inch extended so that he could measure in at 5' 10" tall, it would put those nasty obstacles out of reach.
Changing accounting rules for banks/brokers doesn't make it any more ethical or moral. Clothed in civility instead of the barbarism it really is, or making it legally correct does not reduce the likelihood of another bust. With spelling changed, it's still a dirty word. You can label it as you want, "consolidate" or not consolidate, put it on balance sheets, or not, when the bubble bursts, the next downturn will be that much more devastating because we haven't repaired a thing. We've just allowed them to take more chances to stretch the bubble a little further, with the added promise of delivering a bigger explosion next time.
Common sense will support those Brits who evaluated past experience and noted that about 10% of GDP was required to extract the economies effected from banking crises of the past. That puts clean-up costs at a little beyond $6 trillion worldwide. Changing accounting rules or not, it will still take 3 to 5 years to straighten things out.
Kind of an expensive detour just to accommodate some ruthless, spoiled brats.
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Old and gray
Message #298 - 04/22/09 01:24 AM
Having just scanned through John Kenneth Galbraith's The Great Crash 1929 again (It pays to revisit some of these older classics periodically), I homed in on Chapter one in which he restates the conditions through 1928, leading up to 1929. One thing in his favor: JKG keeps his books short. This allows him to squeeze an awful lot of pertinent text into small spaces and you have the feeling you're racing through time, breathless.

In Chapter one he ends up dealing with 'buying on margin', the circle which was legal then (and has come to be legal again today) wherein banks issue loans, brokers handle the deal for stock purchases, the banks take the stocks in collateral for the loan, and somehow everybody hopes to get rich. Then, of course, the speculative venture falls apart when the price of the stock dips and the call to cover the margin is issued, the speculator doesn't have the money and everybody runs into a problem.

JKG wrote in the foreword of this edition that the book was originally published in 1959 and on every subsequent market downturn, his disgruntled readers blamed the book for their misfortune. Well, Professor Galbraith, looking down from your present elevated seat, I mean no harm or disrespect, but, you've done it again! Have a laugh on me.

The reference to the marginal buys in the market is a propos to the current situation, since all the elements of a margin purchase and call are found in the nature of the derivatives and their relatives. All those instruments are speculative considering their inordinate proliferation and the small premium measured against their notional values.. It wouldn't take much to convince me that the illiquidity of the vehicles was the same as a margin call that went unsatisfied. There certainly is no $683 trillion of assets worth paying off to be found anywhere on the face of the earth. The difference between 1929 and today is that the speculation moved from Wall Street to the erstwhile banks which are no longer banks.

I don't know how many of you realize that there was a real estate bubble in the '20s, but I remember reading Thomas Wolfe's (the first one, from No. Carolina) description of the crumbling market in several of his fascinating novels. Just like this generation, folks back then were speculating on real estate, gambling that the marginal purchase would pay off big in the future. That fizzled pretty much the same way the real estate market fizzled recently and pretty much the same way the highly leveraged SIVs stalled and then deflated. They were using the identical Wall Street tactic of buying on margin when dealing in the 1920's real estate. Well, present generation no money down real estate purchases are the same thing as buying on margin with borrowed money, isn't it? Some things never change.

Illiquidity can be discussed. The claim can be made that credit dried up, or opacity concealed the trap laid by the banks, but the reason that things dried up and evapotrated is simply that the market was over-saturated with these deadly papers and the speculation was carried to the capacity limits of the participating players. When they looked around to pass on the paper that last go 'round, there was no one else waiting to play.

All the explanations being generated over the past ten or fifteen years, including that in the Introduction to the CRMPGIII Report, are so much fluff meant to cover up the nature of the game and the true reason the deception came to an abrupt end. As the reader progresses through the report they realize that the insiders knew what could effectively handle the excesses, but it becomes obvious that they simply didn't want to do anything about it. Even this report hems and haws through to the end, always softening the blow of proposed regulations by "recommending" and leaving implementation up to individual banks since, the excuse goes, they all face different situations. That's how they started out and how they ended up, trying to wring the very last drop out of the stone. And, they're preparing to re-enter the arena to restart the game as soon as the dust
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Old and gray
Message #300 - 04/22/09 07:59 AM
. . . .settles down.

[olderstill]

Duffminster
Message #301 - 04/22/09 04:08 PM
Old and gray,

If you have a moment would you be willing to comment over on another thread entitled:
Is Printing Money via Quantitative Easing Ultimately Inflationary? - Comparing the 1970's to Today

moneycentral.msn.com/community/message/thread.asp?board=MarketTalkwithJimJubak&threadid=1067263&boardname=Hide&header=SearchOnly&footer=Show&linktarget=_parent&pagestyle=money1

Thanks,
Duff
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Defining Quality
Message #302 - 04/22/09 04:41 PM
Illiquidity can be discussed. The claim can be made that credit dried up, or opacity concealed the trap laid by the banks, but the reason that things dried up and evaporated is simply that the market was over-saturated with these deadly papers and the speculation was carried to the capacity limits of the participating players. When they looked around to pass on the paper that last go 'round, there was no one else waiting to play.
O&G - and worse still the initial players who set up the " OTC Derivative Ponzi scheme" wanted their money back. That is exactly why the entire derivatives market was one huge illegal "Ponzi scheme", what was being sold was not there.
As I've said repeatedly - there is a huge difference between liquidity and solvency. The off book accounting of derivatives was an enormous public fraud. Banks appeared strong -flush with cash - when in fact they were being used as a Front, a RICO enterprise to steal from unwitting investors and their stockholders and depositors and society.
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Old and gray
Message #303 - 04/25/09 01:23 AM
According to Bloomberg, March 26th, Sec. Geithner intended to ask Congress for power over hedge funds, derivatives and CDS.
Out of curiosity, has any one heard anything further on this possibility?
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neohguy
Message #304 - 04/25/09 12:00 PM
Somebody must be reading your thread Old and gray
www.washingtonpost.com/wp-dyn/content/article/2009/03/25/AR2009032502311.html
Geithner to Propose Vast Expansion Of U.S. Oversight of Financial system
...The Obama administration's plan, described by several sources, would extend federal regulation for the first time to all trading in financial derivatives and to companies including large hedge funds and major insurers such as American International Group..... In essence, the plan is a rebuke of raw capitalism and a reassertion that regulation is critical to the healthy function of financial markets and the steady flow of money to borrowers. ...The government also plans to push companies to pay employees based on their long-term performance, curtailing big paydays for short-term victories...
Hand in glove with this expanded oversight, the administration also is seeking the authority to seize these large firms if they totter toward failure.
Under current law, the government can seize only banks.
...."Destabilizing dangers can come from financial institutions besides banks, but our current regulatory system provides few ways to deal with these risks," Geithner said yesterday. "Our plan will give the government the tools to limit the risk-taking at firms that could set off cascading damage." ....
The administration also wants to expand oversight of a broad category of unregulated investment firms including hedge funds, private-equity funds and venture capital funds, by requiring larger companies to register with the Securities and Exchange Commission. Firms also would have to provide financial information to help determine whether they are large enough to warrant additional regulation.
Hedge funds were designed to offer high-risk investment strategies to wealthy investors, but their role quickly grew from one on the fringe of the system to a place near the center....

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Old and gray
Message #305 - 04/25/09 05:55 PM
We shouldn't expect less than a heads up administration. Isn't that what good government is all about?
However, the discovery that after an opinion is expressed others of a like mind suddenly appear is a given. The important thing is not such recognition, but that something gets done!
Which returns me to my original point, they talked about the plan, have they done anything in the month since? The Washington Post story has the same dateline as the Bloomberg article I downloaded. In the time since, all that came from Washington was that Geithner and Obama have both pronounced the economy in good shape. That's about the same endorsement the baseball manager gets from the executives just before you discover his office is cleaned out and they're scouring the bush leagues looking for a replacement. Talk is cheap, as the saying goes. Sometimes, it has the smell of failure about it.
I just finished re-reading John Kenneth Galbraith's Great Crash 1929. One of his indictments is for what he labeled the "incantations" of the politicians and financiers of the days leading up to Black Monday. Everybody kept singing that the "economy was in great shape", "fundamentally sound" and the chorus was repeated every day. Despite these empty assurances, or because of them, who knows, the stock market drifted down a little further day by day until the trend was unmistakable, and they arrived at that fateful week leading up to the disastrous Monday and Tuesday in October. The soothsayers still showed themselves in public and repeated the incantation that the economy was in great shape after the plunge.
Cheap talk shouldn't satisfy anyone. Nor, does it convince nervous investors. Positive trends are not brought on by promises, either. If they intend act to cure the ailment, when?
Page 16, Galbraith observed,
By affirming solemnly that prosperity will continue, it is believed, one can help insure that prosperity will in fact continue.
To which a growing number of people are anxious to add. . . FAT CHANCE!
Another of JKG's observations which is not exactly flattering to the egos on Wall Street or their banker friends, is that Wall Street follows the economy, and "never the reverse"! Today their egos are as gigantic as ever, and they're flailing away at the process of convincing Washington that "as they go, so goes the US" to paraphrase another rather famous and failed quotation. No matter what their egos lead them to claim, it just couldn't be so.
If enough people are imported from Wall Street, the echo of the mass fills those cavernous Washington halls and rises to the level where nothing can be heard. They shouldn't count on it where the nation's welfare is concerned. If they fail to recognize the reality of events and refuse to do any more than "jawbone", there will be a swift turn around in administrations in four years. And, I voted for them! Considering how extended campaigns have become, any new administration has a lot less than four years to show measurable, positive results. Three months of that short time has now evaporated.
They should feel the urgency, so they'd better not get too comfortable and rely on nothing more than a little stretching of the truth, covering up, or pollyannic suasions. That won't allow them much of a chance for another chorus of an unpopular tune.
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neohguy
Message #307 - 04/26/09 02:30 PM
They should feel the urgency, so they'd better not get too comfortable and rely on nothing more than a little stretching of the truth, covering up, or pollyannic suasions. That won't allow them much of a chance for another chorus of an unpopular tune.
I still have hope, though diminishing, for the administration and both houses. The best known consumer advocate in the US feels that Obama does not have the personality or backbone to challenge the corporate status quo influence in Washington. I'm not posting the link because I had similar posts deleted in the past because they were deemed to political for this particular board. A few quotes from the article that, I hope, are not overly political:
...The corporate chieftains have easy access to the White House and the new President, whether these bosses come on missions demanding power or missions of beggary for bailouts. When will he meet with the leading heads of consumer protection groups with millions of dues-paying members who could give him the base to hold accountable and regulate the democracy-denying, economy-wrecking corporate supremacists?

¡§Where¡¦s the Backbone?¡¨ asked Ruth Marcus, the usually-restrained lawyer-columnist for The Washington Post. On April 15, 2009 she wrote: ¡§When will President Obama fight, and when will he fold? That¡¦s not entirely clear¡Xand I¡¦m beginning to worry that there may be a little too much presidential inclination to crumple.¡¨ Ms. Marcus asserts that ¡§for all the chest-thumping about making hard choices and taking on entrenched interests, there has been disturbingly little evidence of the new president¡¦s willingness to do that.¡¨ This is the case even with his allies in Congress, never mind his adversaries.
I think the last sentence in the article says it all:
It is important to note that a transforming President has to ask for and encourage this pressure from the citizenry, much as Franklin Delano Roosevelt did in the 1930s.
Nothing has happened in the past month since the Washington Post and Bloomberg article except, imo, an incredible bear market rally that has given many people a false sense of security. Federal Reserve chief Thomas Hoenig had severe criticism of government bailout in his congressional testimony before congress on April 21st. There is a link to the PDF at the end of the following article:
www.greenchange.org/article.php?id=4299
....¡§The United States currently faces economic turmoil related directly to a loss of confidence in our largest financial institutions because policymakers accepted the idea that some firms are just ¡¥too big to fail.¡¦¡¨ he said. ¡§I do not.¡¨...¡§With the crisis continuing and hundreds of thousands of Americans losing their jobs every month, it remains tempting to pour additional funds into large firms in hopes of a turnaround. However, actions that strive to protect our largest institutions from failure risk prolonging the crisis and increasing its cost. Of particular concern to me is the fact that the financial support provided to firms considered ¡¥too big to fail¡¦ provides them a competitive advantage over other firms and subsidizes their growth and profit with taxpayer funds.¡¨....Treasury secretary Geithner suggested in testimony Tuesday that no banks would fail the government¡¦s current ¡§stress tests,¡¨ an outcome Hoenig clearly feels would be a mistake.

¡§These ¡¥too big to fail¡¦ institutions are not only too big, they are too complex and too politically influential to supervise on a sustained basis without a clear set of rules constraining their actions,¡¨ he said.

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flag_usa
Message #308 - 04/26/09 07:43 PM

Dear old and gray trying to ask with regards to video 2nd try
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flag_usa
Message #309 - 04/26/09 08:12 PM
www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4&refer=home
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Old and gray
Message #310 - 04/27/09 01:35 PM
flag_usa

I did view the Youtube link on first posting. Hope my position was clear before and after your link. Certainly am not in favor of feeding more raw meat to the animals and encouraging them to continue in their frenzy. And find nothing to admire in the favoritism being shown to the perpetrators. I expect to continue along the same path.
Numbers are fine, but I believe that concept are more likely universally understood. That's why I favor that type of presentation.
Nevertheless, it's an interesting presentation.
Thanks.



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flag_usa
Message #311 - 04/27/09 02:11 PM
Thank you old and gray for your post.youtube has many clips from this man his presentation of topics I wish our news tried to help us understand in this manner appreciate your posts and your real life experiences I have a few questions on a personal note you may help with please e-mail [e-mail] subject msn market talk kind regards
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Defining Quality
Message #312 - 04/27/09 05:03 PM
Flag - Good stuff - it is clear to me that the tail is wagging the dog.
Congress has abdicated the running of the Government to the Federal Treasury and the privately controlled Federal Reserve.
Americans have been and will continue to be "BlackMailed" by the "Wall Street Mafia". No one is "Too Big to Fail", including the United State Government, and our society is paying a hefty price to keep the criminals "liquid".

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Old and gray
Message #313 - 04/28/09 06:53 PM
Wall Street, the banks, Washington, take your pick: they have little respect for the opinion of anyone else.
The banks are at it again. A couple of months after the collapse with the big (or should that be B-I-I-I-G!!!) bailout and the banks are riding high with our money! They take our billions, report back that with the donation they are worth just a fraction of the total they received, but they have now miraculously achieved a profitable position (equivalent to another fraction of the money received), so they are entitled to the gluttonous salaries they once and again are donating to themselves (at our expense)!
How wonderful to reward yourself for throwing world economies into turmoil, consider it a positive contribution, walk away with nary a wrist slap, and as a free man, immediately plunge into the same thieving mode you never abandoned.

Please, read Paul Krugman's column, and tell me it doesn't frost your ballots!

www.nytimes.com/2009/04/27/opinion/27krugman.html

"Sterile knowledge"! Of course, it is. If you allow it to be! When people lack even a short attention span, feel no indignation, are served by no one, certainly not by the inept clowns in Washington who forget everything once they've succeeded in their immediate (and only) goal, get elected, ensconce themselves in luxurious offices with a buffering staff that never responds to constituents, there is no real, significant knowledge.
The entire experience has drained off the public's back already. The operative cliche is: No need to get upset or do a thing. Our program is to declare that everything is all right, that we have tested it all and all is sound. Let's get back to the game.
Had lunch with my local banker today, pointedly asked how dependent this bank was on any of the LCFIs, was assured it was, at best, minimal at this time, but, we set up a meeting to review it in depth, soon.
I don't care how much pain it causes anyone else. It doesn't matter if I'm the only one in the world who protests, I won't stand for being insulted and abused like this.
Somewhere along the line we have to stand for something!
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Message #314 has been deleted.
Caveman201
Message #315 - 04/30/09 05:38 PM
Everyone,

Most informative as always. I would ask O&G, Duff, and anyone who cares to shed some light here. We are at this point, as maddening as it is, with the apparent intent to allow these guys to skate. However the actions of the Fed, Congress, and the Administration seems to be let's not alarm the peasants and "diffuse" the situation over time with the idea that we will deal with inflation down the road, at which point we will organically develop resolve, tell the American people the truth, and avoid the Zimbabwean economic model. My question to all of you is can we muddle through? Can we diffuse this mess over time? Transparency would seem in the way of this approach so they will spin and obfuscate until the cows come home. This answer would seem to me to be the most important input on any investment approach any of us will attempt to make over the next year.

Most interested if O&G, Duffminster, and the rest of you believe we can. Otherwise back to the cave!
Thanks.
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Duffminster
Message #316 - 04/30/09 08:11 PM
Defining Quality,
can we muddle through
One way or another time will pass and we'll keep living until we pass to another place in time space and the universe.

Is the best approach the fake it till you make and the "manana syndrome re: inflation...?" No, clearly FULL DISCLOSURE and dealing with the problems head on is the wisest choice but its also politically most difficult.

I believe you have adequately diagnosed the planned approach which is to paint the charts, spin a whole bunch of disinformation about recovery, and push the petal to the metal on quantitative easing and deal with (hyper)inflation down the road when it comes. Unfortunately, I think there are lots of land mines and any one of hundreds of exogenous events could throw the plan out of whack, which is why its wisest to level with the public and tack the problem head on now while we have a shot at actually fixing it before we've reached the point of no or very very painful return. Here is an article that to me points out just one possible field in which an exogenous event could cause a second and larger melt down based on the obfuscation of the very important metric in financial companies; "Total Credit Exposure to Capital ratio" and in relation to possible major interest rate fluctuations. I'll only post a very small excerpt and hope that you and others will read it and comment. Thanks for a great question.
Is Goldman Tempting the Interest Rate Black Swan with 1,056% Risk Exposure?

seekingalpha.com/article/128778-is-goldman-tempting-the-interest-rate-black-swan-with-1-056-risk-exposure#comments_header
In fact, Goldman is so enamored with Interest Rate Swaps that it has almost the same notional outstanding as Bank of America (BAC), and more than Citigroup (C).

The thing to note, is that unlike both Citi and BofA, which actually are real consumer banks with a depositor base, Goldman is a consumer bank only in name (when is the last time you deposited your cash in a Goldman retail branch?). Consequently, BOA and C have total assets of $1.5 trillion and $1.2 trillion, both more than 10x the assets of GS, which is at $162 billion (and this excludes the incremental assets at the Bank Holding Company level for both BOA and C).
Has Goldman, in its pursuit to catch up with the imaginary PIMROCK decided to chew off a little more than its assets would allow? 1,056% more in fact? Or, alternatively, has the company bet a little too much in its bet that it can easily anticipate interest rate moves?

n the meantime, the interest rate black swan is growing. Do not misunderstand us: Zero Hedge has no idea what, if any, a black swan in Interest Rates may be. It is - by definition - an unexpected, unpredictable, outlier, aka fat-tail, event. Its prediction would immediately render it a grey swan at best, if not beige. However, instead of focusing so much on CDS as the financial system bogeyman, is it not time to look at some of these other derivative instruments that may soon plague the Basel I/II and whatever other risk consortia appear in the future.
At $200 trillion in total derivatives, and $160+ trillion plus concentrated in Interest Rates, a fat tail event here, whether due to a paradigm shift in US monetary policy (that whole thing about Greenspan focusing on inflation instead of deflation now might raise a few eyebrows), or something totally different, even partial needs to satisfy these contracts will result in staggering and unmanageable repercussions to the global economy (tangentially, is it even physically possible to print $200 trillion in one year?)
Of course, as everything is smooth sailing in IR Swaps for now, I doubt anyone will even think about potential issues in this space... until it is too late.

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Old and gray
Message #317 - 05/01/09 12:15 AM
Caveman
Somewhere back a ways, I mentioned that we do have options. Among those choices, one likelihood was mentioned, probably the easiest way out of anything, is to sit back, do nothing, and just hope the wind blows the debris away and we emerge as clean as a new born babe. (Those were not my exact words, but delay was the principle ingredient, as Duff has pointed out at the beginning of his response).
A true analyst can never deny there is always more than one way to get anything done. That doesn't mean people will go with the best thing when they move. Sometimes, to protect yourself, you've got to grab the first thing within reach and swing in order to survive.
The New Yorker magazine published an article, December 1, 2008, entitled Anatomy of a Meltdown, Ben Bernanke and the financial crisis. It has a picture of a dark faced, dour looking Bernanke peering out from a very dark background beneath the title and the John Cassidy byline, and beneath the picture is a quote from the text, "Bernanke says that he was 'mistaken early on in saying that the subprime crisis would be contained'." Which means, unfortunately, the correction is in the hands of a man who understands neither the nature nor the severity of the crisis, or is deliberately feigning ignorance to cater to his cohorts in the banking world.
That mistaken path had been criticized by French, English, Italian, German, Chinese, Japanese, Spanish, and a host of American economists among others from before the action was taken on up 'til today. It must make Bernanke's nights miserable. I know he gets no rest, what with 16 - 20 hour days seven days a week and the problems hounding him every step of the way.
But, the hot seat at the Fed these days is not the place for a mild mannered, polite, soft spoken man from Princeton. Probably the worst criticism came from a former vice-Chairman of the Fed who said simply, " . . . but it is extremely clear that everything fell apart on the day Lehman went under." I don't believe for a minute that Paulson of Goldman Sachs felt the least bit regret for those results.
Mr. Cassidy also reports that back in 2003 two international economists endorsed a Fed position for raising interest rates in a contrarian move that could be considered "leaning against the wind". One of the proponents later expressed an opinion that "Ben Bernanke really believes that it is impossible to lean against the wind on the way up and that it is possible to clean up the mess afterwards." Adding, "Both of these propositions are unproven."
Reading the article is worthwhile. It's found at this link:

www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy/

It's a long article, but worth the read. The link worked for me.
I have never believed that Bernanke was up to the demands of the Chairman's position. Being alone in that respect would be one thing. Eventually the lone wolf might realize his vulnerability, reconsider and change positions, but too many economists, globally, are engaged in a running critique of the "strategy" used in fighting the crisis, a strategy which is undeniably the handwork of Ben Bernanke. Too many times, on this item, the US has been accused of going in the wrong direction. The wreckage will be strewn so wide and far, starting from a never-ending dependency on the taxpayer as the ultimate guarantor, to the point where the taxpayer will be supporting a perpetual "too-big-to-be-believable brace of indefinable entities incapable of being regulated, managed, or ignored, that it will never be cleaned up, not even rearranged to make it appear to be someone else's handwork. It has the unmistaken mark of Ben Bernanke on it. History will not be kind to the man. And he has to endure the rest of this calendar year to the expiration of his term in January, 2010. Then, it will be up to his successor to clean up the mess, if it is at all reparable.
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Old and gray
Message #318 - 05/01/09 12:16 AM
Muddle through?
We're actually being backed into that corner! The gamblers are playing it that way. The market speculators are so anxious to retain the unregulated, open, "free" market (which is really a closed union of insiders) they'll do their darnedest to make everything look just fine, boost market performance at any price, knowing full well that if they create the appearance that the worst is over, demand for regulation will die down and they'll be back on the track where the attitude of "anything goes!" prevails. We're facing another twenty car pile-up at turn number one or two. The only problem with that is, the first aid crew is there to help the wreckless drivers, but nobody will go up into the stand to treat the spectators who were blasted by all the debris and are bleeding uncontrollably.
In short, we won't have a solution to this crisis to satisfy anyone who's suffering - that includes here and abroad - that includes private entities and public institutions. The only people who gained from any of this the first time around were the players, and they'll be the only to profit from it the next time around. I don't like it, I won't support it and I've let everyone know how I feel no matter where their sympathies.
It's like Humphrey Bogart said in the Maltese Falcon, "I won't do it, because I won't play the sap for you!" And, believe that every effort will be made to circumvent this trap being laid for us. Not having been victimized to this point, only means doubling down to make sure it will not happen. Old, maybe; but, with yet enough whip to get my back up and screech and howl.
Recall that during the Viet Nam conflict quite a few young people went elsewhere to serve their conscience. Some young ones in my family are seriously laying the groundwork for an alternate venue if (dare I say when?) bad comes to worse. I don't blame them. Having worked in situations aiding the underprivileged and helpless, I can say there's nothing more disheartening than seeing people unable either to help themselves or escape the trap that ensnares them. It's not to be wished on anyone.
Truthfully, I'm hoping those who should be in charge but are deferring to the wrong people come to their senses, show some guts, and start to do something to unravel this mess. It's not going to unravel itself if that's what they're waiting for!

[olderstill]

Defining Quality
Message #319 - 05/01/09 09:53 AM
You're going to love this article on Roubini's web site.
Is the best approach the fake it till you make and the "manana syndrome re: inflation...?" No, clearly FULL DISCLOSURE and dealing with the problems head on is the wisest choice but its also politically most difficult.
www.rgemonitor.com/financemarkets-monitor/256553/banking_fortunes_-_from_catastrophic_to_just_awful
Banks have gone from catastrophic to just awful.
There seems to be a patent unwillingness to admit to and confront the problems facing the industry. Recognition of the problem is generally a prerequisite to working towards a solution.
By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.
Mancur Olson, the American economist, in his books (The Logic of Collective Action and The Rise and Decline of Nations), speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralysing the economic system causing inevitable and irretrievable economic decline.
He is in fact writing about the "Wall Street Mafia" corrupting the Government to steal from the Treasury.
Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, illustrates Olson¡¦s thesis. Active well funded lobbying efforts and "regulatory capture" is impeding necessary actions to make needed changes in the financial system. Urgent steps are necessary to accurately recognise losses on assets, remove toxic assets from balance sheets, recapitalise the banks and allow normal financial transactions to resume. If such actions are not taken then the broader economy and sustainable growth levels will be adversely affected.
There seems to be a patent unwillingness to admit to and confront the problems facing the industry. Recognition of the problem is generally a prerequisite to working towards a solution.
Amusingly, Peter Hahn, a former managing director of CitiGroup and now a fellow at London¡¦s Cass Business School was reported by Bloomberg as saying: "When you look at the income numbers that have been put out by banks recently they contain so much fudge and financial manipulation. You could say that the automobile industry has a clearer future at the moment."
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Defining Quality
Message #320 - 05/01/09 10:42 AM
Among those choices, one likelihood was mentioned, probably the easiest way out of anything, is to sit back, do nothing, and just hope the wind blows the debris away and we emerge as clean as a new born babe.
One of my mentors and best friends once told me that a Decision not to decide is still a Decision. The Decider and other Malignant Narcissists' continue to decide and not decide issues that will effect the US for many years to come.
Bank and Insurance Fraud
Free and equal Education to include advanced degrees.
Corruption in Health Care and its financing.
Global Warming or Pollution
Energy and Peak Oil
Criminalization of Certain Weeds and Drugs to protect the Legal Drug Pushers
Over -population to name a few - oh I forgot the worst one of all - Governments using the taxes from "Free Market Capitalists" to guarantee all benefits of employment of all of its employees as Private Industry is allowed by ERISA to walk away from all promises made to their employees benefits and retirement in Bankruptcy.

It must make Bernanke's nights miserable.
Bernanke is a Malignant Narcissist - he actually believes he's smarter and better in every way than everyone else. Trust me he sleeps like a baby.
Corruption is the Defining Quality of a society run for the benefit of "Free Market Capitalists", and observed reality is proof of that statement of fact.
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Defining Quality
Message #321 - 05/01/09 11:07 AM
Bernanke¡¦s knowledge of Lincoln was more limited, but one morning the man who organizes the parking pool in the basement of the Fed¡¦s headquarters had given him a copy of a statement Lincoln made in 1862, after he was criticized by Congress for military blunders during the Civil War: ¡§If I were to try to read, much less answer, all the attacks made on me, this shop might as well be closed for any other business. I do the very best I know how¡Xthe very best I can; and I mean to keep doing so until the end. If the end brings me out all right, what is said against me won¡¦t amount to anything. If the end brings me out wrong, ten angels swearing I was right will make no difference.¡¨
Bernanke keeps the statement on his desk, so he can refer to it when necessary. ♦
Lincoln was clearly a Malignant Narcissist as proven by this statement and he is Bernanke's role model! After reading - Anatomy of a Meltdown - I'm more convinced than ever that this nation has a penchant for placing sick people in positions of power.
Lincoln destroyed States Rights and built what was to become the foundation of a corrupted culture of GREED.
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SOPHISTRY
Message #322 - 05/01/09 11:32 AM
¡§What we are dealing with here is Junk Science in the service of political ideology. . . It is basically an attempt to demonize public control of the monetary system, which helps explain why the free-enterprise monetarists have excluded economic history from the academic curriculum. . ." ~ Distinguished Professor of Economics at the University of Missouri (Kansas City) The Coming Financial Reality, July 11, 2003
re: www.michael-hudson.com/interviews/030711_counterpunch.html

¡§Considering that there is an $800 billion giveaway, to be followed by another trillion and another trillion after that, this is the biggest giveaway since the land giveaway to the railroads in the mid-nineteenth century and just as that giveaway created a power elite that would rule America for a century and a half, this is creating a new power elite that has changed America from a democracy into an oligarchy. And as Aristotle said, ¡¥what is democracy but the stage immediately preceding oligarchy?¡¦¡¨ ~ THE NEW KLEPTOCRACY: by Dr. Michael Hudson (October 8, 2008)
re: www.michael-hudson.com/interviews/081008NewKleptocracy1.html

Nice to see the MAIN TOPIC in a thread. I just had to make a small contribution. Hudson has some interviews on YouTube also.


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Defining Quality
Message #323 - 05/01/09 04:09 PM
Sophistry - Thanks for the leads on Michael Hudson - he's much more cause and effect than most economists. This guy speaks the truth.
I spent some time on his web site - here are some Quotes

The Financial Sector: "A House Burning Down"

Ben Bernanke¡¦s False Analogy
More to the point is the false analogy with U.S. policy. In effect, the Treasury and Fed are not "putting out a fire." They¡¦re taking over houses that have not burned down, throwing out their homeowners and occupants, and turning the property over to the culprits who "burned down their own house." The government is not playing the role of fireman. "Putting out the fire" would be writing off the debts of the economy ¡V the debts that are "burning it down."
To Mr. Bernanke the "solution" to the debt problem is to get the banks lending again. He¡¦s spreading the debt-fire. The government is to lend the "threatened neighbors" enough money so that credit customers of the financial "house on the hill" can to pay it the stipulated interest charges they owe. It is not burning down at all; the neighborhood¡¦s money (in this case, tax money) is being burned up.
The Financial Recovery Plan from Hell
A true reform ¡V one designed to undo the systemic market distortions that led to the real estate bubble ¡V would have set out to reverse the Clinton-Rubin repeal of the Glass-Steagall Act so as to prevent the corrupting conflicts of interest that have resulted in vertical trusts such as Citibank and Bank of America/Countrywide/Merrill Lynch. By unleashing these conglomerate grupos (to use the term popularized under Pinochet with Chicago Boy direction ¡V a dress rehearsal of the mass financial bankruptcies they caused in Chile by the end of the 1970s) ¡V the Clinton administration enabled banks to merge with junk mortgage companies, junk-money managers, fictitious property appraisal companies, and law-evasion firms all designed to package debts to investors who trusted them enough to let them rake off enough commissions and capital gains to make their managers the world¡¦s highest-paid economic planners.
While the Obama administration¡¦s financial planners wring their hands in public and say ¡§We feel your pain¡¨ to debtors at large, they know that the past ten years have been a golden age for the banking system and the rest of Wall Street. Like feudal lords claiming the economic surplus for themselves while administering austerity for the population at large, the wealthiest 1% of the population has raised their appropriation of the nationwide returns to wealth ¡V dividends, interest, rent and capital gains ¡V from 37% of the total ten years ago to 57% five years ago and it seems nearly 70% today. This is the highest proportion since records have been kept. We are approaching Russian kleptocratic levels.
When it comes to cleaning up the Greenspan Bubble legacy by writing down homeowner mortgage debt, the Treasury proposal offers homeowners $50 billion ¡V just 0,5 percent of the $10 trillion Wall Street bailout to date, and less than half the amount given to AIG to pay its hedge fund speculators on their derivative gambles. The Treasury has handed out $25 billion to each and every big bank, so just two of these banks alone got as much as the reported one-quarter of all homeowners in America suffering from Negative Equity on their homes and in need of mortgage renegotiation. Yet today¡¦s economic shrinkage cannot be reversed without a recovery in consumer demand. The economy has lost the ¡§virtual wealth¡¨ in higher-priced homes and the stock market, and must rely on after-tax earnings. But I see little concern for wage earners in the Treasury plan. Without debt relief, consumer spending and business investment will not recover.
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Caveman201
Message #324 - 05/01/09 06:42 PM
Recognition of the problem is generally a prerequisite to working towards a solution.
Yes, but Roubini is giving them much too much credit. It's obvious that there is intent behind the fraud (by definition). Banks, Congress, and perhaps most disturbing and disheartening, our so-called "free press". (After watching several financial forums initially suggest a Resolution Trust solution to this disaster I realized that some of our financial journalists may be the dumbest or at least the most gullible people on the planet. The reason I bring up the press is that this entire thing has now taken on political overtones. The political class (and their buddies on Wall Street) now has a stake, maybe all of it, on supporting a lie. As O&G points out our friends across the world are pointing out the potential catastrophic error of Bernanke's path, from Canada to China, even though the latter is more a cooperative foe. Even Mexico is supposedly telling us to take our own advice we were so free with during their last crises.

O&G, as to the point that younger members of your family are investigating other options, I also have relooked at my Canadian connection and have told my children to plan on being "international" in their job searches and outlook. THe unfortunate thing to this is that poor people can't run or hide assets abroad. The working class can be "degraded" (in many and all senses) but escape is probably not an option. All the while getting pay "raised" less than the inflation rate and lowering expectations and lives. The Worldbank, I think, stated that their analysis indicates that 400,000 children will die as a result of this economic downturn. But is this a crime? What is a proper punishment? Nobody is being held accountable from the "bankers", regulators, or politicians.

Duff's prior rebuff to an "aggregate demand" trigger to a collapse makes sense to this caveman, if I understand it, and appears dead on. In the age of Mr. Toffler's accelerating future shock; timing may be the thing that that truly offers the least control. I believe we will hit a "emperor has no clothes" tipping point, (almost did the other night with Barney Frank and the kid from Harvard), despite the best collusive efforts to suppress it. Which brings me to a question I asked this forum a few months ago: "IF we are headed for a default should we control the timing?"






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Caveman201
Message #325 - 05/01/09 06:51 PM
Credit to MR. Hudson!! Was it not MR. Rubin who decided to finance the federal deficit with shorter term debt? Which of course is what you would want to do if you believed long run overspending and inflation is our path. Wonder who benefited? Goldman perhaps?


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Old and gray
Message #326 - 05/01/09 09:40 PM
Caveman

"The smartest man in the room" laid out his plan for whatever eventuated back in 2002 as I posted earlier. He's following a plan he intended to put into action come hell or high-water. Depression, recession, inflation, deflation, take your pick, the same program would be enlisted to fight all those and anything else that popped up. Bernanke's next step has already been announced, as it was detailed in that speech in 2002: after the short term debt falls short of the mark, finance whatever with long term debt. Under discussion now is fifty year bonds!!
I hesitate to imagine what follows among the "other tools" promised which the Fed has at its disposal when this fails.
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Old and gray
Message #327 - 05/01/09 10:07 PM
As to alternate venues, among those younger family members with options, we have Germany, Switzerland, and France along with Canada covered. The more adventurous of them conduct business from those locales, so they all have established accounts and some have had secondary homes set up long before the crisis. . . as a matter of business convenience, not in response to crises.
After they had the foresight to do this, they now turn to me with a complimentary hug and call me a "genius". I did no more than encourage them to broaden their horizons since they were toddlers. They did it all on their own. More likely my courageous, innovative daughter was the role model, multi-lingual, constantly travelling, friends wherever she goes, along with bank accounts and business contacts. That's the one to whom they should be grateful.
But, truth is, travelers have been in the family since the earliest (that I know of) immigrant came over in 1656, which have since included slave traders, rum runners, pirates, and whatever other line of work can be followed on the high seas.
One of the flaws in having a literate family is they keep records and family history logs. It can be a blast if you have a sense of humor; or, if you happen to be a little uppity, it can be devastating trying to live it down. I happen to think it's hilarious and have the reputation of remembering and eulogizing all the black sheep and blackballing the "respectable" members. Gives me a good on-going tie to the youngest of the youngest, bless them.
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Caveman201
Message #328 - 05/04/09 12:27 PM
O&G,

Thanks again. Let's see...............what kind would of interest rate would it take to sell a 50 year bond? The "other tools" should perhaps terrify all of us. This democracy may not survive in it's current form.

But................I live for those hugs with or without the genius title. In the end our best investment is always ourselves, as I've stressed to my kids. My own family history is Huguenot with arrival in America about the same time, I believe, as yours, although the documentation is more sketchy. Family is still the most important no matter what the fools in Washington and New York send our way. Regards.


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Defining Quality
Message #329 - 05/04/09 06:33 PM
Family is still the most important no matter what the fools in Washington and New York send our way.
True and just like during WW II families are being destroyed one at a time. Government will destroy anyone and anything that gets in its way. This government is proving to be no exception to that rule.
The Federal Governments cost shifting from the have's to the have not's will be our demise.
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Old and gray
Message #330 - 05/05/09 05:35 PM
Caveman
World grows smaller by the minute. We may be related. I come from Phila. by way of Boston arrived at around 1740 by travelling east from Newburg. Two brothers back then, Andrew and Peter. Sound familiar? That's one line, my paternal grandmother.

But this post is in response to someone back a ways commenting on Volcker being assigned to work on tax revisions.

Discovering the Obama team had a website looking for suggestions, I responded with a tax proposal that would have penalized the raiders and dismantlers and rewarded the long-term investor/manager/executives who provided jobs, economic stability, growth and created a substantial community. The idea that raiders could attack a going firm with cash in the treasury, buy into it, dismantle it, lay the people off, send the production end overseas to allow another nation to strengthen their economy at our expense and walk off with tax benefits that became lighter and lighter through the years for the sole apparent reason of easing their tax burden bothered me for years. Those people never deserved that consideration. From a going concern to a hole in the ground usually in less than two years. Worthy of reward?
I favor lightening taxes on those who start up a business, employ people, stay with the business through thick and thin, pay taxes, contribute to the welfare of the community and the over all benefit of the commonweal for thirty or forty years. For those people I would like to see taxes not only reduced to a low level, but even eliminated! Just weigh what they've accomplished for the nation and compare it to the raiders.
This I submitted to the Obama site in response to their open invitation for ideas.
In return, I received a never-ending stream of solicitations for contributions, all kinds of junk PR email from Obama headquarters until I blocked the site. Conclusion, campaign promises tricked me again!
The first troupe that Obama marched out onto the stage was impressive. But, I'm trying to determine what they are doing! Most of them were never seen again in Washington. I know that Volcker is supposedly the Chairman of the Obama Economic Recovery team. He's not trotted out to perform on schedule to perform for the media, but nothing has been heard from him other than an occasional speech.
If he is busy working on tax revisions viz-a-viz the off-shore deferred income situation and bringing those American firms back along with their satchels full of cash, good! . If, furthermore, he's working on something to even the scales to the point that raiders pay fair amount they owe the US citizens for eliminating and exporting jobs, good! If he's working on a tax scheme to recognize and reward the heroic citizens who are creating an economically sound society, good!
If the administration has put him in the closet so the lesser among them will not be embarrassed by his smarts, BAD! Suppressing something like that is a sure indication of a lost political campaign less than four years hence.
Wins and losses are an accumulation of little things strategists attach little importance to, but which have a nasty b-i-t-e in the long run.
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Old and gray
Message #331 - 05/07/09 03:27 PM
Thursday, May 7, 2009
Newsflash!
This morning Professor Bernanke sprung some revealing surprises on us during his speech in Chicago.
After more than a year and a half of financial crisis and the cooperative work of the Fed and other US Supervisors, Vice Chairman Kohn, with the participation of Board members, Reserve Bank Presidents and staff from around the system, the "analysis reaffirms that capital inadequacy, effective liquidity planning, and strong risk management are essential for safe and sound banking" and "the crisis revealed serious deficiencies on the part of some financial institutions in one or more of these areas".
WOW!!! What a shock!
A lot of high priced talent taking between a year and a year and a half to analyze a failure that was understood by the average Joe on the street about seventeen months ago! Could this be just another tactic to beg off taking action to correct the deficiencies? Make it look like an involved situation, attack it piecemeal to make it look like men hard at work, but at the same time, being careful not to change or inhibit the most lucrative of the bank techniques, do little to patch up the gaps and holes which might end up depriving bankers of the opportunity to enrich themselves further?
There's a host of contradictory implications in the speech. Early on in proposing to strengthen Capital, liquidity and Risk Management, the professor points out, "As you know, the Federal Reserve is leading the interagency Supervisory Capital Assessment Program, which is aimed at ensuring that the largest and most systemically important US banking organizations have a capital buffer sufficient to remain well-capitalized and actively lending, even should macroeconomic conditions prove worse than currently anticipated." Toward the end of his speech he mentioned something about treating the "broader creation of currency" (Duff's phantom money) which I find nowhere in the copy of the published text. Can't treat one without addressing the other in a determined manner.
He addresses "Consolidation" . . . At last! Unfortunately, it was not the consolidation we addressed a little while back. We discussed that precious accounting procedure. Somehow the Fed has overlooked that, even in this speech. We assume they were working on the issue in the back offices on the Q.T., of course. . . After all, it's such a confidential and delicate matter.
And, then, of course, there's that damned Gramm-Leach-Bliley bill which limits "the ability of the Federal Reserve, as consolidated supervisor, to examine, obtain reports from, or take actions with respect to subsidiaries that are supervised by other agencies." But, they must have tried to circumvent the GLBA because, as good spirited public servants, but still law-abiding, "Consistent with these provisions, we have worked with other regulators and, wherever possible, sought to make good use of the information and analysis they provide." Reading over their shoulder? It goes on with further excuses and fabrications too incredible for a sophomore's paper to be commented on by adults.
As for derivatives: ". . . The Federal Reserve Bank of New York, in cooperation with other supervisors and market participants, has helped improve arrangements for clearing and settling credit default swaps and other over-the-counter derivatives. As a result, the accuracy and timeliness of trade information has improved significantly. But, the infrastructure for managing these derivatives is still not as efficient or transparent as the infrastructure for more-mature instruments. So, along with others, we are creating increasingly stringent targets and performance standards for market participants."
In his presentation, Uncle Ben did make mention of "broader creation of money" (as a passing reference to the Duff's "phantom money") which we introduced as fiduciary media a while back, but it was not detected in his prepared text.
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Old and gray
Message #332 - 05/07/09 03:28 PM
I finish with his concluding paragraph.

"The events of the past two years have revealed weaknesses in both private-sector risk management and in the public sector's oversight of the financial system. It is imperative that we apply the lessons of this experience to strengthen our regulatory system, both at the level of its overall architecture and in its daily execution. Indeed, although reform of the current system is necessary, much can be done within the current framework. The Federal Reserve has engaged in extensive introspection and review of the lessons of the crisis and is working diligently to implement what has been learned. As the past two years have brought home to everyone, the development of a more stable and sound financial system should be of the highest priority."

I leave you to draw your own conclusions and make your own comments. My own feeling: OK, if you're addressing the sophomore class at the local high school more interested in What they're planning for this Saturday night. But, in the company of bankers, I'd look for substance. He hasn't really addressed the pressing issues. There's nothing definitive, nothing revelatory. If the audience was composed of bankers, I would have been ashamed to show up with such an address. It's more beneficial to the system to talk over their heads than to talk beneath their capabilities.

The text of the speech can be viewed at

www.federalreserve.gov/newsevents/speech/bernanke20090507a.htm

[olderstill]

cYbird2
Message #333 - 05/07/09 03:47 PM
If one liked the above speech by Mr. Bernanke, they will surely love this testimony by Inspector General Coleman for the Federal Reserve.

Who is minding the store?
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Old and gray
Message #334 - 05/07/09 09:33 PM
Alan Grayson is fast becoming a hero of mine. He's armed to the teeth with facts and numbers and causes a lot of squirming in the seats down below. In the responses he elicits, when the testifiers try to play clever or dumb, they merely prove how stupid they are. I may move north to his district just for the privilege of voting for him.
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neohguy
Message #335 - 05/09/09 01:52 PM
Sounds like the banks decided how the "stress test" would be conducted.
news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20090509&id=9886966
Fed cut banks' deficits after negotiations: report
May 9, 2009 12:13 PM ET
CHICAGO (Reuters) - The Federal Reserve reduced the size of capital deficits facing several banks before releasing the results of "stress tests" on the financial institutions, according to a story in the Wall Street Journal on Saturday.....
At least half of the banks pushed back against the preliminary findings of the tests, the Wall Street Journal said, citing people with direct knowledge of the process.
Citigroup's capital shortfall was reduced to $5.5 billion from about $35 billion after bank executives persuaded the Fed to include future capital-boosting impacts of pending transactions, the story said.
Wells Fargo's shortfall was cut to $13.7 billion from $17.3 billion and Fifth Third's was reduced to $1.1 billion from $2.6 billion....

I think I'll rent the film "Idiocracy". My son tells me that the movie pretty much describes where we are heading.
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Defining Quality
Message #336 - 05/09/09 02:39 PM
Alan Grayson is fast becoming a hero of mine.
Amen to that. Thanks for the post. I'm relieved to know at least one member of congress has a Brain.
Clearly the FED and the "Wall street Mafia" have taken over "constructive control" of the government and we are also cleary doomed by the vast amount of money being stolen from "My Fellow Americans".
We Clearly have become a nation of sissy pants bed wetters!
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Duffminster
Message #337 - 05/09/09 04:03 PM
This article seems to put the problems we face in perspective in terms accessible in layman's terms and with a good historical context:
Reviewing Ellen Brown's "Web of Debt:" Part II
baltimorechronicle.com/2009/050809Lendman.shtml

Here is the conclusion of the article:
Hedge funds and Derivatives
"Hedge funds are private funds that pool the assets of wealthy investors with the aim of making 'absolute returns' - making a profit whether (markets go) up or down" on whatever financial assets they invest in. Leverage is used for maximum profitability, the more of it the greater gain or loss. In futures trading, it's called the margin - placing "many more bets than if they had paid the full price."
Originally, hedge funds were to "hedge (investment) bets....against currency or interest rate fluctuations (but) they quickly became instruments for manipulation and control." At their peak, they controlled over half of daily equity market trading because of their numbers, size, amount of capital, and frequency of their buying or selling.
Derivatives are one of their key tools - essentially making "side bets that some underlying investment will go up or down" to insure against the risk. "All derivatives are variations on futures trading (and like it) is inherently speculation or gambling." Familiar examples include puts and calls - on whether assets will go down or up.
"Over 90% of the derivatives held by banks....are 'over-the-counter' (ones) specially tailored to financial institutions (with) exotic and complex features, not traded on standard exchanges." They're unregulated, hard to trace, and "very hard to understand," quite often impossible. In a 1998 interview, banking columnist John Hoefle called them "the last gasp of a financial bubble." More recently Warren Buffett said they were "financial weapons of mass destruction" even though he owns a sizable amount of them and incurred considerable losses as a result.
Derivatives aren't assets. They're "just bets" on how assets will perform using very little real money. Most is borrowed to make private unreported, unregulated bets that have soared to a "notional value" of around $370 trillion, according to the Bank for International Settlements as of 2006. Notional value is "the number of units of an asset underlying the contract, multiplied by the spot price of the asset." In other words, "fanciful, dubious or imaginary" assets.
The amount gets so large because when unregulated "gamblers can bet any amount of money they want," and when markets work well for them, the sky's the limit. In mid-2006, the Office of the Controller of the Currency reported that around 97% of US bank-held derivatives were owned by five major US banks, including JP Morgan Chase and Citigroup. In November 2005, Bloomberg reported that the credit derivatives market was "vulnerable to a crisis if one (of their major bank holders) fails to pay on contracts that insure creditors from companies defaulting...." John Hoefle warned we were "on the verge of the biggest financial blowout in centuries, bigger than the Great Depression...."
Since banks can create money out of thin air, how can they go bankrupt? Because under accounting rules, commercial banks have to balance their books so their assets equal liabilities. "They can create all the money they can find borrowers for, but" if loans default, banks must record a loss.
Just imagine - if the government created money and not banks, economic stability would follow, crises could be avoided or greatly lessened, inflation would be minimal or non-existant, prosperous growth would be long-term, and bank loans would be far less risky than today assuring steady profits but in smaller amounts.
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Message #339 has been deleted.
Old and gray
Message #340 - 05/12/09 01:28 AM
Good link, Duff. Thank you. Apparently there is a series of reviews of Ms. Brown's book. Your excerpt is from #2; number 1 was previously published at the site, and #3 is forthcoming. Ms. Brown's writing has much in common with the thoughts on this thread. The book itself may be an interesting read.
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Old and gray
Message #341 - 05/12/09 02:25 AM
However, I'd take exception to the way she presented the next to last paragraph you quoted.

Since banks can create money out of thin air, how can they go bankrupt? Because under accounting rules, commercial banks have to balance their books so their assets equal liabilities. "They can create all the money they can find borrowers for, but" if loans default, banks must record a loss.
Put in juxtaposition with derivatives as it is, the suggestion is that derivatives were on the balance sheet as loans, which they were not. Normal accounting rules did not apply to the method these derivatives were developed and distributed. It is true, that when ordinary fiduciary media is generated as a debt, there is a balancing entry on the other side of the ledger, the future value of the loan, which also establishes the economic character of the account. In addition, if the bank issues fiduciary media to itself for the purpose of establishing an account and acquiring some property or valued good, that good would then be on one side of the ledger and the media on the other. Again, a balanced and acknowledged entry.
However, there was no balance to the transactions involving these derivatives and the deliberate concealment indicates they had no intention of acknowledging them openly. If you recall our discussion, they commingled the derivatives in the trade portfolio for the purpose of concealing the transaction, make it "opaque". The trade portfolio was held in a conduit which was designed to be off-balance sheet. Therefore, derivatives were not capital, not an investment, not an asset, in short, did not need to be accounted for on the balance sheet until they came due and the bank would be forced to perform, which the banks were convinced would never happen in the most perfect of perfect schemes. That is what made them so dangerous. They granted themselves fees for their cleverness, and launched them adrift like cheap paper airplanes off the tops of those towering edifices in New York, not caring who they infected or impoverished.
Supposedly, trillions of dollars went floating through the air with no anchor! Suddenly, someone woke up one morning, looked out the window at the mass of balloons, panicked and cut whatever umbilical cord tethered them, setting the derivatives afloat. At that point it was obvious to all, they were valueless and there was no hope of recovering any of the investment. That's when everybody put their hands in their pockets to make sure the fees they'd pocketed were still safe and sound, looked innocently up in the air and began whistling Dixie. . . or whatever the bankers' anthem is.

So, the way Ms. Brown reports on the bookkeeping creates the wrong impression. I'm convinced the bankers knew what they were doing, that they could never cover the value of the derivatives, but it didn't matter to them as long as they were compensated for their scam. That's also why I believe they should be serving time. They were well aware of the proper use and method of treating derivatives on-balance sheet, but deliberately did otherwise. That's evidence enough in my mind for prosecution. The practice of generating fiduciary media for purposes of making loans is well over a hundred years old. The bookkeeping standards are understood in banking circles. They staged the entire procedure and set out to dupe the counterparties.
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Old and gray
Message #342 - 05/12/09 02:26 AM
Ms. Brown is absolutely correct when she reports that

They're unregulated, hard to trace, and "very hard to understand," quite often impossible.
. . particularly about the very "hard to understand," quite often impossible, as Mr Lendman critiques. Take a look at the Lehman Bros, Derivatives Primer. It must be on line some where. Reading through that maze is more confusing at each progressive tier. Just when you might begin to think you have a grasp on the nature of the beast, another facet is introduced, another caveat pops up and the light which was beginning to glow dimly is again extinguished. It's impossible to understand from a description. Standard contracts were drawn up, I would assume, at the insistence of some of the confounded purchasers, but then, banks would change the nature, terms and conditions of the derivatives so that the standard contracts had to be augmented with more conditions and terms to confuse the issue.
The book may be worth reading. If I have time, I'll look it up.
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Old and gray
Message #343 - 05/12/09 02:44 AM
I'm in the process of evaluating economists' thoughts on the current crisis. On the continent, they have several organizations offering space to air thoughts, on occasion even conduct debates. At this time, one site, VoxEU.org, has five debates on various issues of the crisis running simultaneously. Some of the participants are younger economists, some not so. In the US, economists are anxious to solicit others' views of current events, but rather n****rdly on expounding their own thoughts for free. I discovered that early after I'd been plagiarized a couple of times. It no longer makes a difference to me.
In all the reading I've done IN RE the crisis, no one has yet broached the issue of electronic money and electronic banking. Whether it hasn't occurred to them, is too difficult an issue or they're waiting to be paid for the effort, I haven't a clue. But, the issue is deep, involved and would require the best talents of the top dozen and a half or two economists to solve. The prevailing thought is that in any given generation no more than twenty economists have the talent to understand the economic problems confronting us. I think it would require all twenty to solve the problem of e-money, e-transactions and e-banking. To date I haven't discovered anyone interested or demonstrating the competence to deal with the issue. I'll keep looking.
One thing resulting from the search underway is the accumulation of notes which may eventually end up in a compendium of sorts stating pros and cons of the issues of the day which could end up being posted here.
I don't believe this thread is near its end yet.
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Duffminster
Message #344 - 05/12/09 07:34 PM
I would think that the issue of e-money and e-credit and changes in transactional speed and other related areas of virtual capital and money would be a prime subject for a younger version of Bernanke at MIT or the like.

The subject is certain to be highly mathematical and would need to draw on the type of math being used in the Unified Field Theory, which pulls together some of the most powerful mathematical modeling and reasoning from a broad set of diverse mathematical disciplines.

I think you are correct that it would take the cooperation of a dozen or more of the most intelligent and creative economic minds to begin to unravel the problems. Just the subject of derivatives and risk are still in realm of the most advanced theoretical mathematics probably involving subjects as diverse as topology and stoichastics combined with all sorts of combinatorial, finite and field theory applications not to mention AI and chaos and other disciplines designed to deal with probability fields.

It requires both empirical wisdom born of experience with ingenious and vastly creative mathematical skill to design the models that take both hollistic understanding with appropriate modeling.

No, the thread is only beginning. I just hope that Market Watch continues. If not, I'd like to start brainstorming on other venues where the discussion and thinking can continue. Ideas?
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Old and gray
Message #345 - 05/13/09 04:23 PM
Latest news, Duff! Mr. Richard Jenkins confirmed that JJ's site will continue. So, at least we have a home site. It's our responsibility to keep building.
And. . . I'll have to regenerate writing energy soon. Enough notes have been accumulated to create a messy desk top! Only one way out! Convert them to text.
One quick observation: there must not be many ways to approach the banking problems. Many economists, US and others are repeating most of what has been addressed on this site. What is amazingly coincidental (?) is the language being used. . so similar in expressions and idioms to what we've been using! Some of these texts were composed before any of our postings and some after. Language must be more restrictive than we realize, placing limits on how much can be said and how varied the expression. But, we'll surmount that limitation.
The challenge to my banker delivered a surprising report from 2004 detailing changes in the banking industry. The big banks have been busy buying up the community banks to the point where large banks have doubled their number and community banks have just about halved their share of activity in the period from the beginning of 1985 to the end of 2003! I was also put on the trail of "The Future of Banking in America" which has yielded other fascinating facts. No idea how much of that is germaine to this thread, but it certainly directs my thinking into previously unconsidered corners.
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sangria
Message #346 - 05/13/09 04:32 PM
Interesting news bit on the MSN page on May 13, "Treasury May Tighten Grip on Risky Derivatives." They refer to OTC derivatives as a "shadowy market." Hmmm.

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Duffminster
Message #347 - 05/13/09 04:45 PM
Hello Gray,
Richard Jenkins confirmed that JJ's site will continue. So, at least we have a home site. It's our responsibility to keep building.
Good news and yes it is our responsibility.

Yes, all symbolic language has limitations, even mathematical. Some would argue that sound (music, mantras, and other generative and continuous spectrum fields) are less restrictive as they allow almost any natural event to be reflected in their domain. At some level mathematics can do this although I believe human mathematics is in its infancy, provided the human race can survive another few million years without destroying itself.
big banks have been busy buying up the community banks to the point where large banks have doubled their number and community banks have just about halved their share of activity in the period from the beginning of 1985 to the end of 2003!
Anti-trust needs to be applied here. It is my personal opinion that smaller more distributed banking is far more robust and doesn't engender the current "too big to fail" problems we are facing. Also the banks have become to big for anyone's good (their own at times being excepted).

Sangria,

We should continue to follow the details of Geithner's proposal to have all OTC derivatives trade be electronic and find out what that actually means.
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Old and gray
Message #349 - 05/13/09 06:28 PM
tj001
When you're right, you're right!!

In any mention of the basic creation of economic wealth, agriculture is the leader by far. Don't need Charles Walters, Jr. to tell us that.
Banks are the hangers on, the second or maybe third tier of activity, trying to pose as something sacred.
Many posters on the various threads here have mentioned that we have to get back to the basics: production, mining, construction, agriculture.
Agriculture will become increasingly important and it has been mentioned here many times when we mention having to import food from other countries to supply what we do not produce ourselves, and if our currency falls into disrespect, we're going to have trouble feeding ourselves.
We've also mentioned Malthus, an eighteenth century economist who claimed we'd eventually overpopulate the world to the extent that there wouldn't be enough space to grow enough food to feed them all.
It's always there in the back of our mind whenever we discuss economics. After all, the food market was the place of origin of all currency and harvest time was the time for settling debts. We still have a carryover mentality about harvest time. The only reason the new models of autos come out in the fall is that's when the farmers have the money to buy! Though I don't believe it is still a seven to one leverage on agriculture. . But, I can accept your word on that.
As a matter of fact, food and agriculture are so important, I'm cutting off here to go prepare my meal.
Glad you joined!
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sangria
Message #350 - 05/14/09 11:43 AM
I agree Duff, see if Geithner follows up on this. Of course, it certainly can be too little too late. And, the creative capacity of people to swindle money is unlimited, so where one door closes another is pried open. And I'm sure ten years from now there would still be investors willing to put money into derivatives. Look how conservative pension funds and 401Ks lined up to buy CDOs. Find out what they were drinking and order me a case.

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Duffminster
Message #351 - 05/14/09 05:19 PM
Sangria,

Well lets start with this report with comments from Sinclair, who basically says that the plans might be for new derivatives going forward but what about the hundreds of trillions in existing derivatives?

jsmineset.com/2009/05/14/in-the-news-today-196/
Jim Sinclair¡¦s Commentary
What is behind us cannot be fixed. What is in front of us can be fixed.
The problem is behind, and not in front. The quadrillion plus is behind us, not in front.
Obama Proposes a First Overhaul of Finance Rules
By STEPHEN LABATON and JACKIE CALMES
Published: May 13, 2009
WASHINGTON ¡X In its first detailed effort to overhaul financial regulations, the Obama administration on Wednesday sought new authority over the complex financial instruments, known as derivatives, that were a major cause of the financial crisis and have gone largely unregulated for decades.
The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of theAmerican International Group.
The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.
The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them.
¡§This financial crisis was caused in large part by significant gaps in the oversight of the markets,¡¨ Mr. Geithner said in a briefing. He said the proposal was intended to make the trading of derivatives more transparent and give regulators the ability to limit the amount of derivatives that any company can sell, or that any institution can hold.
More¡K

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Old and gray
Message #352 - 05/15/09 12:32 AM
¡§This financial crisis was caused in large part by significant gaps in the oversight of the markets,¡¨
I do believe Sec. Geithner is learning how to read. Now if he can retain enough of his reading to enumerate the gaps, he might find management oversight at the top of the list. Of course, since he was in that grouping during his term at the NY Fed, he might have trouble with finding guilt in the mirror. He was part and parcel supporter of the varied list of deregulations which set the stage for the collapse. If anyone should know what contributed to the collapse, he'd be perfect for that assignment. A couple of his endorsements were directed at propagating the demise of the essential markets. . . And, he did nothing to put a halt to the demise. He certainly had a large enough staff to read the warning documents and have the consequences of the gaming explained to him unless he did not want anyone around him operating from a more informed roost than his own.

Economists around the world are growing bolder and more specific in their prescriptions for the ailing global financial system. One source for a continuing stream of economists' ideas in dealing with the crisis is www.voxeu.org, a UK outlet for economists thoughts. Currently, they have "debates" on the global crisis, in which one after the other, they advance thoughts and suggestions on what is wrong and how it can be repaired. I once commented that a roomful of economists will create a babble so loud, you wouldn't be able to think. Well, their writing has to be taken in small doses or the mind could run amok.
To begin with they have a box on their homepage announcing there are five issues, each with their own raging debate. Those issues are headed:

1. Macroeconomics
2. Institutional Reform
3. Financial Rescue and Regulation
4. Countries in Crisis
5. Development and the Crisis
6. Open Markets

I expected to see a few more listed among the five, but I suppose they ran the string at six. (No wonder we're in trouble!)
Among the titles of the articles (details where relevant or pertinent will be introduced later) are:

Macroeconomics
a. Root causes of the Financial Crises
b. Options in Protectionism
c. SDRs
d. The impossibility or unlikelihood of global solutions
e. Time is running out for the EU due to Germany's stubbornness
f. SDRs and Currency Reform
g. The London G20
h. Geithner's Plan for Europe
i. China and the dollar
j. IMF's fumbling
k. The Global Solution
l. Tax, tax, tax, and redistribute
m. Is anyone running the US Treasury?
n. Current world pricing. Is it right?
o. Bailouts are keeping "Toxic" assets illiquid
p. More symmetric and anti-cyclical monetary policy
q. Getting global stimulus right
r. Think out of the box
s. Critical Issues are overlooked

Liberty ws taken with the titles. (For that, I apologize to the authors.) They are are not word for word correct. But it gives you an idea of the varied thought processes. Remember this is only one of six central issues. The other issues have more or less the same wide span of entries.
My opinion? There's little hope for a consensus on any of these main issues, much less an effective, operable consensus.
The respondents are from universities, here and abroad, banks, central banks, think tanks, consultant organizations, civil servants, law schools, and from all over the world, US, UK, Australia, Europe, Israel, Germany, India, you pick it.
One thing common to all, whatever their origin or alliance, that point of view is being served.

[olderstill]

Old and gray
Message #353 - 05/15/09 12:36 AM

Anyone remember the old saw: ontogeny recapitulates phylogeny? Translated into English, the development of the individual recapitulates the development of the species.
To carry this mirror a little closer to home, picture our own mixture in Washington and their varied sets of interests ranging from points of origin, major industries being served, obligations to major campaign contributors, their own future aspirations, and you may see how unlikely it is that anything effective will get done.
But, strange thing about the experience of scanning some of the varied papers referred to above, more has been posted on this thread with most of their issues brought together with more cogent policy considerations. It comes back to having six titles listed and referring to the five. It was mentioned before that the financial world does not always align itself with the economic world and this may be the missing key. Theory and practice do not always complement each other. No one mind has all the answers, and there's always more than one answer that will work. The question comes back at us: who is your master; who do you choose to serve? The answer may be in responding to whether it is the nation, the people (of this nation or this world) or a select few so wrapped in their own importance they don't deserve consideration. If it's the latter single-minded, myopic focus, then the people in charge of the corrections and repair do not deserve consideration.
But, strange thing about the experience of scanning some of the varied papers referred to above, more has been posted on this thread with most of their issues brought together with more cogent policy considerations. It comes back to having six titles listed and referring to the five. It was mentioned before that the financial world does not always align itself with the economic world and this may be the missing key. Theory and practice do not always complement each other. No one mind has all the answers, and there's always more than one answer that will work. The question comes back at us: who is your master; who do you choose to serve? The answer may be in responding to whether it is the nation, the people (of this nation or this world) or a select few so wrapped in their own importance they don't deserve consideration. If it's the latter single-minded, myopic focus, then the people in charge of the corrections and repair do not deserve consideration.
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Old and gray
Message #354 - 05/15/09 01:25 AM
Returning to your article, Duff,

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.
Have you heard that in the text of the proposal there is exemption for certain classes of derivatives?
Previously, on this thread, it was mentioned that a copyrighted standard contract for derivatives has been drawn up by ISDA (International Swaps and Derivatives Association, Inc.), but it has addenda which further complicates things by allowing the parties to alter provisions within the standard contract. (The name of the contract is: 2009 Americas Master Equity Derivatives Confirmation Agreement.)
It wouldn't be out of the reach of reason to assume that every derivative or set of derivatives drawn up could be renegotiated so that they would all be special cases. . . specifically, those which are eligible for exemption from control by those entities Geithner has suggested as overseers. Why should anything in the derivatives class be exempted? A little less protection and politicking might be much more reassuring that we can weather the new program for more than a year or two. We may be faced with a judgment intending to promote policy which will survive just long enough for a term to be served and then the fault falls on someone else's shoulders.
With such an approach to the problem, we're led to believe that the next small paragraph about forcing things into the open and minimizing "shadow" banking is a rather weak hope.
A search for confirmation of the exemptions will be underway tomorrow. A link will be posted.

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Virgil Syonid
Message #355 - 05/15/09 01:28 AM
OK, Duff, O&G.

I read through the NYT article on the regulation of derivatives, trying to prize out the truth lurking behind the words.

I couldn't do it.

For the life of me, the article is so vague that it offers no indication as to how 'they' intend on circumventing the proposed regulations. Normally, the papers throw at least one 'but' or 'critics suggest', or possibly even a 'Senator So-and-So expressed concern', but this time it was all peaches n' cream.

We all know 'they' have no intention of regulating derivatives. The central banks at the top of this thing wouldn't pull a 180 on the 'sacrilege of regulation' just because they wiped out the greater economy, and certainly not in an era where socializing the losses makes for record profits during the bad times as well as the good.

And given the behavioral-economics-approved M.O. of propping a cotton-candy facade in front of every toxic waste issue out there (case in point: jobs, housing, US dollar, etc.), I wouldn't trust the article even if I did believe the central bankers were sane enough to accept systemic regulation.

And so I ask you: what am I missing? How do I see though the cotton candy facade, derivatives edition?
Is it that ominous 'customized derivatives will not be regulated' clause?
What is a 'customized' derivative, anyway? I thought they were all 'customized'.

Many thanks for your financial wisdom.
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Virgil Syonid
Message #356 - 05/15/09 01:30 AM
Hmm. It would seem that you answered my question a slight moment before I asked it.
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Old and gray
Message #357 - 05/15/09 01:48 AM
Skipped by message # 344, which deserves a response.
The mention of a dozen gung-ho economists attacking the issue of fiduciary media flooding the market place via electronics armed with advanced math struck a memory chord. Von Mises may have mulled over the matter of too much fiduciary media back in 1913 or 1917. My memory says he dismissed it as beyond belief! That's got to be investigated. He was notably averse to the use of mathematics, but considered everything in degrees to a fault. No math, just reasoning.
Got to look that up.
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Old and gray
Message #358 - 05/15/09 01:59 AM
Found the Treasury announcement!

„X Preventing Activities Within The OTC Markets From Posing Risk To The Financial System ¡V Regulators must have the following authority to ensure that participants do not engage in practices that put the financial system at risk:
„X The Commodity Exchange Act (CEA) and the securities laws should be amended to require clearing of all standardized OTC derivatives through regulated central counterparties (CCP):
„X CCPs must impose robust margin requirements and other necessary risk controls and ensure that customized OTC derivatives are not used solely as a means to avoid using a CCP.
„X For example, if an OTC derivative is accepted for clearing by one or more fully regulated CCPs, it should create a presumption that it is a standardized contract and thus required to be cleared.
Note: "standardized contracts" only are required to be cleared. Additionally, it must be accepted by a CCP to be cleared. Not submitted? Does that mean it is at the discretion of the issuer/distributor to submit for acceptance? And, we're back in business "non-standardizing" derivatives contracts.
The Treasury has discovered that virtue always triumphs.

The document can be found at www.ustreas.gov/press/releases/tg129.htm

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Old and gray
Message #359 - 05/15/09 09:36 AM
On further review, the press release cited in the prior article contains a few other provisions, some promising integrity, others suspiciously suggestive of an open "backdoor" equivalent to the prior quotation. In order to prevent fraud and "other market abuses" the proviso is appended that

„X Preventing Market Manipulation, Fraud, And Other Market Abuses The Commodity Exchange Act (CEA) and securities laws should be amended to ensure that the CFTC and the SEC have:
„X Clear and unimpeded authority for market regulators to police fraud, market manipulation, and other market abuses.
„X Authority to set position limits on OTC derivatives that perform or affect a significant price discovery function with respect to futures markets.
„X A complete picture of market information from CCPs, trade repositories, and market participants to provide to market regulators.
Does that mean that Summers and Greenspan will apologize for attacking CFTC Director, Brooksley Born a decade ago in an egotistic fit of immature pique, publically admit they were wrong then, or that they'd support bringing back a women three times as smart and prescient as they?
Consider the enormity of their act! Had we done this when and as she suggested, the global financial system would not be embroiled in this fiasco. You could easily place the responsibility for the global crisis on the shoulders of those two hatchet men. This is magnitudes worse than the Teapot Dome Scandal and the vicuna coats that threw the nation into turmoil some fifty years ago. What's being done to atone for the atrocity?
Some people should suffer the indignity of retribution at the hands of those with longer memories and motives nobler to the slightest degree. The type of stain they bear rubs off on others. I wouldn't care to have either of them on my staff in any capacity, or to correspond or consult with them.
What do they have to say about these developments?
Ms. Born, of course, deserves all the credit and accolades (which she is likely never to get!) for all her intelligence and determination to do her job as she saw fit. A true heroine in any age.
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Old and gray
Message #360 - 05/15/09 11:50 AM
Before continuing, redefining fiduciary media may be in order here. Before the debacle of derivatives and swaps, fiduciary media was principally generated to serve two purposes: to issue loans not based on deposits (in other words get a signed contract and declare an account opened in the name of the borrower and credit the account with whatever the contracted amount might be); and, the bank itself might open a current account in its own name for some investment purpose. This was a practice well over a hundred years old. A late comer to this elite group were the swaps and derivatives (since the 1980s). In this case, the instrument was created, carried off-balance sheet in the bank's trading portfolio, and distributed to whomever cared to put down a sum of money and take a chance on the spin of the wheel. It amounted to as much as we all realize today.
To continue on the tack dealing with generating massive amounts of fiduciary media and tossing it out on poorly defined markets:
Von Mises's "The Theory of Money and Credit" may be the most exhaustive study of money, its nature and effect, to date. Long and involved, every edition I've seen suffers mostly due to translators' attempts to be true to the original German. The idioms of German and English are so unlike, a faithful translation doesn't serve Von Mises effort well. So, studying his work in English is tedious. However, . . .

In Part Three, Chapter 17, Ludwig Von Mises addresses the issue of fiduciary media and its effect on the markets and other forms of currency.
Considering the book was first published in 1912, there was no way he could have anticipated e-money, e-banking or the effect the computer would have on the financial markets. He may have had larger vistas in sight but he talks of financial "neighborhoods" or "communities". Even if he meant to include an entire nation in his concept of "neighborhood", that still wouldn't compare with today's idea of a global "inner circle".
His first discussion of the clearinghouse and counterclaims limited itself to two party transactions. Third parties are dealt with in a vague suggestion that third parties would extend the clearing process. Far cry from computer capabilities in finance today, which are yet likely to be dwarfed by computer capacity still to be developed.
To his credit, Von Mises concedes that "the clearing system is still capable of further improvement". Despite the fact that he acknowledged the concept of immediate response, turnaround of funds and settling of claims, he brushed it aside with "But since these assumptions do not hold good, and in fact never could hold good, so long as money is in demand at all as a common medium of exchange, it follows that there is a rigid maximum limit to the transactions that can be settled through the clearing system." Little did he know!
In discussing a line of thought other than his own, he notes that the others' beliefs lead to the conclusion that "the behavior of banks is merely passive; they do not influence the circumstances which determine the amount of total circulation, but are influenced by them." Judging from the behavior of our present day banks, they still believe in that same erred concept of market tone and flexibility of currency to the extent that they continued to issue ever more fiduciary media until the glut was too much to handle or absorb.
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Old and gray
Message #361 - 05/15/09 11:52 AM
Von Mises then points out that there is little natural market force limiting the extension of fiduciary media circulation. It responds to interest rate adjustment, suggesting no matter what the market conditions, lowering interest rates encourages generation of new Media, raising it beyond the prevailing market rates curtails the generation and distribution. This, of course, is the current "advanced" or "Progressive" "modernized" way we handle monetary policy, inflation and deflation, by adjusting rates. I doubt Von Mises originated the idea, so it predates him. We can't think of, or we're too timid to go against the wishes of the bankers to convert to other methods of using currency to influence market conditions.
So, the quantity of fiduciary media, according to his thought, is controlled by manipulating interest rates. That is not what happened in the current crisis. More likely, it was controlled through the compensation practices which rewarded the more imaginative players, how quickly they could supply the market and the depth of the markets' tolerance for new media.
So much for the disparity between theory and practice.
Von Mises did see the eventuality of glut. Later, he states,
"By virtue of the power at their disposal of granting bank credit through the issue of fiduciary media the banks are able to increase indefinitely the total quantity of money and money substitutes in circulation. By issuing fiduciary media, they can increase the stock of money in the broader sense in such a way that an increase in the demand for money which otherwise would lead to an increase in the objective value of money would have its effects on the determination of the value of money nullified."
I'll take the liberty of restating this to mean that the banks have ability to issue virtually unlimited quantities of substitute money (fiduciary media), to the extent that currency of the realm could not hold its value.
Because, later, a little more explicitly, he does say,
"The circulation of fiduciary media is in fact not elastic in the sense that it automatically accommodates the demand for money to the stock of money without influencing the objective exchange value of money, as is erroneously stated."
What he's saying in a roundabout way is that generating fiduciary media will effect the value (or purchasing power) of money.
If it is desirable to limit the issuance of fiduciary media and moderate its effect on thte currency or the markets, he proposes,
"If for any reason it is desired that it should be limited, then it must be limited by some sort of deliberate human intervention - that is by banking policy."
Precisely which was not done, leading us into the current crisis.
Von Mises goes on to acknowledge,
"Of course, all this is true only under the assumption that all banks issue fiduciary media according to uniform principles, or that there is only one bank that issues fiduciary media."
This, I believe, anticipates the profligate creation of fiduciary media and tossing it onto global markets our banks engaged in to the extent that the dollar suffered a debasement and decline worldwide. In effect, fiduciary media encroached on the integrity of the dollar and directly influenced monetary policy, the responsibility of the Fed in conjunction with the several administrations through the period of the SIVs' development, meaning from Reagan through to Bush II. Obama will be included in that group if his administration does not redirect the careless banking practices poised ready to deliver more of the same.

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Old and gray
Message #362 - 05/15/09 11:54 AM
Von Mises sums up the consequences in that germanic language idiom, not quite as sparse and direct as our everyday language, but I think the message is understandable.

If the fiduciary media are perfect substitutes for money and do all that money could do, if they add to the social stock of money in the broader sense, then their issue must be accompanied by appropriate effects on the exchange ratio between money and other economic goods. The cost of creating capital for borrowers of loans granted in fiduciary media is borne by those who are injured by the consequent variation in the objective exchange value of money; but the profit of the whole transaction goes not only to the borrowers, but also to those who issue fiduciary media, although these admittedly have sometimes to share their gains with other economic agents, as when they hold interest-bearing deposits, or the state shares in their profits.
Now, why would the government be careful or anxious in regulating or curtailing regulation of derivatives? And, the general population is among the "injured" from the word go!
Von Mises is a stalwart of the Austrian School. I have not been devoted to concepts which are the foundation of the Austrian School and am still not even slightly convinced that it would be a good path (much less the best path) for the US. Yet, as I've repeatedly asserted, there's something good in every economist. It's just that the search for that good is sometimes so aggravating. Since no one else has written such an exhaustive study of money, credit and banking, even if the work is approaching a hundred years of age, for someone interested in the nature of money and effects of money, this could be the reference work to consult. Everybody needs a springboard for diving, Von Mises may be the right springboard. . . But! Be sure there's water in the pool before you leap!
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Virgil Syonid
Message #363 - 05/15/09 02:46 PM
An interesting article that plays into the broader discussion:

The Systemic Usury Parasite

The report is several pages in length, but a representative excerpt would be:

The usury parasite has infected 185 countries, feeding itself through the central bank syndicate, a shareholder-owned consortium of private banks, headquartered in Switzerland at the Bank for International Settlements. Created in 1930, BIS obscures its transactions with legal immunity ~ an astounding array of cloaks that prohibit any form of oversight, intrusion or prosecution, allowing it to participate in unlawful activities without detection. The activities of its ¡§agents¡¨ are also camouflaged by its immunity.[2] It functioned as a Nazi money laundering operation in World War II.[3] Today it serves as the cashier¡¦s window for the global casino.[4] Each central bank member has an exclusive monopoly on its government¡¦s monetary system, with the power to create public debt and expand or contract the host¡¦s economy at will. Coordinating their monetary policies with each other through the BIS, the central bankers meet behind closed doors, appoint their own governors and set their own rules. Their books are not subject to audit by the governments that host them. They work in concert to protect their fraternity, sharing the credo that a threat to one member is an attack on them all. (NATO is based on the same credo and was created by the same syndicate to enforce gangster capitalism.)

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Old and gray
Message #364 - 05/17/09 01:15 PM
One more invocation of Von Mises and I'll try to refrain from another mention of his name or works. It's just uncanny the way he managed to foretell in detail (!) the situation we're in today. Mind you, this was written nearly one hundred years ago, 1912. And, in addition, nearly every time he mentions the excesses or abuses that could bring the financial world to its knees, he opines that simply is unlikely to happen. . . as though bankers were sworn to uphold some higher values, the strictest and most beneficial virtues of the industry, and there is no conceivable alternate behavior but to abide by those highest standards. That may have been true until the period between 50 to 35 years ago, but the temptation proved too strong to resist. Just as Madoff couldn't resist duping his family, friends and associates, "bankers" couldn't help but deceive the world in the push to strip them of whatever valuables they had. Chalk it up to the "temper of the times".
But, as for Von Mises, if you have a copy, or can lay your hands on one long enough to read one Chapter of "The Theory of Money and Credit", turn to Chapter 18 The Redemption of Fiduciary Media, and in section 4 The Redemption Fund, in particular, is as near as possible we'll get to a description of what has fouled our global financial system. All you need do (beside updating the language) is substitute SIV or derivatives, or swaps every time he mentions fiduciary media and the description of all the ailment is mirrored in today's debacle. It's as if he was printing the primer for modern day pirates and they followed it to the letter. I wonder if Blythe Masters, the JPMChase guru of derivatives, was a student of this chapter and converted it to her own program and impressed the JPMChase brass with the conversion? All they need do to turn it to their advantage is look at the promise of personal enrichment and forget about the effects on the financial world. Isn't that what they did?
It's absolutely uncanny!
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Old and gray
Message #365 - 05/17/09 03:24 PM
To continue on our search for that elusive light at the end of the tunnel, FDIC last published Future of Banking Study in 2004. The last publication of a similar study was 17 years prior to that. The attempt was to show the general trends of development in US banking. Divided into two sections, Regional and Other midsized Banks: Recent Trends and Short-Term Prospects, and Bank Branch Growth has been Steady - Will it Continue?, it is an overall study of the industry over a period of ten years, 1994 to 2003, with data as unlikely to be corrupted as any you'll find, their own. The study was executed by their staff economists, thoroughly familiar with every aspect of the industry. Since it is their responsibility to back up deposits, if the FDIC doesn't know the status of banking or its trends, when that fateful hour comes when their support is needed, they'd better be prepared! And, I have every confidence they are.
In the study, banks are broken up into groups. There are (1) the top 25, (2) the community banks with assets less that $1 billion, and (3) the mid-sized banks being in between the two. On some of the charts, groups are broken down further to small, medium and large. Or, in the case of mid-sized banks, regional ("covering a region of the country" perhaps interstate), or other ("geographically concentrated"). About one fourth of the mid-sized banks are regional.
Among the items reported are (1) the number of organizations, (2) the Return on Assets (ROA), (3) the Return on Equity (ROE), and the Efficiency Ratio. Here are some of the numbers I find interesting:

# of orgs. From 1994 to end of 2003
Mid-sized banks 412 480
Community Banks 9,611 7,335
Top 25 25 25

The reduction in the number of community banks is due largely to mergers and acquisitions. Some merged to become mid-sized,
but more merged while still remaining in the community bracket.
63 community banks failed (about 0.67%) and 3 mid-sized banks failed (about 0.63%) essentially the same.
Overall the total number of banks diminished, reducing the total number by approx. 23%.

The difference in assets, percentagewise, as distributed between the three groups has changed considerably over an extended period from 1985 to 2003. During that period, bear in mind the S & L problems and the winnowing out of the weaker S & Ls. Some of that business was transferred to commercial banks and may have been put to other use such as investment opportunities or stock market accounts.

Community banks Mid-Sized banks Top 25 banks
1985 share 26% 46% 28%
2003 share 14% 29% 58%

% of change -46% -37% +107%

Unfortunately, the charts do not include enough dollar data to compare the total asset growth or shrinkage. My suspicion is that inflation over the 18 year period alone would have been enough to surpass the 46% change in the community bank assets. If the dollar value were available, the measurement might show gains even though both groups of smaller banks appear to have lost ground to the top 25. Undoubtedly, the non-banking activities of the top 25 helped boost their assets beyond normal business growth, meaning depositors and business loans. After all this was the heyday of the introduction and initial growth of the derivatives, CDS and the securitization process. Those profits had to lumped in with the Top 25 performances.
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Old and gray
Message #366 - 05/17/09 03:25 PM
But the overall conclusion is inescapable that the Top 25 banks have engaged in something that has enriched then, comparatively, beyond the transactions and business conducted by the small and mid-sized banking industry. The FDIC text discussing the banking activity engaged in by the midsized and community banks show nothing significant percentage wise. . 3% to 5% up or down, nothing spectacular.
One thing I can attest to from personal experience, Return on Equity has been substantial and steady except for the down years of about '87 to '91. But then, all banks suffered from the S & L problems, and were still struggling to recover from the effects of the high interest rates of the early '80s. Without benefit of data before me, for example, Citi stock jumped around 125% to 135% and Chase around 100% total in the approximate '91 and '92 period. This was their recovery from those high rate years.
In the "Future of Banking" study, there is an accompanying Efficiency Ratio included in the evaluation of the three groups. The lower the number the higher the efficiency of the group. There is not a significant difference between the midsized and the top 25 banks, 56.87 to 54.41. That might be enough to explain a swing of a percentage point more or less but not enough to explain the disparity of -46% and +107%.
So, how did the top 25 banks improve their lot other than engage in the near-illegal "shadow" banking procedures?
In the introduction to the summary of the FDIC study, Katherine Samolyk, a senior financial economist at FDIC, asks:
How important a role do commercial banks play in funding non-financial borrowing? Ten years after the end of the industry's most significant crisis since the Great Depression, does banking remain a major player in financing the nations' economic activity?

I had an immediate knee jerk response to these two questions: (1) None whatsoever; and, (2) If you call destruction of a global financial system "financing the nation's economic activity" then, yes; otherwise, not a whit worth mentioning, constructively speaking.
How can anyone with a clear view avoid concluding the top 25 banks are involved up to their eyebrows in the corruption of world finance? They invented the media that dragged us down, distributed it, and kept producing more when it was obviously beyond support, redemption and with no constructive value whatsoever. Considering their drift away from the business of commercial banking, they are not now contributors to financial activity. The major constructive contributors to our nation's economic well-being will be the mid-sized banks that build on the foundation established at the ground root level by the community banks.
Nor are the top 25 ever likely to return to the banking business considering their awkward, non-controllable, indescribable lump of a heretofore unaddressed mixture of businesses that have no business being linked together. In short, they are no longer interested in banking business per se. Not enough money in the enterprise to satisfy their appetites! These are too big to fail institutions? To use a street term to get the attention of Washington politicians. . . GET REAL, PEOPLE!
The top 25 banks have changed drastically due to mergers, marriages, and mongrelization. Some of them were shot gun marriages for sure, but all of it was due to the failures of management strategies and tactics. Promoting support for them is impossible using any set of ethical, moral, or informed business or banking standards or principles. Wrong outlook, wrong goals, wrong people to be entrusted with economic activity effecting the entire world.

[olderstill]

Old and gray
Message #367 - 05/17/09 04:29 PM
Not long ago, more than 99%, just a shade less than the full load of the derivatives, swaps and "securitizations" were concentrated in the top dozen or fewer banks. Now, after the forced or convenient mergers and marriages, 93% of the "toxicity" is concentrated in the top 5! Is this progress? How far down does the other 7% extend? My guess, not very.
I am convinced that the once "major" banks have destroyed their credibility. This is something the politicians have not yet discovered or hope they can ignore. It was a cry that came out of the ballot boxes last November and nothing has been done yet to improve the situation substantially. The cries aren't finished yet and the politicians will still have to defend themselves unless they start moving quicker with policies that produce improvement. They'd better start listening! It's a painful yowling. It's getting louder while those profiting are hoping it's dying down and the pain will be forgotten. Not so.
I stand corrected in one earlier assertion: that it would take 3 to 5 years and about 6 trillion to get out of this mess. We're already up to $9 trillion and no one has yet agreed that we are in a desperate situation simply because it isn't politically expedient! It might promote a run. Well, the truth of the matter a run is now underway. Not from the depositors this time. The situation is worse: what we have is a run by the banks' managers! Think about that a minute!
On the basis of what is being done, and who is being lionized and absolved of guilt, I do believe this is going to take more than five years, easily, to clear up and the cost could very well end up world wide at about $20 to $25 trillion and our share of that will be about 40%! That is our share of the world's corrupted economic activity.
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Veteran_Lender
Message #368 - 05/17/09 06:16 PM
The most fascinating aspect is the Law of Physics: a Reaction for every Action. There has been $9 Trillion printed but no evidence that it exists in or belongs to any component of the economy. Though real in the sense that credit lines and facilities generated theoretic amounts of "available" credit, much of which was tied to an asset (collateral) washing the value 1:1 or near to it. Where is then, the $9 Trillion? Somewhere in the ethos of ACH (Automated ClearingHouse) is an undetected value amounting now to $9 Trillion. Who has access to it? If no one, why hasn't there been a wash and elimination to restabilize the economies? That, in a nutshell, is the conundrum.
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Old and gray
Message #369 - 05/18/09 12:03 AM
Update!

Above I posted that we had currently committed $8.9 trillion to correct the financial crisis. Unfortunately, according to CNN.Money, that figure is now obsolete.
CNN.Money has tallied TARP, TALF, FRB Rescue, FDIC Bank Takeovers, Financial Initiatives and Housing Initiatives and come up with a grand total of $10.5 trillion. Hold on, though. This has not hardly reached the end point. My estimate of total eventualities is still safe at the $20 - $25 trillion mark!
I see no date on the list.

The list can be accessed through this link

money.cnn.com/news/storysupplement/economy/bailouttracker/index.html#FDIC

How much could we have saved had we paid attention to Brooksley Born instead of ridiculing her?
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Old and gray
Message #370 - 05/19/09 01:00 PM
VL

The credit disbursed to combat the stress is intended to be financed over the next few years. The Controller of the Currency issued an evaluation of the distribution through 2012. When you see a total figure, that is for the future. These are no more than promises to have "aid in the amount of". Most of the full tallies won't be realized until halfway or more into the second decade of the century. So, you won't see it posted anywhere at this time.
But, some of it has come home to roost already. Do you recall my post which questioned (rhetorically) where the Fed suddenly gained over $2 trillion to fight the slump? The Fed started the fight with $800 billion, distributed about $600 billion and at his next appearance before Congressional committee, Bernanke said the Fed had something like $2.3 trillion in reserve? That was paper they received from the banks in exchange for credit. . you know, the valueless paper which allowed the FASB to declare if banks believed it had no value when they fill out a balance sheet, they need not report it at all? . Supposedly, this same "credit" was then available to the Fed to extend new loans and boost the economy out of the pits.
You're right! It is a Game! Which shell is hiding the pea?
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Old and gray
Message #371 - 05/19/09 09:09 PM
The strategy of the Wall Street/White House complex treatment for the banking/financial crisis is now being unfurled. It's the old PR run.
Before any data is collected, Sec. Geithner declares the stress test for the domestic banking system will be "reassuring". After the data is released, everything is declared to be sound, however, it appears that nine of the nineteen banks tested are in trouble and need attention before summer.
Reassuring, that is not!
Mr. Dimon is declared the new genius of the banking world, emerges from a session with other leaders, has a meeting with the press corps and declares the government bailout to be the "bravest, boldest" thing the government could have done. The banks will proceed to return the TARP funds and by year's end banks will be able to declare dividends once more with a clear conscience.
However, to our knowledge, not one corrective step has been taken, no restitution has been made, no systemic diagnosis has been discussed other than the Bernanke statement that cash, liquidity, and credit are problems. No legislation has been passed, and the only concession Mr. Dimon is prepared to make is that a single systemic regulator is "acceptable". Wonder to whom he will report?

Indiscriminate issuing of anything resembling fiduciary media whether the work of one bank or a group of banks eventually has an effect on credit, the purchasing power of money, and the markets. I have discovered, through the years, too many banking (and credit) theorists have chosen to neglect the detailed study which would have made this issue clearer to them. Clearly, banks cannot indiscriminately issue media without limit not expecting a larger problem to develop. We're at that point and this problem needs attention. Without attention, the flood of media floating out there will haunt the credit market, exacerbate the interest rate problem, inflation, and negate any prolonged attempt to carry us back to equilibrium.
The problem will not go away with a few smiling faces promising that things are all right, that we are knee deep in geniuses, or that the sun will come out tomorrow bet your bottom dollar, and we should have confidence that the banking system is now restored. Or, should we?
We had a problem. Barney Frank was red in the face with his indictment of the leaders behind the deceptive raidings and fraud. I haven't heard a word from him since the last TV session he sponsored at the committee meeting. Did he have his exposure and that was that? What about the other indignant congress people? Are they satisfied that we need do no more than shout once, turn around smile at the camera and declare that the problem has gone away.
If that's it, look out for the plunge ahead.

I could go on with more lessons about credit, the media, money supply interest rates, consumption demand and productive supply and the effect fiduciary media has on it, but it gets a great deal stickier beyond our current point, which might already be too sticky for most. It's a question of marginal returns. The deeper you get into the issue, the fewer are willing to follow, and the more difficult it is to comprehend. Despite the fact that economists are hired by and work for the banking system at the FDIC, the Fed, the individual reserve banks, few of them are interested in the mechanics of banks' unlimited capacity to issue credit based on nothing (theorists are always in short supply to begin with). The banks will continue to issue media in ever increasing amounts, each increment will pose more danger and the problems will be too difficult to conceal or ignore. The result will make the current mess look like a Sunday walk in the park.
Credit as issued by the Fed is now costing the taxpayers an incalculable amount, and whether the Fed admits it or not, that credit is now undermining the purchasing power of the dollar. By mid-summer the strain will show up in every market in town. Don't take my word for it, just keep watching the gas price at the pump, and watch your food prices!
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Old and gray
Message #372 - 05/19/09 09:10 PM
Businesses will find themselves unable to produce and distribute profitably. In the inflationary spiral, time itself is working against them. They produce goods at a currency value that disappears before they get the goods to market and when they try to produce the next generation of goods, their cost structure is obsolete. Their capital resources wind down, able to produce less and less. Interest rates on the market, not those controlled by the Fed between banks, the competitive rates, will be inching up while the dollar's value is declining and some businesses will no longer be able to compete. Layoffs will continue and that means the unfortunates at the lower end of the economic scale will be unable to afford to buy. Retail sales will decline. Retailers will be running into the same financing problems facing the producers, and the entire cycle will rotate in an ever magnifying trap. The current banking situation cannot be ignored.
We can't smile this off. PR will solve nothing. Reality will rush in on those on whom the government is depending to go down to the store and buy and they'll discover they'll be unable to do so.
The banks are in need of a big overhaul and repair job. This is more than just an oil change, wash job, fill the tires, and drive away smiling. How childish can adults be to not want to face up to responsibilities and repair their damage? And one end of the complex is assisting the other.
Two things are obvious here: For one, they believe the smiling face will save that day and prevent runs on banks. That strategy was used by the politicians, bankers and brokers in '29 and it wore out in a couple of years and we plunged into the Great Depression. So, at best, that strategy, even if it would work will give us about two and a half or three years before the big blow.
Then, too, they appear to be counting on another thing to assist them in the cover-up: attrition. They know that sooner rather than later, the economists, if they don't tire of the strain and give up monitoring and addressing the issues will have to turn back to their principle occupation, be it their professorships, or their employers - the corporations, governments or banks. The word will come down, "I don't want you to spend any more time on that junk. It's old hat. It's been solved. We're moving on. Now, tell us what's ahead and what we'll have to be aware of."
The machine of commerce will be forced to plod on, grinding away with a crankcase full of sand and a gas tank full of sugar, all tires leaking and mud spattered all over the windshield. But, then, that's our car! Their sedan chair is in tip top shape carried on the shoulders and backs of a bunch of guys easily replaced when they wear out.
Smile, attrition and ignore it, and that will get us back in the race. Depend on it!
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Old and gray
Message #373 - 05/19/09 09:25 PM

An aside here - as a matter of personal information. Does this sound familiar to anyone? If it does, I'd appreciate a response on the issue.

***************
Something about my PC's hooking up to the Message Boards has become an annoyance to me. I'm almost too old to be annoyed. Nor am I a novice with PCs. The one I'm using now is my own construct. . fifth generation. I've built most of the PCs used by myself and other members of my family. . . on special order. You just can't buy these things. On the one I'm now using, the programming, both MSWindows and Linux (the latest SUSE 11.1) is multi-languaged, with programs from Germany, Russia and Japan. The firewalls and security are impenetrable. . but, then you have to be able to read Russian, Japanese and German, all of which should be warning enough of some kind to hackers.
About a month ago more or less, I ran into a problem of being denied access to the msnMoney Message Boards. I could read the board, but couldn't post, couldn't use the spell check. I went to Linux, which solved the problem.
I swept my PC with a Russian program that reports if a comma is out of place anywhere in the 8 gig RAM and (2) Terabyte SATA hard drives. A strange looking attachment (program) was extracted. I studied it, was puzzled, couldn't identify it and destroyed it. Of course, then I took double and triple precaution about my security with encryption, double firewalls and another Russian obstacle that would pose problems for someone trying to access my PC. Haven't had any problems until within the last week. Now, when I go to sign in for the Message Boards (from the msn.com homepage), a warning pops up that the "site I'm trying to reach is not certified and it is suggested that I not try to reach it" It is corrupt!! MSMoney corrupt?
I guess I explained I'm not exactly a newbie. The first computer I had was the Sinclair back in the mid-sixties. PCs per se did not come out on the market until the early 70s. Before PCs were on the market I had studied Fortran, Pascal, and a few other incidental programming devices and took advantage of mainframes.
The issue is that despite all this expertise, I know there are more capable people out there than I, devoted to all kinds of mischief. Some do it for the thrill, some do it for a living. I have a suspicion someone is zeroing in on me and one of these days, I won't have access to the Message Boards. Perhaps, along with it, nothing else on the 'net. This may please some people, but as the saying goes, what the hey. . .
This could be undue suspicion and whatever it is may straighten itself out. But, if it does happen, I'll just set up another partition and try to re-identify myself. In the event that can't be arranged and I'm denied entrance by whomever, I'll get a smoke signal through one way or another.
If somebody is trying to reduce me to just another mark under the attrition heading, they shouldn't be too concerned. Time will take care of that eventually. Until then, I intend to enjoy myself.
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Arrow of Time
Message #374 - 05/19/09 09:51 PM
I would google for the exact text of the error message itself that pops up and then you might find some info about the possible "cause(s)"...(which could turn out to be just a false alarm)...as far as "certified", websites can have certificates...see this discussion, or use google to find more info...but I'm not convinced at all that that's what the error message might mean...in any case, good luck....
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Old and gray
Message #375 - 05/19/09 10:04 PM
Thanks Arrow. .

Did that. Describes my situation to a "tee"!

What makes it difficult to understand is that msnMoney is a Microsoft site!!!! How would you interpret that?
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Old and gray
Message #376 - 05/20/09 10:33 AM
To return to the issue of this thread. . .

Back in February, when this discussion began on the original thread entitled "Treasury yields. . . ", Duffminster expressed his personal evaluation of the situation succinctly.

The Fed is acting like the "Bad Bank" and we are creating money at an accelerating rate while trying to force a low interest rate environment, meaning they will eventually have to buy treasuries and at the same time they are even talking about issuing their own bond or debt instrument.

In a sense, they are causing a second disease to enter the patient, long term inflation. Bernanke, mistook the popping of the speculative asset bubble for true deflation even as the systemic causes of inflation have never gone away and now has reactivated the primary cause of the initial bubble(s). This is all compounded by the OTC derivatives.

So now we have two problems (one the initial credit induced / otc derivative based) problem and now the increasing liklihood of a large wave of inflation and drop in treasury value.

I think the only thing holding up the value of the treasuries is the Chinese "manipulation," as seen from this quote from a related Bloomberg article.

He is correct in that the Fed began and still continues its program of absorbing as much "toxicity" as it can tolerate. It is acting as the "bad bank" and taking on the paper the private, commercial, top 25 banking system cannot price. This was the purpose of the "bad bank" proposal, take on the junk and leave only the good material for the commercial banks and make the system look good. That whitewash won't steer us away from the problem. It was unacceptable because it would have devalued the stocks and hit shareholders hard. As a result of side-stepping that issue, the toxic paper is still sitting there, staring us down with the threat that has intensified, festering as it were until it leaps at us like an angry, neglected uncontrollable enemy. And, now, not only will the shareholders take the delayed hit, but everyone else will suffer a harder hit than they would have had we addressed the issue properly and taken action. It's waiting for us.
The other part of that observation is that the Fed, supposedly the savior of the system is itself poisoned and bankrupted by treating valueless paper as assets. It will be unable to do anything until they discard the toxic paper, in which case their balance sheet will suddenly drop to zero unless they also begin issuing media on the same basis as the toxic material, meaning unavoidable further dilution of the currency, more inflation, and all the expected, accompanying problems.
The "toxic" items must be flushed out of the system.
It'll be a month since Geithner pontifically stood before the press with two pages of a press release and announced we need legislation. Where's the news of the follow up? Where is the indication that Congress is taking him seriously? Since they don't understand the nature of the problem, they are not likely to move any faster than they normally do, through caucuses, setting up schedules, conducting endless hearings and ending up with consensuses shaped mostly by the industry which itself doesn't have the courage to look their destructive step children square in the eye.
Cover up? Count on it until we get a new crew in charge of the industry and needed repair work underway. To retain the same leaders in the industry only means some kind of mix of proposals results which skirt the principle issues and does not address the crux of the problem. Therefore, by the time the hearings emerge from the other end and the banking leaders' interests are served, there is no honorable or effective way out that does not lead us closer to the disgrace promised for us now.
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Old and gray
Message #377 - 05/20/09 10:34 AM
Duff also diagnosed the second disease as inflation. Would that it were so simple.
Thin ice for the entire domestic, commercial scene is more descriptive. Banking is essential to commerce, not the only factor, nor the major factor, but they believe they are and are trying to convince the world that is so. It's similar to an extortion scheme or a hostage situation. Until we subdue the threat and neutralize the threatener, there's no rest or assurance.
There are other means of conducting business, but long ago they proved too primitive and too restrictive, so they were abandoned. But, if banking continues to prove its incompetence, we may be sent back to the alternate means of conducting business and relegated to the status of just another "recessive" country. You've heard of emerging countries, well there's another end of that scale. . and it's happened in history. Rome, Spain, the British Empire, Genghis Khan, Alexander, Napoleon, and so on. . a flash of a few or a few hundred years and it's gone. Their systems were forced to revert and they embarked on the endless struggle to re-establish themselves. Bull-headedness prevailed at the top which led them to the self-delusions that nothing could go wrong, they could continue ill-advised policies indefinitely, ignore the warning signs, with no ill effects. Systems are more fragile than that and need constantly modified attention which deal with anomalies and accidents. We have one of those threatening us calling for attention.
A functioning system whose influence extends beyond the boundaries of our backyard not only deserves but requires respect to be operative and sustained. Playing it for what it's worth, as an instrument of personal aggrandizement is not the treatment that will preserve not only the system but all that depends on it.
In judging the situation at a time which should be considered no more than the start, we have people sitting in lead chairs confused about the nature and needs of today's problems. A host of Nero's and not one fireman in the house.
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Veteran_Lender
Message #378 - 05/20/09 10:58 AM
O&G... I don't know the exact date of your mishap but they did have a server issue here and even us Mods were blocked for a while. We're here more than most so perhaps your incident was simply untimely. I built laptops and work from some of my monsters now... started with Heathkit and Radio Shack models.

Regarding your latest... it STILL comes down to Full Disclosure. Even a Bad Bank is a Dumb Bank if it takes in with no questions asked. That's just giving the burglar the key and turning your head.
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Arrow of Time
Message #379 - 05/20/09 11:57 AM
O&G... I don't know the exact date of your mishap but they did have a server issue here and even us Mods were blocked for a while.
Maybe V_L is onto something here...hard for me to add anymore without knowing other details...and...if the issue went away, I would just forget it for now and see what happens in the future....

PS Thanks for the great info and discussion in this thread!
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Old and gray
Message #380 - 05/20/09 05:37 PM
VL and Arrow

Thanks for the input. The oddity persists. My experience is described perfectly at the link Arrow provided: I get a screen informing me that the certificate is not recognized, offers the choice of proceeding regardless, when the choice to proceed is taken the URL flashes red, but goes on. The entire sequence is something I'm not accustomed to. Eventually, I'll turn to another partition and another OS system installation to determine if it is the OS on this partition. I delay because all my reference material is stored here. This can be moved to a storage partition and accessed from the alternate OS eventually.
I'll get around it, but I'd prefer to finish with what is underway here first.

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Arrow of Time
Message #381 - 05/20/09 05:50 PM
O&G,

OK...go to this site to test the certificate, (there are certainly other sites like this, but this is just the first one that I found with google)...

www.digicert.com/help/

...and enter...

moneycentral.msn.com

...and you'll see the results...everything seems to look good for me...but...if you're getting to the msnMoney site login through another path/server then you'd enter the other path/server name...I hope that makes sense....
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mlsjapan07
Message #382 - 05/20/09 05:52 PM
Banking is essential to commerce, not the only factor, nor the major factor, but they believe they are and are trying to convince the world that is so. It's similar to an extortion scheme or a hostage situation. Until we subdue the threat and neutralize the threatener, there's no rest or assurance.
Great post! How do we fight a war on financial terror when there has been no accountability?
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Old and gray
Message #383 - 05/20/09 07:23 PM
On re-reading message #371, it occurs that may have been the first time theoretical economists (or, economic theorists, whichever) were consciously mentioned. They have a place and a function to perform, which due to the obscure and often tangled nature of the beast is often demeaned. That quick dismissal is so common, it may be one of the reasons politicians feel free to ignore economic theory when they formulate, legislate and promulgate laws pertaining to business and commerce. We pay the price. It results in ineffective laws.
Any theory of money is beyond politicians unless they are trained economists. Even then, in most instances that is no guarantee that the theory will be comprehensively understood. The reason for this is simple enough, it's the age is specialization. Research the separate concepts of currency, money substitutes, credit, interest, and the interactions on the market and you'll discover that each of these items requires nearly a lifetime of study. How do you inter-relate them? Students (or scholars) who finally make sense of the overall picture are usually too old to make a contribution to the vibrant, near-impulsive young man's world that has little room or patience for theory. Beside, they'll tell you, they read the book. So there you are.
The intricate shadings and nuances behind currency, bills, notes and fiduciary media are confusing enough, add to this mix the effect of banking, interest and credit and the usual symptom is a sudden dizzying disinterest, best described as overwhelmed. So, all but a minute few don't have the motivation or dedication to carry them through to the point where the consequences and effect of one on the other are apparent. You won't find anyone involved in the bustle of everyday political life with the time to devote to such studies.
How then, can we expect to find qualified people in a position to compose or propose, much less shepherd legislation through the legislative process with an informed and objective view? We end up with compromises. No matter how severe or casual the problem, we compromise, always at the expense of losing a grip on the situation and sliding into a more compromised position at the next turn of financial or economic events. The politicians listen to the bankers, and the bankers advise taking the path that leads to their own enrichment. With no counter arguments due to time constraints or lack of protagonists, there's little doubt which way the legislation will go.
Carry this thought through the regulating and supervising chain and we might be tempted to throw our hands up in frustration. But, one thought, which is a verity(!), fiduciary media holds attraction to bankers/brokers for two reasons:

1. It is a program of redistribution of wealth. It's not a job where income is steady, nor a career that can help develop a dignified respected social position. It is a cold, calculated redistribution of wealth, not with political overtones, or for the good of the community. And,
2. The issuer of the media is the one who gains. Everybody else loses! Stand on a corner and sell bonds backed by nothing and tell the potential customers that they can use these to establish a business, or buy a house. It's the same thing as fiduciary media except for the backing of a prestigious bank. As long as everyone in the community believes in the issuer, it may work. BUT, the instant they come running to the super-salesman's door asking for redemption, converting the bonds back to cash, and discover he's unable to do so, there's the problem. Not only for the salesman, but the community, for those who started the business, for those who extended him the credit, for those expecting to receive interest for their efforts.

What else do we have in the current situation? Call it inadequate cash reserves, illiquidity, or mismanaged risk, why should that happen if the bonds were adequately funded or supported? Doesn't this sound familiar to Washington? or, the corps of economists out there fumbling for obscure explanations?
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Old and gray
Message #384 - 05/20/09 07:25 PM
From the outset, the question is simply, how long can the salesman issue the porous documents before he's called out. Ask Bernie Madoff. He was selling nothing and escaped challenges for years. The banks managed to do it for 20-25 years because they were trusted. After all, they are banks! What could be more solid and more trustworthy?
The truth is, both Madoff and the banks passed the boundary where their separate financial systems could tolerate the vaporous promise of the media they generated. Bankers did not suffer. Madoff was caught. But his wife still has $69 million! Not much of a commission for $50 billion, but then what did he provide?
Even after the government stepped in and extended assistance to the bankers, they continued to reap their rewards. And, now that all the ex-banker public servants have declared the brunt of the storm gone and sunny skies in view, banks intend to continue their devious activities, with the government's full blessing and help this time. Also, with everyone's full knowledge of exactly what they are doing. So, since no one has put them in jail, none of their party has suffered, they interpret that as approval. They must be right.
I agree with VL about full disclosure. But, full disclosure without penalties is an empty gesture. Their idea, of course, is full disclosure within their community, not to the public. That was mentioned before. That's not my idea of the purpose of full disclosure. I'm for full disclosure that will penalize and eventually punish those who engage in anti-social practices. Ruin my economy, you get ruined. Eye for an eye may be an old and primitive concept, but it works!
From the early 19th century, economists with a eye toward morality have insisted that credit backed by nothing will be the ruination of the financial system. In no way can the issuer protect against failure in such a system. Given the human tendency to endure threats, even ostracism for the sake of profit, it would be up to a moralist to evaluate the baser tendency and warn against temptation. Early economists were moralists. This can be traced back to Nicole Oresme in the late 1400's, a bishop! and author of a study of inflation and monetary debasement still consulted by economists. Adam Smith's magnum opus, "Moral Sentiments" is another example previously cited. The English economists were equally adept at philosophy in general. Hume, J. S. Mill, even Hayek, and on and on. Today, morality is reserved for Sunday morning. The other six and a half days are ruled by the credo, "Business is business."
Issuing that kind of credit had a place in an economy growing out of primitive circumstances. The government wouldn't be able to print money fast enough to fund US growth without credit founded on the principle of fiduciary media. Walter Bagehot made the point that without credit, the thought that a railroad could be built was impossible. It had and probably still has it's legitimate use. As long as issue of the media is contained by market demand, it performs well and we can grow, funded by credit. But, the moment, banks discovered they could create their own intimate market, accompanied by the belief that there was no limit to how much media could be absorbed by this dedicated market, that point was the beginning of the end.
The practice cannot continue. There must be a restriction on the use of the media as determined not by private markets shut off from public review, but in open public view only as the needs of the market develop.
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Old and gray
Message #385 - 05/20/09 07:27 PM
All of this means that banks should be banks in the strict, classic sense. They should not be insurance companies, nor brokers, nor traders of political favors. If issuing the fiduciary media is contained within the limits of commercial banks only, we would have no problems. If commercial banks were chartered to operate as commercial banks, limited to the normal functions of commercial banks and nothing else, we'd have no problems. If the function of commercial banks was not passed on to the broker and insurance subsidiaries of parent holding companies, we would have no problems.

When they say shut up and leave us alone to conduct business as we see fit, then, we have a problem.

[olderstill]

Old and gray
Message #386 - 05/20/09 07:51 PM
OK, guys! Got the little bug!
It was the last Russian steel curtain that I installed. A little too powerful for Microsoft! They're after a few of my other firewalls, too.
I disabled the Russian ditty and it's functioning well.
I'm half tempted to enable it again.
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Old and gray
Message #387 - 05/21/09 09:06 PM
A UK outlet for economists' opinions was mentioned before. The papers run the gamut from reasonable to incredible. Sometimes the papers read so well, the light of dawn doesn't break through until halfway through the document with the realization there must be better ideas out there.
Not that the next two I cite are in that class, I mean to say that sometimes having read two or three in a row that deserve no more than a quick scan the reader is distracted from the true values in the next paper or two waiting down the line.

Margarita Sweeney-Baird, a lecturer at the Univ. of Birmingham, submitted a paper for publication in which she proposed a "Compliance Auditor". She summarizes the auditor's duties in the lead paragraph. . . plus a sentence.

Information is essential for the regulation and efficient operation of financial markets and the current crisis requires a new paradigm to provide information to the market, the regulators and to all investors that addresses the failures that have contributed to the current crisis. The innovation proposed is a compliance audit undertaken by a 'compliance auditor'. The role of compliance auditor in this new paradigm would be to assess the future risks and entire operation of a financial institution and to provide an annual report that would be disclosed directly to the regulators, investors and made publically available. A compliance audit report could provide independent and reliable information from financial institutions that is necessary for systemic risk analysis.
The current crisis in financial markets has been caused, in part, by a lack of transparency in a variety of financial instruments and further difficulties in valuing assets in illiquid markets are exacerbating the crisis.
The idea of an auditor seemed a half step toward what I believe may be necessary to corral the Saturday night cowboys. So, I was looking for more in the way of strong regulation and full transparency. The industry is not about to surrender to half steps, they would even welcome such a program. In addition an annual audit provides too much time for things to go awry. My proposal was to have near-constant auditing.
A response by Adrian Lucas of EVMTech (for which I can provide no more precise identification) was printed about 2 weeks later. It was not the position on the "compliance Auditor" suggestion that caught my attention as much as the questions raised by the respondent. Specifically,

"Why is there no demand that bank regulators communicate to shareholders more, if not all, of their communications with banks? Why all the privacy when taxpayers are the ultimate reinsurance? Presumably the "compliance auditor" would address this communication shortage?"

Later he asks,

"Would a global regulator, assuming the US would agree to it, be preferable to regulation of regulators through peer-reviewal processes? Who would regulate the global regulator?
"Who regulates auditors? Who would regulate a compliance auditor?"

Pesky questions of course. I made a reference in message # 371 above to Mr. Dimon's having no objection to a single "systemic" regulator. And, of course, the obvious question follows, "To whom will he report?"
And, the demand for full disclosure follows, all made available to the public, the ultimate sugar-daddies for the wild plungers.

Mr. Lucas calls for banks to assume the responsibility for "mistruth" and misinformation" about its activities. Furthermore he suggests that compensation for the staff work be awarded in the form of "Reserve Equity Bonds". The recipients of these bonds will be called on to supplement the cash reserves if and when the instruments loosed on the market fail. In this manner, the capital replenishment is not the responsibility of the taxpayer or the shareholder, but of the insiders who issued the paper. My enthusiasm for the idea may have embellished Mr. Lucas's proposal slightly, but the main gist is there, the "Reserve Equity Bonds" and recapturing the compensation in bond form.
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Old and gray
Message #388 - 05/21/09 09:07 PM
I prefer his approach to Ms. Sweeney-Baird's

These papers are copyrighted and available at the following links.

For Ms. Sweeney-Baird www.voxeu.org/index.php?q=node/3462

And, for Mr. Lucas www.voxeu.org/index.php?q=node/3539
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Old and gray
Message #389 - 05/22/09 09:45 AM
I must be out on a lonely limb, a step of two ahead of the cutting edge, in suggesting that something must be done to negate the unacknowledged influence of technology in banking transactions.
There should be little question that turning all this paper loose is harmful to the global system, the financial order, the value of the dollar, credit, interest rates, and ultimately the social order of our societies. Any thought of where the boundaries lie in limiting such media, must admit that in view of the difficulties we face, we've already exceeded the limits the system can tolerate. All of it is due to the speed and lack of coordination with which the transactions occur, courtesy of the computer. It certainly makes transactions more convenient but when you have several institutions generating this media without coordination, the danger is obvious. Yet, I haven't heard of anyone discussing or writing about it at length except for some old speeches from the DTCC CEO. I would not expect DTCC to be too insistent on a program of restraint since their survival depends on satisfying banks, and the bigger the bank the deeper the genuflect. Also, if the problem is big enough, DTCC will have that much more business in straightening out the mess. But, about 15 years ago the then CEO gave a speech addressing the issue, not in any great depth, nor was it steeped in theory, but, he did mention the effect of electronic transactions. I'm not aware that BIS or any part of the Federal Reserve system or the FDIC has addressed the issue.
It may be a given that the coordination necessary between the various CCPs being proposed is via computers, but that's after the fact. Something needs to be done before the glut of media is issued and chokes the marketplace. Waiting until it gets to the CCPs may saddle those entities with an impossible job of straightening out a new mess. Also, there's the question of the "backdoor" that Sec. Geithner's plan provides where not all new issues will be subject to the CCP process. How many of those will there be? More than the legitimate issues? They could cause a renewal of the same problem we now face just a month or two down the road.
Assigning a limit of new issuance based on the size of reserves may be a useful measure. Once a ratio is established and reached, the computer should lock out further issuance. There are relatively simple ways to install such a system. Once established, it should be monitored closely. Banks should not be allowed to manipulate by any means for the purpose of circumventing regulations; not allowed to merge at will with other units that would dilute the ratio of media over reserves, appear to reduce the stress on their position and provide more margin for the sole purpose of issuing more media. The ability of the market to absorb the media must also be studied, defined, established, entered into the formula and monitored.
And, finally, there should be a realistic ratio of fiduciary credit issued backed by reserves and deposited resources. This should recognize the already issued and any new fiduciary credit or other investment, insurance or otherwise characterized media developed and named solely to allow circumventing regulations. A new name should not open new opportunities or vistas, a lack of regulation should not permit unbounded activity, nor should ingenuity and innovation supplant good solid business and banking practice. If the bank management can't understand this, the regulating supervision should be able to step in and issue a stop and desist order with teeth. One or two such well-advertised incidents would get the point across to the industry and demonstrate regulators' unmistakable resolve. That should guarantee that the same crisis will not be repeated.
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Old and gray
Message #390 - 05/22/09 09:46 AM
This probably will have little if any effect on the majority of banks other than to make them sounder and better able to to do their jobs. It would be aimed at the top echelon of banks, the originators of the infrequently useful but potentially dangerous media, dangerous as proven by the perpetrators of this current debasement and defilement of the global system. If there's to be an auditor, which seems necessary when past and present unfettered practice is considered, authority and independence is imperative.
If you care to call this a "compliance auditor", fine. If this is what Ms. Sweeney-Baird was suggesting, I could accept that. But, it must be built on a base that recognizes and defines the role of electronic transactions and electronic banking. That comes first and is essential. We need limits defined and imposed as a base for the supervision, with penalties established to back up the regulation.
When the market can absorb the newly issued media in a constructive way, it poses no problem. As a matter of fact, credit issued on a fiduciary basis is essential for innovative growth which may have no other means of capitalizing. But, when it's issued for its own sake and for the sake of providing just another baseless way to enrich the issuers, it is too expensive for rest of the system to endure.
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_RF
Message #391 - 05/22/09 11:07 AM
Old and Gray,
It seems to me addressing ratings agencies or standards that define ratings are key to providing stability in the financial markets and system as a whole. These ratings really define risk on the balance sheet and in turn capital requirements. Some of the problem seems to be found in avoidance of the ratings system. Other issues are based on working around the intent of ratings, or poor reporting(due to poor performance or intentionally disregarding duties) overwhelming the system and lack of ability to verify. The ability to rely on ratings is key to a functioning system(domestic and global) in both perception an effective performance.

Maybe it would be wise to focus accounting and oversight efforts around ratings agencies. Broader authority, focus funding to strengthen capacity, coherence and reliability of audits to provide a more unified use of resource. The net work product has the ability to regulate risk and capital reserve as long as the system is not avoided(can't have this shadow system undermining the effort).

It would seem that breaking down the regulatory system into smaller and effectively less capable units. Has provided a weaker and less focused platform, that is much easier to work around, overwhelm and defeat. I think AIG is a good example of how the redefinition of who will and how institutions can pick and choose their regulator with disregard for capacity or expertise of a body. Regulatory bodies designed around an institutional based system, that has been tossed aside to allow mixing of previously separate operations(financial supermarkets). If we are not going back to institutional regulation, then it would seem focusing resources and limiting options that allow this picking and choosing of regulators is needed. I think it is important that a super regulator be more powerful than those it regulates. That is a frightening proposition, but then again even more frightening to not have enough power.
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Scared_Shirtless
Message #392 - 05/22/09 03:18 PM
Thanks Old & Gray;

A whole education contained in a thread...

I've learned so much! Please keep posting.

And have a GREAT day!!!

Still scared here...
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Virgil Syonid
Message #393 - 05/22/09 06:40 PM
I finally had the time to read through the first portion of the thread. This forum is enormous. The textual content up to post #200 alone is enough to fill a textbook.

There were some cries for a glossary back around message #90 that were never addressed. Since I sense the thread becoming increasingly hostile (coming at the reader hard and heavy) for newcomers, I decided to do my best at a content index.

It's posted below. Note that if a post number is associated with a topic, it is because I deemed the topic to be a central theme to the post. There is certainly less compartmentalization in reality than indicated in the index, but the index is a fair summary (if I do say so myself).

The index is currently for posts #1 to #200 only. I've reserved a location below for #201 to #400, which I'll fill in later. Changes and criticisms are certainly welcome, but please post them all en masse to avoid cluttering up the thread.

My advice is to find some or all of the topics of interest to you and read up! Duff, O&G, and others have done a phenomenal job of describing the nature and extent of the current financial meltdown, and the reader will certainly benefit from their collective wisdom.
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Virgil Syonid
Message #394 - 05/22/09 06:42 PM
Content Index (Posts #1 to #200)

BOLD posts indicate the 'juiciest' stuff (in this reader's opinion).

2,3, 157, 158 - Nature of the System; Abuses of the System; Nature of Fiduciary Media

4, 6, 165 - A Case for the Gold Standard

6 - Fractional Reserve Banking
8, 9, 19, 48, 70, 123, 125, 131 - Obsolescence of Current Banking Regulations; Resistance to Regulation
12 - The Curse of 'Wait and See'
13, 14, 44, 51, 180 - Inflationary Problems; Obsolescence of Keynesian Economics
15 - Four Problem Areas; The Limited Utility of Interest Rates
17, 27, 44 - Bernanke's Mistakes
18, 21, 33, 56 - Redefining the Fed
20, 58 - A Case for Bankruptcy
23, 53, 56 - Re: 'Too Big To Fail'
24, 25 - The Good Ol' Banks: Prudent and Fiscally Responsible
26, 67, 165, 190 - Big, Bad Banks
29 - The Insidiousness of Fascism
30 - Question: Should we Abolish Fractional Reserve?
31, 44, 190 - Banks: Faking the Data
33, 36, 37, 52 - Simplification of Accounting; Value is Value
34, 170 - On Bernanke, Geithner, Summers
33, 39, 40, 41, 79, 171 - Quantifying the Extent of the Problem
41, 42 - Unwinding the Derivatives: Problem

42, 43, 129 - What ARE the Derivatives?

45 - An Inconvenient Solution
46 - Negligence and Accountability
46, 48, 80, 105-108, 167, 168 - Full Disclosure
49, 67, 114, 171 - Foreknowledge of the Crisis

51, 80, 81, 83, 114, 143, 159 - The Case for Quantitative Transparency, not Quantitative Easing

21, 25, 52, 115, 116, 128, 168 - The Anatomy of Effective Regulation

54, 56, (26) - Question: Should Banks, 'Investment Banks', and Insurers Be Separate?
59, 60, 61, 85-88, 199, 200 - The Musings of the 'Oldtimers'
61 - Nationalization: Not the Solution
70, 109, 120, 159, 194 - The Slow Death of Regulation
73 - GE vs. JPMorgan
75, 76, 81, 83, 90 - Responsible Banking as a Duty
77, 79 - Regarding Credit Risk Transfer (CRT)
79, 80, 92, 131, 143, 171 - Intractable Extent of the Problem
81, 91, 95, 113 - The Problem with Derivatives and CRTs
90 - A New Banking Business Model
93, 122, 192 - The Mathematical Nature of Risk
96 - Investment Vehicle Definitions: securitization, CDS, SIVs, etc.
100, 154 - Re: Disintermediation

102 -

110 - Negative Basis Trading
113, 114 - The Nature of Liquidity Problems
36, 115, 167 - Banking is Difficult
115, 116 - The Russian Solution
120, 135, 161, 190 - Criminal Enterprises
122, 123, 125, 128, 189 - Conflicts of Interest and CRAs
130, 131 - Computers and Finance
130, 189 - Brooksly Born
131 - Lack of Qualified Management

133, 134 - <Should be Deleted>

141 - Definition: 'conduit'
145 - Known Unknowns and Unknown Unknowns
152 - Re: Insurance Fraud
153, 157, 158, 171, 194 - The Deevolution of Banking

157 - Banking Problems in the 80's; the Origins of Derivatives

158, 194 - Regulation Proposals; Suggested Reading
7, 158, 164 - The Gramm-Leach-Bliley Act
165, 179 - Gold Manipulation; USD Manipulation
167, 168 - Problems with 'Disclosure'
169 - Global Scale of the Problem; "Investment-Based" Economy?
171 - The Derivatives Bubble
13, 179 - US Treasury Bond Abuse
181-183 - The Swedish Solution: Problems
187 - 'Intelligence' Usually Isn't
6, 187, 189 - The Phenomenal Rate at Which 'Money' is Produced
189, 190 - Origins of the Financial Meltdown
196, 197 - Money is Power; The Parasitism of Wall Street
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Virgil Syonid
Message #395 - 05/22/09 06:43 PM
(Kindly Reserve for Content Index #201 - #400)
- Virgil
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Old and gray
Message #396 - 05/22/09 11:04 PM
OH, Virgil! What a lot of work! I hope folks appreciate your effort! My whole-hearted gratitude.
We'll have to let #133-134 stand. Nothing I can do about deleting anyone else's posts.
By the way this thread is a carry over from the original thread which was gathered together, edited after a fashion and transferred to this sight by Duffminster.
The original site is still there if anyone cares to see how this developed from the beginning. The link is below.

moneycentral.msn.com/community/message/thread.asp?board=MarketTalkwithJimJubak&threadid=914177&boardname=Hide&header=SearchOnly&footer=Show&linktarget=_parent&pagestyle=money1
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Old and gray
Message #397 - 05/23/09 12:30 AM
_RF

Duff had a minor question in re the CRAs (Credit Rating Agencies). I responded back in message # 122, indicating my belief that ratings agencies are in a bind of sorts. They're dependent on the issuers of the CDS and generic derivatives for income and continued business.
It's difficult to tell whether they are or were complicit in the faulted process. We have no idea if they received the proper information or not, whether what was represented as the packages to be distributed were finally distributed intact or not after the rating, and so on.
CRAs have a refined system, with mathematical models that respond to input from committees, some of them computer programs, some operated manually. But, judging from your informed post, you're probably aware of all that.
Very early I learned the meaning of the law of diminishing returns and the value of having competent backup for your work. In estimating (which pretty much describes ratings) off the top of the head estimates can be issued and if based on sufficient experience can be within 12-15% say.
If you're working with a 8 to 10% profit margin, that's absolutely no good. On the other hand small companies dealing with inexperienced customers usually tack on about 30 or 40% (or more) just to make sure they'll be able to open the doors next week. Bigger jobs facing competition are required to be more accurate for survival's sake. In that case, off the top of the head is taboo. Someone might sit down and study it for three days or a week more or less and pop in the boss's door to announce a rough figure and ask, "Shall I go on?"
That figure (depending on the size of the job) might be in the reliability area of 10% or less. That's usually not good enough, so more time is devoted. Eventually, you get down below 5% somewhere and any additional time spent on estimating is a long drawn out process that would result in minimal advantage. It's difficult to get better than about 2% accuracy in many industries in a reasonable period of time. This is the law of marginal returns, which you probably understand, but the additional time needed to generate more accurate figures is at almost disproportionate cost.
CRAs are not much different, except they can be more much more accurate than 2% on short notice, PROVIDED, they are given accurate data to work with. For instance, as mentioned back in message #122, something with no history is problematic. Bankers recognize this.
Basel II set requirements at five years of accumulated data in determining risk. This was settled on from practical experience. If issuers of the paper under consideration submit a new instrument just designed last week, where's the five year history?
If the Geithner's proposals discussed in messages #351, 354, 358 and 359 are enacted with the PR provisios attached, we'll have a slew of new instruments coming out the issuers' back door every day so they'd escape classification and control by the proposed CCP. Nor will CRAs be capable of rating them adequately.
Of course, you understand the nature of ratings, tools for both the issuers and the market. Three parties are involved with the instruments: in addition to the CRAs, the issuer and the counterparty. The most reliable ratings to this point have been generated when both the CRA and the issuer subject the instruments to a rating analysis, in other words in-house system for the issuer and the CRA being considered a disinterested party. If I were on the purchasing end of a $500 billion or a trillion dollar buy, I'd see to it that I had my own risk assessment by my own in-house set of analysts. Even if a regulator was in the mix somewhere, I wouldn't have more faith in him than someone I pulled in off the street. I want my own evaluation by my own chosen experts. . .even if it's another of the big three CRAs. I don't know what assurances a regulator would provide to me. I'd be more interested in having that regulator stationed in the issuers' office, watching them assemble the instruments and certifying their reliability.
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Old and gray
Message #398 - 05/23/09 12:34 AM
So, in all, although I agree with the first paragraph of your post, am sympathetic with your last paragraph, from my viewpoint, I'd find it futile to support the second.
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neohguy
Message #399 - 05/23/09 05:00 PM
Virgil, thanks for the content index you compiled in post #394. I wish there was someway that the post number could be displayed in the thread title so that readers would be aware that it exists. something like content index post #394-395.

[olderstill]

Old and gray
Message #400 - 05/25/09 12:32 AM
_RF

Apparently, I stand corrected in my assessment of the CRAs by none other than Moody's. Just as soon as I posted that heavy regulation should not be needed to keep the CRAs in line, along comes the news that Moody's has fired managers and assessors who mis-evaluated investment instruments in the past. I discovered this article today on the nytimes site. Notice the publication date which I've emphasized in bold type.

Moody¡¦s Says Workers Rated Some Securities Incorrectly
¡@
By VIKAS BAJAJ
Published: July 2, 2008
Already under intense scrutiny for its role in the credit crisis, the Moody¡¦s Corporation said Tuesday that some employees had violated its code of conduct in rating complex European securities.

Noel Kirnon will be replaced as head of structured finance at a Moody¡¦s subsidiary.
The company said that it would discipline and possibly fire employees who had been involved in rating the debt, which are known as constant proportion debt obligations. Separately, Moody¡¦s said it was replacing the executive, Noel Kirnon, who was in charge of its structured finance business at its subsidiary, Moody¡¦s Investors Service. It would be the second high-profile executive departure announced by the company in less than two months.
The news comes as policy makers around the world are looking into how Moody¡¦s and its competitors, Standard & Poor¡¦s and Fitch Ratings, gave high ratings to mortgage and related securities that turned out to be far riskier than their ratings would have implied and have cost the financial system hundreds of billons of dollars. The companies are the subject of several investigations in the United States and Europe.
Critics have asserted that Moody¡¦s and its peers succumbed to pressures from investment banks that were packaging complex and risky debt during the credit boom earlier this decade. The rating firms are paid mainly by issuers of securities, and receive a relatively small percentage of their revenue from investors.
The attorney general of Connecticut, Richard Blumenthal, who has been investigating the rating firms, said Moody¡¦s admission of incorrect debt obligation ratings was "just the tip of the iceberg." His office is looking at how the firms dealt with investment banks, rated municipal bonds, and handled errors and mistakes.
In a statement, Moody¡¦s said unidentified employees had violated a code that required analysts to consider only credit factors, not "the potential impact on Moody¡¦s, or an issuer, an investor or other market participant."

Reading between the lines, I'm assuming (perhaps incorrectly) that the firings took place in Europe even though the AG of Connecticut is quoted. Since this took place about 10 months ago, it may well have been before I learned how to read!
I think I owe an apology to _RF and reconsideration of that center paragraph of his with which I could not find myself in agreement. Obviously at the time of the firings, Moody's believed that the committee should have asked the issuer if this was the "truth, the whole truth, and nothing but the truth" rather than just take the money and run. The fired manager must not have taken Moody's ethics to much to heart.
Whether this is an isolated incident or only one of series of occurrences during the period these vehicles were being evaluated is difficult to determine without further verification. Does anyone recall having heard or read anything further from the Conn. AG? Or, any other source about CRA firings due to unethical or unprofessional evaluations? This case alone is enough to cause concern.

Anyone?
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Old and gray
Message #401 - 05/25/09 11:13 AM
We may have arrived at a point where some theory needs to be reviewed and probed in order to determine just where the private and public interests should direct their attention and efforts to get us out of the old rut and into new territory. Mentioning the new concerns the LCFIs (Large Complex Financial Institutions) brought to us, or thrust on us, will not be enough. Economists here and abroad do not seem to be responding to the suggestion that e-money, e-banking needs serious, novel consideration. They haven't ventured into defining what has been unleashed on the financial scene and how and why it effected us so seriously. I'm convinced some of them have read strands of this thread, and they have addressed some of the issues mentioned here, but they have studiously avoided any attempts at defining or untangling the mess the LCFIs have created with their new issues.
It's understandable since it's nearly impossible to describe which arm of the new institutions was responsible for the issuance of the corrupting paper, the banking, insurance or brokering interests. Economists don't usually involve themselves with all three branches so it might be unseemly and/or presumptuous for them to step in and take a swing at the issue. It's not gratifying to whiff (first time out) at something new that defies description. Putting your prestige on the line in a discipline where prestige is the only thing that puts food on the table is a risky undertaking. As a group, the economists have hunkered down among the standard phrases, standard approaches, and standard (even if inadequate or inappropriate) solutions.
It's a guess whether it would be appropriate to do so here. Considering the events, the sequence, and the unanticipated side effects of the derivatives, it brings a host of issues to the forefront of my own thoughts. Among these are the concept of currency and its various functions, interest and credit, of course, and then the nature of these "structured vehicles" and their similarity and dissimilarity to pure fiduciary media all enter into the mix. We've already offered suggestions on how to attack the problems created and may be better off leaving it at that. The attempt was to be practical, use standard procedures, so the proposals would be easily understood. To carry it from this point forward is to wander off into finer distinctions which sometimes become tiresome and trying. Definitions get a little sticky and word meanings sometimes need refinement to the extent that new meanings are drawn out.
For instance the current crisis could be restated this way in theory: economic expectations for the future cause bubbles, disappointments cause the bursting of the bubbles. Simple enough to begin with, but then the financial questions begin to emerge: just what is the mechanism and what is effected here and how? We have a credit crunch, we have the fear of inflation, we have investment problems, doubts about interest rates, and the flood of currency, all of this threatens us in our crisis. How is it inter-related?
So you start with a simple description and end up with a mass of questions, most of which can be explained only by defining terms from scratch and demonstrating their influence, contribution, and involvement. And, we end up with questions such as: why does the issuance of the paper influence the value of currency; or the purchasing power; how does this effect interest rates; why should this effect investment; how has this been addressed in past literature and how can it be reconciled with old precepts?
You get into issues like the use of money. The changing functions of currency in response to economic problems. And, too soon it is not a practical problem being dealt with, people lose interest and drop out until the last two old guys are sitting with drinks in their hands, arguing over the meaning of a couple of words into the night after everybody else has turned out the lights and gone to bed.

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Old and gray
Message #402 - 05/25/09 11:15 AM
Do we dare go there? Is there enough interest in the guess work of theory, something which has a high likelihood of never coming into being?
Or, are there still undefined or unexplained issues that have been introduced and dropped before the explanation was thorough enough to be understood? Should we review the old posts and address issues which might seem incompletely treated, or has the old material all been thrashed enough?
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_RF
Message #403 - 05/25/09 11:51 AM
Old and Gray,
Thanks for your thoughts. My thinking was based on trying to look at the three leg design of Basel II. I agree that a system will not be effective if you disregard any part of the framework. From my perspective, which is not from a financial professionals point of view(I am an electrician by trade), I see how risk is evaluated and defined as the most troubling.

Supervisory functions have potential weakness when you have off balance sheet or "unregulated" products. There is also potential problems with disclosure and accounting. there is always the possibility of human error in judgment. I think these issues can be improved upon. No matter how you slice it though, if the risk is not evaluated properly evaluated supervision will never have a chance of functioning even if performance is flawless.

On the front side disclosure and due diligence in collecting information cannot be discounted. If this fails, there is little hope for a good outcome as the system starts with garbage in and has no chance of turning garbage into diamonds if you will. I do believe that this is an area that can be addressed and is likely one of the first areas we will see regulatory change.

Accounting for risk and proper capitalization is a greater challenge. There are many challenges in this area, as well as a good deal of guess work based on history as well as assumptions. The focus(reliance) on internal accounting and evaluation of risk brings about a conflict between a desire for a competitive advantage and consideration for systemic risk. If you do not have a regulatory body that can define certain aspects or limits that all competing parties will base activities upon. You begin an escalation of risk that will not stop until someone fails. Simply, one institution takes on greater risk and gains what is perceived as an advantage as long as they do not fail. When the level of risk is masked through the internal risk analysis so as to not lose any competitive edge or gain some perceived advantage. You step up risk across the system. If the governments around the world believe blindly that competition will regulate this and promote the activity that is building in greater risk. We will never have a reliable balance and sound system that serves the economies.

When risk is analyzed I think it is important that market pressure is considered. Historical data is valuable, but obviously limited. If pressure based on debt loads and relative earnings has reached a more stressful level. This will effect risk as we have seen. Actions taken and loss of employment when safety nets are weakened and debt load pressure runs high, significantly impact risk. This has to be acknowledged. The risk analysis should both reflect this as well as be able to price this in(effectively increasing the cost to add pressure to the system, as well as reward reducing risk and pressure). When the system attempts to spread across the economy, it has to be recognized that you are not removing risk but instead possibly spreading pressure or weakening your safety net. I believe special attension has to be given to these considerations today. Mainly because we have cast aside our separations between institutions which offered and inherent check and balance. If this is the framework that will be used, risk must be measured with a broader systemic view, and the price of that risk is the only tool that will regulate it.

The price of risk to products is based on its definition. The capital reserve requirement is based on what the products risk is defined as. Be it the best approach or not. It just seems to me that how risk is defined through its rating is central. That being the case I assume it is a good place to focus efforts, guidance and resources. Again that is just my perception from a non-professionals point of view.


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_RF
Message #404 - 05/25/09 11:56 AM


If I understand what has or is being attempted through deregulation and broader freedom across institutional boundaries. We are trying to spread risk through the system and reap extra capacity to lend. It is a bit of a shell game. I am not sure if that is good or bad(when managed properly), but as much as certain institutions are glad to make use of this newly acquired capacity. There has to be appropriate measure of its limits and costs. The Security Modernization Act opened the box, but failed to recognize the capacity wasn't being created, it was being transferred across institutions. The assumption that greater capacity would be generated through efficiency would have been marginal at best(in my opinion of course), certainly near impossible to quantify without broadly measured historical data. Hopefully this has been recognized now that we are feeling a small amount of potential systemic damage that can be created.
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Old and gray
Message #405 - 05/25/09 09:13 PM
_RF

We are trying to spread risk through the system and reap extra capacity to lend.
The propaganda is still being distributed for general edification. You are expected to draw that conclusion. It had, nor will it have anything to do with lending.
In issuing the SIVs, drawn up on the fiduciary media tactic, it is stored and issued as you point out, in the off-balance sheer conduits. Derivatives are accounted for in the memoranda of their report, sent in to FDIC which publishes a balance sheet for banks in different categories. The accounting does not include the derivatives among assets or liabilities, meaning their status is privileged, sort of an invisible existence, if that's possible, it was hoped for.
Ordinary fiduciary media is used to extend credit by means of simply establishing an account and crediting that account with whatever amount has been applied for and approved. This is balanced on the other side of the ledger by future value the bank expects to receive. It's a legitimate economic and accounting procedure. So ordinary fiduciary media is accounted for completely. The SIVs are not. Yet, they float out in the financial world in the manner of something of value. And, they have influenced people's thoughts as if they were of real value. But they are backed by nothing but some vague promise that cannot be kept.
When kept off the balance sheet, the hope is that it will not effect circulating values, or have any impact on interest rates, normal currency values, etc.
That was their expectation. However, expectation is the force that inflates bubbles and disappointment is the force that bursts them. As you can now see, the expectation met with disappointment.
I'd point out one common underlying theme which was passed over in your last two posts, human behavior. The expectation was that trained managers understood the dangers in excesses and abuses; the disappointment was that they served themselves and not the economy or the market. Mismanagement is the central theme. Factor in human frailty, weakness, or inability to draw conclusions as to how damaging self-serving behavior can be. If the insiders knew the consequences beforehand, all the more damning to them.
Just a while ago I had to turn the TV off get up and walk away to preserve my composure. (At my age you lose that and you spend the next two days in bed.)
CNBC had a roundtable discussion which was dealing with executive compensation. The guests were all current or past CEOs of banks and large corporations. In the short while I watched, the topic of discussion very quickly turned from executive compensation to reasons for the bursting bubble. In rapid succession, almost machine gun fire staccato, the reasons began to include everything you'd read about in the papers for the past two years, I'd imagine. They were talking over each other in disorderly fashion, couldn't wait to get their two cents in. Then someone began to tie it all in to "housing", that's when I got up and walked away.
It's about time they accepted the fact that the people sitting at the table were responsible for the excesses and abuses not housing, or SVIs, or derivatives, or CDS.
As I've said before, inanimate objects do not rise from the table (or leap out of the vault) and attack people! It's the people's misuse and mismanagement of the inanimate objects that brings on crises!
Those "gentlemen" sitting at the round table were not about to accept blame for their poor judgment, lack of dedication, failure to inform themselves by means of all the literature available dealing specifically with the problems they inflated. It was anticipated by many people in many positions, advice and cautions were extended to the industry in general, and it was all ignored. Many of the publications dealing with the issues are cited in this thread. They didn't do their job; not in preparing themselves or managing their staff, or seeing that the needed programs wer in place. The senior management and the board are responsible for that. The system didn't work because they failed!
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Old and gray
Message #406 - 05/25/09 09:14 PM
Perhaps when the index is completed we may be able to link subject matter in the thread to the location in the text so people could take advantage of info previously posted. All of this was covered previously, yet, it's worth a replay. We've get to get our minds focused on cause and effect and not lose sight of the essentials.
Almost all of what you post, I would venture, I could agree with. If you would include an evaluation of the management skills of those who foisted this on the world, you'd have me on board, paddling the canoe for all I'm worth.
It's never a system. That's beyond the capabilities of a system's nature. It's the people's abuse of a system that causes problems. What we had could have handled the situation had it not been stretched beyond capacity. But, those responsible, didn't care then, they don't accept responsibility now, and they would do the same thing all over again as soon as the opportunity arises.
My suggestion for the required correction is simple: do as Norway and England did. They purged their systems of the incompetents who delivered them to their fate. Norway came out of it fine as I commented back awhile ago. On the other hand, the abusive miscreants who handled England's system were so clever, England has not yet been able to right the ship. But, hopefully, they're on their way.
We would be further along to recovery if we admitted baldly, it's the people! Even if we had to import replacements, we'd have been much further along than we are now with all our apologetic, boot licking, babying of a class of managers deserving of no consideration whatsoever. Which to me indicates that those now in a position to enforce such a program are as guilty as those who led us into it and executed it for their own benefit.
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Old and gray
Message #407 - 05/25/09 09:19 PM
_RF

BTW, I have some notes on your message #403 which, if they seem coherent enough on completion, I'll eventually post.
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Duffminster
Message #408 - 05/27/09 08:38 PM
Caveman,

I've been preoccupied lately and it may be a while before I can get fully re-oriented to the latest thinking in the thread but in doing a quick review I found your comment and something Decoy pointed out to me:


Duff's prior rebuff to an "aggregate demand" trigger to a collapse makes sense to this caveman, if I understand it, and appears dead on. In the age of Mr. Toffler's accelerating future shock; timing may be the thing that that truly offers the least control. I believe we will hit a "emperor has no clothes" tipping point, (almost did the other night with Barney Frank and the kid from Harvard), despite the best collusive efforts to suppress it. Which brings me to a question I asked this forum a few months ago: "IF we are headed for a default should we control the timing?"

"FEDS GRANT EMINENT DOMAIN AS COLLATERAL TO CHINA FOR U.S. DEBTS!"
There was talk several weeks ago in regard to the Chinese wanting guarantees on their trillions in US treasury bonds and then this story started floating around the internet.

If anyone has confirmation please post it. In the meantime, the thought that anyone without full disclosure and congressional authorization could make such an agreement with the Chinese is beyond treason if has happened. Let us remain alert and vigilant so that if it is discovered this has happened that immediate and appropriate actions are taken to reverse it and if it going to happen to prevent it.

halturnershow.blogspot.com/2009/02/feds-grant-eminent-domain-as-collateral.html
Beijing, China -- The United States of America has tendered to China a written agreement which grants to the People's Republic of China, an option to exercise Eminent Domain within the USA, as collateral for China's continued purchase of US Treasury Notes and existing US Currency reserves!

On February 11, Bloomberg Business News reported that China was seeking "guarantees" for its US Government debt (Story Here), and it now appears they got it. Well placed senior sources at the US Embassy in Beijing CONFIRM the formal written agreement was delivered by Secretary of State Hillary Clinton during her recent trip to China.

This means that in the event the US Government defaults on its financial obligations to China, the Communist Government of China would be permitted to physically take -- inside the USA -- land, buildings, factories, perhaps even entire cities - to satisfy the financial obligations of the US government.

Put simply, the feds have actually mortgaged the physical land and property of all citizens and businesses in the United States. They have given to a foreign power, their Constitutional power to "take" all of our property, as actual collateral for continued Chinese funding of US deficit spending and the continued carrying of US national debt.

This is an unimaginable betrayal of every man, woman and child in the USA. An outrage worthy of violent overthrow.

Eminent Domain is the power of government to TAKE private property for public use without the consent of the property owner. Under our Constitution, the government can only "take" when providing "just compensation" for what they've taken.

Who decides what constitutes "just compensation?" The government!

in past "takings" homeowners who felt the government was not paying them enough for property have filed lawsuits. In absolutely every such case, the value placed upon the property by the government was upheld by the courts.

Our federal government has now granted to China, this power to "take" our homes and businesses in the event the US Gov't defaults on its debts.

Let's play this out as a worst case scenario. . . . . .

The US Gov't goes belly-up and China comes in and says, "they owed us $700 Billion in Treasury Notes and another $2 Trillion in actual cash money which is now worthless. We are taking the entire state of Hawaii and the entire state of California in lieu of this bad debt. "

With the stroke of a Chinese chop stick, Hawaii and California -- all the land and buildings in those states -- are now owned by China.

The "taking" would be a "valid public use" b
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Old and gray
Message #409 - 05/27/09 11:25 PM
Who is Hal Turner, the author of this article?

Looked him up in wikipedia and found this.

Hal Turner - Wikipedia, the free encyclopedia
Harold Charles "Hal" Turner is an American white nationalist and white supremacist from North Bergen, New Jersey. He ran his program, The Hal Turner Show, as a webcast from his home once a week, and depended on donations from his listeners. He quit the show in July 2008. In August his website also closed down, though he retains a blog.
I'll pass.
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Old and gray
Message #410 - 05/28/09 12:19 AM
Returning to the thread. . .

_RF

In RE your post # 403 referring to Basel II:

Basel II is not yet in effect. This year, Paul Volcker, in an appearance before a Congressional committee, referred to Basel I and said it took two years to implement. He was then asked about Basel II, shrugged his shoulders and said something that added up to, "Who knows?" to my recollection. That was my impression. Although I don't remember his exact words, I'm sure they were more diplomatic.

As for Basel II, the following comes from the BIS, Financial Stability Institute website. The work it was extracted from was the Executive Summary of "Implementation of the new Capital Adequacy Framework" (Basel II). The bold font is mine for emphasis.


Executive summary
The new capital adequacy framework (Basel II) is a comprehensive framework for determining regulatory capital requirements and measuring risk. The process of implementing Basel II presents a variety of challenges for both supervisors and banks. For instance, some countries are developing or revising laws and regulations in order to implement the new framework. In addition, banks and supervisory organisations are in the process of acquiring additional human, financial and technical resources in order to implement Basel II effectively.
The Financial Stability Institute (FSI) decided to follow up on its 2004 Basel II implementation Questionnaire this year in order to see whether the plans reported in 2004 had changed significantly. 1 The Questionnaire was sent to 115 jurisdictions in Africa, Asia 2 , the Caribbean, Latin America, the Middle East and non-BCBS Europe. BCBS member countries were not included in the Questionnaire. Responses were received from 98 jurisdictions, representing an overall response rate of 85%. The results from the Questionnaire indicate that 95 countries 3 are currently planning to implement Basel II. 4 A number of other countries are still undecided as to whether or not they will implement the new capital adequacy framework.
Based on the 2006 Questionnaire responses, each of the three credit risk approaches under Basel II will be implemented by more countries than indicated by the 2004 Questionnaire results. 5 The standardised approach is expected to be the most widely used of the three credit risk methodologies for calculating capital requirements ¡V 85% of respondents adopting Basel II plan to implement this approach. The foundation internal ratings-based (FIRB) approach ranks behind the standardised approach, at 67%, while 55% of respondents adopting Basel II intend to offer the advanced internal ratings-based (AIRB) approach. Some countries have decided to implement only the standardised approach for credit risk, while others will offer only one or both of the advanced approaches.
Similar trends are evident for the operational risk approaches. The number of jurisdictions intending to implement one or more of these approaches under Pillar 1 has increased significantly since 2004, with the basic indicator approach expected to be the most widely used of the three possible approaches.
A number of countries have decided to offer one but not both of the basic indicator or standardised approaches for operational risk. This partly explains why the number of jurisdictions adopting the basic indicator approach for operational risk is lower than the number of jurisdictions adopting the standardised approach for credit risk.
Relative to the 2004 Questionnaire results, more countries are now expecting to implement Pillars 2 and 3 before the end of 2015. Most intend to implement both at the same time; however, a few will implement Pillar 2 before Pillar 3.

[olderstill]

Old and gray
Message #411 - 05/28/09 12:20 AM
Basel II with it's more stringent requirements for (1) evaluating internal and external risk factors which would determine Capital requirements, (2) calling for improved bank regulation, and, (3) calling for disclosure to the market and counterparties, is obsolete before implementation.
You refer to it as a three legged design, I'll call it a three legged milking stool that has not a leg to stand on. Bank management strategies, which include their own risk assessments controlled by internal management practices or lack thereof, having favorable legislation passed to exclude regulations or supervision and plain old mismanagement, have rendered Basel II superfluous. It is plainly a non-entity. If it is adopted as it now stands it will be of use as window dressing and nothing else.
It took about four years from first draft to a relatively acceptable draft, and for that effort, there is no more than a starting point in need of reconstruction.
In the US, the LCFIs over-leveraged themselves to the point taxpayer bailout was required. Gramm-Leach-Bliley killed any chance of disclosure or regulation, and, market discipline, part of the third leg, was completely absent.
I'll let you take your pick on which of the missing three legs is vital for implementation.
The banks, as I've mentioned before, are fighting disclosure on the basis of "proprietary rights". Risk itself has been pretty much formalized. I have a shelf full of documents dealing with risk - principles, guidance, strategies, important elements and checkpoints. Of what use are they if senior management does not see to it that the procedure is installed and operating?
You are absolutely correct in stating that there are many challenges in the risk assessment procedure. And equally correct in stating the consequences of neglecting risk evaluation. And, now that we see that management has not tended to their responsibilities, do you believe that making the requirements more stringent, will make them any more likely to do their work?
As for your unexpressed contention that carelessness can ruin more than just the market for the instruments, we've seen that. Everything was ignored as though it was all taken care of, when in fact we know it was not. It's as though they set out to prove that it would not work by doing precisely what was wrong for the instruments, the market, the counterparties and the economies effected. And they shut up anyone who pointed out the impending failure.
So, I agree with what you posted, except that Basel II has to begin all over again.
When you read through the partial Executive Summary I posted above, you have to conclude from first introduction (2002) until projected implementation (2015) means we are at least another dozen years away from an effective Basel II Accord. It couldn't work out better for the banks if they had planned it. No more regulations for another dozen years.
Wonder how severe the next go around will be?
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Old and gray
Message #412 - 05/28/09 12:22 AM
Whatever happened to flow5? Those posts were so darned thorough and informative. I miss them.
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Old and gray
Message #413 - 05/28/09 12:36 AM
Referring back to the executive summary above: If a number of countries are considering not implementing the provisions of Basel II as they stand, is it likely that US banks would willingly extend a competitive advantage to some rogue banks in unregulated countries? Or, would they decline to sign on for the Basel II in order to take advantage of an open market? Considering the difficulty the US banks now have in meeting capital requirements, what's the likelihood of their agreeing to more stringent requirements? Or, once agreed to, meeting them?
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Duffminster
Message #414 - 05/28/09 01:19 AM
Old and Gray,

My apologies for not vetting Hal Turner. I let my paranoia override my journalistic sensibilities. Also you mentioned:
Whatever happened to flow5? Those posts were so darned thorough and informative. I miss them.
He hangs out over on FedWatch, once the most informative board on MSN in my opinion. I spent years over there. Most of the original cast has left but Bruce and Flow5 remain. Flow5's latest post is a good place to draw him back into this thread:
Monetarisim Has Never Been Tried --- Bernanke Says Forecasting is Hard, Wishes Grads Luck

moneycentral.msn.com/community/message/thread.asp?board=fedwatch&threadid=1125966&boardname=Hide&header=SearchOnly&footer=Show&linktarget=_parent&pagestyle=money1

You can get to that board by clicking on "Topics and Tickers" from the message Boards menu and then clicking on "FedWatch". I agree that Flow5 is one of the best on these boards for deep and detailed analysis and research. Bruce can be terse but his knowledge and experience are relatively profound in my opinion.
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Duffminster
Message #415 - 05/28/09 03:13 PM
Old and Gray,
Considering the difficulty the US banks now have in meeting capital requirements, what's the likelihood of their agreeing to more stringent requirements? Or, once agreed to, meeting them?
Slim to none. The question for me is "how will such snubbing of the global banking communities desire for better regulation and capital requirements impact US currency and debt markets?".

I wonder how the US banks feel about this idea (below), which is being floated seriously by the BOE and I wouldn't doubt being considered seriously by the US government and Federal Reserve, given the supply situation?

BOE’s Tucker Says Regulators Should Require Bond Bank Buffers
www.bloomberg.com/apps/news?pid=20601102&sid=awW9sCjePw.Q&refer=uk
May 28 (Bloomberg) -- Global regulators should force banks to hold assets such as government bonds as a buffer after the financial crisis exposed a “shocking” lack of liquidity at some U.K. lenders, Bank of England official Paul Tucker said.
“Regulators should define the ‘liquidity buffer’ to comprise high quality securities that can reliably be traded or exchanged in liquid markets, including in stressed circumstances,” Tucker, the bank’s deputy governor for financial stability, said today in Tokyo. “In practice, that would mean focusing on government bonds in many economies.”
Prime Minister Gordon Brown has committed billions of pounds to saving Britain’s financial system as the global turmoil plunged the U.K. into a recession. His government has nationalized banks from Northern Rock Plc in 2007 to Dunfermline Building Society this year, and bought stakes in larger lenders including Royal Bank of Scotland Group Plc.
“It has been shocking over the past year or so to discover how many medium-sized banks and building societies did not hold government bonds or other very high quality assets; or if they did, how many did not have a regular presence in the gilt repo market,” Tucker said. “Turning up in the core secured-funding markets for the first time for years is an absolute giveaway of distress. All that has to change.”
The liquidity squeeze created a “vicious spiral” where the credit famine fed the recession and in the process impaired the quality of banks’ loan books, Tucker said. “It would have been better if, somehow, we could have preserved the liquidity of the markets.”
Market Maker
Tucker raised the question of how central banks should operate as a “market maker of last resort” to preserve liquidity at times of stress. He said the Bank of England is already acting as a market maker when it buys commercial paper and corporate bonds through its asset purchase facility.
“To the extent that such measures work, liquidity risk for intermediaries, and so for traders and investors, is reduced; and thus, the spread in corporate bond yields should decline too,” he said. “There is some evidence that that has occurred since we introduced the facility in March, although it is impossible to control for the more general improvement in global corporate bond markets.”
A policy for providing capital of last resort should have costs finally accrue to the banking system, not the taxpayer, he said. He suggested it may be financed with a requirement for banks to take out private capital insurance, or for them to issue hybrid bonds convertible to equity in times of stress.
Hybrid Bonds
Hybrid bonds rank after loans and senior bonds for repayment, and typically contain options allowing borrowers to defer interest payments.
Tucker also said that the Bank of England plans to expand its list of collateral eligible in its liquidity insurance facilities.

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Old and gray
Message #416 - 05/29/09 02:49 AM
Mr. Tucker mentions the BOE performing the function of a market maker by purchasing commercial paper. The Fed is going the BOE one better by purchasing worthless scrap to improve the balance sheets of the US banks.
Nevertheless the article is a receptacle for crocodile tears on behalf of the British banking system. They are at least as guilty as US banks in creating a faux market for the entire range of generic derivatives. They contributed their share of "innovation".
First reaction to the above article is that all these things have been dealt with in papers issued by the European banking and corporate centers. A few of those located in Britain! Warnings on warnings, accompanied by guidelines, stated principles, lists of best practices dealing with all manner of risks and reserves for even the large undefined institutions which were the prime movers in the fraud. Now, suddenly they're aghast that things happened which were addressed 10 - 15 years ago complete with templates listing how to avoid the oncoming liquidity and capital reserve deficiencies.
Mr. Tucker's suggestions are not helpful either. Where are the banks to get the funds necessary to lay in a supply of bonds to act as reserve funds. Reading the flow5 thread "Monetarism has never been tried", you get to the meat of the posts in Message #6 and toward the end of his messages. He and I are in pretty close agreement after we get past the monetarism obstacle. Especially when he talks about transferring ownership (and, concurrently, wealth). Foreseen by many.
Von Mises (I broke my promise not to mention him again!) uses the idea of redistribution of wealth favoring the issuers of the phantom media. The exact phrase escapes me, but the idea is that there is a deliberate "social" change in the process and this in turn has an effect not only on redistribution of money (which we've seen in spades!) but also on the entire money market, interest rates, etc., in a way that makes it more difficult for those struggle with subsistence to arrange for credit. His monetary uses are broken up into two parts: consumption (meaning basic subsistence) and productive (meaning products beyond subsistence level). I draw the conclusion that when the people are busy clawing out basic subsistence, the people with access to the available money take what they can. . HH and GH (Helping Hand and Grasping Hand) mentioned a while back, coined by a brace of continental economists come in to play, but it's more of the latter than the former.
Anyway the implication behind flow5's biting indictment (if I'd be allowed to extend the thought) is that banks have been loading up on bonds through the borrowing process and counting them as assets, hoping their books look healthier. The only way I see that as an enrichment process is purchasing bonds with fresh capital at half price. That may be the intent of the 0% rate the Fed offers, but unless banks get bonds at a negative rate and use the true valuation as an increase in capital, it's a futile attempt. Borrowing the money and then listing bonds thus acquired only ends up in a wash. The money will have to be paid back or the bonds repo'd and nothing is gained. If they get the bonds at 0% interest and the Fed buys them back at 2 or 3% or more, the banks will have a gain in the process. But, that's just another form of bailout. A gift!
Some banks have reported acquiring additional capital from private sources. They still give up something in exchange. And, the only way that is of help to banks is if they then issue credit using the new capital and leverage the newly acquired funds. Which gilt-edged company will participate in this. . . in this kind of economic climate? Everyone other than utilities with their government support for obtaining higher rates or governments basing new investments on taxes will be steering clear of investment. At the very least, for the remainder of this year retrenchment is the strategy of choice. (You won't hear the word used much, but neither will you hear "aggressive new investment"!)
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Old and gray
Message #417 - 05/29/09 02:50 AM
There is some construction going on, but I heard someone ask on TV today, "Where is the big construction? Big enough to make an impact in a community?"
Mr. Tucker's proposal of expanding a "list of collateral eligible in its liquidity insurance facilities" sounds rich. What wold that be? Office furniture, pens and paper? Suddenly, something will be endowed with value by decree? And, this in turn will assure the financial world that everything is righted?
He may be able to do something through legere-de-main, but it's effect will be short-lived, and another bump in the road will slow us down.
It's unfortunate that all the sound solutions searched out and proposed years ago by the active theorists were predicated on the backing of gold. Once gold was removed, there is no significant backing and the proposals are no longer viable. However, we are now into fiat currency so deeply, gold would cause too many problems in trying to reinstate it as currency, it would be too expensive a proposition from the start just investing in the media. Imposing regulations and market problems at this point are complicated to the point of being insurmountable.
I do believe, though it is not on the immediate horizon, a rambunctious China, the mid-east seeing its store of petrodollars disintegrating, and even the EU, who's losing out on market due to the deterioration of the dollar, eventually will band together and begin to move for a single international currency perhaps a la Mundell's proposals. But, in order to be truly effective, the currency would have to go beyond his proposal and require a universality. Meaning, then, that one currency would be accepted throughout the world with no exchange rates, no bank charges for conversions, no foreign exchanges, and no problems in wiring home for more dollars, or yen, etc. The universal currency will be acceptable for transactions on every level, regardless of animosities, enmities, or national egos.
The US banks have done this for (or to) us. In this way, global money markets will attain equilibrium only because there would be no alternative. When this takes place, the dollar will fall from its lofty, ubiquitous position, and I'm afraid we'll have no alternative but to agree to whatever terms are given to us.
Time frame for the universal currency? 15 - 20 years. . maybe less, but, 25 years tops! But, I don't believe the global economy can wait that long. Not if we use China's anxiety as a measuring rod. OPEC is anxious, too. They have their sights set on the price of oil they called for back in mid 2008 and it's working in that direction, this time not due to speculation, but to the actual or anticipated dropping value of the dollar. They might not want the weakening dollar in payment for their product. And, Europe and Japan may soon tire of supporting the dollar, or worse, find themselves unable to do so in the near future. . due, of course, to the marvelous strategy that enriched so many US bankers.
They may have thought they tested US tolerance for high priced oil, but things have changed in the ensuing year. A barrel of oil at the $83 - $86 dollar price mentioned by OPEC will be unsupportable by our gasping economy. Ours will not be the only economy to buckle under that load. That's when inflation will take hold, the dollar will fall and unemployment will resume it's upward sprint. Then, watch markets force interest rates up beyond the point where it no longer pays to borrow for operating expenses and more businesses shut down.
We may yet be wishing for the good old days back in 1980.
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Scared_Shirtless
Message #418 - 05/29/09 08:56 AM
Old & Gray?

Here's an article/interview that talks about Germany's sub-prime crisis but also goes into the "financial tsunami" aspects of their banking system and draws parallels with ours. Thought I'd throw it out there for review if interested.
us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=362

Just a tiny excerpt:
Foreign observers of Germany might be tempted to believe that the largest nation in the EU avoided the worst aspects of the crisis through a combination of prudent financial regulation and good old fashioned conservatism. But such a view is very far from the truth. In fact, Germany faces an financial crisis in its private and state sector banks that, relative to the size of that nation's economy, could be every bit as serious as the US crisis.
To get a better understanding of the situation in Germany and the growing financial crisis affecting that nation's banks, we spoke last week with Hans-Joachim ("Achim") Dübel, CEO of FINPOLCONSULT (http://www.finpolconsult.de ) in Berlin, one of the leading and relatively few independent voices in the German housing finance community.

Wishing all the very best - still scared.

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Old and gray
Message #419 - 05/29/09 11:32 AM
Scared shirtless;

First, a personal note. Wish I could help with the Scared Shirtless situation. All I can say is I've seen really, really bad (life hanging in the balance situations) and somehow survived, whether due to Divine Benevolence, luck, destiny, the right people on my side, or blissful ignorance was my advantage is not for me to decide. We're here for a while for some kind of purpose which we may never understand. And, whenever that purpose is served, we'll be gone. Nobody has ever been able to defeat that program. So, being scared won't contribute to peace of mind or enjoying the good that's also been put here for our benefit. Better to work, love, and enjoy as if you'll be here for a hundred years and nothing can change that, than to worry about what'll happen tomorrow, next week, month or year. . or in the next five minutes. Most of the time we have no control over that anyhow. If we did, then worrying about it may have some profit to it.

So, important things out of the way. . .

Thanks for the link. That site is a new one for me. It's have it on my "favorites" list now.

Since WWII Germany has operated with a different brand of capitalist than has the US. If we stretch the above cited concept of the HH and GH to a scale, Germany's political economy would be found more toward the HH end while ours would tend toward the GH end. Germany's policies developed largely due to the influence of Wilhelm Ropke, an economist who had the ears of some German leaders long enough to enlighten them. For the good, bad or of no real effect, who knows. . that's the way it developed.
It's older than the US, has its share of landed aristocracy. . or landed gentry, if you prefer, but is now primarily focused on the welfare of its people.
I have no idea if the people were always this way, but personal observation prompts an estimation that Germans are 3 to 5 times more (than US citizens) interested in political economy - not only in Germany but globally. Gain their confidence and it isn't difficult to discuss unemployment, international trade or relative merits of economic/financial systems. . . all on a practical basis. Nor are they gamblers or investors, they play it close to the vest, generally.
They are straight forward in expressing thoughts and opinions - witness the quote of their finance minister, Peer Steinbruck, or of Angela Merkel, their Chancellor, in that site you linked. I can't trace it but I may have some German blood in me, I'm so sympathetic to some of their policies. But, then, there's much to be admired in a lot of the cultures people world wide have developed.
Merkel's quote is worth posting here.

"Excessively cheap money in the U.S. was a driver of today's crisis… "I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the U.S. and elsewhere and whether we could find ourselves in five years facing the exact same crisis."
Angela Merkel
German Chancellor
November 27, 2008



. . . all of which indicates not only attention to recent history and a willingness to confront reality but a non-confrontational political atmosphere unlike that we enjoy in the US which would allow her to express such a thought freely.

[olderstill]

Old and gray
Message #420 - 05/29/09 12:03 PM
There's little doubt that some of the German banks participated in the derivative scams. Their US branches were staffed with Americans and that alone could have influenced their thinking. Not to place the blame entirely on Americans, after all the Germans could have resisted the temptation if they had the gumption to do so, but they were tempted by the same personal benefits as were our banker/brokers. Chinese and Japanese ventures are more closely controlled by home offices and their native cultural principles usually prevail, no matter how deeply they become involved with other cultures. Whoever gave in to the temptation and played the game suffered the consequences and have only themselves to blame.

The quote from Dr Richardson of Univ of Texas is a good one, "Economics is an artifact of human imagination, and the agreement among certain humans who "play games" together - thereby it is a social technology."
I like to call economics, despite its potential, little more than an intellectual parlor game. Case in point, Friedman's "A Theory of the Consumption Function". He, his wife and their friend, Mrs. Brady, all former government economists, long time friends, engaged in a continuing discussion over an extended period until they finally developed an involved, complex mathematic justification (?) for their thoughts and published same in 1957. I don't know how enthusiastically it was received, but there have been six printings since the first, the last in 2008 as a paper back.
So much for an after-dinner-coffee-table-top game becoming a "scientific" work. I know of no one walking around with one of the equations displayed on his/her forehead or tucked away in their pocket reminding themselves or observers precisely how they stand on saving, investing and consuming or how they intend to react to financial or economic events.

But, back to the article you linked. . In all, it's worth a second read.
Mr. Achin Dubel's point is that more than just German banks eventually got caught up in the fever exported by our banks in conjunction with the UK institutions. All of which proves that we don't have exclusive rights to bad financial behavior and decisions, or the weakness to give in to the temptation for personal benefit over consideration for the nation's (or the world's) well-being.

That link is now on my "favorites" list. Its promise bears an occasional visit if not watching.
Thank you.
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Scared_Shirtless
Message #421 - 05/29/09 02:14 PM
And thank you O&G;

In regards to scared... I like to think of it as "productively scared". Not so much as to adversely impact life. Rather enough to make me very wary.

Which is where I'm at. I have gathered a following of sorts at work and at home. And I write to congress, the president, my local newspaper. That goes back to my morals being sort of "You have no right to complain if you've done nothing!" Driven by morals I guess.

In any event your concern - for all things - shows in what you write, how you write it and how you approach your life. You have my ultimate respect.

While no longer politically correct the one moral I live by - every day is:

A man is ONLY as good as his word.

I'm 57 this year. I can't believe how naive I've been all my life. Until about 3 years ago how much I didn't know - or care - about. I care now. I have much less trust in a lot of things than I did.

At this time - I consider that a healthy attitude. Just my opinion.

Back to the point.

It has kinda slugged me in the gut how widespread and how big this is not just at home but throughout the world.

We obviously need transparency and some form of REAL oversight.

Yesterday.

Everywhere.

I'll keep lending my voice.

Many thanks to all for the great insights I've learned from here. They are many.

Wishing everyone the very best.

Don't byte off more than you can que...
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outaheresoon
Message #422 - 05/29/09 02:33 PM
There's little doubt that some of the German banks participated in the derivative scams.

O & G:

Would you be so kind as to explain the derivatives issue? I hear a lot about it and it is always linked to outrageous numbers. I have heard numbers like 600 Trillion up to 1.2 Quadrillion. Others have said that the real exposure is not that much as these were sold and re-sold multiple times and that the real number is something like 10 trillion. Do you have any idea what the real exposure is and wether or not it is someting that we can possibly recover from without collapsing the entire system? Thanks.
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Old and gray
Message #423 - 05/29/09 11:19 PM
outaheresoon

See message # 316 on this thread. Duff has provided a summary of derivatives as distributed in the top 25 US banks as of 12/31/08.

The FDIC Stats of Depository Institutions listed total derivatives distributed throughout the US as of 12/31/08 as being 201 trillion.

BIS in Basel lists total worldwide distribution of derivatives as of that date as $683 trillion.

From all indications, the total is still growing.

As for what are derivatives and what is our exposure and whether we can recover from it, that's the theme not only of this entire thread of over 400 entries, but the one that preceded it, "Treasury yields. . . " another 154 messages. (Link to which is found in message #396, this thread.) The method is involved, complex and cannot be reduced to a single page or even a fifteen minute dissertation. But, ultimately, if the banks, the regulators, and the world banking management and regulating supervisors have any intention of saving the economic world as we knew it, the answer to your last question in a nutshell is yes, it can be saved.
That is not the burning question. The real question is whether those in a position to do something want to do anything constructive! If they continue in the direction they've been headed for the past year and a half or two, I'd say that they do not want to extricate us from the damaging problems we face. They prefer going in this direction and completing the job they started about 25-30 years ago: Regaining the absolute control they lost during the Great Depression when somebody got in their way. Catering to the banks and brokers and not upsetting the apple cart. That appears to be Geithner's plan by presenting the banks program as the way to salvation. The banks, of course, have their own idea of what constitutes salvation.
The sequence may best be described as class warfare, or, restoring the Divine Right of the Privileged.
In the only full description of economic devices such as derivatives and the consequences of over-issuing, written in 1912, it was concluded that the only people who gain anything from the practice are the issuers, and everyone else loses proportionately, and the result is social displacement and altered economic order. People at the bottom of the economic chain suffer the most, by way of losing value in any of their possessions, their possessions proper and any money or other valuables they own. What was written then, is becoming a reality today. That writer kept repeating that this would never happen, of course.
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outaheresoon
Message #424 - 05/29/09 11:54 PM
The real question is whether those in a position to do something want to do anything constructive!

Thanks, Old and Gray. It has always been my contention that this whole thing had to be planned. What I wondered was if the bankers actually got in a little over their heads and got a nasty surprise or if they are actually attempting to destroy the entire economic system in order to bring in their New World Order. I tend to believe the latter of the two. I've never really believed in all of the conspiratist theories out there but I have to admit that this one seems to be progressing according to what the conspiratists have been saying.
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Old and gray
Message #425 - 05/31/09 10:45 PM
What I wondered was if the bankers actually got in a little over their heads and got a nasty surprise or if they are actually attempting to destroy the entire economic system in order to bring in their New World Order.
I'd say the attempt consisted about 50-50 if by "nasty surprise" you mean they didn't quite comprehend the results laying in store for them. They definitely thought they could control the outcome with more precision than they did. Economics and financial means are not that precise and often lead to undesirable ends. But, they appear to be prepared to pay no attention to current conditions, but continue along the same path until something worse takes place.
Apparently, they feel they're so well insulated, nothing can harm them. The government bears them out in that. So, regardless of campaign rhetoric, voters' hopes, or appearances, their motto must still be "To devil with the peons".
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Duffminster
Message #426 - 06/02/09 02:42 AM
This article poses a few questions and opinions in regard to the parts of our discussion here. I would really like to get your take on this Old and gray.

Money Confusion and Inflation/Deflation

news.goldseek.com/SpeculativeInvestor/1243923420.php
The total supply of US dollars, as measured by TMS, is about 10% higher now than it was a year ago. Also, the total amount of credit within the US economy is higher now than it was a year ago thanks to the government's yeoman-like efforts to replace the bursting private-sector credit bubble with a public-sector credit bubble. With the supply of money and credit continuing to expand -- at an accelerated pace, in the case of the money supply -- you have to be inventive in order to make an argument that the US is experiencing deflation. You must either argue that non-monetary quantities such as collateralised debt securities and other derivatives form part of the money supply, which is the tack taken by the author of the article posted HERE, or argue that a decline in the combined market value of debt counts as deflation, which is what Mike Shedlock routinely does at his web site. Neither argument is valid, in our opinion.
The idea that collateralised debt and other products of the "shadow banking system" constitute money holds no water because you can't use these things to buy goods and services. If you don't believe us, try handing an ABS (Asset Backed Security) to the person at the Walmart checkout and see how far you get. Securities of various types can be posted as collateral when purchasing other investments, but that just means they have perceived value, not that they are money. Money is the general medium of exchange.
The idea that a decline in the market value of debt constitutes deflation boils down to defining deflation in terms of prices (the price of debt, in this case). However, the market values of debt and other investments rise and fall for many reasons, some of which are related to inflation/deflation and some of which aren't. The point is that a decline in the market value of anything (including debt) does not, in and of itself, constitute deflation.
What we have observed in the financial world over the past year are the symptoms of a bursting credit bubble. Such an event creates an enormous deflationary bias, but up until now this bias has been more than offset by the inflationary biases built into today's monetary and political systems.
Rising Fear of Inflation
Suddenly, the financial world is again fretting about inflation. Or, to put it more aptly, the financial world is again becoming excited by the prospect of rising prices (most people believe that inflation is equivalent to rising prices and that rising prices are good).
One of the strange things about the way the financial world tends to work these days is that the general level of fear/excitement about inflation moves inversely to the actual rate of monetary inflation. This happens because a) very few people understand what inflation is, and b) the monetary authorities react to the lagged effects of inflation rather than the inflation itself. To be more specific, economic weakness and/or rapid declines in asset prices cause almost everyone (the public, professional money managers, economists, most journalists and newsletter writers, the central bank and the government) to become concerned about deflation, which prompts policies designed to rapidly increase the money supply. Due to the normal lead-lag relationship between changes in the money supply and changes in prices, the initial phase of this rapid monetary inflation is usually accompanied by a further reduction in prices, which leads to heightened fear of deflation. Some time later the INEVITABLE effects of the money-supply growth begin to emerge, but by then the rate of monetary inflation has tapered off. As time goes by the increasingly blatant effects of the preceding money-supply growth lead to the widespread perception of an inflation problem and to more restrictive monetary policies, even while the actual inflation (money-supply growth) rat
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Old and gray
Message #427 - 06/03/09 02:08 AM
Duff

Read the article, printed it out and have notes down the margins which need organization. Will do so for posting either late tomorrow or the following day.

Quick summary: he's right in his paragraph one and two. However, if you recall several times early on, reference was made to whether credit was money. That is the way the Fed has been handling the problem, substituting baseless credit for money. Result is profligacy and extraordinary debt! Debt is being treated as money by the Fed in the bailout process.
Issuing the derivatives, etc. has had the same deleterious effect as if it were in fact substitute money, in that reserves have been completely depleted. Banks' values have been drawn down to nothing. Thus, Citi's worth, reported as $274 billion a year ago is now down to $10 B and JPMChase has lost about 40% of its value, both of them after receiving massive infusions from the Fed/Treasury. This is all a matter of debt. Where you have debt, you must have an offsetting credit. It's accomplished through the fiduciary media strategy. There is no money. That's why Mr. Saville can report that M2 is only up 2% along with a fictional annualized growth rate of 5.2%.
Being aware of reports of rising unemployment, shut down of businesses (I assume the auto industry debacle is no secret!) and the resulting gradual slowing down, if not shutting down, of the economy, where is that 5.2% growth? Count the credit being issued by the Fed as money and you may be able to breathe air into the clogged lungs of banking industry bookkeeping, but that's not only deceptive, it's temporary, and of little long term value. Is that where the 5.2% growth emanates?
How do they intend to pay back the bailout money? Will the Fed be moved to forgive the loans they've extended to the banks?
We're not out of the woods by any stretch of the imagination. The debt is strangling us in the same manner as if it was a flood of currency.
Watch the value of the dollar, listen to the talk of adopting baskets of currency as the global reserve currency, and then make a claim that we have not devalued the dollar as if it were inflation!
The actual effect is the same. You cannot go on forever, issuing valueless paper thinking you're absolving yourself of risk and responsibility. The Fed cannot disregard the ultimate effect of the massive infusion of credit which may bolster banks short term, but strangles them long term. Eventually depositor fees and customer charges will have to leap up in order to allow banks to gather the funds they'll need for payback. And, the taxpayer/bank-customer will be hit twice, maybe fourfold to make up the shortfall.
Conventional thinking has currency leading us into inflation when in actual fact, that is not the case. (See the Huerta de Soto comment for one outlook that departs from the "conventional", and not necessarily correct, evaluation.) There's a sizeable group of economists who insist that inflation begins with the availability of capital, capital meaning credit/investment for "goods of the higher order", or other than consumption goods. Since our economy has turned away from production, investors believed there was only one place for their money, the stock market. And with the approximate 15% recovery in the current market rally, which is suspected of being a bear market rally, that's not enough to reassure people who never were in the market, or entice the absent money back into the the market with any certainty or consistency. And, the moneyed folks look around and decide there's not much else they can invest in. That means there is no capital volume. Bad news for the currency, bad news for growth, bad news for the inflation staring down the barrel at us.
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Old and gray
Message #428 - 06/03/09 02:09 AM
The debt is not only hanging over us, it is also growing. Baseless credit continues to flood the scene, backed by nothing. The $201 Trillion reported derivatives in the FDIC summary for 12/31/08 has been revised to $213 T! Q1 of '09 shows $203 T. That will be revised upward guaranteed. They are not stopping! Banks have learned nothing or simply do not care! New accounting rules and a sugar daddy in every taxpayer. That's what they see. In the meantime, the piper is playing and waiting patiently. He knows he has a call out for his repayment. Where are those funds coming from?
This is not the low-level inflation rate which Mr. Saville cited. There is no market for current investment. Not only that but prices on consumption goods are climbing at a rate faster than people realize. All out of proportion to investment opportunities. Food prices, for one, are a growing burden. First, you don't get a pound any more, you get 13 or 14 ounces at the same price. You don't get 3 pounds, you get 40 or 45 ounces. Then, the prices rise on the reduced quantities which multiplies the inflationary effect. Prices for paper and plastic goods are climbing at a faster rate. All the while the producers are hoping nobody notices. Producers have no choice. They're also caught in the spiral. That's why unemployment continues to grow and capital is almost a meaningless concept. Those with cash on hand can buy the world today, just by walking down the street and saying hello. How many are willing to take the risk?
Mr. Saville may not realize it, but the spiral is at work. NOW! More realistically, we should be dealing with the totally ignored threat of inflationary devastation. That grinding noise off in the distance is the death knell of any hope of growth or investment.

So much for the quick response. Went a lot longer than I intended.
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Old and gray
Message #429 - 06/04/09 02:10 AM
As for the longer and more involved response to Mr. Saville. . .

He is correct in opining that "Money is the general medium of exchange." (Irving Fisher's definition in "The Purchasing Power of Money.)

However, it is not the sole medium of exchange, nor in my rough estimate, is it even the dominant medium. I would say that checks and charge cards convey more real-time purchasing power than does currency. And when the largest transactions are factored in, such as multi-million dollar transactions, hands down, the winner is the current account (with fiduciary media deposited to the account) with not even a close second! No one can doubt that none of the derivatives' transactions were conducted on a cash basis. There isn't enough currency, or "money", the term I assume Mr. Saville prefers, on the face of the earth or in all of history to add up to a fraction of the value transacted to convey the derivatives.
We've been through this at length. Mr. Saville does not address the issue as a banker. If he is a banker, he's playing games with the concepts of money and the wide range of money substitutes employed in the business world. . . Even in domestic transactions, checks and charge cards dwarf the use of currency, or "money". Yet they are no less ubiquitous. The US Postal System has a machine in the lobby of the small local post office which accepts charge cards for any purchase. . a 44 cent stamp! Buy something at the local home supply chain store and you can check out at a dedicated processor with a charge card and bypass the long lines. Food markets, retail stores, restaurants. . . Does Mr. Saville pay cash for all his transactions? A rare person indeed! So, yes, "Money is the general medium of exchange", but not even the dominant medium.
As for the derivatives: substitute money was involved in that transaction in several ways. It would seem most probable that those transactions were conducted via current accounts, along with some clearinghouse activity. When the compensation for generating the business was dispensed, I'm sure the value of the compensation was credited to some one's account or they received a check. None of these is currency. But, any of those transactions have value attached that would have been attached to cash. We measure it in terms of currency, but try lugging a couple of tons of $100 bills around to pay for the derivatives and there are backaches involved, to be sure.
The fact that there are limited applications for certain money substitutes does not obviate the fact that substitutes exist in many forms. A contract may have money value attached. Of course, you can't take it into Wal Mart and use the contract to purchase a bar of soap. But, if I sued someone and they lost the case and had no other means of settlement, I might be tempted to accept a valid contract that promises value in partial payment of the judgment. Is that not a means of payment? Not in every conceivable case would the contract have transferable value, but in given circumstances it has "cash" value.
Derivatives have similar characteristics. They were devised and distributed on the basis that they had intrinsic value. Something of value was exchanged. Derivatives had a substitute money value. They still have, but no one is sure what that value is in most if not all cases. Yet, we can conceive of instances where the residual value may serve to settle debts or obligations.
In my lifetime, commercial paper was circulated as cash, concessions were made depending on maturity, and debts were settled with nothing other than the paper changing hands. I'm not aware that it is still the practice, but that doesn't rule out the viability. When we were on the gold standard, bank notes were fiduciary media. The old Dutch goldsmiths' certificates representing gold on deposit in their vaults were fiduciary media. They probably were not generally used for daily transactions because of the fractional value of smaller every day purchases. For that reason, they may have been cumbersome, yet they had value and given certain circumstances,

[olderstill]

Old and gray
Message #430 - 06/04/09 02:11 AM
So, everything considered, I don't believe I would change my mind about the nature of derivatives recognizing their mode of issue, a la fiduciary media, the current accounts, the clearinghouse process, or the residual value they retain. After all Merrill Lynch was able to retrieve 22 cents on the dollar when they disposed of a batch of the derivatives genre last year. If that isn't cashing it in at the international supermarket, I'll take a lesson if there's a reasonable point to be made.
What Mr. Saville does not address in his paper is infinitely more important than what he does. And that is, how would he reconcile the vast amount of credit and debt that has been traded back and forth between banks in an effort to balance their books? We're fighting debt with more debt? This under the leadership of a proud, intelligent, educated economist? I think my seven year old great grandchild could give me a pretty good tussle in rejecting such a settlement for debt between us. Is this supposed to fool adults into believing that the monetary system is under control?
There's little doubt in my mind that our current weak status is due to the issuance of those damned messy, good for nothing waste paper. . . And they continue to issue more. (The 12/31/08 tally was revised upward from $201 trillion to $213 Trillion. Preliminary figures put Q1, '09 at $203, which will also be revised.) It's been proven that the instruments do not reduce, transfer or share risk (they aggravate it), do not satisfy the need they are directed toward, and end up costing more than the entire country is able or willing to pay.
It grows more obvious by the day that my predictions still stand: we're going to come out of this with uncontrollable inflation, the dollar will lose too much of its value, interest rates will be forced up to service the banks' debt (which was never interest's intended nor natural function), killing any hope for affordable capital to build our way out of the mess. Each day they do nothing, we face a longer period of recovery, and the recovery effort will be less and less effective.
I would rather see that very, very serious matter tended to than spend time uselessly discussing whether derivatives have any value as substitute money, which if they still have any value, in the fiduciary sense, they are a substitute. And, if they have value, they should be traded until they're taken off the market and stop polluting our entire system beyond salvage. If they have no value, they cannot be redeemed and they sit there, threatening the banks and rendering them immobile. Those CCPs are a a long time coming. One entity will be operational in August. That wouldn't handle the quarterly growth of new issue.
It would seem the Washingtonians are going to bat this around and not let the ball hit the ground, meaning they'll delay until nothing could come of it.
I'd like to see Mr. Saville or anyone address this huge issue directly.
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Old and gray
Message #431 - 06/04/09 03:24 PM
I'd like to be able to turn off the thought process at will, but humans are not built that way. That's why we wake up at three AM and whip ourselves into a frenzy over something that has no meaning during next morning's coffee.

The "very, very serious matter" I refer to above is the well-being of every American, my family included. It carries beyond our borders, so others are effected as well.
The reckless issuing of fiduciary media engaged in by these unconscionable bankers/brokers have consequences that have been studied at length by too limited a number of first rank economists, unfortunately. Of course, Milton Friedman comes to mind. His theory of the "consumption function" is traceable back to Knut Wicksell, Sweden's economic giant, through Von Mises, who was mentioned previously. Thence to Friedman and Mundell. There may be others in there that I neglect, either by way of not being informed, or short-mindedness, for which I apologize. Those four have meaning to me either in a positive or negative way, meaning that I have come to agree with all of them in some degree, or their stimulating thought has impelled me to move in another direction, guided by another set of signposts. When you have such giants in your vision, it's difficult to contradict any of them and then come back and quote them to strengthen your own convictions.
So, I'll do just that.
I'll return one more time to Von Mises, whose epic work on Money and Credit, if you have a deep interest in the nature of money and credit stands up to reading and re-reading even if you have nothing in common with his over all economic visions.
One sentence summarizes all my concern more than any other in his "Theory of Money and Credit". Chapter 19, about 2/3 rds of the way through section #4, Von Mises contends, "Now it is true that an increase of fiduciary media brings about a redistribution of wealth in the course of its effect on the objective exchange value of money which may well lead to increased saving and a reduction of the standard of living." It need hardly be pointed out that the saving is managed by the recipients of the redistribution by means of the reduction of the standard of living of all those not enjoying the benefits of the increase of fiduciary media. Throughout his considerations of fiduciary media, the consequences of issuing more fiduciary media than the market calls for, we're constantly reminded, are in most respects disastrous for the system.
If the $683 trillion of the SIVs, more than ten times the world's GDP, are not more than the market calls for, there can be no excess! As it stands, the disruption it has caused needs no road signs to lead us to the obvious.
If the people in Washington can't see the damage, they don't deserve the stewardship that does not serve the country. If they don't redirect their attention to stop the insanity, they don't deserve respect. For someone to take on the responsibilities of public office without making an attempt to inform themselves of the mechanisms that endanger us, is pitiful and woefully negligent!
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Message #432 has been deleted.
Duffminster
Message #433 - 06/05/09 02:08 PM
Thanks Gray for analysis of the Saville article. I think it was a good refocus point for the conversation as it had us return to a central conceptual pillar of this subject thread which is principally that credit is not the same thing as "money" in reality despite what the current school of perceptual economics may be trying to sell.

I have an article in regard to the new Government Sachs, excuse me, former Goldman executive, Gary Gensler, newly appointed CTFCs plan on Derivatives. Doesn't it make you feel comfortable knowing that those with the interest of Goldman are overseeing the interests of the Derivatives market. I feel certain that the investigation of the massive silver short concentration by the largest one or two bullion banks will be killed in short order now that Gary Gensler is in the house and anyone hoping for real regulation and reform should consider the following:

www.populistamerica.com/gatas_message_on_gold_and_silver_manipulation
"Gensler spent 18 years at Goldman Sachs, one of the ringleaders of The Gold Cartel, making partner when he was 30, becoming head of the company's fixed income and currency operations in Tokyo by the mid-90's.
"As the Treasury Department's undersecretary for domestic finance in the last two years of the Clinton administration, Gensler found himself in the position of overseeing policies in the areas of U.S. financial markets, debt management, financial services, and community development. Gensler advocated the passage of the Commodity Futures Modernization Act of 2000, which exempted credit default swaps and other derivatives from regulation.

Now, given the last sentence above, lets see what Gensler and company are cooking up for derivatives regulation:

CFTC Chairman Details Derivatives Plan - WSJ
In prepared testimony before the Senate Agriculture Committee, Commodity Futures Trading Commission Chairman Gary Gensler recommended amending the Commodity Exchange Act to require all derivatives dealers for the first time to register with regulators.
In addition, he called on lawmakers to expand the CFTC's enforcement powers over swaps and give the agency the authority to set position limits across all markets to prevent manipulation and excessive speculation.
"By fully regulating the institutions that trade or hold themselves out to the public as derivative dealers we can oversee and regulate the entire derivatives market," Mr. Gensler said. "All derivative dealers should be subject to capital requirements, initial margining requirements, business conduct rules and reporting and record keeping requirements."
Thursday marked the first Congressional hearing since the Obama administration rolled out its plan last month to bring over-the-counter derivatives under the tent of federal regulation -- a market that was deregulated with the passage of the Commodity Futures Modernization Act in 2000.
The plan aims to avert another crisis, which many believe was caused in part by large firms that used exotic financial instruments like credit-default swaps to engage in reckless and risky trades.
A portion of the Obama plan targets derivative dealers such as Goldman Sachs Group and Morgan Stanley by subjecting them to new capital and margin requirements and forcing them to adhere to strict business conduct standards and report certain data to regulators. Such a move would likely prove costly to the industry.
Another component of it, meanwhile, would regulate how derivatives are traded. All standard over-the-counter contracts would need to be traded on an exchange to make prices more transparent. They would also need to go through clearinghouses, which guarantee trades and help cushion the blow to the market if a counterparty defaults.


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Old and gray
Message #434 - 06/08/09 11:19 PM
It sounds as if Mr. Gensler, and by extension the administration, is caught in an attempt to compromise the effectiveness out of the idea. At one time, they may have realized the power in the clearinghouse procedure, but, once outed, the idea has become more of a cliche than an effective option of choice. Proof is in the idea that registration alone will force compliance. How viable is that? The LCFIs would love to concede such a weak point, have the regulators off their backs, and go winging off into fresh fields for more fun and games. Their lawyers have already worked out the technique to work around such conditions to minimize impact.
It bears the imprimatur of Government Sachs, 100%!
Do you suppose they've changed their attitude since the days of the Born fiasco in 1998? Hardly likely. . . no? They've hardened, become more cynical, more confident, and more dangerous to the global system. How many GS alums do they have highly placed in the Obama administration now? About a dozen? including holdovers from the Bush administration? They've even retained such "I-agree-with-you-Senator-I'll-have-to-check-into-that" well trained economic/financial geniuses as Kashkari.
In this entire world, there are no other qualified people but GS alums? Where's the change we were promised? Where's the integrity we expected? I didn't vote to preserve the disaster, I voted to correct it!
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Old and gray
Message #435 - 06/08/09 11:49 PM
Approximately 6:45 PM, I heard an economist respond to a reporter's query on PBS, "The current crisis is due to failure of the regulators." (Not verbatim.)
If that is his true belief, if he is not a plant from one of the LCFI homes of derivatives originators, he is certainly beholden to them for part of his paycheck.
Unfortunately, too much of that kind of attitude is circulating. Whether politically motivated or the result of wasted classroom and study hours is difficult to determine, but something went awry somewhere. People don't seem willing to come out and say that someone is to blame for the mess they've created.
Do you have an opinion on that?
Can we be so poorly informed as a nation? Are our schools that far behind the times, we don't train people to qualify for their jobs? I know it's difficult to find qualified people. I couldn't even guess how many I've interviewed for jobs during my career. . . well up into the thousands. But, if they weren't qualified, I didn't hire them! Today people seem not qualified and get the jobs. There's nothing else available?
When you point to Gensler or Kashkari, or the nameless economist, it's an embarrassment that the US should have these people in positions exposed to public. The impression of incompetence they leave behind forms the judgments we make of the people they represent. I can't say how many applicants I've rejected because they failed the most important test: first impression, exactly what the client/contact will be thinking. Pass that and we'll review qualifications, and then spend time determining if you're temperamentally or culturally suited to the position. Needless to say, I can tell you some people in recent government that did not pass test # 1 with me: Paulson and Kashkari among them. I saw Geithner's credentials before his first appearance. Hope rose and disappointment quickly followed.
Is it now an immutable law that those in the first chair won't hire impressive people and charge them with the responsibility for which they qualify?
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rjslrs
Message #436 - 06/09/09 06:33 AM
When you point to Gensler or Kashkari, or the nameless economist, it's an embarrassment that the US should have these people in positions exposed to public. The impression of incompetence they leave behind forms the judgments we make of the people they represent.
That is what I thought when Geithner was trotted over to China to "show them the math" behind this doomed adventure in economics. China will, no doubt, come to the conclusion that we are a nation of con men. (at least in the financial sector)
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Arrow of Time
Message #437 - 06/09/09 10:38 AM
Is it now an immutable law that those in the first chair won't hire impressive people and charge them with the responsibility for which they qualify?
The first job of the people within the current system is to protect the system as it is (whether they like it or not)...that's the system that has chosen them and gotten them to where they're at...also, supporting the current system is always (for obvious reasons) initially deemed to be the path of least risk...thinking out of the box comes later, generally when all else seems to have failed...a system should be/needs to be evolved over time, but once the crisis strikes it's too late to worry about that, and all the resources are put toward trying to normalize the current system just to keep the boat afloat another day, (and hopefully until the crisis passes).

Also...the financial system has been/is a tool for other (political) purposes which have been deemed to be more important then the health of the financial system itself...this issue goes much deeper than the one mentioned above......

My suggestion is to look at Ron Paul's agenda to see if you can identify with at least part of it...(e.g. who wouldn't want the Fed to be Audited?)...IMHO the system needs to be restructured, but that will only happen if the current system collapses, or over time through the political process....
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Duffminster
Message #438 - 06/16/09 08:24 PM
This needs on-going scrutiny. It seems like real reform is being pushed aside for this proxy "regulator."

Single US regulator for big banks under reform plan: Obama
www.google.com/hostednews/afp/article/ALeqM5jKd599YGfeuOqPnagXBy4rUnOjkg
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mlsjapan07
Message #439 - 06/16/09 09:14 PM
This is ridiculous. We need a banking system, but we don't need these particular banks. So the small, healthy banks will still operate under the purview of the FDIC, while the too-big-to-fail banks (which have failed) will fall under the Fed or a "council of regulators?" Is that because the toxic assets can't be unraveled, and the government knows it? If we can't have transparency, which we wouldn't under the Fed, then we might as well nationalize the entire banking system and get it over with.
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Old and gray
Message #440 - 06/17/09 03:36 PM
All good questions, mls. . ;
A short while ago, the CNBC economist-in-residence gave a short, extremely simplified example in response to a less than interested question from the moderator, who showed his disinterest in trying to end the 15 second expose prematurely. It suggests that no one is truly interested in exploring or understanding the complex nature and mechanism of the devices.
Lehman Bros had at least four main publications on Derivatives which reference at least as many other pubs expounding further on the mechanisms of CDS and CDOs all issued in the same manner - draw it up and throw it out on the market for someone to pick up. The market Lehman Bros. discussed was drastically understated. One specific pub, "The Lehman Brothers Guide to Exotic Credit Derivatives", publication date somewhere around 2003-2004, stated the ". . total market outstanding notional [value, my addition!] across all credit derivatives products was calculated to be $2.306 billion. . . " (this was in 2003). For one thing, according to FDIC - SDI (Statistics on Depository Institutions), as of 12/31/2002, total derivatives notional value in the domestic banking system, 9,354 institutions reporting, amounted to $56.433 trillion dollars! Their discrepant quoted valuation showed up the third paragraph into their promotional literature.
It's not surprising that Lehman is no longer on the scene when they were so self-serving they couldn't face the truth to save their public image.
But, beyond that, the four Lehman documents alone, numbering in excess of 200 pages which were still not detailed enough to explain the instruments, then referred to another half dozen or dozen pubs (I'm not certain how many) for clarification, shows that in no way can a 15 second dissertation on selling limited rights regarding a container of coffee suffice to explain the vehicles.
With current derivatives construction (which to date has not stopped), each issue introduces complications which add to the complexity of the instruments, and reaches well beyond any written definitions or categorizing. A basic list: Single name, multi-named, baskets, tranches, funded, unfunded, first to default, nth to default, varying maturities, cash, physical settlements, cash settlements, spreads. . . it goes on and on. Delving on the combinations and permutations resulting from just the few rudimentary elements listed in the previous sentence is more than can be defined well enough to allow for regulation.
It was all by design, of course. The more elusive the classification, the less subject to regulation. And, since there was no tie to any reserve requirements, it was easy for Lehman to claim that "The CDS can do almost everything that cash can do and more." Principal among the observations they failed to mention: hold its value.
One salient observation might have been made at the outset: If the value of the underlying documents were sound and worth committing to, why would credit protection be necessary? And secondly, if they sought credit protection, and issued derivatives equivalent to short credit risk (i.e., in anticipation of incurring losses) why would an "investor" looking for a sure thing, take such a gamble on a market that banks were so certain would collapse? Those questions can't fail to return an answer that indicates banks knew where the process was headed from the outset!
The gambling aspect of derivatives is so obvious, they should have been banned from the start. They weren't. And, now, they are sitting out there, like a black cloud waiting for everyone to relax their guard.
The question is: can we afford to leave them there, motor running, ready to invade the "It's-all-over-folks" picnic.
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Old and gray
Message #441 - 06/17/09 03:38 PM
This and a few other items, namely, the Fed's issuance of credit and funds that inflated the circulating currency to combat insolvency (or euphemistically, "liquidity"), the anxiety of the banks to come out from under the protective umbrella of TARP, and the failure of either the Fed or the regulators to provide adequate supervision of banks, causes questions of when, if ever, is the administration intending to address the issue, either alone or in collaboration with the Government Sachs unit.
If the best that we can do to describe derivatives is barely tolerate an inadequate fifteen second dissertation, then by no stretch of the imagination are we anywhere near addressing the pressing issues of the day. . . or decade, as it now seems more likely.
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Old and gray
Message #442 - 06/17/09 04:20 PM
Arrow

You are right in every part of your message #437.

Also, I'm familiar with Ron Paul's stance. He is very much in line with the Austrian school (BTW, he is (or was) the general counsel for the Mises Organization! Many of his writings are available at the Mises.org site for those interested).
However, I'm pretty much of an economic cherry picker. . a little from this and a little from that line of thought. Doesn't make me much more "correct" than anyone else, but it has suited my working conditions and helped develop a significant and lasting client base. I have said and will continue to maintain that all economists have something of value to contribute.
I could never find myself aligned with the Austrian concept of "free market" or the "libertarian" economic philosophy here in the US mostly because of events (aberrations?) similar to those that led us to the current situation. I don't think the Austrian School or the libertarians would be receptive to my thoughts on control and regulation necessary to corral the wild Saturday night cowboys who ride into town, guns ablazing and rob the bank just for the helluvit. Also, contrary to Austrian School economics, the US market in general is too inclined to join in the Saturday night fun even though they rue the results Monday morning. Bear in mind that Europeans in general are not of an investing frame of mind. So, the underlying concepts with which we operate, and have operated with (and will probably continue to operate with) differ significantly from theirs.
I believe we need more than simple trust that discipline will prevail on a more or less extemporaneous or unregulated basis. History bears me out on this, I believe. Even when we were less populated, excesses were in evidence. We've had all kinds of runs, monopolies and cartels at work. I've seen it in my day close up and unmistakable. We may not be able to operate without some restraining agency overseeing operations. Another version of tough love, I call it.

I don't believe we'd restructure. What we'll do is very much akin to what's been done in the past: a band-aid here and there and once in a while some stitches and some castor oil and wait for the patient to heal. It turns out to be inadequate in the long run, but, too many have too much invested to allow for radical change, no matter how battered the system may be. The invested will opt for installing a single leader system rather than allow the economy to be re-ordered. Whether the citizens would stand for this is up for debate.
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neohguy
Message #443 - 06/17/09 04:44 PM
This and a few other items, namely, the Fed's issuance of credit and funds that inflated the circulating currency to combat insolvency (or euphemistically, "liquidity"), the anxiety of the banks to come out from under the protective umbrella of TARP, and the failure of either the Fed or the regulators to provide adequate supervision of banks, causes questions of when, if ever, is the administration intending to address the issue, either alone or in collaboration with the Government Sachs unit.
Like many people I was expecting change. Oh well, dissapointed again. A great article about the "change" that was promised.
www.thenation.com/doc/20090622/greider/print
The governing party faced an awkward dilemma. People were hurting and furious at the government's generous bailouts for banks. But how could the Democrats do something for the folks without upsetting their friends and patrons in the banking industry? Democrats think they found a way. They are enacting a series of measures described as "breakthrough" reform and "unprecedented" defeat for the bankers. Only these achievements are more accurately understood as "reform lite." The house is on fire and Democrats brought a garden hose.
If not now, when? That question ought to haunt the Democratic Party and President Obama, who has been missing in action himself on key issues. Congressional Democrats are responding to this epic conflagration with the same risk-avoidance tactics they learned during many years in minority status. In those days, they could always blame right-wing Republicans for blocking their good intentions. But whom do the Dems blame now that they have the White House and fifty-nine votes in the Senate and a seventy-eight-seat majority in the House? Their standard explanation for not doing more is, "We didn't have the votes." So when might we expect Democrats to achieve more? When they have eighty votes in the Senate?
American Usury
One of the fundamental issues that party managers wished to avoid was the scandal of American usury. Usury is the ancient sin of charging inflated interest rates sure to ruin the borrowers. It is considered immoral by Judaism, Christianity and Islam because usury involves the powerful using their wealth to ensnare weak and defenseless borrowers. The classic usurer offers an impossible choice that debtors cannot easily refuse. If they reject the terms of the loan, they will not be able to pay the rent or buy necessities. If they accept the usurious interest rates, their debts will accumulate until they are bankrupted (at which point the creditors claim their property). No civilized society can endure in such conditions....Usury used to be illegal in the United States but it was "decriminalized" in 1980--the dawn of financial deregulation. A Democratic president and Congress repealed all interest-rate controls and the federal law prohibiting usury. Thirty years later, American society is permeated with usurious practices--

A roll call on usury would have compelled legislators to choose between their constituents and their bankers. Rep. Donna Edwards of Maryland proposed a tougher ceiling on interest rates, but the House rules committee rejected her amendment. "Our constituents are so angry with the banks," she observed, "siding with credit-card companies would not be helpful to me, and I expect that's true in other districts." Bankers are contributors, so this is what members call "a money vote." A consumer lobbyist explained. "Let's face it," he said. "The main reason lots of members get on the House Financial Services Committee is because they want to raise money from the financial industry."
Anyway, the entire article is sobering because I think it is true. I don't expect people to do much until they feel a lot of pain and are suffering.

[olderstill]

mlsjapan07
Message #444 - 06/17/09 05:39 PM
Old & Gray,
A CNN round-table discussion (mainly about themselves) occurred a week or so ago. Someone brought up the derivatives issue, and it was quickly dismissed as "Well, nobody knows what they are...." a non-issue. Obviously, journalists don't want to touch the issue.
Could the bankers have actually created a system that they don't understand how to dismantle? Or are they digging in their heels, just trying to figure out a way to get the party started again?
I may not understand derivatives, but if it looks like a bomb and it ticks like a bomb.....

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Defining Quality
Message #445 - 06/17/09 05:46 PM
IMHO the system needs to be restructured, but that will only happen if the current system collapses, or over time through the political process....
This needs on-going scrutiny. It seems like real reform is being pushed aside for this proxy "regulator."
Is that because the toxic assets can't be unraveled, and the government knows it?
since there was no tie to any reserve requirements,
One salient observation might have been made at the outset: If the value of the underlying documents were sound and worth committing to, why would credit protection be necessary?
Credit Default Swap regulation was not done. The Office of Thrift Supervision and the Commissioner of Insurance for the state of New York had a clearly expressed legal duty to Regulate the OTC market for all Derivative activities. It was not done and those in public office who did not enforcement the "Rule of Law" should be prosecuted for criminal negligence. Government is lying to us and that's a fact.
$Trillions have already been lost and stolen world-wide because of the illegal sale of Default Insurance by Bank Holding Companies and Insurance Holding Companies and Financial Holding Companies all engaging in the "Business of Insurance" as defined by law and doing unregulated insurance business in the US and around the world, and that too is a fact.
No regulation can undo the $Trillions upon $Trillions that was lost and stolen from innocent people.
CDS were no Ponzi Scheme but a well organized R.I.C.O. enterprise which required the regulators to turn a blind eye to the corruption because the "Enterprise" was well funded, politically connected, attorney and lobbyist represented financial criminals that are still running the Banks and Insurance Companies and Financial Institutions and the FED.
The trading of Credit Default Swaps should never have been allowed - a fact now proven by history, and all future trading should be stopped - period, but that would be an admission of criminality and everyone knows politicians and public servants in America are not capable of such criminal behavior. Stealing from the public trust only occurs in Banana Republics never in america. So far $14 Trillion (depending on who if anyone can be believed) has been committed from the public trust to back stop the RICO enterprise.
Just like the War Exclusions that exist in all property insurance - there is no way any model can predict how deep or wide War /credit losses might be under the wrong political /economic circumstances (like today), and because of that fact premiums for coverage on potential loan losses can not be determined.
That too is now a fact of historical reality, as the insurers of the SWAPS are all bankrupt - virtually everyone who got in on the Global "Confidence Game".

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Duffminster
Message #446 - 06/18/09 03:56 PM
I believe we need more than simple trust that discipline will prevail on a more or less extemporaneous or unregulated basis. History bears me out on this, I believe. Even when we were less populated, excesses were in evidence. We've had all kinds of runs, monopolies and cartels at work. I've seen it in my day close up and unmistakable. We may not be able to operate without some restraining agency overseeing operations. Another version of tough love, I call it.
Gray, I'm in full accord with this thought and what the President via Geithner is proposing isn't even close to adequate and putting the controls with the Federal Reserve smells like a conspiracy (power grab by the Fed). It makes me think the old thread regarding the panic 1907 as banking act of agent provocateur to set up the conditions that led to massive banking consolidation, control and eventually the creation of the Federal Reserve was closer to the mark than we may have guessed. Here is the lite weight coverage (IMO) of the subject over at CNN:
Geithner defends reform plan before Congress

money.cnn.com/2009/06/18/news/economy/geithner_congress_reform/?postversion=2009061814
In his appearance before members of the Senate, the Treasury chief spent much of his time defending the Obama administration's plans to broaden the Federal Reserve's regulatory reach.
"Why is it your judgment that the Fed should be given this additional extraordinary authority and power?" asked Sen. Banking Committee chairman Christopher Dodd, D-Conn.
"Does it not conflict in many ways, or could it not conflict, with their fundamental responsibility of conducting monetary policy?" Dodd continued.
Under its proposal, the White House wants to extend the central bank oversight over large financial firms and formalize the Fed's role as the lender of "last resort", in addition to its existing powers to set monetary policy.
Many critics have charged that the Federal Reserve contributed to the nation's housing bubble by keeping interest rates extremely low for a lengthy period of time earlier this decade.
There have also been allegations that the central bank was asleep at the wheel when it came to protecting Americans from the dangerous mortgages and usurious credit card agreements that have made the current recession particularly painful for consumers.
"What makes you think the Fed will do better this time around?" asked Sen. Jim Bunning, R-KY, a perennial Fed critic.
Geithner conceded that changes to the current system would not enable the Fed to protect the markets against every threat, but he maintained that empowering the Fed made the most sense given the circumstances.
A new agency or committee created to shoulder some of the Fed's new responsibilities might be ill-equipped to react appropriately in the event of another crisis, he noted.
Geithner said the White House tried to learn from the experience of other countries during previous financial crises. Efforts by those governments to remove power from their respective central banks, he noted, did not work in the past.

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Old and gray
Message #447 - 06/19/09 02:46 PM
Just completed downloading and printing out the Treasury Department's "program" for dealing with the crisis. This is all available at the Treasury's website

www.ustreas.gov/initiatives/regulatoryreform/

If your interest extends beyond the Secretary's speech, the Department's plan for implementing controls to deal with future crises is accessible directly from this site. There are Executive summaries, condensed versions of each of the five principle "key objectives", and the full report of 89 pages.
In addition should anyone want the President's Wednesday address in full, a link is provided at that site. There's a list of "Resources" and "Papers".

After I read what has been accumulated, I'll comment on length, since it is essential to the purpose of this thread.
My first impression on a glance through the work and reading the President's address: there's a gap between the inspiration and the implementation. As Paul Krugman begins his analysis with his usual directness, June 19, 2009, NYTimes:

Would the Obama administration's plan for financial reform do what has to be done? Yes and no.
He notes that, as Geithner points out, "more than half of America's banking, in this sense, was handled by a "parallel financial system" - otheres call it Shadow banking" - of largely unregulated institutions. . .
"When Lehman fell, we learned just how vulnerable shadow banking was: a global run on the system brought the world economy to its knees.
"One thing financial reform must do, then, is bring non-bank banking out of the shadows. . ."
Later Krugman makes two small comments:
"Good stuff. But what about the broader problem of financial excess?"
And,
"Unfortunately, the plan as released doesn't live up to the diagnosis."
I expressed a few misgivings about a Krugman column earlier, but this is the Krugman I expect, particularly when he makes the point that is easy to agree with,
". . .5 percent. . [of a loan to retain] . . isn't enough to deter much risk lending, given the huge rewards to financial executives who book short-term profits."
In view of CRA problems, which Duff has pointed out several times, out of 89 pages of system analysis and reform proposals, CRAs are given less that one full page of attention. Under the heading of "K. Tighten Oversight of Credit Rating Agencies" on page 87 of 89, a sub heading summarizes the Treasury Department's reform proposal as,
"We urge national authorities to enhance their regulatory regimes to effectively oversee credit rating agencies (CRAs), consistent with international standards and the G-20 Leaders' recommendations."
Five short paragraphs follow. The impression is that it is not Treasury's responsibility to handle the issue of CRAs. Come to think of it, quite a bit of the report conveys the same impression, mainly that Congress, or the Fed, some government department or agency should be shouldering the burden.
In all, The Secretary again was quite unimpressive when he delivered the introductory speech. It may be the quick speech pattern which creates the feeling that the ritual is an annoyance and he has more important things to attend to. The Senate Banking Committee may have been equally impressed inasmuch as his testimony was short, lacking essentials the committee may have been hoping for, and the afternoon session was cancelled (according to CNBC news media reports).
If someone told me they had a plan fleshed out and after the build up showed up with generalities, I think I'd be offended that my time was taken up with fluff. I'm hoping the full report has more to offer than has emerged from either the President's or the Secretary's speeches. If not, the old pull-the-wool-over-the-eyes political maneuvering is back in fashion. We need a lot more.
If anyone has the time or interest to read the speeches, or the report, impressions would be appreciated.

Krugman's column is found at this site:

www.nytimes.com/2009/06/19/opinion/19krugman.html?_r=1
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Brian33
Message #448 - 06/22/09 05:02 PM
Well, I just looked at this article in this last post , and what a crock. This is the same psycho babble coming from the same institutions trying to distract people from the real reasons why we are in this mess in the first place. In the article, it discussed terms for selling a loan, as part of the financial reform. Selling loans should not be happening at all, for any reason. They should stay with the originator of the loan. This way the risk would stay with the lender, thereby making delinquent loans greatly diminished because of the obvious reason of people who made the loans were taking the risk as well. This is how this mess began. As soon as you make it so you can sell loans, it takes the risk and responsibility off the original lender. The system of selling loans seems to be a conflict of interest. But all of this talk misses the point.

The point is the reason why the system collapsed is not because of these financial rules, but more the reason that people could not pay back the mortgage and foreclosed on the loans. The actual defaults on loans at ever greater scales is what caused the actual collapse of these banks and financial firms, not how this system was structured. Mortgages could not be paid if the holder of the loan was not able to make the monthly payments. Regardless of who owned the loan.

So we need to look at the reasons why people could not pay back their loans. I have been telling people as early as 2004, that because of individual wages going down and quality jobs leaving the country that this was going to cause huge default rates and as a consequence a housing market crash, and economic crash as a result. I am no economic or financial scholar, but yet, I was able to predict this. And it doesn't take a rocket scientist to figure this out. In 2003-2004 I saw people who were making 18 + dollars an hour lose their jobs and were soon making 5 dollars an hour with little to no benefits. I saw people like myself who could not find work even as a skilled worker. I saw wages stay the same, all while Food, energy, property taxes, fees, all went up in some case 300 percent. The signs of danger were clear and obvious. Lending standards that were changed in 1997-2001 to allow investment firms to borrow money at a much lower rate allowed companies like Fannie Mae and Freddie Mac to make loans to lower income people, this change in the rules did not become a problem until the Bush administration came into office, and then this system which worked well became a real problem. Instead of this system being used to benefit the poor, which worked well under the Clinton administration, the Bush administration used this same system to benefit the rich, at the expense of the poor. Real Nice.

In other words, they exploited the system which Clinton had in place. They will always make the claim that it was Clinton's fault, even though the regulations were changed in his term of office, in reality, the regulation change wasn't a problem , until the Bush administration came into office. It was the Bush administration which exploited this system. This system is what then fueled the housing boom, which created fake home ownership, fake wealth, and a fake robust economy. Continued below------------
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Brian33
Message #449 - 06/22/09 05:29 PM
Part 2

Normally, these loans were given to "low income" people, but because of job losses to shipping jobs overseas, and opening mass trade with China this made for huge loss of jobs and wage reduction. But low wages and job security was not as important for qualifying for a mortgage loan, during a time where banks could sell loans , and greatly reduce the monthly mortgage rates. By using exotic terms of the loan via ARM, Option-ARM, interest only, no-documentation, etc. type loans which made the Loanee qualified for a mortgage even though he or she under previous "Lending Standards" would have been disqualified. In other words, Banks and House flippers will selling, and re-selling homes hand over fist, and much business growth was created from this environment. A good percentage of the GDP was residential construction during the housing boom years. Without this market existing, the true economy would have been seen. But not many people saw this. I was one of them who did see through the smoke and mirrors. I warned people early on, that as soon as teaser rates on these loans were over, and real rates returned, along with the fact that people would not have employment to support paying back the loan, that a vicious economic destructive cycle would ensue.

The FIX: Original loan stays with the original lender. there should be no selling of the loan, then you will have accountability.

However, none of this will work , unless people have the ability to pay back the loan. And this is where the bigger problem lays, which is actually what caused the first problem. If people don't have quality jobs, and cannot pay for the loan then either one of 4 things have to happen:

A. Real Estate values have to come down

B. Interest rates have to come down

C. Job creation and/or Wages have to go up

D. any combination of the top 3

Right now the system is unbalanced, and it will have to balanced again for it to work again. But there is a lot of bad debt and fake wealth that was created during the Bush administration that still has yet to be de-leveraged. Some of it has been absorbed onto the US Treasury and Fed Balance sheet, however there is a lot more which is not on the banks balance sheets because of the change in accounting rules. In other words, the new financial fix was not a fix, but a mere change in accounting rules which hid the bad assets banks are truly holding. In any case, all the debt whether it be held by Banks, the U.S Treasury or Federal Reserve will all have to be paid back some day, and if it is not, then the dollar will be devalued greatly which is a recipe for inflation which would be disastrous during a recession or depression. In other words, if this thing goes down, its game over.
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Duffminster
Message #450 - 06/22/09 08:02 PM
Gray,

The above linked report to the full report in treasury is about 80 pages. I'll be working my way through it but right off I can see that what you are saying is true. Its lite on detail. The subject of regulating OTC derivatives is massive. The system is nearly completely unregulated and the tone seems to me that we'll be adding new regulations. They system is so far out of hand now and there is no discussion of how to reign in the outstanding derivatives. Here is a huge mouthful of rhetoric, which if one were to provide detail should be several thousand pages in my opinion:
We also propose to strengthen the prudential
regulation of all dealers in the OTC derivative markets and to reduce systemic risk in
these markets by requiring all standardized OTC derivative transactions to be executed in
regulated and transparent venues and cleared through regulated central counterparties.
We propose to enhance the Federal Reserve¡¦s authority over market infrastructure to
reduce the potential for contagion among financial firms and markets.
Finally, we propose to harmonize the statutory and regulatory regimes for futures and
securities. While differences exist between securities and futures markets, many
differences in regulation between the markets may no longer be justified. In particular,
the growth of derivatives markets and the introduction of new derivative instruments
have highlighted the need for addressing gaps and inconsistencies in the regulation of
these products by the CFTC and SEC.

[olderstill]

Old and gray
Message #451 - 06/23/09 06:50 PM
Brian33

I think we all agree that loans were a part of the problem. . .
Yet, this thread believes it's a small part of the problem.
The nation's banking system has created monstrous, unregulated. . even undefined institutions in an effort to circumvent supervision and regulation by agencies normally devoted to overseeing banks and the financial system to protect the economy. In the new Treasury proposals, these large institutions which the Basel Committee on Banking Supervision referred to as "Highly Leveraged Institutions" (HLIs), and others called Large Complex Financial Institutions" (LCFIs), have combined banking functions with insurance, investment, and distribution functions until the regulators don't understand what they are supposed to be regulating and banks, not in the spirit of compliance, I'm sure, have chosen their regulators. ("Foxes guarding the hen houses" is a favorite line in this concern.)
Beyond that, legislation has been passed by Congress exempting certain complex financial instruments from being monitored or regulated. These instruments, "derivatives", have been distributed throughout the global financial community to the point where no one knows who owes what to whom, what obligations they've undertaken, or whether these obligations will ever be honored. In the meantime, the industry continues to generate more derivatives to "insure" what has already failed! All unregulated, and all without any concern of what is being done to the value of the dollar which supposedly backs it up.
In view of this, doesn't it seem that the mortgages are small potatoes?
Housing might constitute about $15 trillion in the US and these derivatives have a nominal value of more than $220 trillion dollars (as of 3/31/09) in US banks and over $683 trillion world wide! If that supposed value is backed by US currency, don't you think that's a threat to the dollar that's borne by every US citizen? Don't you believe that when it all comes home to roost, a barrel load of the cheapened dollar won't buy you a gallon of milk?
If you take a peak at the Treasury's proposals, entitled, "Financial Regulatory Reform: A New Foundation", you might discover there's not one mention of housing or mortgages. I'm about halfway through the study and haven't seen it other than a mention of bringing a "Federal Housing Finance Agency" in on the play.
This thread is about the threat to our entire economy and our currency.
To be sure, housing and mortgages are a mess and more needs to be done to solve that problem. But, it isn't the burning issue of the day. What is of concern: how do we save the dollar? What do we do to these institutions that have debased our value by just cranking out paper and peddling it to the rest of the world. At the same time how do we treat the rest of the world when they come knocking on our door asking for the payment they were promised with that worthless paper, which is a valid contract. Do we say a contract is a contract (as the bank execs did about their bonuses) or do we just admit it's a worthless piece of paper and suffer the consequences?
The new Treasury document (let's call it the FRR) begins by addressing the issue of the Tier 1 FHC. (I'd assume the FHC stands for Financial Holding Companies.) So now the Treasury has issued their own name for the LCIs or LCFIs, or, as they define it, "firms whose failure could pose a threat to financial stability due to their combination of size, leverage, and interconnectedness". That's issue number 1 with the Treasury at this time. That has been issue number one with this thread since the beginning.
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Old and gray
Message #452 - 06/23/09 06:51 PM
To face up to the issue, Treasury is proposing to bring in all the big regulatory guns of the government - The Treasury, The Federal Reserve, The National Bank Supervisor, The Consumer Financial Protection Agency (a new creation), the SEC, The CFTC (Commodities and Futures Trading), The FDIC, and the FHFA (Federal Housing Financial Agency) - into play to address the financial situation. Do you sincerely believe that all this is necessary to deal with only the housing and mortgage situation?
That particular mess was a symptom of the situation not the cause. . . in other words, a small part of the bigger issue, that of banks running wild trying to take over the entire economy and corner the net worth of the United States. . . and as long as they were about it, they might as well set their sights on the entire world.
What the FRR is trying to do, we might hope, (and while I'm thinking about it, it might be our last chance) is to straighten out the mess that was created in the process. We all hope it isn't too late to do so.
We all recognized at the outset of this thread that it would not be easy. It may turn out not to be too well organized either. But, I believe I'm almost talking myself into believing that it might not be a bad start.
I don't know for sure yet, but maybe all those provisions of the FRR are exactly what we were hoping would take place. There may be a closer correlation between what we asked for and what was delivered.
But this is not only about housing and mortgages, this is about survival . . what level of survival will we enjoy after the mess is all straightened out?
Does that seem a bigger problem than mortgages and the tranches?
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Old and gray
Message #453 - 06/23/09 07:14 PM
Brian. . . to conclude. .
I should thank you for forcing me to regroup and restate what I believe was our original purpose. The thread has followed a tortured path.
We justify the subject on the grounds that we are investors, (or would be investors, whichever) and investors can only function one way, on the basis of assurance that there will be a safe and sane tomorrow. As an investor, no one would be willing to commit something of value in an uncertain climate. If we better undertand what's right and wrong with the system and if anything is being done to help or hurt, we might know what constitutes a better investment or whether it's better not to invest.
Apparently , considering how the market is reacting these days, many more than just those posting here have the same or similar thoughts.
Anyway. . . Glad to see you post.
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mlsjapan07
Message #454 - 06/23/09 08:00 PM
I think this belongs here. This is a link to one analyst's written testimony to Congress regarding OTC derivatives, what they are, and how they should be handled. It is long, but very informative. I hope Congress will pay attention. (Hat tip to Karl Denninger, on whose blog I found this.)

www.rcwhalen.com/pdf/StatementbyChristopherWhalen_SBC_062209.pdf


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Duffminster
Message #455 - 06/23/09 08:35 PM
Gray,

In the new Treasury proposals, these large institutions which the Basel Committee on Banking Supervision referred to as "Highly Leveraged Institutions" (HLIs), and others called Large Complex Financial Institutions" (LCFIs), have combined banking functions with insurance, investment, and distribution functions until the regulators don't understand what they are supposed to be regulating and banks, not in the spirit of compliance, I'm sure, have chosen their regulators. ("Foxes guarding the hen houses" is a favorite line in this concern.)
You may have seen this in another post:
"Fed mulling revamp of repo market" - Are the Clearing Banks Facing New Higher Levels of Risk???

I think it is reasonable, given the financial meltdown, continuing problems in the derivatives markets and a host of other financial chaos, that the Fed is concerned that behemoth clearing banks like JP Morgan Chase and Bank of NY Mellon could be vulnerable to margin calls and that under the right/wrong circumstance one them could have stability concerns. It is the fact that the Fed is "mulling a revamp" of the repo pool system that leads me to speculate that this could possibly be the case.

www.reuters.com/article/newsOne/idUSTRE55L0TR20090622
LONDON (Reuters) - The Federal Reserve is considering creating a utility to replace the Wall Street banks that handle U.S. repo market transactions, the Financial Times reported on Monday, citing people familiar with the matter.
The proposal is partly motivated by concerns that the structure of the U.S. overnight repurchase market may have exacerbated the financial turmoil that followed the collapse of Lehman Brothers in September.
Fed officials plan to meet next month with market participants to discuss reforms, the paper said.
The newspaper cited people familiar with the Fed's thinking as saying the central bank is looking into the creation of a mechanism to replace the clearing banks -- the biggest of which are JPMorgan Chase and Bank of New York Mellon -- that serve as intermediaries between borrowers and lenders.
"The Fed is raising questions about whether the system really protects the interests of all participants," said a person familiar with the Fed's thinking quoted by the FT.

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stockmarketinvestorobserver
Message #456 - 06/23/09 09:13 PM
The DOW 30 Components was at 11,722 on January 14,2000. Today June 23,2009 even WITH cheating, i.e. take out AIG($1.50), GM($1.25) and C($3.00) and add KFT ($25.50), CSCO($18.50) and TVR ($41.00) the DOW can only muster 8,322 points. This truely has been .....the lost decade!
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stockmarketinvestorobserver
Message #457 - 06/23/09 09:34 PM
What about the millions of investors that have lost trillions of dollars on the bankruptcies of: General Motors, Eddie Bauer,Asia Pulp & Paper, Lehman Brothers, Southeast Banking Corporation(Miami, Florida) National Steel Corporation,Circuit City, Atlas Air Cargo(emerged from chapter 11 July 2004), Holsum Bakery, ADIC(Advanced Digital Information Corporation), AGCC( Anchor Glass Company), KB Toys, INDYMAC, Sharper Image (electronics), Lyondell Chemical, Hvide Marine(Bankruptcy September 1999), Nortel Networks, Polaroid, Circuit City, Worldcomm, Enron, McCleod USA, 360 Networks, 6 Flags Atlantis, Bear Stearns, Barnett Bank(Miami, Florida), Bank United(Coral Gables, Florida), National Steel Corporation, K-Mart(before Sears Holding Group), Winn-Dixie( Chapter 11 2005), Braniff International Airways, Aloha Airlines, Commodore Business Machines(bankruptcy 1994) StorageTek(chapter 11 1984) , Gateway Computers, Atari Computers, General Growth Properties, Royal Ahold(bakeries/supermarkets),Parmalat(milk/dairies) a 15 year investment horizon or a highly concentrated portfolio or a well diversified portfolio......the losses have been HORRIFIC!!!!
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Old and gray
Message #458 - 06/24/09 12:08 AM
One of the reasons I see benefits in any administration appointing someone in charge of a committee of all agencies or departments involved in any decision making pertaining to the derivatives, including the clearinghouse proposal and any and all other problems evolved or still on the way out is clear cut results. The collision of ideas between new committees and old agencies dedicated to specific purposes or tasks, results in confusion when you throw an idea into the air and it comes down in seventy two different laps. They all assume theirs is the god-given task to save the world. Then each of the seventy two parties have two or three options on how to escape and/or repair.
Bernanke and the Fed are running with ideas, the Treasury has its ideas, the SEC its, and so on.
Forgive me for discussing the following again, but it can stand retelling.
There was an article on the CNNMoney website about a meeting back in the first half of May, 2009 during which Geithner introduced his plan for dealing with the OTC derivatives. At that meeting, also addressing the issue of derivatives was the new Chair of the SEC, Mary L. Schapiro.
During his address, Geithner, former president of the New York Federal Reserve Bank, with typical bankers outlook was assessed in this manner by Colin Barr who was reporting for CNN:
"The financial crisis was caused by - and exposed - significant gaps in oversight," he (Geithner) said. "We are committed to working with Congress to create more comprehensive system."
Later in the article the reporter writes,
Geithner said that while derivatives weren't the cause of that plunge, their untrammeled growth over the past decade and poor disclosure surrounding their use made the financial system more vulnerable to panics.
That, I'd suppose would be the typical, defensive, bankers position.
On the other hand, Ms. Mary Schapiro was first involved with the SEC in 1988, reappointed by Bush I during his term, was appointed to Chair the CFTC by Clinton, prior to Ms. Brooksley Born, and left government position to serve with the firm which eventually became the FINRA, (Financial Industry Regulatory Authority) the largest private sector "regulator for all securities firms doing business with the US public". She was the CEO when she responded to President Obama's call. In other words, over twenty years of solid regulatory experience.
Her words at the same meeting, from her speech on SEC Letterhead, dated May 13, 2009,
". . . We also have initiated an active rulemaking agenda to ensure that our securities laws are keeping pace with new financial products and that we are responding to the financial crisis.
"But no matter how great our capabilities, no regulator can effectively protect investors from unregulated instruments.
"There is widespread agreement that OTC derivatives, particularly credit default swaps, may have contributed greatly to the financial mess we're cleaning up today. Unfortunately, the lack of clear regulatory authority over this vast market has hindered the ability of regulators to fully understand how this market functions or to ensure that basic standards of fairness are followed.
"There is agreement now that this needs to change.
"Today, current federal statutes significantly restrict the ability of financial regulators to obtain reporting or record-keeping in the OTC derivatives market. Yet these are the very types of tools that any regulator would need to identify suspicious trading patterns or better understand systemic risks."
Apparently bankers cannot see the "wide spread agreement" assigning fault that regulators do.
Unfortunately, I have not been able to track down Sec. Geithner's speech of May 13th. I'll resume the search some time in the future, my memory permitting.
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Old and gray
Message #459 - 06/24/09 12:09 AM
My opinion as to who would be better suited to handle the derivatives problem is clear, let the one with the regulator experience handle it! Bankers handle regulation only one way, hide from the regulator! Conceal the books, lock them in the vault if possible. And, when you answer a question, one word! Don't volunteer any information! And if they confront you, you don't recall. We have no new instruments. And when they find the smoking gun in your hands, this gun wasn't fired, better yet. . . What gun?
I may have something complimentary to say about Geithner in the future, but remember which side he's on, just as Ben Bernanke is on just one side, anxious to attack the derivatives issue and get it resolved and under the rug. Save the banks. . they didn't do it. What gun?
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Old and gray
Message #460 - 06/24/09 12:45 AM
Duff in re message # 455
One of the corollaries of my post immediately above is that we'll also have everyone and their brother trying to act as clearing centers for derivatives if they could corral enough banks to serve. After all, there's money to be made.
Recall DTCC was setting up offices in both the US and Europe to handle derivatives. In those cases, and any competing cases, banks who expect to have access to those clearinghouses, pay a fee for the service. DTCC's domestic operation was originally scheduled for seven banks, but they have since expanded their operations. I couldn't guess how many clients, subscribers or part owners (I have no idea what kind of arrangement it is) there will be when DTCC swings into the second phase of operation scheduled for August.
The Fed always works on a fee basis for services they provide. To my knowledge, they are not targeting derivatives. Their current concern is the repos only according to the article. The way things are moving along now, I wouldn't expect them to compete with DTCC or any other facilities that pop up as far as derivatives are concerned. In view of the magnitude of the derivatives market, I don't believe DTCC will provide much relief for the stress involved. For the Fed to get involved would mean a substantial enlargement of staff and facilities.
I know I suggested the idea before and still believe, if the Fed could expand to operate such a facility handling derivatives to unwind the market, it might not be a bad idea. But, the Fed does not operate in competition. Recall, that prior to this crisis, the Fed was the lender of last resort. Their policy was that banks were forced to seek help elsewhere before they came to the Fed to borrow, and when Fed loans were granted, theirs were higher than market interest rates.
As for the Fed's concern for JPMChase or Bank NY Mellon, it's pretty clear to me that most top 25 banks are vulnerable at this time. I don't believe the possibility of further weakening or outright failure is ever far from the forefront of Fed's thinking. Could they tolerate another embarrassment?
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Old and gray
Message #461 - 06/25/09 03:41 PM
. . . As for the review of the Treasury's document, "Financial Regulatory Reform: A New Foundation" the process is continuing, but to avoid a great mass at one sitting, an update might help
At the outset, no claims are made that this will be an objective approach to the entire report. This is the "Top-of-the-Line Comment", first order of business that must be stated clearly.
Secondly, the Report itself is an extensive list of proposals for regulating the financial sector in an attempt to prevent the re-occurrence of a crises similar to the one we now experience.
Third, the Treasury has made no attempt to define immediate action to counter the damaging effects of the derivatives and their relatives. Medium and long term issues are addressed, but nothing in the report deals with how to unwind or correct the excesses and abuses that have taken place to date and still hang over us, with no intent to go away voluntarily.
And, last, fairness is hoped for in analyzing the report, but not impartiality. The report itself seems to be directed toward what would favor banking despite the weight added to the regulatory burden banks would have to bear if all the provisions suggested were enacted.

The Table of contents provides an idea of the coverage.

Financial Regulatory Reform: A New Foundation
TABLE OF CONTENTS
Introduction
Summary of Recommendations
I. Promote Robust Supervision and Regulation of Financial Firms
II. Establish Comprehensive Regulation of Financial Markets
III. Protect Consumers and Investors from Financial Abuse
IV. Provide the Government with the Tools it Needs to Manage Financial Crises
V. Raise International Regulatory Standards and Improve International Cooperation
The quickest condensed version in considerable detail can be had by reading pages 10 through 18 (This is the "Summary of Recommendations"). The essence is there in outline form, easily understood without the distraction provided by the nitty gritty of thought processes, which do not always serve the principle purpose and can sometimes be a waste of time.
„X First order of business in the Treasury report is establishing a new "Financial Services Oversight Council", membership composed of most government agencies dealing with finance and regulation: Sec of Treasury, Chairman of the Fed, Director of the new National Bank Supervisor, a new Consumer Financial Protection Agency, Chair of SEC, Chair of CFTC, Chair of FDIC, and Director of Federal Housing Finance Agency.
„X This Oversight Council will deal with the newly named Tier 1 FHC (Financial Holding Companies, identical to the LCFIs or HLIs, or the generic "Too-big-to-fail" institutions) those we pointed out as being in need of definition.
„X It will gladden a few souls to know that Treasury recommended removing the provisions of the GLB Act which "constrain" the Fed from examining or reporting on certain activities of the LCFIs, or as now named, Tier 1 FHCs. The assumption is that among the activities is the issuance, without limit, of derivatives, CDS and the like. (The Treasury report will address that issue later.)
„X "Treasury will lead a working group" in assessing Capital requirements and banks and BHCs (bank holding companies) standards. To this end "regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value and to prevent compensation practices from providing incentives that could threaten the safety and soundness of supervised institutions".
„X Accounting standards should be reviewed by FASB, IASB and SEC on the reporting of loan loss provisions, credit information and fair value reporting, in hopes that fair value information and greater transparency will yield information on management expectations of cash flow.
„X Loopholes will be closed. Thrift charters will be eliminated. And all subsidiaries of BHCs will be expected to conform to regulations, not just depository entities.
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Old and gray
Message #462 - 06/25/09 03:43 PM
„X Since investment banks are a thing of the past, SEC's role there is to be eliminated and any i-banks remaining (assuming the BHC categorization, it's pre-supposed) would come under the Fed's jurisdiction.
„X Hedge funds and money pools are to be regulated.
„X SEC regulation of Money Market Funds would be strengthened.
„X A new Office of National Insurance would be established. (States now provide the only insurance regulation. A sticky and currently contentious proposition which does not serve the public well.)
„X And, the GSEs will be re-evaluated as to their future fate by the Treasury and HUD. The report asserts that, "We need to maintain the continued stability and strength of the GSEs during these difficult financial times."

Most of this work is to be done by either October 1, 2009 or December 31, 2009. The GSEs fate will be revealed "at the time of the President's 2011 Budget release".

This is a condensation of a summary. Therefore, many details in the report have been omitted. Anyone interested in more detail can download the report from the link below, which was also cited in message #447. This can be downloaded only, it will not open on the site. Apparently, they are anticipating quite a bit of traffic and want to keep the road as open as possible.

www.ustreas.gov/news/index1.html

The above is no more than the first major subject from the 5 in the table of contents, I. Promote Robust Supervision and Regulation of Financial Firms. In one sense it's encouraging if you're in accord with the analysis and proposals set forth in this thread (The Root of the Financial tsunami) and the predecessor "Treasury yields. . ." Yet, there are items in addition to the first response which are not addressed.
On the encouraging side, the complex nature of the new, massive institutions has been addressed. To what total extent we'll have to wait until we get to the body of the report. But the Treasury has its own classification of the group, the Tier 1 FHC, which indicates a definition must be forthcoming.
Then, too, the fact that insurance will be brought into the federal jurisdiction is helpful. Just how far they'll be brought in remains to be seen. Mentioned elsewhere was the fact that the insurance industry was able to escape supervision in too many areas due to the 50 different sets of laws they are subject to, all of which is no help to the ordinary consumer. The more insurance is subject to national regulations, the better for the consumer, provided the regulations are constructed with the consumer in mind and not dedicated to serve industry interests alone.
The Consumer Financial Protection Agency is long overdue. I'm aware of many people who suffered at the hands of inexperienced or unscrupulous brokers and their only recourse was to appeal to the brokers' own insurance. None of the people I knew or read about recovered a cent. . . Not even the concession of a sympathetic consolation. A CFPA is about 100 years overdue. Now, the question is, how helpful will the new entity be?
Discussion of "Strengthening Capital Requirements" and "Other Prudential Standards" for banks and BHCs avoid reference (at this point) to BIS or the BCBS, or G20 or G30. The BIS and their BCBS studies and work papers are more germaine to the issues in these categories, and the assumption would be that the wheel does not have to be re-invented. There are other works dealing with these issues beyond Basel II. (Now obsolete, IMO.) The more relevant of those encountered (though not an exhaustive collection) have been cited further back in this thread.
If the talk of closing loopholes in regulations, the supervision of hedge funds and private pools, exercising more supervision of MMFs, and providing federal oversight of insurance is sincere, it would be a welcomed assurance that needed order can be established in those areas.

[olderstill]

Old and gray
Message #463 - 06/25/09 03:46 PM
Banks may disagree. But, it's been no secret here that the feeling is their reckless behavior does not entitle them to any right to protest. Common sense would have told them where they were headed and how disastrous the consequences. They failed to exercise that sense and now must suffer. . . along with the rest of us. Too may innocents out there have lost jobs, homes, pensions, and had their children bound to servitude to the state as a result of these "privileged" people's thoughtless and self-centered behavior.
I have friends and family on both the innocent and guilty side in the banking business, but no sympathy for the miscreants. I have no idea why they should be considered bankers. What they indulged in was not banking! That's why there's such an urgent need for redefinition and control of the industry.
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Old and gray
Message #464 - 06/25/09 10:57 PM
The next step in the Treasury's rescue program

II. Establish Comprehensive Regulation of Financial Markets

along with 2 of the 3 remaining sections occupies a minor position in the overall proposals.
"Strengthening the supervision and regulation of the markets" suggests
 Federal banking agencies promulgate regulations requiring originators of the CDOs, RMBSs and CMBSs to "retain an economic interest in a material portion of the credit risk of securitized exposures";
 Regulators promulgate regulations "to align compensation of market participants with longer term performance of the underlying loans";
 SEC should increase transparency and "standardization of securitized markets";
 SEC should strengthen the regulation of CRAs; and,
 Regulators should reduce the use of credit ratings "wherever possible".
OTC derivatives and CDS should be
 prevented from posing risk to the financial system;
 transparent;
 safe from market manipulation, fraud, another market abuses; and,
 OTC derivatives should not be "marketed inappropriately to unsophisticated parties".
Furthermore,
 CFTC and SEC should recommend changes to Congress "that would harmonize regulation of futures and securities";
 The Fed "should have the responsibility and authority to conduct oversight of systemically important payment, clearing and settlement systems, and activities of financial firms";
 The Fed should have "authority to provide systemically important payment, clearing, and settlement systems access to Reserve Bank accounts, financial services, and the discount window."

That's it! Just enough to promote the feeling of being abandoned. Apparently, Treasury does not believe the Financial Markets need more than a quick glance before they move on to the next issue.
What happens to the derivatives once they've been generated? Who determines when the market has seen enough of the instruments? Past experience has taught us that risk has not been transferred, do we then continue to issue the derivatives until we learn it is a truly catastrophic process? How much more do we need to gauge that?
Treasury passes on these charges in an almost flippant manner and drops it there.
There are 11 text pages devoted to these issues in the general body of the report, but the majority of that (from 2/3 to 3/4) is a historical retracing of events and some banking philosophy. Neither is sufficiently developed to act as foundation for legislation. That (along with all other issues) will be revisited later.

The document moves next to

III. Protect Consumers and Investors From Financial Abuse

which is to be accomplished by means of a Consumer Financial Protection Agency, a new agency which would "protect consumers of credit, savings, payment, and other consumer financial products and services, and to regulate providers of such products and services". It should be independent, have broad jurisdiction, sole rule-making authority, supervisory and enforcement authority, should work with the Department of Justice, should promote effective regulation, its rules would be a "floor, not a ceiling", coordinate efforts with the states, should have a wide variety of tools, and the FTC should also be given better tools. (That last seemed an after thought, totally out of place.)
(If the foregoing list seems unduly abrupt, it's only because the repetitious phrases which lengthened the section were omitted.)
Consumer protection will be reformed by means of
 A proactive approach to disclosure which will promote transparency;
 the regulator will be authorized to define standards for the sake of simplicity;
 where transparency and simplicity fall short, the Agency will be empowered to enact tailored restrictions for the sake of fairness; and
 the Agency will enforce fair lending laws and the Community Reinvestment Act so that consumers and communities have access to prudent financial services, lending, and investment.
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Old and gray
Message #465 - 06/25/09 10:59 PM
Finally, in this topic, investor's protection will be strengthened.
 SEC's expanded authority will promote transparency;
 SEC's new tools will increase fairness in broker-dealers operations;
 financial firms and public companies will expand protection for whistle-blowers, "expanding sanctions available for enforcement", and there will be non-binding shareholder votes on executive pay plans;
 the new Financial Services Oversight Council will establish a new Financial Consumer Coordinating Council to include federal and state consumer protection agencies and a permanent role for the SEC's Investor Advisory Committee; and,
 adequate savings, employment-based and private plans will be promoted for retirement security.
At this point I was beginning to suspect the authors were suffering from long hours and were losing interest in the project. In addition, I could understand why some Senators were perturbed when the Wednesday morning meeting broke up. . prevailed upon might better describe it.

The next section

IV. Provide the Government With The Tools It Needs To Manage Financial Crises
 Create a resolution regime to prevent disorderly resolution of failing BHCs, including the Tier 1 FHCs; and,
 legislation should amend the Federal Reserve Act to allow the Fed to extend credit to individuals, partnerships, and corporations in "unusual and exigent circumstances".
I really don't care to go into the last section

V. Raise International Regulatory Standards and Improve International Cooperation

in any depth, since it defers or delegates nearly all suggestions to BIS, BCBS, FSB, ICRG, G20 and G30, all international organizations. This may be due to the weakness of Treasury staff in their comprehension of international efforts, or their total exhaustion for having run this thing through in the limited time they had available. (I did the same all night thing in my undergraduate years with papers for courses for which I had no particular liking.) There are references to domestic accounting changes, supposedly to be developed by the FASB, but, apparently, it's assumed these would be coordinated with the International Accounting Standards Board, the IASB, so I'd judge them to be preliminary.
Besides the above, there is a task they reserve for themselves, namely, to determine an appropriate definition of, and requirements for, foreign firms relative to the Tier 1 FHC classification.
The last bombshell in this section is turning responsibility for the CRAs over to the G-20 recommendations, "consistent with international standards".

The above is an outline of the program Sec. Geithner delivered to the Senate Banking Committee Wednesday, June 18th before the afternoon session with the House Committee was postponed.

The text of the document will be studied a little more thoroughly before further comment is made.
One exception, if I'm allowed, a repeat of Paul Krugman's assessment of the proposal quoted above:

Would the Obama administration's plan for financial reform do what has to be done? Yes and no.
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Duffminster
Message #466 - 06/27/09 11:42 AM
Gray,
 legislation should amend the Federal Reserve Act to allow the Fed to extend credit to individuals, partnerships, and corporations in "unusual and exigent circumstances".
I really don't care to go into the last section

Come on. I want my Fed Loan money.

Reminds me of that old song by Dire Staits - "Money for Nothing"


That ain't workin', that's the way you do it
Money for nothin' and your chicks for free
Now that ain't workin', that's the way you do it
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Scared_Shirtless
Message #467 - 06/29/09 12:19 PM
QUOTE: I think this belongs here. This is a link to one analyst's written testimony to Congress regarding OTC derivatives, what they are, and how they should be handled. It is long, but very informative. I hope Congress will pay attention. (Hat tip to Karl Denninger, on whose blog I found this.)

www.rcwhalen.com/pdf/StatementbyChristopherWhalen_SBC_062209.pdf



Wow! Thanks mlsjapan!

It was a very interesting read. I try mightily to understand OTC derivatives. I read and read. This one helped but it also illuminated some possibilities regarding FRAUD that I hadn't understood before.

So...

As far as insurers go - the CDS business that they (AIG especially!) got into may have been to move away from another fraud scheme regarding reinsurance/side letters? That means that a goodly portion of the CDS business may have been a new fraud - including side letters - to replace the reinsurance/side letter fraud?

More and more it looks like this whole scheme was rigged to AVOID REGULATION! Nothing more and nothing less!

If this is some of what Old & Gray alludes to in the whole OTC derivatives mess - I NOW am starting to understand his anger!!!!

ALL these people ought to be in jail!!!

And NOTHING has been formulated YET to regulate them. No.... That's wrong. I mean BAN them!!!

Whoa.... I think I find myself on a new horse here. Or at least more understanding.

And MOST IMPORTANTLY - we may well have bailed out AIG at full 100% reimbursement on totally FRAUDULENT CDS's!!!

Do I have that right?

Wishing everyone the very best.

I think I'm gonna lay down and take 2 aspirin...
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neohguy
Message #468 - 06/29/09 12:54 PM
The pope of the Roman rite is scheduled to release an encyclical soon, possibly today, about wall street abuse and unregulated banking. Supposedly he thinks that some type of global regulation is best (if I'm reading it correctly). Encyclicals are delivered in Latin so an accurate translation may not be available for awhile (according to a friend of mine that is more familiar about such things).
www.guardian.co.uk/commentisfree/belief/2009/jun/23/pope-caritas-capitalism-encyclical
The pope's home truths for bankers
The White House and Wall Street are on notice of the bad news that is about to come out of the Vatican for the already battered supporters of free markets and global capitalism....
It is the church's duty to denounce the fundamental errors that have now been revealed in the collapse of the major American banks. Human greed is a form of idolatry. We must denounce this courageously, but also concretely, because grand moralisations are not helpful if they are not supported by a familiarity with reality
Now, as Sandro Magister of Rome magazine Espresso, one of the most acute of Vatican observers, reports, the German scholar Ernst-Wolfgang Böckenförde, a man esteemed by the pope, calls for the church to come out more strongly against capitalism which must be overturned at its foundations, because of its inhumanity...
Whether or not Benedict sides with the German scholar and his calls for an outright drive against capitalism, the encyclical is unlikely to make pleasant reading for capitalists.
Another article from the Washington Post:
newsweek.washingtonpost.com/onfaith/georgetown/2009/06/what_to_look_for_in_the_new_social_encyclical.html
Conservatives will be shocked and disappointed by the encyclical, which will reflect Benedict's skepticism toward unbridled capitalism based on greed.
Back in February, he said, "It is the Church's duty to denounce the fundamental errors that have now been revealed in the collapse of the major American banks. Human greed is a form of idolatry that is against the true God, and is a falsification of the image of God with another god, Mammon."
Unlike President Obama who wants to reform a system that he believes is out of control, Pope Benedict wants to rethink the whole system. As he said earlier this month, "The financial and economic crisis clearly shows that certain economic-financial paradigms that have been dominant in the past years must be rethought."
Undoubtedly it will also develop the pope's concern about the environment. As he has already said, "Starvation and ecological emergencies stand to denounce, with increasing evidence, that the logic of profit, if it prevails, increases the disproportion between rich and poor and leads to a ruinous exploitation of the planet."
Skepticism toward capitalism and the market will permeate the encyclical. Absolute faith in the market is seen by Benedict as a form of idolatry. The need for government regulation of the economy is a given.
The above post is not to be taken as a religious endorsement but rather as possibly a European view of unregulated capitalism.
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Virgil Syonid
Message #469 - 06/29/09 02:48 PM
Shirtless, the Christopher Whalen link seems to have gone dead.

"Statement" is pretty vague (i.e. not searchable). Could you post the name of the article, please. I want to hear what Congress is hearing about OTCDs.
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Scared_Shirtless
Message #470 - 06/29/09 03:10 PM
Sorry Virgil!

It is in message 454 of this thread. The whole link is this (I hope):

www.rcwhalen.com/pdf/StatementbyChristopherWhalen_SBC_062209.pdf

And I have the pdf saved - just in case.

Best! s_s
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Old and gray
Message #471 - 06/29/09 03:28 PM
For those having trouble reaching R C Whalen's testimony through message #467, the original link provided by mlsjapan and copied in #470 leads directly to the 22 paged pdf document.

Well worth the read if you're in agreement with the line of this thread. On the other hand, if you are constitutionally opposed to the thoughts and arguments posed here, keep your eyes shut if you accidentally click on the link and bring the document up. Christopher Whalen is as opposed to the derivatives and the stable of relatives, as well as the bankers that developed them and are now engaged in a life and death struggle to preserve them as are most of the responders on this thread.

There are others out there with similar thoughts. All writers approach the issues with another language set. Sometimes one pattern of speech conveys more personal meaning than others. That's why it always pays - if there's intention to study a subject - to get more than one exposure to the subject.
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Virgil Syonid
Message #472 - 06/29/09 03:35 PM
And I have the pdf saved - just in case.
So do I. What a phenomenal article. I'm sending it as far and wide as I have the means to.

Thank heavens Christopher Whalens still exist in government.
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Scared_Shirtless
Message #473 - 06/29/09 04:15 PM
Now if we could only find the side letters that go with some of those.... um... suspect AIG CDS's we "bailed out".

I saw Duff once post:
I sometimes wish I didn't know what I now know.

Haunting words... Will there ever be justice?

Awhile back I wrote my congressman and told him - we need heroes! He didn't respond to that one although I now get these preprinted postcards from him quite regularly.

Keep up the fight! Its only EVERYTHING that's at stake here!
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Duffminster
Message #474 - 06/29/09 08:14 PM
I think Spitzer is right here. But don't worry, with the Fed as the new watch dog, those banks will shape up.
Spitzer says chance to probe banks was lost
www.reuters.com/article/ousivMolt/idUSTRE55S6AE20090629
NEW YORK (Reuters) - Former New York Governor Eliot Spitzer hailed the Supreme Court's decision on Monday that allows the state's mortgage lending probe, one initiated by Spitzer in 2005, to finally proceed after a protracted legal battle with federal regulators.
Yet the former attorney general laments the lost opportunity regulators had to question and possibly halt subprime mortgage activities that ultimately caused massive damage to banks and the economy.
"This is a big win for law enforcement and for those who believe that banks need to have an appropriate level of scrutiny," said Spitzer, who launched the investigation while attorney general and resigned as governor early last year.
Andrew Cuomo, the current New York attorney general, had brought the case wanting to revive Spitzer's probe into possible lending discrimination. The nation's highest court overturned an appellate court ruling that blocked the state from enforcing fair lending laws against national banks.
"The question that bothered us several years back when we began this case was whether banks were lending fairly and properly to people," Spitzer said in a telephone interview. "It was very clear people were being offered loans they were financially incapable of repaying."
While initially a case into lending practices biased against minorities, investigators were concerned that loans extended to people with weak credit were becoming problematic.
By the end of 2006, mortgage losses started to weigh on banks and by 2007, the housing market had collapsed, bringing mortgage markets and eventually the entire banking system down.
"We didn't quite know how much or in what form, but there was much there that was troubling," Spitzer said. "Obviously, it's a little late to forestall the cataclysm that emerged when the subprime debt fuse finally exploded."
VOID
Spitzer does not claim his mortgage probe would have prevented the credit crunch, but regulators squandered an opportunity to stop questionable lending practices, he said.
Back in 2005, Spitzer's star was climbing. After taking on Wall Street conflicts of interest and mutual fund trading abuses, his prosecutors turned their sights on mortgages.
The probe was stopped by a group of powerful commercial banks backed by their supervisor, the Office of the Comptroller of the Currency, who as a federal bank regulator argued states had no jurisdiction to probe national banks.
The problem, Spitzer said, is the OCC left a void when it did not ask its own questions.
"The federal government under Bush, and unfortunately under President Obama as well, took the side of the banks, not only in saying states shouldn't ask these questions but then in not directing the OCC to step into the void to ask the questions."
Spitzer, whose career as attorney general was marked by stepping into regulatory gaps, said it remains to be seen how the Obama's regulatory reforms turn out. For now, he contends the government is not doing enough. Continued...

[olderstill]

Old and gray
Message #475 - 06/30/09 08:33 AM
Anyone with an interest in a video interview with Mr. Whalen and another of his comments might find this link of interest.

finance.yahoo.com/tech-ticker/article/261090/Jamie-Dimon-A-Great-Operator-But-an-Obstacle-to-Reform-Whalen-Says?tickers=JPM,XLF,SKF,FAZ,FAS,C,GS
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Old and gray
Message #476 - 06/30/09 09:46 AM
Mr. Whalen also coined a phrase to describe the OTC derivatives activity: "Yield to Commission". This was his description of the LCFI's profitable activity in derivatives and CDS, etc.
He wrote an article entitled "Yield to Commission: Is an OTC Market Model to Blame for Growing Systemic Risk?" From the first two paragraphs, these statements are of interest.

www.rcwhalen.com/pdf/JSF_Yield_08.pdf

. . . . Over the past 18 months, hundreds of billions of dollars in losses have been recognized by banks and investors due to the liquidity problems of over-the-counter (OTC) structured debt, some of which contained subprime mortgages. The fact that regulators in the U.S. and elsewhere have blessed these opaque, inefficient market structures adds to the concerns regarding transparency and overall efficiency, especially regarding the safety and soundness of global financial institutions.
. . . . The principle of maximizing the ¡§yield to commission¡¨ is a normal human trait and one that applies to sales in just about any industry. In the OTC world of complex assets containing subprime debt, however, everybody besides the dealers seem to be the losers. Indeed, the OTC market in complex structured assets seems so deliberately opaque and thus difficult to value as to be on the verge of being deceptive by design¡Xthat is, a fraud¡Xand yet it has the full blessing and endorsement of politicians in most of the industrialized nations.
One point which has often been overlooked when the current crisis is blamed on the housing market, people over-reaching, buying beyond their means, etc.: when you consider that the mortgages were executed with the originate-to-distribute process in mind, first, they were so blinded by the profit involved in passing the documents on that banks never considered the degree of risk involved. Finally, when it was discovered that the securitization process devalued the original document, that devaluation was transferred off the backs of the banks onto the holding (meaning the house itself). The market then developed distrust for all mortgages and reacted by devaluing the entire stock of houses.
Blame in this process falls squarely on the shoulders of the banks. The plain fact is that this was a manifestation of their reordering of the social structure which came to light - the redistribution of wealth, the social displacement operative mode that is often the root cause of busts. It was an important cause of the Great Depression, too, but, generally overlooked in the race to assign blame to money, investment imprudence and banking exclusively.
A definition of this order would be tied in to Whalen's citation of the "normal human trait", which might better be described as the predatory instinct.
But, even though this will be explored with a return to a study the text of the "Financial Regulatory Reform" document, it's a diversion from finance and economics.
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Old and gray
Message #477 - 07/01/09 07:10 PM
BTW, the web address at which the "Financial Regulatory Reform" document can now be retrieved has changed. It can now be found at

www.financialstability.gov/docs/regs/FianlReport_web.pdf


I didn't try to open it on site. I assume it must still be downloaded to be read.
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Old and gray
Message #478 - 07/01/09 07:55 PM
A personal problem in going on with this analysis bothers me. There should be no secret as to where my sympathies lie. The criminal fortune hunters who disrupted the world's financial system for personal gains and ended up stealing value from innocent people worldwide are despicable to say the least. They should be prosecuted not only in US courts but in international courts so far-reaching is their corruption.
Now we have to address the wreckage and repair the system. Won't be easy and won't be inexpensive. However many hundreds of billions will be spent on the "corrections" will be added burden on still unborn people, worldwide! When you think of that when you're trying to present a case in the interest of the living, it makes the crime all the more heinous.
In trying to evaluate the document presented by Geithner (I'm sorry, I'm back to dropping any deferential title), it's more upsetting when I think of how calculating the banks, bankers, brokers and insurance industry have been. As I see it, an ice berg is a tropical paradise in comparison to the coldness in their hearts and minds. And, now the administration comes out with a document to deal with most of the flaws which causes me to gag mentally on every other sentence. Most of the corrective steps suggested in this thread are in it. In fact, it's gone further than requested by proposing building another structure on top of the already massive regulatory system in place. But, in another sense, it's unhealthy in the worst way.
So, why the discomfort? . . . It's the justification for each of their proposals.
For every thing this thread blames on the executives, the "Financial Regulatory Reform" blames bank supervision, the overseeing authorities; and every time this thread indicts faulty short-sighted management, the "Financial Regulatory Reform" passes the blame onto the regulators, the same folks who were either restricted from doing their job or denied the tools to do their job.
When reading the text justifications (starting on page 19) for the corrective actions listed in the outline review above (which ended on page 18), the regulators are blamed for taking what might be interpreted as a twenty five year vacation and/or turning a blind eye toward the banks, the very entities that deliberately defied definition and churned out toxicity which regulators were legally restrained from regulating. Now, the folks who sponsored the corruption over the years are back at the microphone, blaming the regulators they restrained for the corruption.
Other than ranting and railing against it in a way that would drive everyone away from this thread, I don't know how to handle the mess they offer. I hope I'm coming to understand why the Senators were miffed (or less than satisfied) with this presentation.
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Old and gray
Message #479 - 07/01/09 08:29 PM
Page 19 begins by describing a list of faults that developed. "Risks built up dangerously", "sharp deterioration in underwriting standards for loans", "the nation's largest financial firms, already highly leveraged, became increasingly dependent on unstable sources of short-term funding", "weaknesses in firms' risk-management system", "aggregate risk exposures on and off their balance sheets", "credit boom and a housing bubble", "firms did not plan for the potential demands on their liquidity", and "firms were forced to pull back from lending".
Care to guess who was to blame for this?
Regulators!
"Our supervisory framework was not equipped to handle a crisis of this magnitude. . . . those forms of supervision and regulation proved inadequate and inconsistent."
"First, capital and liquidity requirements were simply too low. Regulators did not require firms to hold sufficient capital. . . Regulators did not require firms to plan for a scenario in which the the availability of liquidity was sharply curtailed."
Poor helpless, uninformed, incapacitated banks, led by people not properly prepared to assess their situation so carefully concealed from supervision and regulation. . . a situation so carefully crafted by the banking industry.

"Second, on a systemic basis, regulators did not take into account the harm that large, interconnected, and highly leveraged institutions could inflict on the financial system and on the economy if they failed."
"Third, the responsibility for supervising the consolidated operations of large financial firms was split among the various federal agencies. Fragmentation of supervisory responsibility and loopholes in the legal definitions of a "bank" allowed owners of banks and other insured depository institutions to shop for the regulator of their choice."
Too big to fail is too big to be managed, which is too big to exist. The point has been made in many different forms, but it's an unavoidable conclusion. Here it's an admission.
Break them up and put the incompetents out of work.

"Fourth, investment banks operated with insufficient government oversight. Money market mutual funds were vulnerable to runs. Hedge funds and other private pools of capital operated completely outside of the supervisory framework."
This is the fifth attempt at summarizing my thoughts on this pile of clap-trap! They came home to Mommy Gov after confronting the nasty world out there. Got bruised and battered and after a few soothing hugs and smooches from Mommy Gov, who joins them in a chorus of curses for those who brought this on them. They're being sheltered before they get assurances that Mommy Gov will protect them from the big bad people who they cheated out there. . . until it's safe to go out to play again. And, all will be made safe by blaming it on the regulators and supervisors who have been away on a twenty-five year vacation, or just woke up from a Rip Van Winkle episode.

This kindergarten reasoning is going to convince adults that these kindergarteners were of age and able to deal with the consequences of their actions by blaming people prevented from interfering by legislation bought and paid for? By calculatingly creating monstrous, undefined institutions and distributed unregulated, incomprehensible and secretive documents unaccounted for and destructive to any and every one who touched them. And then when the inevitable occurred and everything collapsed, it was the regulators fault for not keeping bank and broker management from behaving unethically?

Talk abut whiners!!!

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Old and gray
Message #480 - 07/01/09 08:30 PM
I'll have to take a break here. After reviewing less than a page of the Treasury's document.
See what I mean by a mental gag?
I'm not done with this by any means. The entire issue of regulation has been turned around to make those who wished for restrictions sorry for the day they wanted accountability and a demonstration of responsibility.
Somebody said that it was a pleasure to have an erudite president in office again. I believed that meant that his entire staff would be elevated a notch. Maybe I didn't realize it was better to have Hank Paulson come into the room waving a sheaf of 200 pages of blank paper than to have a literate shyster trying to pull the wool over every one's eyes.
I don't blame the Senators for being insulted and miffed.
These people are out to prove they are simply not competent. . . PERIOD!!
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Virgil Syonid
Message #481 - 07/01/09 09:19 PM
This kindergarten reasoning is going to convince adults that these kindergarteners were of age and able to deal with the consequences of their actions by blaming people prevented from interfering by legislation bought and paid for?
Hey, what do you expect in a country where it's illegal to refuse service to an overweight customer but you can still sue McDonald's for making you fat?

At least they're saying the right things. It could be worse. They could be blaming the whole mess on overregulation.
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Duffminster
Message #482 - 07/01/09 09:39 PM
This whole document appears to be one big excuse note from Mommy Geithner and Poppa Ben. Poor banks need to be protected and spared no expense because they just were not regulated well enough. Uhhh, lets see, they lobbied for that deregulation, used every means of political manipulation to get it and then knowing they would be bailed out and that the largest banks would ultimately benefit from the consolidation proceeded to destroy the lives of millions of investors and burden the middle class for generations to come with borrowed bail out money.
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mlsjapan07
Message #483 - 07/01/09 09:59 PM
It is noteworthy (I hope) to remind ourselves that whenever we say "they," whether we are talking about the politicians, regulators, bankers, etc,. we are talking about the same person. Yesterday's regulator was last year's banker. He was a lobbyist before that, and a congressmen before that. The "revolving door" between government/industry/lobbying ensures that the same group of people stay in power and stay connected. This is the real reason we can't get out of this mess, IMHO.

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Scared_Shirtless
Message #484 - 07/03/09 10:29 AM
Hang in there Old & Gray.

Remember what you told me - keep your perspective on what's REALLY important in life. You are performing a service here. And we need your clear perspective.

You're a person of conscience and moral fiber (as am I) and thus your natural revulsion for things completely contrary and sinister. Quite simply - these people have no regard for humanity. Apparently even the Pope knows it! To you and me - that simply doesn't compute!

We have to keep pushing. I am gaining the opinion that our best shot for our general society is to vote every last one of them out starting with the 2010 elections. Then continue in 2012 and finish up the remaining senators in 2014. We will only keep the few worth keeping. As ms. mls said - its the revolving door. We must stop it ourselves!

(Deep breath - dare I say this...)
In a certain sense - our "suppression" is no different than the suppression currently being faced by the people in Iran! Is this Iran or the USA? Think about that.

I think we need to take a bit of time and look at the Declaration of Independence again. One particular passage comes to mind. That whenever any government becomes destructive of the people's basic rights "it is the Right of the People to alter or abolish it, and to institute new government..."

I never would have ever guessed it in my lifetime. But I'm really believing it is coming to that!

Go Christopher Whalen!!! And many thanks to all for the great links and posts here.

Wishing everyone better times ahead. s_s
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Old and gray
Message #485 - 07/03/09 12:15 PM
The "revolving door" between government/industry/lobbying ensures that the same group of people stay in power and stay connected.
That's why we really can't buy the solons of Washington. As Dr. Kane says, we can only rent them! Their positions are not guaranteed, only their connections. They stand prepared for sudden shifts in order to take full advantage of opportunities.
Like the corrective proposals we offer, for instance. They've accepted them all and implemented them all. . . then drew the line in the sand beyond which they will not budge. That's negotiation?! The attitude is: "You have what you asked for, watch dogs, top heavy regulations and supervision, now pay for it and shut up. You get everything and we keep doing what we want."
They accept the proposals not for corrective action but as an empty appeasement. And to make certain that the negotiations will be further moderated, the top heavy structure they offer is so expensive, there's little chance it will be passed by Congress. Too expensive! After the taxpayer bails out the poor banks, where can we find the money to pay for all that? How much more self-serving can you get? They give us what is required but ignore the purpose.
Further negotiations will probably include support for weakly re-arranged healthcare and some infrastructure support, two needed items but of course, they, too, will be on somebody else's side of the line which will be erased with the tide and redrawn further away from where it would be most needed and most effective. This will distract and confuse the citizens, draw their attention away from the fact that nothing has changed, nothing has been restored, no restitution or corrections have been conceded.

Proceeding along with analysis of the Regulatory Reform (RR) document, The Fed appears poised to come out of the new order with immense concentrated power, beyond what was established by the Federal Reserve Act. . . And, this new power is to be established by what means? Does this qualify for implementation by executive fiat? Or, is legislation required to re-arrange our entire financial structure?
We propose that authority for supervision and regulation of Tier 1 FHCs be vested in the Federal Reserve Board, which is by statute the consolidated supervisor and regulator of all bank holding companies today. As a result of changes in corporate structure during the current crisis, the Federal Reserve already supervises and regulates all major U.S. commercial and investment banks on a firm-wide basis. The Federal Reserve has by far the most experience and resources to handle consolidated supervision and regulation of Tier 1 FHCs.
The Council should play an important role in recommending the identification of firms that will be subject to regulation as Tier 1 FHCs. The Federal Reserve should also be required to consult with the Council in setting material prudential standards for Tier 1 FHCs.
The ultimate responsibility for prudential standard-setting and supervision for Tier 1 FHCs must rest with a single regulator. The public has a right to expect that a clearly identifiable entity, not a committee of multiple agencies, will be answerable for setting standards that will protect the financial system and the public from risks posed by the potential failure of Tier 1 FHCs. [My bold emphasis.] Moreover, a committee that included regulators of specific types of financial institutions such as commercial banks or broker-dealers (functional regulators) may be less focused on systemic needs and more focused on the needs of the financial firms they regulate. For example, to promote financial stability, the supervisor of a Tier 1 FHC may hold that firm¡¦s subsidiaries to stricter prudential standards than would be required by the functional regulator, whose focus is only on keeping that particular subsidiary safe.

(Please excuse the doubt that the arrangement is orchestrated to serve the public's interest. We'll know where the responsibility lies, but outside the banking industry, no one will have a say in how. )

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Old and gray
Message #486 - 07/03/09 12:17 PM
Diffusing responsibility among several regulators would weaken incentives for effective regulation in other ways. For example, it would weaken both the incentive for and the ability of the relevant agencies to act in a timely fashion ¡V creating the risk that clearly ineffective standards remain in place for long periods.
Also, it's easier to control one regulator already on your side than to struggle with the FDIC, the SEC, the state chartered banks, the thrifts, etc., etc.
The entire world has seen those "incentives" at work! They're profitable and destructive.
In view of the fact that the Fed will "consult" with the Financial Services Oversight Council, which is located in the Treasury and chaired by the Secretary of the Treasury; but, since "the ultimate responsibility for prudential standard-setting and supervision for Tier 1 FHCs must rest with a single regulator", and "Diffusing responsibility among several regulators would weaken incentives for effective regulation in other ways"; then,
". . . the Federal Reserve establish[es] rules, in consultation with Treasury, to guide the identification of Tier 1 FHCs. The Federal Reserve, however, should be allowed to consider other relevant factors and exercise discretion in applying the specified factors to individual financial firms. Treasury would have no role in determining the application of these rules to individual financial firms. . ."
the scheme seems to give free rein in many new areas which were never intended for the Federal Reserve! What restrictions or control applies to Fed decisions? There should be open debate on this dubious arrangement. The fox needs to be restrained by accountability. We're in this situation due to the proven ineptitude of the leaders of the temple. Giving them more leeway in decisions and implementation, which amounts to whim which corresponds directly to the wants of the industry, is not what's needed here. Yes, they need to do their work, but for safety's sake I would look for accountability to someone other than a complicit member of the "Club". The industry supplies the personnel for their own regulation and supervision as it is and this will not change soon.
I recall reading that a foreign economist, observing the Fed system from the inside over a period of time, questioned, "How can an entity be independent within the government?" His foreign education did not include the concept of such an anomaly. Well, my domestic education does not include such a definition or categorization. The Fed should get both its feet inside the line and be converted to an accountable government agency subject to constitutional authority, the laws of the land, with control vested in the voters.
Instead of this democratic arrangement, Treasury will take the weak stance of "We'll indicate who, but not how"? Is there any room for more transparency?
If Treasury is to involve itself to the extent suggested in just the few paragraphs quoted above, through the Council and consultation with the Fed, it would seem logical to expect Treasury to also take an active role in developing details of the supervision required. Otherwise, what's the point? Does that seem logical? Or, does it seem logical to assume that Treasury wants to wash its hands of the entire mess and it on a weak executive setting. A setting in which the various Reserve Banks are not in full accord as to how this crisis developed or how it is to be dealt with? Considering the helping hand extended to the criminals who brought us to the dance: Advantage Tier 1 FHCs!
The RR sweeps by all this and moves quickly into
3. Our legislation will propose criteria that the Federal Reserve must consider in identifying Tier 1 FHCs.

[olderstill]

Old and gray
Message #487 - 07/03/09 12:28 PM
The weaknesses of the system have been demonstrated. No matter how they are approached, piece meal or whole hog, anew or using the guidelinesand standards already developed and distributed by BIS, BCBS, OECD governance guidelines, or by means of an old-fashioned re-education, without addressing the issue of the industry's management short-fall, no amount of regulation, supervision, or conveyed new powers will correct deficiencies or rectify faults. To sweep everythng into one entity that has allowed this to happen on the assumption tha it can operate in a mode different mode than it has been without changing accountability is absurd.

The Fed should be the entity supervising the banks, but they've been part of the problem to date. To assume they have the backbone to regulate their relatives without a makeover is beyond reason. Before the RR proposals should be considered acceptable, this makeover should be addressed. . . thoroughly!
The RR does propose a series of changes to the industry. The list is familiar. (The list and the compressed definitions are verbatim.)
„X Capital Requirements.
Capital requirements for Tier 1 FHCs should reflect the large negative externalities associated with the financial distress, rapid deleveraging, or disorderly failure of each firm and should, therefore, be strict enough to be effective under extremely stressful economic and financial conditions. . .
„X Prompt Corrective Action.
Tier 1 FHCs should be subject to a prompt corrective action regime that would require the firm or its supervisor to take corrective actions as the firm¡¦s regulatory capital levels decline, similar to the existing prompt corrective action regime for insured depository institutions established under the Federal Deposit Insurance Corporation Improvement Act (FDICIA).
„X Liquidity Standards.
The Federal Reserve should impose rigorous liquidity risk requirements on Tier 1 FHCs that recognize the potential negative impact that the financial distress, rapid deleveraging, or disorderly failure of each firm would have on the financial system.
„X Overall Risk Management
. Supervisory expectations regarding Tier 1 FHCs¡¦ risk management practices must be in proportion to the risk, complexity, and scope of their operations.
„X Market Discipline and Disclosure.
To support market evaluation of a Tier 1 FHC¡¦s risk profile, capital adequacy, and risk management capabilities, such firms should be required to make enhanced public disclosures.
„X Restrictions on Nonfinancial Activities
. Tier 1 FHCs that do not control insured depository institutions should be subject to the full range of prudential regulations and supervisory guidance applicable to BHCs. In addition, the long-standing wall between banking and commerce ¡V which has served our economy well ¡V should be extended to apply to this new class of financial firm. . .
„X Rapid Resolution Plans.
The Federal Reserve also should require each Tier 1 FHC to prepare and continuously update a credible plan for the rapid resolution of the firm in the event of severe financial distress.
(The above are redactions except for the "Market Discipline" and "Prompt Corrective Action" which are copied in their entirety.)
These are to be applied to the Tier 1 FHCs, those in most need of restraint.
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Old and gray
Message #488 - 07/03/09 12:30 PM
Notice that in Capital Requirements, "externalities" are responsible for current conditions. This, despite too many economists claiming the LFCIs were the sole market makers and dealers.
Prompt Corrective Action leaves the responsibility of supplementing capital requirements with those who neglected it last time around.
Liquidity standards. . . This puzzles. The avowed intent for the change in supervision is that the system should be safe guarded, and yet here the responsibility for the liquidity remains within the purview of the individual banks. Why not industry-wide if the focus is supposedly on the system?
Risk Management? We already had that arrangement, and we can see the results of its inadequacy. A replay is not required. Let's try another arrangement.
Market Discipline and Disclosure - Recall a specific call was made for FULL DISCLOSURE!!! PERIOD!! along with the added comment that any call for "disclosure" would end up with qualifiers that would negate change. Well, there it is! Please describe the precise meaning of "enhanced disclosure".
Restrictions on Nonfinancial Activities. Since the games have "served us so well" as to threaten the entire global system, why shouldn't we leave it as is by complying with existing rules and regulations. To be administered how? Not reassuring.
Finally, Rapid Resolution Plans. . . Leaving the final disposition of the body to the deceased? Well advised move! At least the Fed is required to take a peek at the corpse.

Too critical? Too harsh? Probably. Nevertheless, my impression is one of rushing through again in order to have some papers to present for the scheduled meeting with the Senate and House committees. Most of the effort seems to have been directed toward the Tier 1 FHCs. As the RR progresses, the staff seems to be tiring and losing interest. Long night, too much coffee, and little sleep? We all did that in the undergraduate days when we had more stamina and less sense. But, this is the grown up world and high priced talent should generate more comprehensive and feasible proposals than has been witnessed to this point.
The RR doesn't improve in quality as it progresses.
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Old and gray
Message #489 - 07/03/09 04:16 PM
Folks, before the fat lady starts to sing. . the personal feeling is that JPMChase and GS control the playing field, the equipment, and the light switch, and they want to start playing the game under their rules with rule #1 being these two monsters are too big to fail and #2, the game starts at midnight on a moonless night and we'll turn on the lights, bottom of the ninth, two outs, the count on the batter 0 and two, and we'll tell you what the score is after the game is over.
Even with the thought that constitutionally our nation might be more sympathetic to fascism than democracy, allowing two entities to control the destiny of our entire nation never crossed my mind. Eisenhower had the right outlook but named the wrong culprits. Instead of the military industrial complex, it is now the banking/brokering/insurance industries combined that have usurped authority.
Systematically, they've placed their people in the proper positions, found the opportunity (after having undermined the global system) and the pretext to re-arrange our system to suit their wants. They are convinced and apparently have convinced the rest of the nation that we are unable to operate without them. A man campaigns on an idealistic platform calling for change, and in appointing a group from among the anointed, he is the first to change. Is he powerless, unaware, or was it impressed upon him that this is the way it will be done? Or, is it simply that we're incapable of doing things with a wider vision than we now have? Go all the way back to Mitchell's warning not to "listen to what we say, watch what we do".
Is this the American way? What have I missed out on?
I was a firm believer in cycles. My type of cycle will come around again. If the cycle theory fails, I'm depending on reincarnation. I'll be back to fight in a younger body. I just hope the memory of this tasteless episode comes back with me so I'll concentrate on the right parties.
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neohguy
Message #490 - 07/03/09 04:52 PM
They are convinced and apparently have convinced the rest of the nation that we are unable to operate without them.
The nation is oblivious to what is happening or totally frustrated with what to do about it. We need a leader but I don't even see one on the horizon.
A man campaigns on an idealistic platform calling for change, and in appointing a group from among the anointed, he is the first to change. Is he powerless, unaware, or was it impressed upon him that this is the way it will be done?
I'm very disappointed. My youngest warned me about this (he volunteers for Ralph Nader). My son is going to be 27yo. I asked him if other young people were aware of or even care about what is happening. He said no. My son e-mails me several times a day. Yesterday he sent me several articles. All of them were sobering, Washington Post scandal, cronyism, etc. The following article hit home with me. (O&G, should I ever post anything that you feel is inappropriate for your thread then please let me know and I will delete it if it hasn't been by the moderators).
nader.org/index.php?/archives/2127-Ignoring-Propethic-Predictors.html
Ignoring Propethic Predictors
I¡¦ve wondered often why people who go to ¡§town meetings¡¨ held by campaigning politicians rarely ask fundamental questions.

Here is one that should have been asked of presidential candidate Barack Obama: ¡§If you get to the White House, will you appoint to top positions Americans who have a track record of making the right decisions in their respective fields?¡¨

¡§Of course, I will,¡¨ Obama would have undoubtedly replied.
Of course, he did not when it came to the collapse of the corrupt Wall Street casinos and the bailout of these gamblers by the American people. Obama chose the very Wall Streeters and Wall Street servants who were involved in, condoned, or profited from the speculative binges that led to the biggest government bailout scheme in world history. The President¡¦s explanation is that he wants experienced people who know how Wall Street works. Yeah, right! In reality, he wanted political cover.
Something very important is missing when even people who are part of the ruling establishment are ignored, marginalized, or ridiculed even though their detailed, public warnings prove to be all too accurate.

Consider billionaire, Ross Perot. Back in the 1980s and 1990s, Ross, as everyone calls him, was right on General Motors, right on NAFTA trade, and right on the federal deficits...

Two years later, reflecting on his experience at GM with a reporter from Fortune, Perot called the ¡§General Motors system a blanket of fog that keeps people from doing what they know needs to be done.¡¨

Warming up, Perot continued: ¡§One day I made a speech to some senior executives. I said, ¡¥Okay, guys, I¡¦m going to give you the whole code on what¡¦s wrong. You don¡¦t like your customers. You don¡¦t like your dealers. You don¡¦t like the people who make your cars. You don¡¦t like your stockholders. And, to a large extent, you don¡¦t like one another. For this company to win, we¡¦re going to have to love our customers. We¡¦re going to have to stop fretting about dealers who make too much money and hope they make $1 billion a year though us. The guys on the factory floor are the salt of the earth¡Xnot mad-dog, rabid, burn-the-plant-down radicals. And all this sniping at one another¡Xthe financial guys vs. the cars guys¡Xis terribly destructive.¡¦¡¨
Perot devoted much of his 1993 published book Save Your Job, Save Our Country to NAFTA and trade. Looking back, he was right most of the time. NAFTA cost more U.S. jobs than it created, generated a huge U.S. trade deficit with Mexico, and mainly benefited the ¡§36 businessmen who own Mexico¡¦s 39 largest conglomerates or over half of Mexico¡¦s Gross National Product.¡¨ (bold by me)

The border-located maquiladora factories have high worker turnover and squeeze the laborers in often unsafe conditions for little pay.

Here is how Perot described the scene behind the boasting of Washington, DC, and corporations about the large increase in trade after NAFTA:
¡§Most o
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neohguy
Message #491 - 07/03/09 04:57 PM
Most of the goods produced in the maquiladoras are shipped into the U.S. market. Consequently, most of the so-called trade between the U.S. and Mexico is not trade as trade is commonly understood. Rather, it is primarily U.S. companies shipping their own machinery, components, and raw materials across the border into their Mexican factories and then shipping their finished or semi-finished goods back over the border into the U.S.¡¨
n Bush¡¦s and Obama¡¦s Washington, there is no room for Perot to gain visibility and recognition.

It is one thing for the Washington politicians to ignore prescient progressive commentators, like William Grieder, who have been prophetically right on. It is quite another escape from reality to turn their backs on leaders within the business establishment itself.

There are many like Perot who must be watching the day¡¦s news and saying ¡§we told you so, but you didn¡¦t listen then and you are not listening now.
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Old and gray
Message #492 - 07/03/09 05:56 PM
neohguy
Many years ago (at my age you can say that!), Many years ago I wrote a piece published in the NYTimes dealing with the difference between American manufacturing corporations and the Japanese. My experience extending back to pre-teen years was such that I understood the Japanese and they understood me. That put me in an enviable position which lasted nearly my entire career and gave me some PR advantages.
But. . to the main issue. The article dealt with essential differences between Japanese and American management in which the American managers were at an ever-widening disadvantage. The Japanese at that point came up through the ranks and understood the business from root to the newest shoots. Americans on the other hand, increasingly went off to school to study something that had nothing to do with the manufacturing business and more frequently were promoted to positions with no floor experience. In plain language, they did not understand their people, their process or their product.
I can't tally the number of times I moderated between the two in cases where the Americans should have been embarrassed by their lack of knowledge as compared to the Japanese thorough, practical education. The Japanese are too polite to say anything outwardly. But, it doesn't require obscure observation skills to notice reactions and they were not complimentary.
What Ross Perot read off to the GM people I'd accept as gospel truth. We are in trouble in more than just this banking scandal we're addressing because of Board room politics. Too many board members do not feel responsibility toward the corporation they serve. They probably believe that the gratitude should flow the other way. I could also tell you that when a conscientious new board member shows up prepared, ready to make a point or deal with issues, Ross Perot's fog machine begins working to obfuscate every blessed thing. First, how dare you come onto our board and show us up; and, second, did you ask for permission to prepare yourself ahead of time to embarrass us?
Too many board members look for their sinecure and nothing else. They leave all the work to the folks on the lower tier. Had all the banking board members been involved like some of the few conscientious members, we would have had no financial problems in liquidity, capital requirements, risk evaluation, or the glut of toxic paper corrupting the world markets, devaluing the dollar and putting our future in hock forever.
At my age, I serve on one last board. I consider it the ultimate compliment when the much younger president calls on me for advice or to work with him to research or organize a presentation for a program he has in mind. I knew his parents and was put in contact with him through his mother, but the truth is I don't believe we see any generational differences. For only one reason. . . mutual respect for integrity and industry. Isn't that the important thing? Once you have that in the hierarchy of any corporation, respect not only each other, but the people working for and with them and the public they should be serving, nothing can stop the organization.
On the other hand, when institutions do what banks have done, they not only have no respect for the public, I don't believe they can have any for themselves. They may have narcissistic attitudes, but that's not respect, that's vanity. . . usually with little, if any, justification.
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Old and gray
Message #493 - 07/07/09 12:04 PM
Doubtless, participants in these threads have all encountered liars. In consulting, no matter how small a group, too many clients in search of corrective advice are in trouble because they couldn't face the truth. It's surprising how many potential contractual engagements were dropped before they got started due to denial whether the lies tried to conceal market conditions or personal short-comings. Some folks are simply constitutionally unable to handle the demands of keeping a business afloat. Some are unable to face the fact that they couldn't assess market conditions and couldn't adjust their production or service to deal with constantly changing demands. So, the response is either honest: "I can't handle it and need help."; or, less frequently, lies place the blame elsewhere.
What's a consultant to do? Lies makes the task impossible. No reliable data, books in disarray, no incriminating documentation, not much is required to conclude you're dealing with another Madoff. The easiest and most direct path is walking away from the deal and let someone else deal with it. There can be no profitable contract under these circumstances. Nothing but frustration waits in every corner of that venture. Walk away.
I've done it.
Wrestling with this Regulatory Reform document is leading to the same unproductive frustrations. If it weren't so important to our future, it would have been dumped long ago. But, some effort is essential. This document is not the way!
It doesn't take long with a liar. In a few minutes the first lie pops up and from that moment on, there is no credibility.
That's my hang up on this document. On the third page of the text exposition the following paragraph causes intellectual pain.

The sudden failures of large U.S.-based investment banks and of American International Group (AIG) were among the most destabilizing events of the financial crisis. These companies were large, highly leveraged, and had significant financial connections to the other major players in our financial system, yet they were ineffectively supervised and regulated. As a consequence, they did not have sufficient capital or liquidity buffers to withstand the deterioration in financial conditions that occurred during 2008. Although most of these firms owned federally insured depository institutions, they chose to own depository institutions that are not considered ¡§banks¡¨ under the Bank Holding Company (BHC) Act. This allowed them to avoid the more rigorous oversight regime applicable to BHCs.
Those bold italics are mine. If that phrase were changed to place the blame on management, The paragraph would be an honest evaluation of the situation. As it stands, it is disgustingly unpalatable! It shows no accountability, no responsibility, no honesty.

Professionals properly assessed the situation, drew up the document and the head honcho looked it over for a half a second and bellowed, "What the hell is this? Management was responsible for the disaster? Whose side are you on? Change it!"
So, instead of stating the truth, that banks were ineffectively managed, the document claims that management was impelled to behave the way they did because the regulators made them do it! How ridiculous can a document be? How can it be addressed seriously?
Once the lie is recognized there is no room for credibility. Any corrective action proposed bears the stain.
There's nothing between the above paragraph and corrective proposal following.

We propose a new, more robust supervisory regime for any firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed. Such firms, which we identify as Tier 1 Financial Holding Companies (Tier 1 FHCs), should be subject to robust consolidated supervision and regulation, regardless of whether they are currently supervised as BHCs.

[olderstill]

Old and gray
Message #494 - 07/07/09 12:06 PM

Not only does this constitute the whole of the basis for addressing the call for regulatory revision under this title and sub-section, but it leaves the impression that it's the basis for the entire document.
B. Implement Heightened Consolidated Supervision and Regulation of All Large, Interconnected Financial Firms
1. Any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed (Tier 1 FHC) should be subject to robust consolidated supervision and regulation, regardless of whether the firm owns an insured depository institution.
Discussion of new responsibilities assigned to the Federal Reserve and new legislation to be proposed by the Treasury hinges on a lie! We all know the purpose of the lie, save the drunken financial geniuses who drove us into the ditch. They didn't do it, they were provoked by lax supervision and regulators.
The lie is consistent. When the issue of executive compensation is addressed, "Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value and to prevent compensation practices from providing incentives that could threaten the safety and soundness of supervised institutions. . . ."
The means of controlling the excessive compensation which raided the vaults and left the institutions short on reserves and an unprepared state when dealing with the inevitable and predictable illiquidity is to have Congress pass "say on pay" legislation which would provide shareholders with a voice on executive compensation. However! . . . and this is crucial as we all understand. . . the annual vote will be non-binding! How helpful is that?
By no means are these issues the most important but they do demonstrate the bias of the proposals to correct the problems in the industry. This document is full of such defensive thoughtlessness. The most naive of new business owners knows that he cannot raid the cash register indiscriminately and expect a going business. I've seen second and third generation family members inherit a business and run a thirty or fifty year old thriving enterprise into the ground in a matter of months. Then, they call a consultant in and say, "Look at what he left us with! What can we do to save it?" And, where the old Chevy used to be parked, there's now a brace of BMWs or top of the line Lexuses. Where the prior management worked long hours, weekends and holidays, took no vacations for years, the new, absentee manager/owners are off on a tour of Europe or Caribbean vacations or a visit to Hawaii all in five-star accommodations while the business is left to run itself.
It's the same attitude in the RR. The devil made me do it. Make the devil do the right thing and we can get out of this.
Not in a million years! Lack of personal responsibility and accountability cannot be be over-ridden by regulatory authority. Some astute government official said something to the effect that, no matter how much regulation is proposed or provided, if management continues to behave in a wanton, self-serving manner before regulation arrives on the scene, there's nothing can be done to correct or control the abuses. That may have been posted here previously, I don't recall who said it, and I've also taken liberties with re-stating it: but, the essence is there.
My prediction is dire: If the same people are allowed to continue running the industry (and that begins yesterday!), the next collapse will occur within less than ten years. And, the next time, there will not be anything left worth resuscitating. These managers are blind, deaf and dumb to anything but their own aggrandizement. Is that anyway to run a business?
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Old and gray
Message #495 - 07/07/09 12:19 PM
I've got to drop further critique of the paper. The conclusion is quick: it was intended to address important deficiencies, but although it points out these deficiencies, it does so in a disingenuous, off-handed manner with not much thought devoted to correction and every effort exerted to defend the violators. Since those responsible for the document are unwilling to assign blame where it properly belongs, it cannot propose either reasonable or effective corrective action. It could have been a great document. It's a malodorous rag desperately in need of sanitizing.

Not that he needs any amplification, but, maybe what Krugman meant with his "Yes and no" judgment on the document was that it might have been, could have been, but the path is too twisted and devious.
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Old and gray
Message #496 - 07/07/09 03:49 PM
June 30, 2009 Martin Wolf wrote another provocative column for the Financial Times entitled, "The cautious approach to fixing banks will not work".

Here are the first few paragraphs.

With one bound the banks are free, or so it seems. Already, the panic of the autumn of 2008 is fading. The period within which lessons can be learnt and changes made is closing. Yet without radical changes, another crisis is certain. It may not even be that long delayed.
In a recent speech, governor Elizabeth Duke of the Federal Reserve told an anecdote from just after the failure of Lehman Brothers last September. Ben Bernanke, chairman of the Federal Reserve, was asked: ¡§Well, what if we don¡¦t do anything?¡¨ To which he replied: ¡§There will be no economy on Monday.¡¨ Instead, all institutions deemed systemically significant were saved, by shifting almost all of the risk on to taxpayers.
¡§Never again¡¨ might be too much to ask. But ¡§not for a generation¡¨ is essential. Governments cannot afford an early repeat, financially, politically, perhaps morally: the lives of so many cannot soon be sacrificed to the whims of a foolish few.
Yet what has emerged after the crisis is, as I argued last week , an even worse financial system than the one with which we began. The survivors are an oligopoly of ¡§too-big-and-interconnected-to-fail¡¨ financial behemoths. They are the winners not because they are necessarily the best businesses, but because they are the best supported. It takes no imagination to realise what these institutions might now do, given the incentives for risk-taking.
So what is to be done? The characteristic, but futile, response is to move the regulatory deckchairs on the deck of the Titanic. Recent proposals from the US Treasury fall partly into this category. But the financial system had to be rescued from its own mismanagement of risk. This is not going to be changed by external supervision. It is going to be changed only by fixing incentives.
The starting point has to be with ¡§too big to fail¡¨. We need a credible system for winding up even huge financial institutions. The most attractive proposals are for ¡§good banks¡¨, in which unsecured creditors become shareholders. That would be easier if, as President Barack Obama has proposed, and Mervyn King, governor of the Bank of England, has argued, a regulated institution has to produce a plan for an orderly wind-down of its activities.
In the meantime, three economists from the Bank of Italy have prepared a two part paper addressing what they believe are issues in the current crisis. Below is the leading paragraph of both part one, followed by that of part two. (This article is copyrighted by Vox EU.org)

Part One of "Financial Sector developments and pro-cyclicality" begins

"With the benefit of hindsight, two of the most foretelling indicators of a crisis looming in the financial sector were the strong increase in leverage and managers' appetite for risk due to compensation schemes based on incentives to boost performance (Panetta, et. al., 2009). In this column, we discuss below how the evidence in recent developments in capital regulation, leverage, and managers' compensation may have contributed to the current crisis."

Part two continues to develop their proposition.

"As discussed in our first column, two key determinants of pro-cyclicality are leverage and managers' excessive appetite for risk, induced by inadequate remuneration schemes. In this column, we discuss policy options to keep them in check. In principle, leverage as an indicator of balance sheet soundness should be made redundant by supervisory capital ratios; managers' incentives, in turn, should be kept under control by the proper functioning of market practices. However, the recent events have made it clear that loopholes in capital regulation may let managers increase leverage undisturbed and that market forces may be unable to properly self-regulate remunerations."
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Old and gray
Message #497 - 07/07/09 03:52 PM
In addition, there is a publication copyrighted (I assume) by CEPR, the UK-based economic research "think tank" with distinguished contributors world-wide. The particular work, "The Fundamental Principles of Financial Regulation", authored by several economists, Markus K. Brunnemeier (Princeton U.) among them, is available through CEPR at a cost. That's too bad, but, on the other hand, knowing what many people think of free advice, that may be the way to go!
A three paragraph summary is available on the 'net at the CEPR.org site. which is quoted below.

Summary: Today's financial regulatory systems assume that regulations which make individual banks safe also make the financial systems safe. The eleventh Geneva Report on the World Economy show that this thinking is flawed. Actions that banks take to make themselves safer can - in times of crisis - undermine the system's stability. The Report argues for a different approach.
What is needed is micro-prudential (i.e., bank-level) regulation, macro-prudential (i.e., system-wide) regulation, and careful coordination of the two. Macro-prudential regulation in particular needs reform to ensure it countervails the natural decline in measured risk during booms and its rise in subsequent collapses. "Counter-cyclical capital charges" are the way forward; regulators should adjust capital adequacy requirements over the cycle by two multipliers - the first related to above-average growth of credit expansion and leverage, the second related to the mismatch in the maturity of assets and liabilities. Changes to mark-to market procedures are also needed.
Macro- and micro-prudential regulation should be carried out by separate institutions since they differ in focus and expertise required. Central banks should be tasked with macro-prudential regulation. Financial Services Authorities with micro-prudential regulation. Improved international coordination is also important. Since financial and asset-priced cycles differ from country to country, counter-cyclical regulatory policy needs to be implemented mainly by the "host" rather than the "home" country.

These are simply a tip of the iceberg indication of the range of opinion circulating among economists world-wide watching developments in the US. They're concerned because what we do effects their own stability. Our world has become so small that almost no one can allow the rest of the world to hiccup without having a glass of water at hand. Dec, 2008, two Japanese economists issued Working paper # 14401, NBER (a US organization), drawing out the similarity between the long drawn out Japanese problem and our own situation. They remark on a "surprising number of . . similarities between the current U. S. crisis and the recent Japanese crisis." And, they note, "the Japanese policies were only partially successful in recapitalizing the banks." They suggest that "While the U. S. plans are still in flux, it appears that U. S. is at risk for running into some of the same problems that hobbled the Japanese policies."
So, world-wide the suggestion is that even if we do things correctly, we run risks. My feeling is, if we start off servicing the wrong factions for the wrong reasons, in the wrong manner, we are not running a risk. . it's a sure thing that conditions will not improve.
Above we have objective views of our condition. Without reproducing the documents in full, (and each of them has a list of corroborating documents in support) which is obviously beyond the limits of space and time available, I'd say that well over 2/3 of the documents I've read are inclined to believe that the path we're setting out on will not correct our situation. Furthermore, any benefits we reap from the work would be the same as propping up a sagging building with rotten timber. In too short a time, it'll collapse again resulting in more devastation of a more severe nature.
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Message #498 has been deleted.
Old and gray
Message #499 - 07/07/09 04:42 PM
On thing I neglected to mention is what I detect as a difference in tone between the Part one and Part two opening paragraphs of the last cited item in message # 496. May be my imagination, but they appear a little more forceful in their analysis of leverage, risk and remuneration in the second section than in the first. Read in succession, it suggests they had time to evaluate whether these were "foretelling indicators" or perhaps stronger, impelling factors.

Nor did I do right by the authors, deserving of citation. The three economists, all with the Bank of Italy, are Francesco Columba, Wanda Cornacchia, and Carmelo Salleo. Any one who spends as much time in developing such penetrating work certainly should get the credit they deserve. This is published, too, on the Voxeu.org cite and is copyrighted.
The two articles are available through the following links
www.voxeu.org/index.php?q=node/3722 and

www.voxeu.org/index.php?q=node/3723

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neohguy
Message #500 - 07/08/09 07:40 AM
It seems that most of the problems are with a few US banks. Why don't we hear more from foreign countries about this? Are they afraid that if they blew the whistle then the entire world financial system would be in jeopardy?
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reverendbarb
Message #501 - 07/08/09 09:54 AM
Old and Gray: Thank you so very much for the very interesting, informative and thought-provoking material. As depressing as it all is, I would rather go forward with my eyes wide open and have full awareness (as much as is possible, anyway) about what's really happening in our country's, and in the world's, economy.
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Old and gray
Message #502 - 07/08/09 11:52 AM
reverandbarb

Thank you. I always found it helpful to write about situations to better understand them. You never discover how much you don't know until you try to describe it.
Besides, it's good to have an audience, no matter how small, to help bring the thoughts together.
It's my pleasure.

and, neohguy

I suspect, the others fellows are pretty darned busy with damage control of their own. They are at work. Whether they can concentrate on the US perps to the exclusion of their own complicity is something to think about. They suffer from fallout not because they were standing by idly.

I do believe: if they are not totally dependent on the US market for trade, they'll pull out of this long before we will. Not because our situation is any more involved than theirs or theirs is less penetrating, but because of the very fact that the entire community is at work positively, trying to define and control the situation in a realistic way. Their economists are at work looking for a way out and propose a wide range of opinions, all published, all considered. . . And, they are not ridiculed! Compare that with the one track mind we are rutted in here in the States. Give a differing opinion, it need not even be contrary to the central thrust, and you run the risk of having the door slammed in your face.
You might call that unity of interest, or focus, but I call it short-sighted and creating unnecessary difficulty. If one viewpoint doesn't treat the problem effectively, what then? We don't allow for plan Bs! Much less Plan C or D. Not much choice to do anything other than what JPM and GS have agreed to behind closed doors and send off to Washington via their puppets.
Most damaging piece of evidence is the way those two giants are trying to revamp the industry as evidenced in the Regulation Reform layout, by taking advantage of the lack of power in the smaller institutions. (Entry to the powers that be in Washington is called propinquity - that's what the biggies have an abundance of.) Bernanke addressed the community banks once in the past few months at a convention, but is in daily contact with the biggies. The conclusion is unavoidable. They are in lock step in changing the banking system, putting obstacles in the way of the community banks to protect the advantage the LCFIs have and probably to build on it.
The smaller banks, not participating in the devaluating flood to anything near what the top boys have done, nevertheless have done some work in that area. About 8,000 banks have about 10%- 12% of the top 10 (or less) participants. So, they aren't the problem. Yet, Geithner, et cie. are anxious to restrict them, take away the market advantages which have nothing to do with the glaring weaknesses of the banking industry, advantages they need in order to survive, and further penalize them by tightening the screws on their regulation and supervision. This only for one reason: the biggies want to move in on that market and squeeze the smaller banks out.
There's nothing wrong with normal competition, but to go to the government and have the deck stacked against you is unconscionable. Setting the stage, dictating the terms and controlling the outcome is not a "free market". The irony of the move is that the LCFIs have chosen their principle interests and worked those markets until they collapsed. Now, they want to invade areas with banking goods and services they abandoned for the quick buck?
What's the fate of the rest of the banking industry when the LCFIs get their way? They show no regret, no understanding of the chaos they've created, and no concern. Nor do they have any intention of changing their MO.
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Old and gray
Message #503 - 07/08/09 11:53 AM
Things are a little different in Europe and the Orient. Whereas everything in the US is decided behind closed doors, In Europe, it's more of a community effort. For one thing, if American economists want a place to air their thoughts, they are almost required to go to the continent, where venues are provided. There are University presses and a few trade journals in the US and a couple of column inches daily in the newspapers. But, in Europe they have open venues to which all reasonable presentations have access. Witness the pubs I've presented on this site. Plus, bankers, American, Oriental, European all convene in Europe - be that Switzerland, London, Frankfurt or some other convenient location. Those places are more receptive to the economists and bankers than anywhere in the US, IMO. I interpret this as more freedom of thought and expression.
Which brings me to the response to your question why we don't hear more of the European bank issues. Very simple. The US media does not give it the time or space. American economists have to go to Europe to get their incidental papers published. Many times, only after the domestic journals read these papers in the European outlets will they contact the author and ask for a revision or edited version for publication here. Truth is, if not for the European outlets, we'd not hear of most of the accomplished American economists. . . or what was in the works for the banking industry.
After all, we don't need help from the rest of the world. We know better. . . have a better way.
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Scared_Shirtless
Message #504 - 07/08/09 12:44 PM
Thanks Old & Gray. Quite awhile back I asked for signs to look for.

We got your message! LOL

And now - A Bloomberg article that may petain to this thread:


Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds
www.bloomberg.com/apps/news?pid=20601087&sid=aeTzfvEedKpQ

[olderstill]

Old and gray
Message #505 - 07/08/09 08:18 PM
Scared. .

Funny you should post the link to the Morgan Stanley story, bundling Baa2 instruments with AAA and using the higher rating to entice the suckers into an unthinking purchase. . . back on the same old path. You're right! The story belongs here!
. . .And, to go along with this wonderful blast of clear, cold reality, I left the PC to watch interviews of head honchos convening in Sun Valley. James Lee, the Vice Chairman of JPMChase admitted the swaps and derivatives were a mistake and just about admitted they'd never do that again. Morgan Stanley wasn't listening in. I reported on a speech by Volcker who relayed the story that Citi personnel admitted it was a mistake and wanted to get out of that business. Yet, the game goes on.
I knew they couldn't resist. It doesn't much matter that this is only $80 million, it's a test of the waters. If this floats, they'll start throwing more and more garbage into the stream until it no longer supports life.
Those instruments should be outlawed as proposed way back in the beginning.

neohguy
Message #506 - 07/09/09 09:27 AM
Thanks for the article scared. I wish regular folks (and law makers) understood what is happening. Exotic financial instruments are complicated and can't be explained in a 60 second news blip. Personally, I still have to refer to and carefully read the earlier part of this thread that explains what they are, what they were originally intended for, how they became abused, and why they continue to be abused (the easy part).
I don't think folks are stupid. They understand why house prices are falling and why this may not be a bad thing. They understand why they should save more and reduce personal debt. Many of them are beginning to understand why outsourcing jobs on a massive scale is folly. Explaining the dangers of abusing little understood financial instruments will be difficult.


Thomas F
Message #507 - 07/09/09 09:56 AM
the main reason is fraud by many of the financial companies such as Merrill Lynch.
the regulators aided and abetted ; for self gain and promotion within the private and public sector.
interesting that wall street is talking big bonus again for the too big to fall individuals in their ranks.

Scared_Shirtless
Message #508 - 07/10/09 11:52 AM
Besides Morgan Stanley, Goldman Sachs also has their own trial balloon to float.

They ARE off to the races again! Our only hope is to vote all the offenders out starting in 2010!!!

And is anyone here the LEAST bit surprised that Goldman is involved too?

Wall Street trickery is back

blogs.moneycentral.msn.com/topstocks/archive/2009/07/09/wall-street-trickery-is-back.aspx

We need some heroes in Congress. Really!


reverendbarb
Message #509 - 07/10/09 02:14 PM
HOW CAN THIS BE ALLOWED TO HAPPEN - AGAIN???!!!!



Defining Quality
Message #510 - 07/10/09 02:45 PM
"A fool and his money are soon parted".

Duffminster
Message #511 - 07/11/09 12:07 AM
Old and Gray,
Those instruments should be outlawed as proposed way back in the beginning.

This story is a light weight treatment (video interview) but on a positive note at least the debate is appearing in some form in the mainstream.
Derivative Debate: Financial Nymphomania, Kama Sutra?
www.cnbc.com/id/15840232?video=1177874464&play=1
Airtime: Fri. Jul. 10 2009 | 8:05 AM ET
Janet Tavakoli, of Tavakoli Structured Finance, and Joel Telpner, of Mayer Brown, debate whether over-the-counter derivatives should be abolished.

Old and gray
Message #512 - 07/11/09 12:31 AM
Sorry, Duff, I watched about 15 seconds and that was it for me.

Can't stand a moderator who breaks in on invitees to advance his own agenda. . . even when the interviewee is on his side!!! Unbelievable! Why invite anyone else? Do a monologue.

Kudlow is not for me. He ruins the program every time.

Visited your thread on Government Sachs and the NYSE secrecy. . Read the article also. Good job!


Old and gray
Message #513 - 07/11/09 12:50 AM
Risk, a publication for insiders, available only by subscription, is running a story on Swedish firms wiping out their CDS holdings.

General News - 9 July 2009
TriOptima tear-ups cut CDS notional by $9 trillion
Swedish technology company TriOptima eliminated $9 trillion in notional outstanding from the credit default swap (CDS) market in the first half of 2009, the firm announced on July 9.
This is the headline, I cannot supply the article nor any part of it. This should be enough to show that 1) It can be done; and, 2) Others are doing it.
Unfortunately our dealers don't have the necessary self-control.
The link that Scared Shirtless supplied in message #504 in re the Morgan Stanley bundling is explained in Risk as "testing the appetite" of the market to see if the lead balloon will fly again. [This is my coloration; Risk stopped at testing the market.]


Old and gray
Message #514 - 07/13/09 10:03 AM
There are so many ways to look at the current crisis it's no puzzle why some folks are ready to throw up their hands and allow the pirates to have their way. Not a good idea, since that will only allow the situation to worsen. We're looking at medium term projects to put us up on dry ground - extending five - ten years into an uncertain future.
We can consider our prospects from the economic point of view which is not too reassuring since it depends on theory not necessarily based on the very real need for proactive initiative. Theory arrives too late to do any good for an existing problem. Although the economic viewpoint may explain the problems' development, whether it be abuse, distorting practical applications in a way that harms the environment, or personal proclivities - basically, meaning greed.
There's the mechanism which can be explained - just how did so many deceptions maneuver through the loose system of checks and balances to escape the regulators and foul the system. Again, after the fact explanations that correct little.
Finally, there's the human element which leads to evaluations which might shed light on why people behave greedily with anti-social destructive results.
Assembled in one presentation, combinations of explanation as well as a viable solution process is never ending, principally because the people delivering us to the brink of catastrophe never stop generating new little disasters that pile insult onto the prior abuse compounding the mess and usually moving resolution that much further off to a future date. In the meantime, with the introduction of the new Machiavellian twists, the solution becomes distorted and complex to a comparable degree.
All this is part of what can easily be labeled conspiracy insofar as it serves the wants of the few insiders who refuse to consider "common good". But, if the ideal and benefits of the concept of common good is "esteemed", the only valid evaluation of the behavior exhibited by those engaged in the destructive process is psychopathic. In which case, a program based on reason, something psychopaths cannot understand, is useless. Their MO is to twist everything around to suit their ends and forget anything which intrudes on their program or deters them from reaching their desired, or should that be obsessive, goal.
That's why the call for reason only ends up with more distorted responses. Geithner's Reform document (the pdf copy is labeled "Final Report", meaning there is no further negotiation, I'd assume) opens doors and once a foot passes through, the door is slammed - on the foot! There is no promised land. There is no consumer satisfaction. There is no solution, no improvement, nothing but more of the same that brought us to the present state.
An agency is proposed to "Reform Consumer Protection", with a host of super powers to deal with abusive business powers, should they ever be detected or determined or admitted to. But, within the labyrinth of constructs and suggestions, is found, after careful detective work, a statement that, for all the apparent dedication to consumer protection, the simple statement that negates the whole massive structure of pulling all the power and authority together with the simple provision that, "We also propose that the CFPA should have the authority to craft appropriate exemptions from its regulations". Composing regulations so that the same agency can say, "They don't apply?"
No neutrality allowed! It's the old, "You're either with us or against us." "You're either for the American way and do as we tell you or you're not for freedom." I don't see such a document providing such an escape route as beneficial to the American consumer. The document is good for creating the illusion that there is consumer protection, but no more.


Old and gray
Message #515 - 07/13/09 10:05 AM
The rest of the schemes, for enlarging the Fed, empowering it with unregulated, unfettered dictatorial power is as equally compromising for the consumers. The original proposal here was to incorporate regulating authority into the Fed system, but WITH A DESERVED, EARNED, APPROPRIATE OVERSIGHT especially in view of the Fed's failures to conduct the business expected of an overseer of the Nation's monetary policy and banking stability.
This is not the only site complaining of the short-sightedness of Fed policy nor the short-comings of its actions. World-wide, the Fed is under attack from far more credible critics than found here, though none of the others are as intimately involved as those posting here. More than half of the observers unhesitatingly accuse the Fed of missing the mark. By his own published admission (The New Yorker December, 2008 issue quoted here) Bernanke confesses he misdiagnosed and misjudged the severity of the financial crisis. Subsequent policy shows no evidence of change. Why bother to confess? Does the confession relieve his conscience? Wouldn't he feel better if he corrected the flawed thinking and move out onto the preferred path?
I don't expect much more from our bankster Secretary of the Treasury. He has his umbilical cord still firmly attached and cannot set out on any path other than what is dictated to him. He owes too much to the industry and those who have been smoothing the path through the entangling shoots of regulation and supervision for the past 20 or 30 years. Remember he was an underling to Rubin's dedication to squelching dissenters and providing the legislation that freed banks of interfering regulation and supervision. He shows no signs of change of heart.
The supposition the administration operates on is probably that no one knows the system like the insiders. If you want to administer to banks, put a banker in the position of authority; if you want to control logging, give a logger/executive the authority; and so on. How does such a policy assure us the proper authority has been selected to protect and serve the country?
So, whether you start out assessing the issues with the vision of an economist, an insider, or a trained, supposed objectivist, very easily something can be overlooked. That overlooked element might very well be the common sense needed to serve the common good.
The result is what could have been a year and a half or two to the correction (Who knows? Six months might have been enough time had the response been appropriate!) ended up with an increasingly complex situation where no end is in sight and we wait for bubble after bubble to develop, expand and explode. And, the egoistic psychopaths with no concern whatsoever for the common good continue to compound the entanglements.
In the previously detailed review of the general outline of the Regulatory Reform document, under consumer protection, Transparency, Simplicity, Fairness, and Access are pointed out as essential elements of the program. A couple of months back, a post suggested that judging on the basis of past performance from Washington "leaders" what would result from the program addressing the issues would probably end up being little more than window dressing.
Voila! Predictably, we're back to John Mitchell's, "Don't listen to what we say, watch what we do!"


Duffminster
Message #516 - 07/14/09 03:15 AM
Credit-Default Swaps Probed by Justice Department, Markit Says
www.bloomberg.com/apps/news?pid=20601087&sid=aTIJ1GZBX_m4
July 14 (Bloomberg) -- The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.
“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,” spokeswoman Teresa Chick said yesterday in an e- mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. “We will work with the Department to provide any information requested of us.”
The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. U.S. lawmakers plan to regulate the $592 trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.
Justice Department spokesmen couldn’t immediately be reached for comment.
Credit-default swaps -- contracts that protect against or speculate on corporate defaults by paying the buyer the face value of a bond or loan if a company fails to meet its debt agreements -- ballooned almost 100-fold within seven years to represent about $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association.
Unregulated Market
Unregulated trading of the contracts made it difficult for the U.S. to assess how connected banks had become following the failure of Lehman Brothers Holdings Inc. in September. Credit markets froze when the New York-based firm, once the fourth- largest U.S. investment bank, collapsed in the world’s biggest bankruptcy.
The Obama administration now wants all trades of over-the- counter derivatives to be backed by clearinghouses or registered with regulators. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.
Markit provides derivative and bond data to more than 1,500 customers. It owns the most actively traded credit swap indexes and pricing services in the market, which represents $28 trillion in underlying securities, according to the New York- based Depository Trust & Clearing Corp.
Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.
Owners and Providers
Justice Department investigators want to know if Markit’s bank shareholders received advantages as owners and providers of prices and trading patterns for credit-default swaps, said two of the people. The data from the market’s largest users is provided to more than 300 financial firms to set prices of the contracts in their portfolios, according to Markit’s Web site.
The notices ask recipients to give the Justice Department details on the amount of their trading, exposure in the market, monthly value of their credit swaps and other information, said a person who read parts of the letter to Bloomberg News.
The letter also seeks the level of current bank ownership in Markit and whether the shareholders have tried to sell their stakes, the person said. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, all of New York, are among the owners of Markit.
Transparency, Efficiency
End-of-day and real-time prices for credit swaps are available to Markit customers, the company says on its Web site. Real-time prices come from the Wall Street dealers that send that information to clients throughout the day.
Markit checks the information it receives to ensure it’s current and correct, according


Defining Quality
Message #517 - 07/14/09 12:51 PM
Finally - The Truth behind the social engineering leading to the creation and evolution of Credit Default Swaps is plainly there for anyone who wants to see it. All the players were trading paper whose only purpose was to Defraud the Public. They might as well have been selling Nuclear Annihilation Insurance which would leave no one to collect. Credit Default Swaps were Fraudulent Insurance Contracts period and everyone knows it. No one ever intended to pay a claim and no claims should have been paid by the Treasury.
The perpetrators of the largest Insurance Fraud in history should all be executed.

Duffminster
Message #518 - 07/14/09 01:11 PM
Quality,

In regard to message 516 you said:

Finally - The Truth behind the social engineering leading to the creation and evolution of Credit Default Swaps is plainly there for anyone who wants to see it.

Here is more evidence of the fallout coming from the crime and this time for our neighbors in Euroland. I'm sure they are not celebrating the major bonuses of the handful of program trading and derivatives giants.

CIT Collapse Would Hit Hard European CDOs
www.cnbc.com/id/31902340
CIT Group tops the list of names in portfolios of European synthetic CDOs rated by Standard & Poor's, which would mean widespread default losses in the nearly $600 billion market if it files for bankruptcy.
S&P said in late 2008 that 1,053 European synthetic collateralized debt obligations (CDOs) -- 66 percent -- included CIT, a New York-based lender to small and mid-sized businesses, in their portfolios of credit default swaps (CDS).

CIT [CIT 1.45 0.10 (+7.41%) ] stock and bonds have fallen this week on fears of a bankruptcy filing, while a source familiar with the matter said the U.S. Federal Deposit Insurance Corp was opposed to a rescue favored by the Treasury Department and Federal Reserve.
Since mid-2008, five-year CDS spreads on senior CIT debt have widened in volatile trade, signaling its financial plight, reaching a record closing wide of around 2,744 basis points on Oct. 20, according to Markit data.
"This is a telegraphed punch. People will have seen it coming," said Citigroup credit strategist Michael Hampden-Turner. "Lots of people will have marked it down already."
Even so, people in the market had become more sanguine about systemic risk since the fourth quarter of 2008, he said.
"This brings back a reminder that we are not out of the woods yet -- that there is still fallout from the credit crunch to come," he said.
S&P officials could not immediately provide updated information, saying that the timing of an updated list was not yet decided.
But credit strategists said limited trading in the synthetic CDO market meant that rankings would probably have changed little since then.
CIT also ranked third among CDO portfolio names in a similar 2008 list by Fitch Ratings, which rates fewer deals than S&P.
"CIT is quite large with $80 billion in assets and $39 billion in debt, and a bankruptcy will have some impact on the market (overall)," BNP Paribas credit strategists wrote.
Moody's cut the company's rating by four notches to B3 on Monday, while S&P cut its counterparty credit ratings to CCC+/C from BB-/B.
Five-year CDS on the company were around 2,521 basis points, or 41 percent upfront, early on Tuesday.
That means an investor must shell out $4.1 million initially plus $500,000 per year to buy protection against the default of $10 million of CIT debt.
Boom-Era Deals
In October and November, seven high-profile corporate failures, including Lehman Brothers and Washington Mutual, led to $23 billion in synthetic CDO default losses, out of a total net notional value in the market of $584 billion, Citigroup credit strategists calculated in late 2008.
Synthetic CDOs are bundles of 100 to 150 investment-grade CDS -- bets that companies will honor their debts -- that are sliced up by degrees of risk.
The riskiest tranche at the bottom takes the first few percent of default losses from any name in the portfolio, before losses move to the next tranche up. Most deals were sold in the boom years of 2005 to mid-2007 and still have five to 10 years to run.
Investors typically had CDOs tailored to produce a single tranche with a high yield for a top rating. Slices typically started between 5 and 9 percent and would be wiped out between 7 and 10 percent.
The dealer would neutralize the risks of other slices of the deal using hedges in the CDS market. Depending on the portfolio, a tranche that kicked in as low as 5 or 6 percent could hav


Defining Quality
Message #519 - 07/14/09 04:38 PM
All Banks - Insurance Companies and Financial Brokerages that were in any way associated with Credit Default Swaps should be taken over by the Government and liquidated for the benefit of the depositors and then the creditors and finally the stockholders if anything is left. The reason why that won't happen and has not happened is because all the players are legally insolvent.
Clearly no Government has the resources to fix what has already happened and is yet to come because of the Banksters and Insurers attempts at securitizing the "risk of default" they illegally traded OTC in violation of known Insurance Regulations. All revenue from the transaction should have been placed in "Loss Reserves" until the underlying loans were paid in full or refinanced, because of the actuarial unknown they were selling in the various tranches'. This was not a stick-up by an uneducated felon but a highly sophisticated fraud by the financial elite who knew they were selling insurance by buying the risk.
www.project-syndicate.org/commentary/stiglitz113
America’s Socialism for the Rich - by Joseph E. Stiglitz
The Obama administration has, however, introduced a new concept: too big to be financially restructured. The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. Markets would panic. So, not only can’t we touch the bondholders, we can’t even touch the shareholders – even if most of the shares’ existing value merely reflects a bet on a government bailout.
I think this judgment is wrong. I think the Obama administration has succumbed to political pressure and scare-mongering by the big banks. As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.
If I ruled the world - I would bail-out the bank's depositors only and let the RICO Enterprise that defines Wall Street suffer from its own corruption. The jig is up and Other Peoples Money was criminally invested in an ever inflating Ponzi Scheme by individuals who hi-jack the Banks for self rewarding corruption.
The IRS knows who those people are that gamed the system for personal benefit and the FBI should start at the top and work its way down. A complete idiot could prosecute the culprits, but unfortunately our government is manned by the morally brain dead.