The (new) Financial Tsunami thread

[Virgil Showlion]

Duffminster
Message #1405 - 03/22/10 09:33 PM

Good to be back. I've got ground to make up. Unfortunatley, I'm busy on several fronts now with my new Blog and the larger project I'm working on. I'm posting some of the most essential stuff. With the exception of the Tsunami thread, the old "Is the Panic of 1907 being re-enacted by the Fed and its biggest Primary Dealers" thread is also one that deserves to be recreated. There was so much great commentary on that one. I'll see you over on P&M. In the past that thread has been tough for me as it seems like (in the past) that it was a place even more partisan than our Congress and that is about as bad as it gets!

Thanks for the support. Perhaps Microsoft will find a way to get the posts back. Anything is company for a company with as much technical skill as Microsoft.

---

cedaredge
Message #1406 - 03/22/10 09:44 PM

Duffy, I caught you over at the P&M board and thanks for the appearance!
Now all I'd like to know as well as the others is just how to get to your BLOG?

Sorry but I have never hung out at a "BLOG" so all I need to know is how to get to yours

---

Ž
Message #1407 - 03/22/10 09:54 PM

cedaredge, we're not supposed to provide links to anyone's blog but I bet you if you google 'Duffminster on silver and gold' you will find the site you're looking for.

---

neohguy
Message #1408 - 03/23/10 02:05 PM

Thanks stonerdr

[Virgil Showlion]

Duffminster
Message #1409 - 03/23/10 06:43 PM



"I am happy to report that after the overwhelming support of the MSN community and what must have been substantial effort on behalf of MSN staff that the Permanent Ban on Duffminster has been lifted and that despite earlier claims by MSN moderators that there was no way to restore the nearly 7000 posts that were deleted from the MSN boards that I had posted, all of my posts appear to have been restored.

I count this as a victory for Freedom of Speech and a testament to the power of protest and persistence as well as the power of knowledge of how things work in the real world. It is also clear that MSN is one of the few forums in which Freedom of Speech is taken seriously and where alternative views on finance, economy, politics and markets is not only well tolerated but in a reasonably fair way, encouraged. It is why I have most often come here to read, post and participate. This restoration of the deleted content has restored my faith in MSN and that human beings still have relevancy in the very rapidly growing web-sphere I have referred to as "the machine".

Again, thanks to each and everyone of you who persistently pursued justice and the "right thing" in this matter and "never gave up" and for your understanding that Freedom is always worth defending, even if the freedom or speech you are defending doesn't necessarily always represent what you believe. It is the freedom we all believe in. Standing together we can accomplish great things and defend great ideas. Freedom of speech and justice are two of the greatest things we have.

God Bless

Very Truly,

Duffminster"

---

jma23
Message #1410 - 03/23/10 07:00 PM

Duffminster, I for just one, am glad the error has been corrected. You are one of my biggest reads here that I look forward to every week. Thanks for the personal time you give to this thread. jma23

---

lonelyfather76
Message #1411 - 03/24/10 07:53 PM

The Root of the Financial Tsunami and a Solution. That is real simple and dont need a winded reply. END THE FED, COMPLETELY!!
An institution run by foreign bankers controlling our country? No thanks!
Support HR 1207 and Ron Paul.
Keynesian economics is a JOKE. Follow Austrian and we will prosper!

---

stonerdr
Message #1412 - 03/25/10 01:59 PM

lonelyfather

I take it you don't understand that Greenspan followed the Austrian School/Ayn Rand brand of "free market" hypothesis and recently confessed publicly that he was "mistaken". And Bernanke is blindly (near incomprehensibly) following in those footsteps with this hands-off, "free market" oriented approach which delivered us to the current crisis, facts which no one in authority seems interested in dissecting, understanding, or correcting?

The only thing lacking here before complete capitulation to the Austrian mode is the Fed completely abandoning monetary policy and allowing everybody and his brother in that "free market" to make their own currency. But, then, through the Fed's hands-off permissiveness toward banks it amounts to much the same thing with a very slight hybridization. All that results with the current set of vultures at the controls is glutted and corrupted credit. But, then, as a nation, we never do anything by the book.

Oh, yes, by the way, as much as Von Mises and Hayek, and the more contemporary Rothbard (the three gurus of the Austrian School) have been quoted here, there never was an expression of favor toward the school. Nor is Keynes favored here. All three of the old timers failed in their predictions, diagnosis and prescriptions for correcting the Great Depression.

You may not realize you're getting exactly what you're proposing! More of the same, just in a halfway mode. You should be half-satisfied with that. Everybody is proposing to keep hands off and let the system handle itself. You saw how effective that was in protecting us from failure on the way in, it should be just as effective in saving us from stumbling back in.

Mind if I ask if you have read this thread?

[Virgil Showlion]

djrick
Message #1413 - 03/25/10 04:15 PM

Ambac·s regulator moves in, CDS likely triggered

Ambac·s shares tumbled more than 20 per cent in mid-morning trade in New York on Thursday, after its regulator moved to take over some of the bond insurer·s more troubled assets · some $35bn worth.

[ftalphaville.ft.com/blog/2010/03/25/187326/ambacs-regulator-moves-in-cds-likely-triggered/] ftalphaville.ft.com/blog/2010/03/25/1873...

---

djrick
Message #1414 - 03/25/10 04:16 PM

could have some interesting ripple effects if Ambac goes down:

"...a failure of this restructuring process and a continued violation of the OCI·s minimum capital requirement could result in a regulatory seizure of Ambac. This would set off the so-called ·nuclear event·; which entails a number of adverse consequences including an event of default for $1.6 billion of Ambac·s holding company debt and the termination of CDS insured by Ambac Assurance which could liquidate mark-to-market claims in respect of underlying exposures in the amount of $23.1 billion.

Based on our conversations with the [New York Insurance Department], it is possible that the regulators could close the books for a number of years to see how claims shake out before making partial prorata payments and then closing the books again and letting all the policies run out before a final payment is made. Additionally, certain components of claims paying resources, such as installment premiums, would essentially be worthless under receivership. In all, this would equate to a recovery of pennies on the dollar."

---

Duffminster
Message #1415 - 03/25/10 05:32 PM



Nice post Rick. Ambac is a name we were talking about a whole lot before AIG became the hot topic. I think that with the fed temporarily out of the QE business there are lots potential sigularities cropping up in the OTC derivatives markets. I've been watching the CTFC live WEB broadcast today which goes back to Brooksley Born's issues on allowign CTFC to regulate OTC derivatives and they are focusing on metals futures and having some limits on super high levels of concentration and whether it should be regulated. I think this is more of a "humor the critics" meeting rather than anything serious being done to remedy an out of control situation among the largest concentrated and I would argue naked silver and gold short, comprised of just a handful of US and UK based bullion banks. If your interested this should be going a couple more horus. They are on break for a few minutes but here is the link: [www.capitolconnection.net/capcon/cftc/032510/CFTCwebcast.htm#] www.capitolconnection.net/capcon/cftc/032510/CFTCwebcast.htm#



Or if its over by the time you get back you can probably find the video archives here: [www.capitolconnection.net/capcon/cftc/032510/CFTCwebcast.htm] www.capitolconnection.net/capcon/cftc/032510/CFTCwebcast.htm

---

midwesterner123
Message #1416 - 03/25/10 06:45 PM

The Root of the Financial Tsunami and a Solution. That is real simple and dont need a winded reply. END THE FED, COMPLETELY!!
An institution run by foreign bankers controlling our country? No thanks!
Support HR 1207 and Ron Paul.
Keynesian economics is a JOKE. Follow Austrian and we will prosper!

Could not have said it better myself. It is the root of most all our problems, economically and politically. END THE FED!!

[Virgil Showlion]

Fred Buntz
Message #1417 - 03/25/10 07:10 PM

Everybody is proposing to keep hands off and let the system handle itself. You saw how effective that was in protecting us from failure on the way in, it should be just as effective in saving us from stumbling back in.

Stoner; I think the problem is on the backside not the front side. The free market concept doesn't hold if the government jumps in and rescues the bad guys each time. As long as we continue to believe that these banks/business are too big to (let) fail, then we will need more regulation on the front end to protect people from themselves. If the consequences of their actions is their own, unmitigated financial destruction they may choose not to engage in such risky behavior. And maybe, their investors might be more cautious and attentive to the mechanisms at work behind closed doors. The market can't self regulate if it is not permitted too.

---

decoy409
Message #1418 - 03/25/10 07:22 PM



Fred , yes you certainly have the old thinker cap on don't you!

we will need more regulation

REALLY Fred!

Boy I am so happy people such as your self our on the ball Fred! Why couldn't someone have thought of this before!

---

Fred Buntz
Message #1419 - 03/25/10 07:32 PM

did someone say something or was that just a fart?

---

decoy409
Message #1420 - 03/25/10 07:35 PM

Oh,the baby does not like it. Sorry baby,things are coming your way. Enjoy!

[Virgil Showlion]

Fred Buntz
Message #1421 - 03/25/10 07:38 PM



Actually Decay, I don't favor more regulation. Please don't cut out parts of my comments and retort with your idiocy.

---

Fred Buntz
Message #1423 - 03/25/10 07:40 PM

Papa always told me not to engage in an intellectual battle with an unarmed man. I should listen more often.

---

decoy409
Message #1424 - 03/25/10 08:01 PM

Thanks for your donation today! You may want to scrap some of those long terms.

---

stonerdr
Message #1425 - 03/25/10 09:45 PM



Fred Buntz



I agree with you in what was the problem in message # 1417, but the problem now is getting out of the pits. Back in the text of this thread, you'll find quite a few quotes from Von Mises (an Austrian school economist) in particular in and for which O&G expresses qualified agreement or sympathy. You'd also discover that he states quite often that every economists has something of value to contribute (and he does so without equivocation). The implications of your sentence

If the consequences of their actions is their own, unmitigated financial destruction they may choose not to engage in such risky behavior.

indicates you're very much aligned with the general tenor of the proposals in the body of the work. I imagine with little effort I can pull up at least a half dozen economists who can give a hatful of reasons why government support for any commerce will end up with a dependency that would ruin that industry. Bagehot is one who comes to mind, since O&G mentions him. And Bagehot dealt specifically with banks. He said flat out, if government helps banks, it only encourages them to conduct bad banking business on bad banking principles.

This thread contends that our banks are in trouble because the ambitious bankers wanted to do something other than banking. What resulted is not the way to run a bank business!

But, the truth of all human behavior is that give them an inch, they'll take a mile. In order to conduct commerce, or any interaction between people, you've got have a workable understanding to begin with. That's usually the role of regulations. If you start with half an understanding, you'll get a half effective result. And if you begin with no understanding, that's a invitation to disaster. Which means either way, the result will be failure. By passing legislation that released the industry from regulations, Congress gave notice to the banks that they need fear no reprisals, punishments or retaliation, and the banks took advantage of the promise. It meant even more to them since getting that sweetheart legislation passed, proved that banks controlled Congress!

Now. . If you're standing with the ball on your own five yard line, and the opposing defense goes over to sit down on the sideline. . what are you going to do? You'll run up and down that field as if you owned it. And, that's what they did. It was a conspiracy from the beginning. And, the same lackadaisical attitude that served back then, is serving now.

This thread has maintained that there should be no Too Big To Fail. . . from the start. So, it appears there's also agreement there.

However, I think there's enough evidence to indicate that our banking leaders, in the process of developing these megaliths, are not capable of restraining themselves within the bounds of appropriate or ethical business behavior. That is the basic problem: not markets or innovations or investment vehicles; but common sense and morality. They appear to be conspicuous in their absence. In my book that simply adds up to mis-management. Mis-management deserves to be dumped unceremoniously, and if the company has suffered severely enough, the company, as Volcker phrased it, should be "euthanized, not rescued".



But, more than that, the hope would be that the high moral ground of this thread could be retained in honor of the gentleman who contributed so much to it. At one time an observant contributor noted that since this thread started the tenor of the entire Market Talk message board was boosted up a few notches. They attributed it to O&G's influence.

[Virgil Showlion]

Stay Put
Message #1426 - 03/26/10 05:46 PM



Two words....Big Picture.

I have gone through most of the postings on this board, from the highly analytical and highly regarded, to the seemingly most absurd and quite often attacked. The one common thread that I see, is that everyone is far more focused on the individual problems rather than seeing where all of this ultimately leads.

It's as if you have received a puzzle with over a million individual pieces, and all of you w/out exception are focusing all of your attention on the sheer number of pieces or the importance of a few of the pieces. Nobody (or most on this board) seems to understand one simple fact. The pieces, when all are finally put together, can still only create "1" picture. In the case of our markets and our government, that is a One World Order, Communist rule.

---

BRENTEFS
Message #1427 - 03/30/10 06:19 PM

DUFF: I don't show any of the deleted postings as being "restored". I'm still among the furious that someone at MSN felt that this chain of information should be "censored". Maybe if GWB were still in office that would be reason enough, but that aside I will continue to check until I see everything as it was previously. BL

---

HappyDaysareHere
Message #1428 - 03/30/10 06:38 PM



BRENTFS



Have you gone back to page 1? And find the text not yet restored?



There was a series of posts in which ASK posted her downloaded files before MS restored those deleted. When they reappeared, ASK deleted her postings. . That was the long string of deletions around messages #1300-#1400.



Check again. As far as I know most others have posted thanks to MS and the Mods for reinstating Duff's messages.

[Virgil Showlion]

HappyDaysareHere
Message #1429 - 04/01/10 02:28 AM



I found a copy of Murray Rothbard's "The Mystery of Banking" (mentioned above) in a used book store, picked it up, read the preface and that was enough to convince me I needed that book. The first sentence and the last paragraph of the preface sold me.

Although first published 25 years ago, Murray Rothbard's The Mystery of Banking continues to be the only book that clearly and concisely explains the modern fractional reserve banking system, its origins, and its devastating effects on the lives of every man, woman, and child. . . .

When I discovered Rothbard's great work I had been a banker for six years, but like most people working in banking, I had no clear understanding of the industry. It is not knowledge that is taught on the job. Murray may have referred to me as "the efficient banker", but he was the one who knew "the evil implications and inflationary domination of the State."

[My bold lettering]



Working in banks for six years with no understanding of banking. That would come as a surprise except for this long dissertation on banking by O&G. How far up does that lack of understanding of banking extend? If we take O&G's assessment of the problems we are now facing and how we got here, it goes all the way to the top. Several times when he mentioned mis-management, it was in bold and occasionally with an exclamation mark. He knew it without reading the preface to the book.

I've often gone into banks and after I've developed an acquaintance with the people behind the counters or desks, tried to find out how much they knew about banking. It amounted to which form and which lines had to be filled out. And, that was about as far as they wanted to go. Which means that is about as far as they will go. Just another job. Somebody sets the tone for the work place, and if people are interested in their work, it's because somebody made it interesting for them. Only a person who was interested and informed in the operation could do that.

I wonder what it's like to work in Citibank. I had my personal and business account there because a branch was conveniently nearby. But, the people were like automatons except for a couple of occasions when they made mistakes on my account and then they flurried about in what seemed to me total confusion.

Could I have made an investment judgment on that observation?

---

number32inhealthcare
Message #1430 - 04/01/10 04:18 PM

Thanks for what you do. Here's a Reuters article about how Wall St. basically owns our government and therefore real regulation of OTC derivatives is a pipedream.

www.reuters.com/article/idUSTRE62T5RD2010033​1

---

Duffminster
Message #1431 - 04/01/10 05:09 PM

Wall Street cabal seen derailing serious swap reform

www.reuters.com/article/idUSTRE62T5RD2010033​1

O&G, did you notice how the Dodd Bill was quitely passed on the day that Health Care reform was passed. It seems like they want to put a lot more power in the Fed's hands and any truly meaningful OTC derivatives reform, free from exemptions for the Too Big To Fails, is less and less likely.

---

reverendbarb
Message #1432 - 04/01/10 05:41 PM



[www.fool.com/investing/general/2010/03/24/why-the-fed-will-fail.aspx] www.fool.com/investing/general/2010/03/24/why-the-fed-will-fail.aspx



This looks like a good article, but I haven't had a chance to actually read it yet.

[Virgil Showlion]

HappyDaysareHere
Message #1433 - 04/01/10 08:08 PM

Yes, reverendbarb, it looks good to me, too. Lot of good comments followed, too.

---

neohguy
Message #1434 - 04/02/10 06:43 PM



The following article pretty much describes how powerful/unethical banking interests will quietly walk away with billions as O&G described in this thread. The article describes how greed and corruption by JPM and politicians have brought the city of Birmingham to third world status.

[www.rollingstone.com/politics/story/32906678/looting_main_street/print] www.rollingstone.com/politics/story/32906678/looting_main_street/print Looting Main Street How the nation's biggest banks are ripping off American cities with the same predatory deals that brought down Greece

MATT TAIBBI

Posted Mar 31, 2010 8:15 AM

---

reverendbarb
Message #1435 - 04/02/10 06:53 PM

Thanks for the link neohguy. It's OUTRAGEOUS what is going on in the financial industry - JUST INCREDIBLE!!!

---

neohguy
Message #1436 - 04/02/10 07:11 PM



Hi reverendbarb, I found that article at one of my favorite web-sites called "The Automatic Earth". They provide a series of articles several times/wk that escape the main st. media. It brings me down to Earth after reading the economy is cured hype that other sources provide.

[theautomaticearth.blogspot.com/] theautomaticearth.blogspot.com/

[Virgil Showlion]

Veteran_Lender
Message #1437 - 04/05/10 10:45 AM



Isn't one way to finally get rid of the Fed- to give it the authorities it claims it needs to do away with the exponentially climbing derivatives? Essentially, we're running out of time as it is. They either "break the bank" or we tank. We arrive at the same place either way... at a beginning with a whole road ahead and a hard knocks education behind.



Please do not muddy this thread with in-fighting. If you posted off-topic above, please delete your own.

---

HappyDaysareHere
Message #1438 - 04/05/10 02:54 PM



It would be good to see the Fed put itself out on a limb for a change. They're reluctant to exercise any regulating authority. . . that's a big if not the biggest contributing cause of the crisis. They haven't even expressed an opinion on the existence of derivatives. That may be due to the fact that despite Dodd's proposal to repeal GLBA, it hasn't been done yet and GLBA is still the law of the land. . . to the banks advantage!

Remember, derivatives don't exist. No Federal arm can point to them, note their contribution or how severely they undermine the system, etc. I guess that means the Fed doesn't even know how to spell the word.

And, of course, since the Fed is in a state of constant and continuing suckling of the bank industry, it does not want to crack down on their wards. . . or bosses, whichever fits.

I agree with your statement that we're running out of time, and Duffminster's above opinion that it seems less and less likely anything will be done. But, you just can't ignore the big pile under the rug! The longer everyone delays, the larger the pile of trash grows; the weaker banks grow, and the more dependent on taxpayers the system becomes. They'll be too big to even tolerate a disapproving glance from any regulator.

Duff notes above that the second Dodd Proposal was passed. I've been reading and listening, no corroboration, yet.

I wish O&G would make one more appearance and explain in detail just how derivatives are effecting the nation's monetary system. I know it's not good, that much is obvious. Somebody out there has first call on our money, and we'll have to scratch harder and longer to get enough for just getting by. I'd like to know about the mechanism. Maybe if that was brought out to people in graphic terms, it might make an impression on the dormant "movers and shakers".

Retirees with fixed income are going to have an awful time with what's coming at us. I know they had a struggle during the 1980 crisis. But, then, the interest rates were higher and that helped. Now, there's no help and principal is evaporating for some. I don't know how those on a lower tier without any principal, can make it at all.

---

decoy409
Message #1439 - 04/05/10 03:09 PM

I agree with your statement that we're running out of time, and Duffminster's above opinion that it seems less and less likely anything will be done. But, you just can't ignore the big pile under the rug! The longer everyone delays, the larger the pile of trash grows; the weaker banks grow, and the more dependent on taxpayers the system becomes. They'll be too big to even tolerate a disapproving glance from any regulator.

It's nice to know all of this however HappyDaysarehere you better start looking at the really big things coming along with the ruin. NAFTA superhighway is now officially leaked Tx. way by the taxpayers. 'O' man having a weekend meeting about the current currency with the asia man,recent comments by 'O' man as to opening up the Mexico border and the coming merge of the US,Mexico,Canada folks. Oh yeah. To turn your thoughts and think that these things are not real,not happening is just to be plain foolish.

---

HappyDaysareHere
Message #1440 - 04/05/10 05:48 PM



Decoy



Do you think the president and his helpers are trying to buy their way out of the hole instead of dig their way out? After all, the guys in Washington are not the kind to do physical labor.

[Virgil Showlion]

Duffminster
Message #1441 - 04/05/10 09:23 PM

neoguy,

Thanks for posting the new Matt Taibbi article from the Rolling Stone. Once again, he brings home the point that if we are now in a nation where the only lenders that are too big to fail are the predatory lenders that have no problem taking down a nation or a state to make a killing, then the nation is extremely serious trouble.

Looting Main Street:
[www.rollingstone.com/politics/story/32906678/looting_main_street/print] www.rollingstone.com/politics/story/32906678/looting_main_street/print

---

HappyDaysareHere
Message #1442 - 04/06/10 02:28 PM



For those readers interested in a quick side by side summary and comparison of the House and Senate proposals:


[www.nytimes.com/interactive/2010/03/16/business/financialreform-billcompare.html?scp=1&sq=comparison%20of%20financial%20reform&st=cse] www.nytimes.com/interactive/2010/03/16/business/financialreform-billcompare.html?scp=1&sq=comparison%20of%20financial%20reform&st=cse



This link was provided through a nytimes reader's comments. 1300 pages is not condensed too easily, but it's been done at this location.

The page is interactive. Titles on the left hand side of the page under "Consumer Protection" takes you to the side by side comparisons and below that are three more articles, one of them lengthy. The comparisons are not editorialized; in other words, they present the general drift of the proposals and lets it go at that.

---

HappyDaysareHere
Message #1443 - 04/06/10 05:17 PM



Simon Johnson discussing his outlook for breaking up the TBTF banks is at this site:



[money.cnn.com/2010/04/05/news/economy/13_bankers/index.htm?section=money_mostpopular&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_mostpopular+%28Most+Popular%29] money.cnn.com/2010/04/05/news/economy/13_bankers/index.htm?section=money_mostpopular&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_mostpopular+%28Most+Popular%29



It's short, direct, and claims we'll eventually get around to breaking up the large TBTFs, but not effectively so for about another 10 years. He bases the time table on our past history of reaction and cites our past experiences during the terms of the two Roosevelts.

---

Duffminster
Message #1444 - 04/09/10 04:51 PM

Happy, we need to not accept that time table because in that time the TBTFs may well cause so much destruction that it will take 50 years to truly recover the nation if ever in my opinion.

[Virgil Showlion]

mlsjapan07
Message #1445 - 04/10/10 08:04 AM

Duff is right. We don't have ten years.

---

HappyDaysareHere
Message #1446 - 04/10/10 02:26 PM

Basing an opinion on highly subjective and personal experience: our history suggests if we don't get it done on an emergency basis - say, within six months - we won't get it done at all!

By the time all those who feel they have "skin in the game" get to express their desires, and those in authority learn enough to make a meaningful contribution, the time will be long past when corrections and reformations should have been completed and in force to be effective. In ten years, we'll probably be through two or more increasingly severe financial jolts and still trying to get the economic engine started. . . while the smiling faces on CNN will still be hawking that we're well on our way. . . the way to what remains to be seen.

---

Old and gray
Message #1447 - 04/13/10 08:20 PM



There may be an extension of this thread underway. . . starting now.

I'm reading things on Market Talk that indicates some supplementary history might not harm us. Since we're dealing essentially with the corrupting influence of banks as they are currently constituted, we should have some idea of the history of banks, long term, in the US. I could list a number of good reliable historical works, but it all depends on a person's intent. Most of us frequenting the Message Boards are not scholars, do not pretend to be, and scholars' writing and research may not be to our liking. So, how do you get just enough facts to satisfy casual interest composed in a way that holds that interest and also holds our attention?

Here's the first paragraph of Rothbard's "The Mystery of Banking", Chapter XIII, "Central Banking in the United States: The Origins". He then proceeds through US banking from the founding of the nation, 1791 to 1982, the time of publication.



Try this on for compatibility.

The first commercial bank in the United States was also designed to be the first central bank.1 The charter of the Bank of North America was driven through the continental Congress by Robert Morris in the spring of 1781. Morris, a wealthy Philadelphia merchant and Congressman, had assumed virtually total economic and financial power during the Revolutionary War. As a war contractor, Morris siphoned off millions from the public treasury into contracts to his own mercantile and shipping firm and to those of his associates. Morris was also leader of the powerful Nationalist forces in the embattled new country whose aim was to reimpose in the new United States a system of mercantilism and big government similar to that in Great Britain, against which the colonists had rebelled. The object was to have a strong central government, particularly a strong president or king as chief executive, built up by high taxes and heavy public debt. The strong central government was to impose high tariffs to subsidize domestic manufacturers, develop a big navy to open up and subsidize foreign markets for American exports, and launch a massive system of internal public works. In short, the United States was to have a British system without Great Britain.

The link to this document: (click on "Chapter XIII" in the left hand column and it takes you directly to the section I refer to.



[mises.org/Books/mysteryofbanking.pdf] mises.org/Books/mysteryofbanking.pdf



I presented the first paragraph of Rothbard's historical reprise of the development of Central Banking in the US.

I admit I find some of it grating to my sensibilities. Specifically I object to his characterization of Robert Morris as a taker and not a giver. Morris really did finance the major part of the Revolution on his own, contributing millions and committing to millions more by way of personal loans he signed for in order to pay the salaries of the Revolutionary Army, provide clothes, food and arms and munitions. I was taught that he was tireless and dedicated to the cause, though he might have had a difference of opinion with the general trend of Revolutionary thought on occasion. One of my ancestral progenitors was an associate of his and family documents are understandably gentler to the man. It was his boats that ran the blockades set up by the English to import necessities the Colonists could not provide for themselves and provide support for the troops. In the process he lost a large part of his fleet, sunk by the British navy. You might contend that he provided the bulk of the Revolutionary Navy. As a result of his dedication and generosity, Morris died pretty much impoverished, much like most of the other signers of the Declaration of Independence. That in itself hardly warrants such characterization as you might walk away from by reading nothing else but Rothbard.

That and a few other tidbits here and there in Rothbard's recount bother me, but that's the last I'll say of those things.

---

Old and gray
Message #1448 - 04/13/10 08:21 PM



I don't know of another source that conveys the sense of US banking development in such a compact manner. . It gives you an idea of what kind of people sought to control banking and the struggles between some of the factions up to modern banking. It's a hundred pages at the end of the book (Chapters XIII to XVII, pages 191 to 291. . . and you needn't go that far. . the last chapter consists of conclusions which might be dropped), no obtuse math or graphs, no insider language, very much in a modern idiom and the leaning forward, confidential manner of Murray Rothbard himself, one on one.



If we're to critique the banking industry, we should know how they got where they are in a long term development process. This thread went back as far as WWII with a reference or two to the Depression working a lot from personal recall. Murray may be depending on memory for his presentation, too, if he snuck a little white lie about his age by us.

If this bit of literature generates enough interest we might have a few comments to make on the issue of the tunnel vision our banking system has labored under since the birth of the Nation. It might also give us an idea of the deeply ingrained, self-serving nature of the industry.

[Virgil Showlion]

Virgil Syonid
Message #1449 - 04/15/10 12:48 AM

Duff is right. We don't have ten years.

Stop it! You both stop believing the yield curves!

---

Virgil Syonid
Message #1450 - 04/15/10 03:43 PM

An excellent article... this one by Ferguson at the [www.weeklystandard.com/articles/nudge-nudge-wink-wink] Weekly Standard.

About the underpinnings of behavioral economics. It's a brilliant piece. Pithy and erudite. A bit long, but the best of it is found on pages 5, 6, and 7.

Summers, Goolsbee, Orszag, and the gang featured.

Get's Virgil's 'Recommended Read' award.

I have some time off today, so I plan on catching up with the thread.

Regards to All,

Virgil

---

frank the impaler
Message #1451 - 04/16/10 01:55 AM

Behavior modification is in the eyes of the beholder

---

Virgil Syonid
Message #1452 - 04/16/10 03:10 AM

Behavior modification is in the eyes of the beholder

I just wish I could pull in the Stanford Psych Department's combined salary for calling a tax rebate a "spending bonus".

This is the space-age science running your Dow up to 36,000, Frankster:

"The vast majority [of behavioral science conclusions] come from behavioral experiments that are completely artificial in their construction. Most take place in labs at elite universities, where graduate students and professors pay undergraduates a pittance to sit for varying periods of time and fill out questionnaires of varying length. Sometimes the subjects are asked to interact while the grad students watch them, other times the questionnaires alone suffice to produce the data. ·Behavioral economics,· Thaler likes to say, ·is the study of humans in markets.· Actually, it·s the study of college kids in psych labs."

This just in, hot off the lab bench: if you make 401K's optional to opt out rather than optional to opt in, lazy people who couldn't give a toot end up with 401K's. ...And your stock market bubble lasts for maybe another seven months.

This engineering crap is for suckers. I shoulda been a behavioral scientist.

[Virgil Showlion]

EdRed
Message #1453 - 04/17/10 01:26 AM

zzzzzzzzzzzzzzzzzzzz​zzzzzzzz

zzzzzzzzzzzzzzzzzzzz​zzzzzz

zzzzzzzzzzzzzzzzzzzz​zzzzzzzzzzzz

zzzzzzzzzzzzzzzzzzzz​zzzzzzzzzzzzzz

for better or worse?

zzzzzzzzzzzzzzzzz

zzzzzzzzzzzzzzzzzzzz​zzzzzzzzz

zzzzzzzzzzzzzzzzzzzz​zzzzzz

zzzzzzzzzzzzzzzzzzzz​zzzzzzzz

---

Duffminster
Message #1454 - 04/19/10 01:13 AM

Here is an article (rather shallow in my opinion) but hitting a few points on the Dodd Financial "Reform" bill which are good but of course misses the point that the Bill grants a private bank the role of an agency and rather than reforming the Federal Reserve (key to lasting "reform" in my opinion) we give the Fed vast new powers, which I believe will eventually be abused. In any case, these are my personal views. The article is worth the read in my opinion.

Too Big Not to Get Right [online.wsj.com/article/SB10001424052748703312504575141703012449686.html] The Dodd bill would make financial bailouts more likely.

---

Old and gray
Message #1455 - 04/20/10 06:41 PM



Apropos banking, free banking, laissez faire banking and the central bank systems, in an attempt to refresh my recall of Vera C. Smith's work, I reviewed her work. Chapter VII in particular deals with the arguments that raged on either side of the Atlantic relative to Central banking versus "free banking". The participants were distinguished people of the time who left their mark in the world of political economy in more than one way.



One of the participants, Thomas Tooke, in one of his publications, "History of Prices", 1838, wrote, "As to free trade in banking in the sense in which it is sometimes contended for, I agree with a writer in one of the American papers, who observes that free trade in banking is synonymous with free trade in swindling." He also wrote that the claim for such freedoms "do not rest in any manner on grounds analogous to the claims of freedom of competition in production -. It is a matter for regulation by the State and comes within the province of police." I'd judge that he was in favor of effective bank regulation.



Vera Smith comments that this became "something in the nature of a motto" by the opponents of "free banking".



This is very much in line with a host of comments from readers and contributors to this thread. All of which proves that there was intelligent life on this planet before our generations, and we do have something to learn from them, if we had the time and dedication to read, remember, coupled with the inclination to believe our forbearers saw very much what is still to be seen.



Also, I had contact with the ABA through which they informed me it was "time for action". I responded that such was the case and that I was busy doing as much as I could. But, that they might be disappointed to learn that I was coming down on the side opposite to what they believed, were proposing and defending. Then, I proceeded to give them some of my thoughts. I wonder how many people bother to write to the ABA, The American Bankers Association? From his fiery attitude, I'd judge that Thomas Tooke would have written were he alive today.

---

reverendbarb
Message #1456 - 04/20/10 07:18 PM

Hi Old and Gray! Great to hear from you, as always. Hmmm, probably a lot of us did not think of writing to the ABA, but if we did....well, it might be hard to keep the words "civil" shall we say?!!

[Virgil Showlion]

midwesterner123
Message #1457 - 04/21/10 02:30 PM

Next bubble: $600 trillion? Cities, states, universities could sink from monster derivatives meltdown

As interest rates begin to rise worldwide, losses in derivatives may end up bankrupting a wide range of institutions, including municipalities, state governments, major [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] insurance companies, top investment houses, commercial banks and universities.

Defaults now beginning to occur in a number of European cities prefigure what may end up being the largest financial bubble ever to burst · a bubble that today amounts to more than $600 trillion.

[www.bis.org/statistics/otcder/dt1920a.pdf] The Bank of International Settlements in Basel, Switzerland, now estimates derivatives · the complex bets financial institutions and sophisticated [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] institutional investors make with one another on everything from commodities options to credit swaps · topped $604 trillion worldwide at the end of June 2009.

To comprehend the relative magnitude of derivative contracts globally, the [www.cia.gov/library/publications/the-world-factbook/fields/print_2195.html] CIA Factbook estimates the 2009 Gross Domestic Product, or GDP, of the world was just under $60 trillion.

Derivative contracts, therefore, have now reach a level 10 times world GDP, meaning even a 10 percent default in derivatives would equal world GDP.

The small 800-year-old town of Saint-Etienne in France has just defaulted on a $1.6 million contract owed to Deutsche Bank. The city entered into a complex [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] currency swap arrangement to reduce the cost of borrowing some $30 million.

To cancel all 10 derivative contracts Saint-Etienne currently holds would cost the town approximately $135 million, more than six times the amount initially borrowed, largely because no bank or institutional [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] investor would want to purchase contracts that are now on the losing side of the bet.

Saint-Etienne is only one of thousands of EU municipalities that bought into derivative contracts as a way to cut the costs of municipal borrowing.

[www.wnd.com/index.php?fa=PAGE.view&pageId=143057] www.wnd.com/index.php?fa=PAGE.view&pageId=143057

---

midwesterner123
Message #1458 - 04/21/10 02:32 PM



Continued:

WND MONEY
Next bubble: $600 trillion? Cities, states, universities could sink from monster derivatives meltdown Posted: April 19, 2010
9:40 pm Eastern



By Jerome R. Corsi
© 2010 WorldNetDaily




Bank of International Settlements in Basel, Switzerland


As interest rates begin to rise worldwide, losses in derivatives may end up bankrupting a wide range of institutions, including municipalities, state governments, major [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] insurance companies , top investment houses, commercial banks and universities.

Defaults now beginning to occur in a number of European cities prefigure what may end up being the largest financial bubble ever to burst · a bubble that today amounts to more than $600 trillion.

[www.bis.org/statistics/otcder/dt1920a.pdf] The Bank of International Settlements in Basel, Switzerland, now estimates derivatives · the complex bets financial institutions and sophisticated [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] institutional investors make with one another on everything from commodities options to credit swaps · topped $604 trillion worldwide at the end of June 2009.

To comprehend the relative magnitude of derivative contracts globally, the [www.cia.gov/library/publications/the-world-factbook/fields/print_2195.html] CIA Factbook estimates the 2009 Gross Domestic Product, or GDP, of the world was just under $60 trillion.

Derivative contracts, therefore, have now reach a level 10 times world GDP, meaning even a 10 percent default in derivatives would equal world GDP.

The small 800-year-old town of Saint-Etienne in France has just defaulted on a $1.6 million contract owed to Deutsche Bank. The city entered into a complex [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] currency swap arrangement to reduce the cost of borrowing some $30 million.

To cancel all 10 derivative contracts Saint-Etienne currently holds would cost the town approximately $135 million, more than six times the amount initially borrowed, largely because no bank or institutional [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] investor would want to purchase contracts that are now on the losing side of the bet.

Saint-Etienne is only one of thousands of EU municipalities that bought into derivative contracts as a way to cut the costs of municipal borrowing.

(Story continues below)



A key problem with derivatives is that in the attempt to [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] reduce costs or prevent losses, institutional [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] investors typically accepted complex risks that carried little-understood liabilities widely disproportionate to the any potential savings the derivatives contract may have initially obtained.

The hedge fund and derivatives markets are so highly complex and technical that even many top economists and investment banking professionals don't fully understand them.

Moreover, both the hedge fund and derivatives markets are almost totally unregulated, either by the U.S. government or by any other government worldwide.

But losses on derivatives are not limited to government entities.

Harvard's billions

Obama administration economic guru Larry Summers may end up being best remembered for having destroyed almost single-handedly the Harvard University endowment fund as a result of misguided instructions he gave the fund's management during his tenure as Harvard University president from 2002 to 2006.

Summers, currently director of the White House National Economic Council, called for an aggressive investment strategy in which Harvard' endowment fund engaged in risky strategies, including derivative strategies that have burdened the nation' largest university endowment with billions of dollars in toxic [www.wnd.com/index.php?fa=PAGE.view&pageId=143057#] assets.

As a result, the Harvard endowment, which peaked at $36.9 billion in June 2008, has since lost some 30 percent of its value, dropping to $26 billion, [www.bloomberg.com/apps/news?pid=20601109&sid=aHQ2Xh55jI.Q] according to Bloomberg News.

In October 2009, Harvard University paid $497.6 million to investment banks to get out from $1.1 billion in interest rate swaps that were intended to hedge variable-rate debt for capital projects, [www.bloomberg.com/apps/news?pid=20601087&sid=aHou7iMlBMN8] Bloomberg reported.

In what amounted to Harvard's biggest endowment loss in 40 years, the university also agreed to pay $425 million over the next 30 to 40 years to offset an additional $764 million in credit-swap deals gone

---

HappyDaysareHere
Message #1459 - 04/22/10 01:19 PM



NYTimes has some comments from notables, among them

[boards.msn.com/thread.aspx?ThreadId=986726&BoardName=Hide&header=SearchOnly&Footer=Show&BoardsParam=Page%3D15&LinkTarget=_parent&pagestyle=money1&ForumId=18#peter] Peter J. Wallison, American Enterprise Institute and ex-Treasury counsel [boards.msn.com/thread.aspx?ThreadId=986726&BoardName=Hide&header=SearchOnly&Footer=Show&BoardsParam=Page%3D15&LinkTarget=_parent&pagestyle=money1&ForumId=18#simon] Simon Johnson, M.I.T. professor and co-author of ·13 Bankers· [boards.msn.com/thread.aspx?ThreadId=986726&BoardName=Hide&header=SearchOnly&Footer=Show&BoardsParam=Page%3D15&LinkTarget=_parent&pagestyle=money1&ForumId=18#cowen] Tyler Cowen, economist, George Mason University [boards.msn.com/thread.aspx?ThreadId=986726&BoardName=Hide&header=SearchOnly&Footer=Show&BoardsParam=Page%3D15&LinkTarget=_parent&pagestyle=money1&ForumId=18#thoma] Mark Thoma, economist, University of Oregon



The title of the article is "What is Missing. . . ." from the Congressional bills addressing the TBTF banking issues.



This takes you there



[roomfordebate.blogs.nytimes.com/2010/04/20/whats-missing-in-the-financial-rules-bill/?ref=business] roomfordebate.blogs.nytimes.com/2010/04/20/whats-missing-in-the-financial-rules-bill/?ref=business



Four more ideas of how to approach the problem.

Of course you all know about Senator Brown (D, Ohio) and the proposal to impose a specific number on banks to prevent the Too Big aspect of the TBTF equation. Some critics have picked up on that and by way of relevance are measuring banks according to share of GDP. Sometime back, O&G suggested that limiting size might be determined as a ratio of assets/GDP. Brown's calling for a specific number can very easily prove to be quite a hobble in the event of hyperinflation. In the extreme, it might force severe shut downs if hyperinflation gets out of hand.

At the least, consider the effect of 10% inflation per year instead of the 10% per month economists' view of hyperinflation. If banks were limited to $750 billion (the number tossed out by some) in three years of 10% annual inflation, that limit would effectively be reduced to a relative $525 billion. At only 5% inflation, in the same three years, the reduction would amount to $112.5 billion. Reducing the limitation to $637.5 billion in an inflationary environment if still a sizeable restriction and unfair. That is severe! It is also an indication that the Senator is not considering inflationary effect at all. Not a good approach to the problem. Wish we could all expect the same future benefit of an inflation free outlook he foresees.

On the other hand, in order to promote financial activity while still providing some protection for banks (who are not all bad) and the system, the asset/GDP ratio can actually grow in proportion to the increase of economic activity of the nation - as well as decline in the event of nation-wide slide.

I think I prefer O&G's more realistic approach which takes into consideration reality moreso than does the Senator's suggestion. At the same time, the Volcker rule - that banks not speculate with depositor's money in ways that are counter to depositor's, as well as the system's, interests, needs to become law. Banks have no right to dip into the till, run out into the back alley for a quickie crap game and risk coming back inside with empty pockets then expect the depositors, creditors, or the taxpayers to make up the loss to keep them solvent.

---

HappyDaysareHere
Message #1460 - 04/22/10 01:23 PM



midwesterner



You'd expect that Harvard people show more smarts than to be caught up in the derivatives scam. Some temptations are too strong to be ignored. . . no matter what your level of education. On the other hand, maybe the trustees who handle the funds work at Goldman Sachs. . . and get a bonus for capturing the loose endowment funds!

[Virgil Showlion]

Duffminster
Message #1461 - 04/22/10 11:43 PM

I thought these articles were germane. I'd like to know if any of these ideas may be congruent with O&G's thinking and or possible pragmatically effective:

The SAFE Banking Act: Break Them Up

[baselinescenario.com/2010/04/22/the-safe-banking-act-break-them-up/] baselinescenario.com/2010/04/22/the-safe-banking-act-break-them-up/

The proposal places hard leverage and size caps on financial institutions. It is well crafted, based on a great deal of hard thinking, and · as reported on the [www.nytimes.com/2010/04/21/business/21fail.html] front page of The New York Times this week · the issue has the potential to draw a considerable amount of support.

The idea is simple, in the sense that the largest six banks in the American economy are currently ·too big to fail· in the eyes of the credit market (and presumably in the leading minds the Obama administration · which [13bankers.com/] saved all the big banks, without conditions, in March-April 2009). The bill put forward by Senator Christopher J. Dodd, the chairman of the Banking Committee, has some sensible proposals · and is [baselinescenario.com/2010/04/14/senator-kaufman-is-right-senator-mcconnell-is-wrong-any-questions/] definitely not an approach that supports “bailouts” · but it does not really confront the problem of the half-dozen megabanks.

In the American political system · where the power of major banks is now so manifest · there is no way to significantly reduce the risks posed by these banks unless they are broken up.

These banks are so powerful that they can confront and defy the government, as seen in [baselinescenario.com/2010/04/20/the-best-thing-i-have-read-on-sec-goldman-so-far/] the twists and turns of the S.E.C. versus Goldman Sachs case. They are also powerful enough to threaten a form of extortion: If reform is tough, [baselinescenario.com/2010/04/20/jamie-dimon-should-debate-us/] according to JPMorgan Chase’s chief, Jamie Dimon, credit will contract, the recovery will slow and unemployment will stay high. Given the size of his bank, that·s a credible threat.

and this one:

Stop Talking About "Breaking Up The Big Banks" -- Size Is NOT The Problem
Read more: [www.businessinsider.com/henry-blodget-stop-talking-about-breaking-up-the-big-banks-size-is-not-the-problem-2010-4#ixzz0lsLf5Ixi] www.businessinsider.com/henry-blodget-stop-talking-about-breaking-up-the-big-banks-size-is-not-the-problem-2010-4#ixzz0lsLf5Ixi

The right way to eliminate "Too Big To Fail" is to create a mechanism by which any financial institution can fail without taking the system down with it. This is easily accomplished by forcing the banks to include mandatorily convertible securities in their capital structures.

What are "mandatorily convertible securities"?

They are [www.businessinsider.com/henry-blodget-stop-talking-about-breaking-up-the-big-banks-size-is-not-the-problem-2010-4#] bonds (debt) that automatically convert to equity if the bank's equity capital level falls below a certain threshhold. (Conversion can also be triggered by other events, such as the stock price falling below a certain level, but in our opinion tying conversion to the equity-to-debt capital level is the best way to go).

How does this mechanism work?

If a bank gets in trouble and starts writing off huge loan losses, its equity falls. If the equity falls below a certain level, the mandatorily [www.businessinsider.com/henry-blodget-stop-talking-about-breaking-up-the-big-banks-size-is-not-the-problem-2010-4#] convertible bonds automatically convert into equity, thus replenishing the bank's equity capital. To provide a further cushion, there could be several layers of mandatorily convertible debt: The first tier converts, then the second, and so on.

Buyers of the mandatorily convertible bonds would know what they were buying, and the bonds would be priced accordingly. The yields would be higher than for senior debt, but the risk of conversion would also be higher.

---

stonerdr
Message #1462 - 04/25/10 06:27 AM



Duffminster



In discussing the mis-management of banks, O&G did mention, early on, that we had a tendency to grow businesses and organizations to a size beyond our ability to manage effectively. Not to speak for him, but to express my own opinion in correlating the second article and his writing, I'd say that the statement

Stop Talking About "Breaking Up The Big Banks" -- Size Is NOT The Problem

would appear to be in conflict with the idea that the banks ran aground because the pilot didn't know where the heck he was going! . . Or, couldn't maneuver the monster ship. So, an argument could be made that size is the problem. Managers simply can't take care of what the monster organizations are doing to themselves and us!



In my opinion, the first article you quote fits in very nicely with most of what is in this thread. O&G mentions that the banking brokerages and insurance businesses are not at all the same and it shouldn't present any problems for the Fed to step in and say the crisis is over, we no longer need the meld of the three industries under one roof. And, that the Fed is not built to handle anything but banks in the first place.

He also said something similar to - if they were separated, we might be able to save any of the three industries should they run into trouble, but bound together, we couldn't save any of them in the coming sequence of events he anticipates . . . or something to that effect.



I'll see if I can find the location of what I'm recalling from the top of my head and post it tomorrow or the following day. I'm caught up in reading these books, one thing leads to another and time just fades away while I fall behind on my schedule. Then, too, I shouldn't be up this late!

---

stonerdr
Message #1463 - 04/25/10 02:44 PM



Update on the location of text dealing with the two issues above:



Merging of the three industries to create the TBTF megaliths - posts # 54-60.



The dangers of the mergers - #26 - 28.



Too big to be managed - #75 - 76.



Also, I have a distinct advantage which is no longer a secret to anyone. . . I'm family, so I have access to the edited version of O&G thoughts contributed here. Some are clarifications, some are additions or supplements. . . a lot is edited out.



On entry #132 he added this thought, "The fact that everything bounced back at the banks at such speed, caught them unprepared and devastated their playing field, is prima facie evidence they were dealing with matters which snowballed into something they did not comprehend."

To relate this quote to the current question you might add - "Being surprised by the swift development is more evidence of management's ineptitude."

Leading into the crisis, banks were looking for more than just free banking environment, they were striving for unfettered operation where they could run rampantly wild. They found it: open range which provided complete freedom - no fences, no wranglers, no restrictions whatsoever and they ran wild as if they had no obligations to the community - or, for that matter, to global society.



On further thought, my image above treats the banking community like a herd of cattle, benign, placid, only occasionally subject to stampedes. . . or, distinguished, proud mustangs. I should have referred to those unconscionable bankers as more in line with feral dog packs.

---

Duffminster
Message #1464 - 04/26/10 06:18 PM

Leading into the crisis, banks were looking for more than just free banking environment, they were striving for unfettered operation where they could run rampantly wild. They found it: open range which provided complete freedom - no fences, no wranglers, no restrictions whatsoever and they ran wild as if they had no obligations to the community - or, for that matter, to global society.

Hi stonerdr and nice to make your acquaintance. I am still trying to get my head around the idea that 90% of the destructive potential of the hundreds of billions in OTC derivatives already unleashed during this period of Wall Street Amalgamations (sometimes known as Banks) on the open range of the global financial system are beyond any kind of help or meaningful regulation. What if anything can be done to unwind these positions in the most orderly possible means without creating a giant financial tsunami which would make the previous one pale in insignificance?

[jsmineset.com/2010/04/26/in-the-news-today-525/] Jim Sinclair’s Commentary

Two points:

1. It is amazing that the evil of derivatives is just coming from people who have dealt significantly in OTC derivative.
2. There is no cure for 90% of the enormous number of outstanding OTC derivatives because they have NO standards. No standards means no fix possible. That is an ABSOLUTE fact!

Deal Near on Derivatives
Berkshire Presses Lawmakers to Roll Back Proposed Curbs
By DAMIAN PALETTA And SCOTT PATTERSON

WASHINGTON·Democrats took a step toward their goal of overhauling financial regulation, reaching a tentative deal to set restrictions on trading in exotic financial instruments known as derivatives.

Among the considerations still in the balance: A big provision being sought by Warren Buffett in recent weeks. A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett·s Berkshire Hathaway Inc., potentially helping the famed investor avoid a financial hit, congressional aides say.

A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett·s Berkshire Hathaway. John Bussey and David Weidner discuss.

Sunday night·s deal, hammered out by Senate Banking Chairman Chris Dodd (D., Conn.) and Senate Agriculture Chairwoman Blanche Lincoln (D., Ark.) reflects the populist, anti-bank sentiments simmering on Capitol Hill. A Senate Democratic official said the two have "worked out a deal," which is expected to be folded into a broader Democratic measure that revamps the U.S. system of financial regulation in the wake of the catastrophic financial collapse that occurred in 2008. The agreement includes a proposal that could force banks to spin off their lucrative derivative trading operations, reshaping Wall Street.

The fate of Berkshire·s effort to influence the legislation remains uncertain. Senate officials said Sunday night that most of the details of the agreement haven·t yet been finalized.

[online.wsj.com/article/SB10001424052748703441404575206252252365076.html?mod=WSJ_hpp_LEFTTopStories] More…

[Virgil Showlion]

djrick
Message #1465 - 04/26/10 11:16 PM



This is the working draft of a Law Review submission by Christopher L. Peterson, a University of Utah (formerly University of Florida) law professor and consumer advocate.The title is: FORECLOSURE, SUBPRIME MORTGAGE LENDING, AND THE MORTGAGE ELECTRONIC REGISTRATION SYSTEM. The link I am providing provides a free click, free download.


The article addresses the MERS catastrophe. This is really big trouble, and no one seems to be watching it.

[papers.ssrn.com/sol3/papers.cfm?abstract_id=1469749] SSRN-Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System by Christopher Peterson

---

stonerdr
Message #1466 - 04/27/10 01:11 AM

1. It is amazing that the evil of derivatives is just coming from people who have dealt significantly in OTC derivative.

The participants have created the disaster, but the burden created and cost of clean-up is borne by the taxpayer.

2. There is no cure for 90% of the enormous number of outstanding OTC derivatives because they have NO standards. No standards means no fix possible. That is an ABSOLUTE fact!

If the SEC is successful in its exploratory suit against Goldman, look for an attempt to carry it a little further. I've been informed that SEC's MO has been and will continue to be to sue those involved in causing bank losses which end in resolution. The feeling here is that the bailout was the equivalent of a resolution and injection of new capital. . . at the expense of the general public.

The process was more than just a means of recovering the expense of clean-up, it was a continuation the SEC's principle means of covering expenses involved. Sooner or later some court will be forced to acknowledge that the lack of standards of the entire fraudulent process was meant to evade laws and avoid prosecution. The ponderous weight of the derivatives cannot continue to hang over the system, a constant threat to our entire monetary/credit system. It's got to be cleaned up before we can move forward.

Halfway measures won't do.

---

stonerdr
Message #1467 - 04/27/10 01:17 AM



djrick;



The problem is, and we all know from your involvement, that you are well aware, that we have so many problems that dealing with them is going to take several Congressional sessions. All we can hope for, is that the subsequent Congresses don't take office with the assumption that the last Congress took care of it. . or, that because it happened before they came into office, it's not their responsibility to serve up solutions.

---

Scared_Shirtless
Message #1468 - 04/27/10 11:22 PM



Bill Black - like O&G - says things so well.



Its fraud. Its all fraud!



And now the big banks are broke.



And everything done up until now is just a giant cover up.



Its that simple - we are watching the biggest cover up of failed banks ever witnessed, from the president on down.



They are scared - scared shirtless if I may - that we the people will realize it and make a panic run.



That we're not smart enough to depend on the FDIC, etc. and we'll break them. In a day.



That's why no one has lost their job! No one has been replaced! Heck if you put an honest CEO in he'd immediately want to know - how bad is it? They simply cannot afford us finding out. No how - no way.



A giant cover up. That's all this is.



I stand in utter awe and amazement at how they've gotten away with it to this point.



We're going to have to vote a lot of ourselves into government over the next few years to get this done right. What we have is too far gone - they must go.



Any volunteers? Heck I'd run if I knew how!



Wishing everyone the best!

[Virgil Showlion]

HappyDaysareHere
Message #1469 - 04/28/10 03:02 AM

Scared

We're going to have to vote a lot of ourselves into government over the next few years to get this done right.

You need money and an organization just to get on the ballot. Depending on which state you live in costs could run up towards $20,000 just to get the petitions circulated and accepted. Then, if that's accepted, you have to comply with Federal Regulations, which means more money and a real organization, with officers, bank accounts, etc. otherwise, the government doesn't believe you're serious.

If you want to find out how, just contact your state's Secretary of State. You might even access the Sec of State's website and find out what your state requires.
I live in Florida. I can be a felon, illiterate, and any other disreputable kind of person - even a banker! - just as long as I can pay for it and get enough registered voters to sign up for me, I can run for US Congress.

Of course, it's a lot easier if you're a party member. The independent has a lot more hoops to jump through.

---

djrick
Message #1470 - 04/29/10 02:58 AM



"So here now we finally have the truth. All those synthetic CDOs, in which investors lost tens of billions of dollars, were created to fail, and they were designed by the people betting against them. It was not only common practice, it was the whole reason these instruments existed in the first place -- exclusively as vehicles for short sellers to buy protection against."




[www.huffingtonpost.com/martin-luz/blankfein-plays-dumb-but_b_554633.html] Martin Luz: Blankfein Plays Dumb, But Did Tourre Just Sink Wall Street?

---

reverendbarb
Message #1471 - 04/29/10 01:12 PM



djrick: That's a very good article that puts this whole financial fiasco in a nutshell. But while reading the article I couldn't help but notice the link to the Jon Stewart Daily Show video with his wrap-up of the hearings. And as OUTRAGED as I have been and still am, that man can still make me laugh out loud!!

If anyone is interested here's the link: [www.huffingtonpost.com/2010/04/28/stewart-rips-senate-for-i_n_554873.html] www.huffingtonpost.com/2010/04/28/stewart-rips-senate-for-i_n_554873.html

---

HappyDaysareHere
Message #1472 - 04/29/10 03:00 PM



An article by Harald Hau, published on the voxeu site, entitled Market Failure or Market-existence Failure? claims that a "major cause of the crisis was the lack of exchange trading for derivatives . . . . more "missing market than "market failure". In the form of a review of Michael Lewis's book, "The Big Short: Inside the Doomsday Machine', the article has statements difficult to determine if they are the thoughts of Lewis, or Hau's reaction to them. But, whichever, and to whomever's credit, in 2 1/2 pages, the article has some direct statements. Makes you wonder who was fighting whom and who worked with whom.



Examples of the statements,



". . . speculators were dependent on the very investment banks they speculated against."

". . . investment banks set prices for illiquid credit default swaps more or less at will with large intermediation margins."

". . . In one example Goldman Sachs is able to sell a mortgage credit insurance to a Californian fund at an annual premium of 2.5% and then pass on this very same risk to AIG for a mere 0.12%."

". . . "over the counter" market - a technical term for the opacity of inter-bank transactions."

"credit default risk - was not traded in any centralized market at all."

". . . there was no real price discovery process in which the information and analysis of short sellers could have any price impact."

". . .Investors and market insiders alike would have been alerted by clear market signal if mortgage default swaps were competitively and transparently traded."

"The very opacity of the OTC market was their source of large intermediation profits."

"The scale of these profits was clear proof for the absence of a functioning market."



The point is made that "a better market infrastructure, a competitive derivative market, and centralized clearing should be top priority." Ant, that "banks will again try to resist such market development."



The EU is on course to establish something along these lines. Hau reports, "The EU draft law on derivatives markets promised by July 2010 will hopefully ark a leap into a more market-based and less bank-centric financial system. Thus one legacy of the subprime crisis could be a big boost to financial markets."



But, his main point is: "a centralized market for mortgage default risk did not exist." Of course, those who followed this thread knew that all along.



It's an unfortunate phenomenon of the human mind that learning facts and becoming familiar with ideas or thoughts is usually tied in with with people's ability to repeat a phrase, written or spoken. A penetrating written description of complex things such as derivatives or their markets, is guaranteed not to get wide circulation or sustained support. It's too difficult a situation or arrangement to memorize and repeat. . . and, that's not what is needed to make sense of an idea and keep it foremost in the mind.



The link for the article is



[voxeu.org/index.php?q=node/4893] voxeu.org/index.php?q=node/4893

[Virgil Showlion]

Bad Vibe
Message #1473 - 04/29/10 06:05 PM

Rule of thumb: the p/e ratio of stock should not be greater than 15:1. Instances where the ratio is above 15:1 signals investors are bullish on the stocks (companies earning) prospects, below 15:1 means they are bearish (not too optimistic). WHY DOES THIS MATTER? The average p/e ratio for the entire S&P 500 is 22:1 -- Bottom Line, the entire market is inflated!!! There will be a correction. This market run is irrational, exuberant and unsustainable, not to mention a complete farce. Look for a 25% correction soon!

---

djrick
Message #1474 - 04/29/10 07:35 PM

Thanks Rev, yes, it is good to find something to laugh about each day, even in irony........best to you.

---

HappyDaysareHere
Message #1475 - 04/29/10 07:53 PM



Freedom, we may both see it that way, but that doesn't stop the stampede to cash in on the next bubble in the making.

However you measure it, you're using the same common sense that tells us if everyone and his brother and sister rush in to take advantage of a new market opening up for whatever reason, this will only flood the supply line and the demand will be overwhelmed too soon. Ergo, over-investment, loans floating through the atmosphere, too much money in circulation, and never-ending bubbles bursting in the air. How do you tell someone to exercise common sense. It's a rush to put the feed bag on before the oats are all gone.

Some feel there's no reasonable alternative to taking advantage of the opportunity while it's there. But there doesn't seem to be any balance in the rush to capitalize. No moderation. No idea that just so much is good enough for me. Folks point to their own balance in the checkbook and say that justifies it all. Some others look around and see another new group of 200 million people world-wide are being squeezed into the already over-crowded poverty level, or another ten million in our country standing in the unemployment lines without any other prospects and feel the suffering isn't worth the increasing wealth of a few. It depends on what kind of glasses you wear.

I don't know how to trade mine in for another outlook. I happen to believe it's not the healthiest of thoughts to forget about 200 million so that a thousand or a hundred thousand even a million others can feel good about themselves for beating the game.

I guess I didn't learn my lessons when I was growing up. . . it's too late for me to change.

---

djrick
Message #1476 - 05/05/10 09:57 PM

[dailybail.com/home/audit-the-fed-call-your-senators-now-202-224-3121.html] Audit The Fed -- Call Your Senators NOW @ 202-224-3121

[Virgil Showlion]

reverendbarb
Message #1477 - 05/06/10 03:24 PM

djrick: THANK YOU for the link - I emailed my senators and signed the petition!!

---

Duffminster
Message #1478 - 05/07/10 04:56 PM

Under the Cover of the 1000 point market GLITCH and with the excuse "Under Pressure from the White House" both Democrats and Republicans Did the Will of the Too Big Wall Street Federal Reserve Member Banks and Defeated the Two Most Important Reforms in the Financial Reform Bill.

1. The Audit the Fed Amendment was Defeated
2. The Amendment to Break Up the Too Big To Fail Banks was Defeated.

Now lets see if Buffet and the Other huge OTC derivatives players can Defeat the Derivatives Transparency and regulations components of the bill with a whole series of Too Big To Fail Derivatives Exceptions.

---

randy47
Message #1479 - 05/09/10 10:03 PM



All that happenned was that because the markets are highly manipulated someone got over greedy and it back fired on them . They simply got caught while moving the markets the way they want it to go!!

---

Duffminster
Message #1480 - 05/11/10 08:42 PM

Randy, I take proximity of events seriously. The real Audit the Fed Amendment that would have looked into Fort Knox and the Gold Books as well as the Feds Stealth QE operations and Foreign Bank operations was soundly defeated. Breaking up the Too Big To Fails was also defeated.

Lets hope that the Derivatives Legislation isn't filled with millions of exceptions for the Too Big To Fail Market Makers. There is so much hot air about financial reform and while some good may come from it, the unrelenting influence of money in a system that is dependent on money will likely corrupt the legislation to the point where the needed systemic changes will not take place and the conditions under which a larger and more prolonged derivatives based meltdown can take place will be allowed to evolve to the eventual fruition and its our children that will pay the price for the greed, avarice and lack of any humanity or wisdom that these people operate with every day in a system that rewards them for ethical and moral degradation.

[Virgil Showlion]

djrick
Message #1481 - 05/16/10 04:15 PM

The intersection of politics and reality in this article is really delightful:



[www.nytimes.com/2010/05/16/us/politics/16derivatives.html?partner=rss&emc=rss] In Tough Stance on Wall St., Democrat Finds Few Allies - NY Times

The chairman of the Federal Reserve opposes it. The country·s chief banking regulator dislikes it. The secretary of the Treasury has been unsupportive, at best, and Paul A. Volcker · no one·s idea of a best friend to Wall Street · calls it unnecessary.




Their antipathy is directed at a proposal from Senator Blanche Lincoln, Democrat of Arkansas. She wants banks to get rid of their lucrative derivatives operations because they played an outsize role in the financial debacle. And when Wall Street needed a rescue, Mrs. Lincoln says, taxpayers should not have had to bail out bankers· bad bets.

---

djrick
Message #1482 - 05/16/10 04:16 PM

And from what I read all they have to do is stall to November - Ms Lincoln stands almost no chance of getting re-elected if the polls are correct. She is way behind the likely GOP challenger.

---

Old and gray
Message #1483 - 05/16/10 08:30 PM



dj

To date the only country truly recognizing the undesired effect of derivatives has been Sweden. IMO their simple and total destruction of $9 trillion worth of derivatives has stabilized their banking system in short order and since that bold move, they have delivered their banking system to what may be the most dependable on the planet. Of course, their stability has been founded on other policies as well (things we couldn't even conceive of since it would interfere with the back office operation in suspiciously grey areas (the shadow banking nether world)). But, the fact that they can bring themselves to recognize the destructive effect of the paper and rid themselves of it, illustrates their realistic approach to dealing with banks. Their interests are wider than just the finance industry. Perhaps they recognize that the finance industry is there to serve the rest of their economic and social operation, instead of the reverse, as bankers look on it here in the US. On the other hand, the US is fixated on the derivatives device, unable to give up the addiction, still piling up more and more of the junk paper and holding it over the heads of the taxpayers, depositors and creditors who accept it as normal operation without a whimper. Addicted to money and those "essentials" the derivatives fraud represents, I believe we've elevated banking and its quick money schemes to a status beyond religion.



Another country has also developed an admirable functioning program for dealing with derivatives without hesitation: India. India's Central Bank regulates the practice. They've already closed down two deals from foreigners which sought to circumvent their regulations. They made a big public issue of it thereby demonstrating their resolve to keep the derivatives trading desk under strict control. Derivatives trading is allowed as long as one of the parties is regulated by the ICB. Derivatives are used for "balance sheet management" by financial firms and "non-financial firms use derivatives only for hedging their exposures". This is reported in two recent copyrighted works by two Indian economists, Dayanand Arora and Francis Xavier Rathinam. A 2 1/4 page shortened summary (an assumption) of the original work, dated May 11, 2010, "OTC derivatives market in India: Recent regulatory initiatives and measures for market stability", is available on the Voxeu.org site through this link



[www.voxeu.org/index.php?q=node/5026] www.voxeu.org/index.php?q=node/5026



India has a CCP (CCIL) in place and unlike our "self-regulating markets" is tightly monitored. The two economists report that all trades are required to be reported "within 30 minutes of the deal". Since "regulated entities" are required to report to the Reserve Bank of india "on a regular basis" this provides for "automatic surveillance of the OTC exposure of all banks in India". "Additionally, the use of centralised counter party as a reporting platform on a real-time basis helps the Reserve Bank keep a real-time watch on systemic risk", they report.

The regulatory agency, the CCIL, collects initial margin, mark-to-market margin and volatility margin, as applicable to each deal, in the form of cash or Indian Government securities. And the CCIL maintains a "guarantee fund" in the event of failure of documents or entities. All this to eliminate possibilities of "system wide" mismanagement or "moral hazard".

None of the Indian banks has raised up on its hind legs and brayed to the world that the arrangement is unfair and suppressive. It's been so long I'm not certain I recognize that trait. Is this what is meant by ethical bank operation based on integrity? We should try it and see if we can't build a better banking system with more of that rare attribute, integrity; it might yield responsibility and finance a more resilient and dependable economy instead of a screeching, self-serving system of spoils.



I've downloaded their longer work, an ICRIER (an Indian Economist group) working paper #248 and will report on that in more depth when I've completed the read.

---

Old and gray
Message #1484 - 05/16/10 08:31 PM



Along the same line of thought, BIS has issued a work produced by a brace of economist in the BIS Quarterly Review, September, 2009 entitled "Central Counterparties for Over-The-Counter Derivatives", and the European Central Bank has a paper produced in 2009, "OTC Derivatives and Post-Trading Infrastructure", by Cecchitti, et. al. I'll post something a little more substantial on those in due time, with links if available and appropriate.

[Virgil Showlion]

Veteran_Lender
Message #1485 - 05/18/10 11:21 AM



Very interesting synopsis on the India system, O&G. We can't duplicate it because the Fed is one of the daily players in the market. The SEC would be hard-pressed to track trades who's sole purpose is to keep the markets high by fully undermining the assets of the nation. Yesterday was a Monday. On Mondays, we pump cash into the markets.

What I find fascinating in America today is-- our government is currently operating in direct opposition to it's People while aggressively pursuing tactical moves that solely benefit our biggest banks. I have said that it is in our best interests to collapse the banks. Sure, it will be devastating to daily transacting but not critical to recovering them "outside" the realm of the banks.

Once done, spinning the Derivatives Desks away from newly-regulated traditional Credit and Investment is a quick and painless move. At that point, Americans gain back control of their economy and traders get what they created, a base-less medium, worthless, yet they being fully committed to it's continuance or they walk away broke.

Duffminster, I've said repeatedly... if you have the coin or bullion in hand, you own gold. If you have the certificate, you own an expensive but meaningless piece of paper. The gold in Fort Knox is gone.

---

robin kingsxx
Message #1486 - 05/18/10 02:24 PM

Do you guys believe the paper gold market can crash, but the physical market explode??? Can they be unlinked? I'm not very knowledgeable, but I'm leaving my house in a few minutes to buy some physical gold. What if people who own paper gold find out they share the same "bar" with others??? This will crash the gold price right? But won't physical gold be all that much more in demand?

---

Duffminster
Message #1487 - 05/20/10 06:04 PM

Proposal Would Rid Finance Bill of Derivatives Measure
[online.wsj.com/article/SB10001424052748703957904575252193114436292.html] online.wsj.com/article/SB100014240527487039DAMIAN PALETTA And [online.wsj.com/search/term.html?KEYWORDS=GREG+HITT&bylinesearch=true] GREG HITT [/Color][/blockquote]

WASHINGTON·The head of the Senate Banking Committee proposed diluting a controversial provision in the Senate's financial regulation overhaul bill that would ban banks from trading derivatives.

The move set up a fight on the Senate floor just days before a vote on the bill is expected to take place.

Sen. Christopher Dodd's proposal puts the Connecticut Democrat at odds with Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.), who wants to force banks to spin off their derivatives trading operations into affiliates. She said Tuesday she would "fight efforts to weaken" her provision

---

outaheresoon
Message #1488 - 05/20/10 06:26 PM

Do you guys believe the paper gold market can crash, but the physical market explode??? Can they be unlinked? I'm not very knowledgeable, but I'm leaving my house in a few minutes to buy some physical gold. What if people who own paper gold find out they share the same "bar" with others??? This will crash the gold price right? But won't physical gold be all that much more in demand?

I wouldn't touch paper gold with a ten foot stick. Paper gold holders will find out that they are sharing their gold bar with 100, or maybe 1000 different people and, in the end, none of them will get anything. I would take physical possession and keep it in a well-hidden safe, or two. On the way to the gold store, I would stop at the gun store.

[Virgil Showlion]

gkmcares
Message #1490 - 05/22/10 02:37 AM

Wow!
WOW!

I watched the video, I didn't read everything.........yet.
But I Plan to.

THANKS DUFFMISTER

---

djrick
Message #1491 - 05/23/10 12:01 AM

Thanks O&G, just saw your posts today, very appreciated. The bank shills are trying to kill derivative reform in reconciliation, hoping to fatigue the public, which totally forgot about placing the Consumer Protection nonsense within the Fed.

---

Old and gray
Message #1492 - 05/30/10 03:13 AM



My apologies to those who had trouble with the link provided in message # 1483. The usual verification was overlooked in this instance and the error was just discovered. . . . . . a missing period! It's been corrected.



The review of the three items promised in message # 1484, is underway and will be forthcoming Monday or Tuesday.

---

Old and gray
Message #1493 - 06/01/10 09:59 PM



This first segment (itself broken up into segments) concerns itself with a paper published by the "Indian Council for Research on International Economic Relations" (ICRIER) entitled "OTC Derivatives Market in India: Recent Regulatory Initiatives and Open Issues for Market Stability and Development". Written by Dayanand Arora and Francis Xavier Rathinam, it was published April, 2010, so it is recent and has data as current as is possible in a such a careful and well-organized study.
They have a quotation under the title which reads,

"Blaming derivatives for financial losses is akin to blaming cars for drunken driving fatalities" by Christopher L. Culp.

It should be no surprise that the same sentiment has been expressed in this thread. Contracts, documents, transactions, etc. do not create chaos or attack society. Those who apply them to undermine the stability of systems are the culprits. If the temptation is too great that the perpetrators can't restrain themselves and their binges result in crises, then those instruments should be banned. We may need another Prohibition to protect ourselves. Give them a network of regulated CCPs and a cadre of regulators, if the perpetrators, bankers, brokers and participants, are determined enough, they'll find a way to work the system to their advantage.

To someone with an interest in exactly what derivatives have done to the global financial structure and economies dependent on financial stability, the current subject, the first of the three papers mentioned in the closing part of message # 1483 provides a guide if not an expose. Of the 29 pages, about six of them are devoted to explaining the nature of OTC Derivatives and their markets, both the exchanges and the OTC trades. The authors, Arora and Rathinam, have divided this part into a primer, the importance of the markets, selected facts detailing the breadth of the markets, and policy initiatives on the global OTC markets (of which, they point out, the CCP is the most dominant solution at this time).


The next part of their paper addresses the OTC Markets in India and the regulatory framework, the current structure of the Indian markets and the types of derivatives currently traded. Whether the paper is dressed in economic jargon or not depends on the level of exposure the reader has had to the literature. From my point of view it is written in basic language, easily understood and shouldn't present any difficulty. Some issues previously addressed in this thread probably have used more esoteric language than the subject paper. So, that shouldn't be a problem. What should be a problem is the purposes served by the paper. Through most of it, it is a detached study of derivatives themselves, the market, and regulations. However, at the point where the future of the Indian markets are introduced, the reader should proceed cautiously. Where the authors pointed out the past strength of the Indian regulations and operations, they suddenly become ambitious and suggest that the very thing

that kept Indian banking out of the global mess should be changed to allow the "benefits" of expanded involvement with types of derivatives other than what has been permitted to this point and in a "leap-of-faith" suggest that Indian banking needs those toxic instruments they have carefully avoided. So, the last ten pages took on the characteristic of propaganda to this reader. But, before we get to that issue, some comments on the first 2/3 of the paper might be helpful.

The Foreword to the paper has an interesting little revelation in one sentence:

"The OTC market in India, though in its infancy, is an interesting case, because it came out unscathed in the present global crisis."

[Virgil Showlion]

Old and gray
Message #1494 - 06/01/10 10:00 PM



Not too many nations can make that claim. India has been doing something right and should continue on that path. Nothing needs adding to the summary in the above message to cover the current working Indian system. Unless data is needed to support or further describe the operation. That is provided in the paper. It's available for download at this link



[icrier.org/pdf/WORKING%20PAPER%20248.pdf] icrier.org/pdf/WORKING%20PAPER%20248.pdf



For those not certain of how a CCP (Centralized counterparty or clearinghouse counterparty to some) functions, it's a simple matter. Where a legitimate contract has been drawn up between two parties, a third party, the CCP inserts itself in the process through a "novation" process. Nothing mystic about novation, it's a legal term, similar to the legal device of a letter of delegation. Substitution might be close to an adequate description. It's a process of taking a position between the two parties to a contract, and instead of one contract, there are suddenly two, each directed at the CCP in the case of derivatives. So, at this point the dealer now has a contract with the CCP and the CCP has contract with the participant. Or, if the parties have the titles of Guarantor and Beneficiary, the CCP is between those two. The CCP is then able to collect data, track the performance of the agreement and sees that both parties perform as expected. The performance would include financial exchanges required by the contract, or, in the event of failure, seeing that restitution is made either from the paying party's resources or, in event of their inability to do so, from a common fund all market participants would have contributed to beforehand. All this in the interest of averting a global meltdown such as we faced during 2007-2009.


I still am not convinced we need an instrument out there which can result in such a threat and would rather see them destroyed before distribution. But, I'm understandably old fashioned.


However, India does have a central party in place: the CCIL (Clearing Corporation of India Ltd.), which was operational in August, 2007, just in time for the start of the meltdown. This was created by the RBI (Reserve Bank of India), their equivalent of our Federal Reserve. It is a smaller system and can conceive of a idea, and have it in operation where our Federal Reserve is so ponderous, ensnared by politics in their "independence", and slow acting as to be nearly inoperative.


Early, the authors set out their purpose.

"The main argument of the paper hinges on how central counterparties CCPs reduce the counterparty and credit risks and how good supervision through a well-defined regulatory framework underpins the systemic risk."

That should make purpose and direction clear to the reader.

The authors' description of derivatives is limited; only 5 categories are listed.

• Interest rate derivatives;
  
• Foreign exchange derivatives;
  
  
• Credit derivatives;
  
  
• Equity linked derivatives; and,
  
  
• Commodity derivatives.

Apparently, some of the more exotic creations we've had, such as Enron's weather derivatives and Wall Street's more obscure tranches of mortgaged based, collateral backed, index based contracts, or other imaginative speculations are unknown to them. As indicated above with the quote, the authors admit that India's markets are still in their infancy. They should be perceptive enough to guard their position and bypass the accompanying unavoidable problems.

I still have trouble trying to justify a defensive position more than 10X the world's GDP unless the assumption is that all the capital stock in the world is worth 10X GDP; something I could never accept. Therefore, my opinion remains, the system is overplayed and not to general benefit.

---

Old and gray
Message #1495 - 06/01/10 10:02 PM



6 supporting arguments are provided in detail to explain the "economic significance" of derivatives.

(i) OTC markets promote the price discovery process in financial markets and hence, improve allocational and operating efficiencies of intermediaries and market participants.

(ii) OTC markets provide liquidity to financial markets.

(iii) OTC markets help in risk management inherent in underlying assets by transferring the risk to the party that can shoulder it the best.

(iv) A well-developed OTC market would provide financial institutions with tools needed to manage risks associated with financial globalisation.

(v) Currency and interest rate derivatives are important for monetary policy, also.

(vi) Competition between OTC and exchange traded derivatives markets can drive players to minimise transaction costs and adopt better practices.

To be fair, they offer this list of objections to derivatives:

The global OTC markets (particularly, some products, such as credit default swaps (CDS) or credit default obligations (CDO) are viewed by some as an amplifier of the stress in the present global financial crisis. The more common criticisms relate to the fact that OTC derivatives markets are less transparent, have more leverage, have weaker capital requirements and contain elements of hidden systemic risk.

It would seem appropriate to offer at least as much organization and space to objections as to the supportive line of thought.



As for their supporting justification for derivatives, some contrary thoughts occur.



(i.) As for price discovery in financial markets: the gauge eventually became too expensive. The price will be paid out over the lifetimes of a couple of generations of Americans.

(ii.) Liquidity to financial markets also proved to be an idle day dream. Liquidity could have been there had there been someone on the other end of the contracts able to pay off. There was not.

(iii.) Help in risk management by transferring risk on the OTC market: again there was no one there when the emergency bell rang. Case in point was AIG. The assistance came from the American taxpayer. The question of how much of that rescue from American tax obligations went to help foreign enterprises and speculators has not been answered.

(iv.) Providing financial institutions with tools to manage risk is redundant. The situation ended up in disgrace considering banks had the problems in liquidity (or insolvency), credit and risk, the very things derivatives were constructed to avoid.

(v.) As for Derivatives helping monetary policy, we have yet to see evidence of that. It's my opinion they are destructive of that policy and have revealed themselves as such. I'll explain in detail later in this series of posts.

(vi.) And the advantage of competition minimizing costs is anti-climactic to say the least. We can save not only the cost of the transaction but the cost of recovery by not engaging in derivative dealing.



There are also "Stylized Facts on Global OTC" which impel comment. That will follow shortly.



(to be continued)

---

reverendbarb
Message #1496 - 06/02/10 12:44 PM



Thanks very much for your interesting commentary O&G - I look forward to reading more!

But it still boggles my mind how industries that were "supposed to be" highly regulated, i.e., banking and insurance, were set up that way due to the awareness of the multitudes of greedy and arrogant people who would take advantage of the systems if they were not highly regulated. So, some brilliant banksters "bought" the politicians who make the laws in this country and as long as their pockets were heavily lined said "hey, who cares about regulation - let's repeal some long-standing safeguards imposed due to the last great financial meltdown and let the industries regulate themselves!!" A brilliant idea!! After all, everyone in the insurance and banking industries are just bursting with integrity and concern for the common folks!! Then, who pays the price when it all came tumbling down - WE DO - the good 'ol common folks!!! Wonderful, just wonderful.

---

decoy409
Message #1497 - 06/02/10 09:47 PM



reverendbarb , common folks,I like that!



O&G , thank you so much for who you are and what you share. I truly mean that. You have helped me to learn so much more and you have confirmed some suspicions I have had for so long. As well you have helped me to be able to close some question marks.



O&G ,thank you very much! Peace be with you. Decoy409

[Virgil Showlion]

Old and gray
Message #1498 - 06/03/10 04:22 AM



Continuing with the Arora/Rathinam paper:



The "Stylized Facts on Global OTC Derivatives" section provides numbers from various sources which are intended to explain the depth of the derivatives market - how banks handled cost, returns and accounting of the OTC derivatives and to what extent they effected not only our finances but the global system. The numbers don't reflect reality. Why this should be so is open to conjecture. It may never have been intended as any more than a generalization; the fact that India was spared suffering from the derivatives game may have moderated their concerns; or, they may have been too trusting of the several sources providing the data. The gaps are worth more detailed analysis.

The authors set their thesis out in eight points, which will neither be repeated verbatim nor reconstructed, but each will be addressed.

Their first point is that "Notional" amounts are not a measurement of the markets, nor are they the amount at risk in the contractual agreement. If someone offered me some notional value of something for a set price, I'd be very suspicious. The definition of the word notional should be warning enough: abstract, speculative, not based on fact or evidence, existing in the mind only. That should be enough to warn a literate analyst not to rely on the word for anything positive. Therefore, the "notional amounts" should be disregarded.

This thread has already discussed the role of premiums and anticipated failure (the at-risk portion of the derivatives) implicit in the contracts. In a general sense we had pegged anticipated failure somewhere in the 5% range, made the point several times and then attempted to demonstrate how the wheeler-dealers clipped something off that rate in order to make the sale attractive to subsequent participants. The point was also made that should the actual failure exceed the premium rate, the holder or his resources were in trouble. But, being based on a notional amount might lead one to believe that any percentage, no matter how small, might also be a fanciful figure. Generating a number which is not based on something of underlying value so that speculation on the rise or fall of an index, an interest rate, or changes in a rate of exchange seems a ridiculously childish game. Definitely, a transaction not made for serious investors.

Consider this, if I wanted to invest a certain amount in anticipation of the rate of exchange between the ruble and the dollar will favor the ruble in the next 15 months and held no rubles and had no intention of putting any of my dollars up against the bet, how do I convince someone else to cover the speculation? By generating a piece of paper and passing it off for a price? Sounds ridiculous, doesn't it. It's no wonder Gramm Leach Bliley Act specifically noted that no information about derivatives can be used for purposes of proving fraud, deception, or manipulation. It will be interesting to see if A.G. Holder is able to get around this stipulation of law should he manage to get his case against Goldman, Sachs before a judge.

BIS reported derivatives transactions as having been at $683 trillion at the close of the second quarter, 2008. I ask again: what on the face of the earth is worth $683 trillion? Even now, with deflated dollars? That certainly is a notional sum. So, it's agreed that practicality dictates we not consider that figure the "gross market value" of anything. Since there is no such value, it cannot be at risk.

---

Old and gray
Message #1499 - 06/03/10 04:24 AM



At any rate, the authors then proceed to point out that the amount at risk is dependent on price levels, fluctuations and the volatility of markets during the covered period. Then, like any good banker or lender would, they factor in the new buyer's background and elements of the market's condition. At the time markets were saturated with the greatest number of outstanding derivatives, that $683 trillion mentioned, the authors reported that BIS also calculated market value of that total at $33.89 trillion, which strangely enough comes out to 4.96% of that fictional notional value, pretty close to the 5% we had assumed would be an insurance premium. No surprise there. That amount was labeled the "gross market value" of the derivatives. So, gross market value was established by however much the counterparty was willing to pay for the worthless paper. That was the start.

We've noted repeatedly that the distribution of derivatives was not a one-stop standard transaction from originator to final recipient. There was no telling how many parties handled a derivative, bundle of derivatives, or portion of either. Each time a new party was involved, the transaction fee should be added to the cost, which then raises the "gross market value". That is one of the contributing costs to the accumulating leveraging multiplier effect. So, the "economic significance" of the transaction goes beyond that first stage, is unpredictable and often indeterminate even after settlement - if there is one. All we can deduce is that someone made money and someone paid for that gain during the series of turnovers.

What this sequence does, in addition to losing track of the the holder of record and an assessment of his creditworthiness, is confuse the issue of just how much derivatives cost and if there is any profit in the end. It also gives us a clue as to the principle interest of the originators, dealers, counterparties and participants from start to finish. It had nothing to do with hedging or covering underlying risk.

With these facts in mind, discussing "gross market" exposures the contracts represent is superfluous except for pegging the growth of activity in the circulating markets. From June, 2007 to December, 2008, BIS surveys as referenced by the authors indicate that "the gross credit exposure of the global OTC derivatives market has increased from $2.6 trillion as of end-June 2007 to $5.0 trillion as of end-December 2008." We've gone from $683 trillion to 33.89 trillion to $5.0 trillion. Does this sound like valid pricing structure, or was the amount overstated to begin with? BTW, $5.0 trillion of the original $683 trillion is about 0.75% - less than one percent. What part of that determined how much banks received in the bailout? Second query: was that bloated notional amount engineered for any reason other than justifying the obscene bonuses bankers/brokers awarded themselves?

---

Old and gray
Message #1500 - 06/03/10 04:25 AM



The next consideration in the authors' presentation is the responsibility required between parties to the contract. OTC contracts are very much like forwards and futures which were briefly mentioned and described back in message # 901 during the discussion of Dodd's Proposal I. Like US futures traded under the once watchful eye of the CFTC, India's system has derivatives traded in daylight under the auspices of their operating CCP, the CCIL, using the same principles. In that venue, the CCIL keeps an eye on market trends and makes daily adjustments to margin requirements and sees to it the responsible party posts the margin required to keep the derivatives updated in the black. On execution (consummation of the contract) a final margin may be posted with CCIL. In this manner there is little unattached risk in the deal - in India! - which might surprise and hammer the guarantor at closing. The beneficiary can be assured he will receive his due. This is the collateralized category of derivatives. The authors report that the ISDA (International Swaps and Derivatives Association) reported that collateralization amounted to $4.0 trillion at the end of 2008. That sum is supported by the system and would not represent risk. The risk posed by the uncollaterized derivatives then is in the remainder, a paltry $1 trillion dollars! This, the authors insist, is the portion that needs close tracking.

The original $683 trillion concern has been reduced to $1 trillion, 1/683rd or less than 0.15%!!! . . . Globally!!

Carry this over to the US, which when BIS was reporting $683 total nominal circulating derivatives worldwide, our FDIC statistics was reporting $183 trillion derivatives in the banks memorandum. Using the 0.15% of uncollateralized derivatives, that would mean the domestic US share of uncollateralized derivatives would be in the neighborhood of $274.5 billion! And we distributed a minimum of $700 billion, acquired an additional $1.2 trillion domestic debt, put millions out of work and crippled our financial system, still looking forward to a decade of suffering. . . all for the sake of $274.5 billion of derivative activity? I think not.

Another set of figures is provided by the authors. A report was published by the City of London in April, 2009, written by L. Jones, Current Issues Affecting the OTC Derivatives Market and its Importance to London. That author reported that the US held 24% of the overall derivatives market by value. 24 % of $683 trillion amounts to about $164 tn. Although there is some question about the reporting in the last half of 2008 (several figures were published at various times - none smaller than $183 trillion - by the FDIC). That reported figure was a sum of all involvement as reported directly from the banks. I doubt banks would have overstated their involvement. However, had the lower figure been the case and we use the 0.15% factor, we'd compute the amount at risk at $246 billion. Doubly doubtful given what has been committed to date for the clean-up. Even 0.15% of the $183 trillion only amounts to $274.5 billion. Even were the US saddled with 100% of the global at risk amount uncovered, it would be no more than $1 trillion according to the authors. Hardly enough to cause the pain and displacement we've gone through.

The numbers do not match and that causes confusion.

[Virgil Showlion]

Old and gray
Message #1501 - 06/03/10 04:27 AM



From this point on, the authors turn their attention to the Indian situation: the historical development of the Indian system, the regulatory framework, the OTC Derivative Products Permitted in India (to date only two derivatives, the Interest rate derivatives and the Foreign currency derivatives), how they conduct their clearing process, and so on. The fact that they report the system unscathed, would be strong recommendation that it not be tampered with. However, they express confidence that the system can handle other Forms of Credit Risk Transfer: among them, the CDS (credit default swaps - which nearly wiped out our financial system if Bernanke is to be believed), the CDO (collateralized debt obligations), ABS (asset-backed securities) and leveraged loans. The claim, in April 2010, is that "banks and financial institutions are able to protect themselves from credit default risk through the mechanism of credit derivatives". If there is a more blatant state of denial, it's to be found only in Washington or on Wall Street.

We're left with the question of what effect do derivatives have on monetary policy. Since Ben Bernanke has stated the objective in a shortened version several times, here is the complete statement from the Federal Reserve Act as it stands today.

Section 2a. Monetary Policy Objectives
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]

It's no secret that I honestly do not believe they are living up to their charge recently; and, that is not a political statement. We do not have anything near maximum employment unless you qualify the statement by adding "under prevailing conditions" which is something for which the Fed bears responsibility. We've done nothing to increase production, prices are not stable, nor are our interest rates moderate by any stretch of the imagination. Which of their assigned purposes are thet serving? Every charge against them in this paragraph is a direct result of their abdication of responsibility.


There will be mention of the journeyman language in current use which refers to the "tools" available to the Fed to influence if not control monetary policy. We'll be interested in interest rates, reserves, the amount of currency, and/or its dilution, and the wonderful, magnanimous bedrock of civilization, banks and bankers.

We'll pick that up next.

---

Duffminster
Message #1502 - 06/04/10 05:18 PM

O&G,

It's no secret that I honestly do not believe they are living up to their charge recently; and, that is not a political statement. We do not have anything near maximum employment unless you qualify the statement by adding "under prevailing conditions" which is something for which the Fed bears responsibility. We've done nothing to increase production, prices are not stable, nor are our interest rates moderate by any stretch of the imagination. Which of their assigned purposes are thet serving? Every charge against them in this paragraph is a direct result of their abdication of responsibility.

I am sad to say that I agree with you fully on this count. With Bernanke out with his new PR slogan stating "
"Bernanke Says Unemployment Imposes `Heavy Costs' on Economy, Urges Lending ", one wonders what he intends to do to actually encourage lending.reference: [www.bloomberg.com/apps/news?pid=20601087&sid=aHCJHOTC1yr0&pos=3] www.bloomberg.com/apps/news?pid=20601087&sid=aHCJHOTC1yr0&pos=3

---

flow5
Message #1503 - 06/04/10 05:26 PM

IT's hard to guess whether the FOMC actually follows the recommendations of the FED's technical staff. I actually know they haven't always considered their views. They read my friend's papers (via the District's President) several times. Having the right information doesn't always help.

---

Old and gray
Message #1504 - 06/04/10 09:18 PM



Rather late to get started today, personal events have not been running smoothly lately. Nevertheless, something in writing is needed to wrap this up.



To continue with the Indian derivatives paper:



The relevant question is - of what use is the Arora/Rathinam paper as it pertains to the US situation? Simply put, on the surface, it can serve as a compass. To this point, India has:

• limited the types of derivatives trades to the most benign - Interest rate and Foreign currency Derivatives,
  
• established a CCP (CCIL) under the aegis of the Reserve Bank of India to restrict the OTC trades,
  
• set a control on participants (one party must be tied to the RBI),
  
• set rather strict reporting requirements to provide transparency,
  
• and, this was all done with a wide range of contributors other than insiders.

As a result they have turned away from the "wide-open range" don't-fence-me-in system of pre-2007 toward the CCIL which was up and functioning as a tightly monitored system. To date this has protected their system.

The point is particularly important to us for two reasons: as an example to bankers/brokers, regulators and Congress of what actually works; and, to demonstrate which derivatives are less likely to harm and more likely to be beneficial, and which are irrelevant and destructive - and, for what reason.

As for the Indian model, I'm not aware that anyone told either Congressional group about any program in place which protected a banking system during the current crisis. Now, they're in process of reconciling the two versions of the Regulatory Reform Act, preparing to offer the version which, if the final step is successful, will become the law of the land. But, then, as flow5 reports above, those who make decisions behind closed doors don't feel the compulsion to exercise common sense by listening to outsiders, who often work or have worked in the pits on a daily basis and have more direct exposure to the system and more readily recognize warts and wrinkles.

Why should we avoid a wide-open door to a "free market" for derivatives? What constitutes their destructive nature? What should we not have and what should we permit?

The most obvious problems evolving from the derivatives binge were liquidity (insolvency), shut down of lending (restricted credit), and currency flow issues (escaping capital).

Liquidity is a matter of open trading. If there is a market and participants trade frequently, that's liquidity. An open exchange provides a venue for liquidity. Any OTC transaction is away from exposure and therefore "anti-liquidity". If a transaction is dependent on a dealer making personal contact with prospective buyer and conducting the business between two parties to the total exclusion of all others, that's not what might be considered an open market, and also evades regulation. That is not the way an exchange works.

An exchange handled ups and downs. The Dow is down 323 today because there were more sellers than buyers. Information is freely available to the participants. They bring their judgments based on this information to the exchange and they traded based on weighted decisions. So a billion trades more or less resulted from informed and concerned people. Monday it may go up 300 points. That, too, will be a judgment based on information and decisions. That's a functioning open exchange.

But, OTC doesn't work that way.

The RBI recognizes this. In 2007, according to the authors of the subject paper, the RBI released a "notification" which stated

". . .it is necessary to have a mechanism for transparent capture and dissemination for trade information as well as an efficient post-trade processing infrastructure for transactions in OTC interest rate derivatives, to address the attendant risks".

[Virgil Showlion]

Old and gray
Message #1505 - 06/04/10 09:20 PM



Their CCIL fulfills that role, serves that purpose. It was because such a monitoring system was in place that recently two derivatives trades were negated by the RBI in which foreign concerns were involved. (I've been searching the net to determine which foreign firms were involved, but, have been unsuccessful to date. If I stumble across it, I'll amend this post.) The first thought that occurs is that they may have been derivative trades which are disallowed in India. That is the function and value of an exchange. Keep it legitimate, keep it in the open, and see that it observes the rules. To make sure the market does not begin to operate on its own, the RBI has specifically stated, again according to the authors report,

". . . with a view to accessing complete information on this segment of the market, it has now been decided to collect details of client trades in respect of IRS (Interest Rate Swaps) transactions. Accordingly, SCBs (India's Scheduled Commercial Banks) and PDs (Primary Dealers) are advised to report the IRS transactions entered into with their clients in the format enclosed on a weekly basis".

The RBI goes a lot further with specifics, the authors report. All trading parties are required

". . . to submit counter party and contract wise marked to market (MTM) values of derivatives (viz., forwards, swaps, FRA (Forward Rate Agreements), futures, options, credit derivatives, etc.,) contracts on gross basis (i.e., positive as well as negative market/fair values) in equivalent UIS dollars with details of currency of settlement, country of the counter party, country and sector of ultimate risk, to their respective head/principal offices".

What could be clearer than that? Exchanges are obligated to provide open information concerning deals and the RBI has the right and has exercised their right to negate deals. It's a matter of protection for the entire system. Somebody doesn't mind doing their work! Nor, is this all there is to the RBI system. OTC transactions have been subject to monitoring since late 2008, and in 2009 there has been participation in non-guaranteed settlement of OTC rupee interest rate derivatives, the authors report. This is, as they point out, a matter of high priority with the RBI because of the systemic nature of the transactions. What could be more important? And, what could be simpler and more direct?

Considering the stage of our pending legislation, it's probably too late to amend the work in process. The best that could be hoped for if and when the legislation becomes law, experience may point out the benefits of following India's example. . . provided we're not too proud to learn from someone else. Amendments to laws for the sake of clarification and improvement are commonplace.



Next consideration will be the nature of derivatives as they've been applied in our system. Do they serve the purpose claimed to justify their existence? What are the dangers and can that be avoided?

---

Old and gray
Message #1506 - 06/06/10 05:12 PM



A little aside that's been bothering my conscience lately - ever since I posted that flippant appraisal of the Fed's responsibilities in message #1501 above. With the quote directly in front of me, I ignored it and proceeded into stage two of the criticism without laying the groundwork.



Taking another look at the quote, it begins:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, . . . .

There are two important assertions in there: one explicit, the other implied. The explicit should be the restrictive message to the Fed, that they "shall maintain long run growth of the monetary and credit aggregates. . . " It says nothing about mothering banks through their renegade side excursions into market activity which allowed them to create markets for their own "innovations", escape without apologizing for the destruction, then have the Fed rush in to repair the damage so they (the banks) go free to attack the system again. From the outset in 1913, all the Fed was charged with was to look after the money supply and credit mechanism to assure that it services "the long run potential to increase production". In other words, make sure the money and credit are there when needed. They were not appointed guardians of the Faith.

Volcker asked that someone should look into how the Central Banks became so important, and I assume, how they acquired the principal role of not only guardians of the economy, financial, commercial, as well as the consumer aspect, but the role of arbiter as well. If the "Monetary Policy Objectives" (and only those!) set out in the Federal Reserve Act are abided by, the Fed has no right to swing out to other areas and do what they did during the most bitter days of the crisis when Bernanke simply stated, without any justification other than his own opinionated contention, If we don't do this, there won't be an economy Monday. What made it easier for the folks involved to act as he dictated was the lack of objections. Was that due to someone being tongue-tied or completely at sea? At any rate, it left the door opened and arrogance needs no invitation where open doors are concerned.

The second issue in that sentence is the implication of supporting "production". It may be because of that phrasing that the Fed is now talking about their "tools". Sort of puts them down on the factory floor, doesn't it? They don't have "policies", "strategies", or "programs", they have "tools". I like that folksy approach, disingenuous as it is. Euphemism can work two ways, either upscale the tenor or bring it down to the common denominator. Neither of the two cases is genuine. But, the importance of the "production" in the context presented was meant for the purpose of having the monetary and credit system serve to keep the production that creates wealth in good working order by providing enough money and credit. If they wanted to assume that what they've done to the economy and the financial system vests them carte blanche with the power to intrude in other areas, who's going to stop them? Congress made an attempt (in Dodd's first proposal) to curtail the Fed's branching out by transferring many of their assumed powers back to the departments responsible for regulation. It appears that the Dodd Brigade is forced to backtrack and that will leave the door open even wider than it was. The Fed's "independence" is about to enable it to jump up into a more controlling role in dictating the nation's make-up through financial pressure. It's not their strength, it's not their mission. It's flat-out wrong! I don't have to pull punches. I'm not obliged to observe any restraint. I'm not a former Chairman of the Fed.

---

Old and gray
Message #1507 - 06/06/10 05:13 PM



Many posters in the Market Talk threads have been talking about the need for re-developing the US manufacturing segment so that we can produce goods for exportation in competition with other nations and bring home the profits. Make something valuable out of less valuable resources and bank the proceeds. That should be plain enough for Congress to understand! Well, this is confirmation that the posters holding that position were not far from the letter of the law. And, the protest assailing the Fed's behavior is simply that they are not serving their reason for being. They've made up another.

If you follow the various posts addressing the banking situation leading up to 1913, and the clash of wills in the early days of the Fed's development, you can see the parade of egos and aggressive attempts to route the Fed to serve only special interests. The most notable and persistent argument to allow the Fed to deviate from their original responsibility has been that it should forever remain "independent" of politics or government. It's a ruse, a veil to conceal the diversion which will allow the Fed to serve purposes other than the original intent. Well, from Benjamin Strong down to Benjamin Bernanke, it's persisted. And, along the way, the Central Bank of the US, our beloved Fed has more and more openly served as the handmaiden of interests that are not serving in a way that is "commensurate with the economy's long run potential to increase production. . . "



Had to clarify that position. It was bothersome. Expressed as it is now, it is now more than bothersome.



Arranging the continuation on derivatives is in process.

---

Duffminster
Message #1508 - 06/08/10 05:25 PM

null

[Virgil Showlion]

HappyDaysareHere
Message #1509 - 06/08/10 09:07 PM



Washington Post also has a graphic attempting to explain the issues being dealt with in the Congressional Regulatory Reform legislation that summarizes 5 important issues basically.



It's found here



[www.washingtonpost.com/wp-dyn/content/graphic/2010/05/20/GR2010052004992.html] www.washingtonpost.com/wp-dyn/content/graphic/2010/05/20/GR2010052004992.html



I've been looking for a full text version of the bill as passed by the Senate March 20th. I found Sen. Dodd's proposal version II, but cannot find text with any amendments attached during the floor debate or negotiations. Nothing to finalize the Senate's position for comparison with the House version on direct, word-for-word basis.



Can anyone provide a lead to the text?

---

Virgil Syonid
Message #1510 - 06/09/10 01:05 AM

[www.washingtonpost.com/wp-dyn/content/graphic/2010/05/20/GR2010052004992.html] www.washingtonpost.com/wp-dyn/content/graphic/2010/05/20/GR2010052004992.html

Is the WP serious!?

This is the kind of stuff you see in bad 1984 clones.

---

Stay Put
Message #1511 - 06/10/10 05:19 PM

Why is this post still made sticky? It has completely strayed from its original op, and segwayed so many times that it's nearly impossible to even venture a guess as to what the subject will be from day to day. Duff puts up at least ten posts/day on this board, so I'm sure that he will not allow himself to be lost to posterity.

---

Old and gray
Message #1512 - 06/11/10 01:02 AM



Stay Put



The title of the thread is

The Root of the Financial Tsunami and A Solution: Banks Unleashed, OTC Derivatives, Phantom Money and Deregulation.

Where has it strayed? We're still discussing derivatives and banking, aren't we? Or, do you consider Congress's Financial Reformation bill not germane to the issues?

[Virgil Showlion]

reverendbarb
Message #1513 - 06/11/10 12:20 PM

O&G: The VAST majority of us who visit this board are extremely grateful for your intelligent, insightful and thorough commentary on pertinent issues - which you not stray from. Thank you my dear friend.

---

djrick
Message #1514 - 06/14/10 02:18 AM

The world wide notional value of derivatives?

About $1.3 quadrillion.




World wide GDP?

About $60 trillion.




The entire global economy has been mortgaged and remortgaged about twenty times over. For the last couple of years the US government has been giving the banksters actual US dollars in return for the bankster's phony paper assets. sigh.

The real reason inflation has not happened is because banks are sitting on their cash reserves rather than lending it out, because they figure they're going to need those cash reserves in case the Vast Derivatives Market starts unwinding, even though though none of them has enough cash to cope with such an event by an order of magnitude.

The bankstas' are in a position to profit from moral hazard, and therefore have created incentives for themselves to create the biggest moral hazards possible, even if they can't actually manage them.

Moral hazard is simply an inducement to conduct macro-economically destructive behavior. Banks certifying loans as safe that they were getting a commission to sell would be one example.

---

Old and gray
Message #1515 - 06/14/10 05:13 AM



Yesterday, HappyDaysareHere posted a quotation and provided a link to the source on a thread Duffminster began, which was entitled "Lloyd's of London warns of 'perfect storm' threat to insurance market."

I wish he had posted it here. It fits and I don't want to steal his thunder. However, to resume consideration of derivatives, it's the perfect starting point.

It's a section of a paper written by Mr. Lynton Jones for the City of London dealing with the derivatives market and comparative sizes and values. It puts things in perspective before we go any further. It was published in 2007 so it's details are dated, but rest assured things have progressed since then and that only makes things worse. That can be proven by the usdebtclock which has been referenced by several people.

The interesting entries on the usdebtclock: "The Federal Monetary base" is listed at $195 billion; and the next entry is "Currency and Credit Derivatives" $619.217 trillion.

First, the combination of Currency and credit derivatives may surprise some, but not those who have been following this thread for any appreciable time. Lehman Bros. boasted that derivatives can do everything money can do and more. We know what happened to Lehman Bros. But, their exodus does not eliminate the champions of derivatives. Everyone in banking, including the Fed, a holder of a considerable amount of derivatives, consider derivatives indispensable. If you want to become a billionaire over the weekend, derivatives certainly provide the shortest route in banking, especially if you have no concern about the destruction caused to the financial system. Something as misused as the derivatives have been, rates no support as a viable instrument or measure or carrier of value in my book. Yet, there are quite a few writers attempting to protect derivatives, the banks who use them and their policies preaching for the retention and continued use of derivatives.

Second, the total the USdebtclock lists as the Federal Monetary Base, $195 billion, may surprise others. The total amount of currency in circulation has been a matter of discussion on several MT threads, and the calculations and guesses trying to work up a respectable figure usually exceed a trillion dollars, sometimes by multiples of 2 or more. So, precisely what is meant by "Federal Monetary Base" needs a little investigative analysis. It's difficult to believe that the global reserve currency is less than $200 billion in this day and age of easy money. We'll let that lie there for the time being and return to that problem in the future.



As for the quotation, I'm going to reproduce it here, taken directly from the same source which was arrived at through around about path.

2. Size and Scope of the Market

2.1 The market in OTC Derivatives was explored in some detail in the Bourse Consult research report for the City of London, "The Competitive Impact of London·s Financial Market Infrastructure", published in April 2007. The relevant passages describing the OTC derivatives market are to be found in paragraphs 2.2 to 2.4 of this report. In brief, the OTC derivatives market can be divided into three main groups: Financial Derivatives (including Interest Rate and Fixed Income Derivatives and Credit Derivatives), Commodity Derivatives, and Foreign Exchange (FX) Derivatives. The size of the overall market is enormous. In its latest triennial report published in 20071 the BIS estimated that the market value of OTC derivatives contracts stood at US$415 trillion, with average daily turnover by April 2007 standing at US$2,544 billion. To appreciate the size of this market it is worth noting that at the start of 2007 the market value of all OTC Derivatives contracts were some eight times greater than the equivalent exchange traded derivatives. We at Bourse Consult estimate that the value of daily turnover in exchange traded derivatives in London is some 25 times greater than the value of daily turnover in exchange traded cash equities. This leads to the following "inverted pyramid" model of the scale of the business

---

Old and gray
Message #1516 - 06/14/10 05:15 AM

2.2 Within this market, by far the most important products are Interest Rate Derivatives, followed by FX. The former accounted for some 70% of market value at the start of 2007, with FX at 10%. Both of these showed a slight decline from the previous study undertaken by the BIS in 2004 as a result of the rise in trading of Credit Default Swaps, which by early 2007 had become the third largest product traded OTC at 7% of market value. Since 2007 this latter sector has grown considerably and the market in CDS has become a focus of attention in the wake of the financial crisis (although there is anecdotal evidence that use of CDS declined in the later stages of the crisis). The total of all other OTC derivatives traded (including Equities, Commodities, etc) amounted to just over 13%.

2.3 Not only is the overall market huge, but by far the largest proportion of the OTC business is done in the EU, of which the UK is the largest player. To quote the IFSL Derivatives 2007 paper: "The UK remains the leading derivatives centre worldwide with its share of turnover stable at 43% in 2007. The US is the only other major location with 24% of trading." The amount of OTC business undertaken in France, Germany and Japan combined amounted to less than 15% in 2007. Another point to note is that the proportion of the industry concentrated in the UK is primarily serving international customers. Some 74% of turnover generated by UK-based institutions is cross border. Thus the UK is responsible for some 47% of all cross border trading, even greater than its 43% of all derivatives turnover.



2.4 Since the publication of the BIS triennial report in 2007 and in particular since the onset of the financial crisis many more sources of data have been made public as a result of a desire to increase confidence in the market and address credit issues. As a result it is almost certainly the case that the overall shape of the market has changed considerably. In particular we know from anecdotal information that swaps volumes have increased significantly. Additionally, prime brokerage activities have changed considerably and there is evidence that the buy side has become very exercised about counterparty risks with banks. It seems likely that the BIS triennial report due in 2010 will show significant changes in the overall composition of the OTC markets while at the same time underlining the preeminence of London as the centre for most of these major markets, specifically CDS.



2.5 Therefore there can be little doubt that not only is the future of this industry of significant importance to the UK, but the UK market is of significant importance to the global market as a whole.

In view of the size of the global distribution of derivatives, Mr. Jones displays a need to protect them for the sake of the industry in the UK. If this is a measure of the prevailing sentiment in the UK, the Brits are as intent on destroying the financial system as are the banks here in the US.



It's late. I'll pick up on this tomorrow.

[Virgil Showlion]

Old and gray
Message #1517 - 06/14/10 02:41 PM



The numbers related by Mr. Jones are alarming. By the time you expand on the multiples, ratios and percentages the totals are almost beyond belief. Trying to establish how much US currency floating through the markets and deposited in vaults is almost impossible. If we think of currency as money supply we should have a sound idea of the total available to serve global commerce. Yet, it doesn't seem likely that can be established reliably.

A BIS paper by Cecchetti, Gyntelberg and Hollander published in IMF's Quarterly Review, September, 2009, states that ISDA (International Swaps and Derivatives Association) claimed that at the end of 2009 "the estimated amount of collateral in use at the end of 2008 was approximately $4 trillion, of which almost 85% was cash". The dominant currencies for the derivatives transactions were the euro and the USD. The indomitable duo of Arora and Rathinam in the cited work above stated that BIS reported the USD is the predominant currency in the OTC Foreign Exchange derivatives with a 42% share. In the same paragraph they write "the euro is either the dominant currency or the second most important currency after the USD. If we take the Cecchetti, et. al. percentage (85%) of cash used as collateral for $4 trillion of the derivatives in circulation, assuming the two nations handle 70% of that $4 tn, (($4 tn X .70) X .85 = $2.38 tn) If we were to assign the US 1/2 of that cash collateral (which may be high), that alone would indicate that roughly $1.2 trillion of the world's reserve currency, our USD, is tied up as margin for derivatives. How many more trillion are in vaults and in circulation throughout the world?

So, there is a compound puzzle here: what is meant by "Federal Reserve Currency"? On hand and in Fed Reserve Bank vaults? And, secondly, and more important, how much restriction is forced on global commerce by tying up $1.2 trillion (or more) of currency to insure the proven ineffective insurance provided by derivatives? (This does not include the problem caused by the euros committed to the same purpose.) Those two must total between 2 1/4 and 2 1/2 trillion committed and out of circulation, a vast amount of lost non-working capital. Lastly, is the deprivation worth it? Bernanke says he fears deflation. Whereas normal over-supply of currency almost guarantees inflation, can we depend on this dedicated treasure trove being neutralized, having it tied up by derivatives? Releasing that amount would cause a sudden surge that would guarantee uncontrolled inflation.

How does the Fed intend to guard against the potential consequences of so much currency being released on global markets? Faith that it will not happen? Expectation and disappointment stand ready to pounce on us. Rest assured banks and brokers are at work trying to discover a subterfuge for releasing that money just as derivatives gave them an excuse to release currency from serving as reserves, which in turn undermined the credit system. And, the nature of inflationary trends is not as much the actual money on the market as it is the expectation of the flood. Bankers brokers and insurance know that money is there and they are operating as if the currency is on the verge of being released, so they jump the gun and raise prices now in anticipation. Thus, we're faced with the two forces, one devaluating our assets because of the currency being withdrawn from circulation, and the inflationary pull with knowledge combined with expectation: the currency is out there and it will be released into circulation soon.

The Fed is instrumental in creating this monstrous situation.

---

Old and gray
Message #1518 - 06/14/10 02:43 PM



Pressure isn't easing any nor will it any time soon. The end of June, 2008 FDIC figure for derivatives in US commercial banks stood at $183 trillion; March 31, 2010, we stood at $213. This does not include derivatives held or issued by brokers and insurance. Hence, we have the US debt clock reporting US derivatives (and currency) of the magnitude of $619 trillion currently. What does that do to the global figure? djrick tosses out $1.3 quadrillion above (#1514). I have a great deal of respect for her acuity, but in this case I think she's woefully un-estimating the amount of derivatives in store or circulating. As a matter of fact, I do believe that BIS, also, has either been a little casual about their estimating process or the survey on which they base their numbers was incomplete.

We're looking for transparency in this issue, but what's being offered to satisfy that curiosity is a transparency that's open to participants only. The IMF paper by Cecchetti, et. al., mentioned above, classifies derivatives into three trading types - Bilateral OTC, CCP, or Exchange Traded. Transparency is sectioned into two functions: "exposures and activity", and, "prices". In both of the functions, under bilateral trades, transparency is limited or none. Under CCP it appears to be "information available but not disseminated". And, under the exchange-based transactions, exposures and activity information is available but not disseminated, but prices are published. To my understanding, that's transparency in one out of six trade situations and it just so happens that is the situation in which the least number of trades are made, low, single digit value, someplace between $1 and $5 trillion. Of the total derivatives of somewhere in excess of a quadrillion dollars, it amounts to nothing, despite it's destructiveness to our daily lives.

---

flow5
Message #1519 - 06/14/10 08:02 PM



The "notional" value of derivatives = ? I guess there aren't any legalistic "margin calls" in the non-exchange banking world. Stops are negotiable, or non-existent, depending upon each default. So what is the real exposure? There are 2 sides to every transaction. Could the bets cancel out? How do you calculate the diversity in overall leverage? Can GS corner the derivatives markets?

Buyer & seller beware.

---

neohguy
Message #1520 - 06/14/10 09:46 PM



I haven't been able to check on the validity of this story yet but, if true, then irresponsible use of derivatives are going to destroy some pension funds.

[www.zerohedge.com/print/150027] www.zerohedge.com/print/150027 61% Underfunded Illinois Teachers Pension Fund Goes For Broke, Becomes Next AIG-In-Waiting By Selling Billions In CDS

·If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.· So begins a story by Alexandra Harris of the [news.medill.northwestern.edu/chicago/news.aspx?id=166746] Medill [1] Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008. Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG." Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out, is the disclosure that a stunning 81.5% of the fund's investments are considered risky - this means it is the fourth-riskiest investment portfolio for a pension fund in the U.S! All it will take is another Flash Crash-like event, or a liquidity crunch, and the 355,000 "full-time, part-time and substitute public school teachers and administrators working outside the city of Chicago" will likely end up with a big, fat donut in their retirement portfolios courtesy of some deranged lunatic, portfolio manager, situated externally at a bank like Goldman Sachs, who in taking a page straight out of Obama's bailout nation, has decided there is no such thing as risk. And to those naive enough to think the TRS is the only such fund which has now gone all-in on "no risk and infinite return", wait until such stories start emerging about every single massively underfunded pension and fully insolvent fund in the US......

[Virgil Showlion]

kman49
Message #1521 - 06/15/10 01:57 AM

Can GS corner the derivatives markets?

I think they already did.....only, we don't know it yet. They must have taken lessons from the Hunt bros...what not to do.

---

Duffminster
Message #1522 - 06/15/10 07:27 PM

Looks Like the Wall Street Lobby and the Hire for Pay Political Mercenaries reached a deal to continue the Casino on Wall Street. A "Tamer Bank Bill" just means that Wall Street has got the Senate Under its Thumb as usual.

[] Senator Pitches a Tamer Bank Bill

WASHINGTON·A key senator who has championed strict rules on derivative trading for banks has offered a retooled version of her plan that would allow banks to keep derivatives-trading businesses but could force them to raise billions in capital to do so.

Regulators had opposed the original plan by Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.) which initially appeared to force banks to get rid of their derivatives businesses entirely.

The new proposal, which is opposed by Wall Street, is more likely to pass Congress. The two-page plan from Sen. Lincoln is one of the first in what is expected to be a series of offers and counteroffers as House and Senate Democrats reconcile differences between their dueling financial regulation bills.

---

Duffminster
Message #1523 - 06/15/10 07:32 PM

[www.zerohedge.com/article/tbtfs-remain-immune-reform-there-no-way-break-them-when-need-arises] TBTFs Remain Immune From Reform, There Is "No Way To Break Them Up" When Need ArisesPlease see the previous message as well.

When (not if) the need arises to dismantle the TBTFs, full of noncashflow producing loans, the next time around we have a Flashiest Crash, we will have no way to do so, despite the widely propagandized Obama FinReg reform. These are the words of Obama's right shoulder man Paul Volcker, who on William Isaac's program earlier noted that proposed legislation is "not going to prevent the top five banks from being saved." In that sense, the primary goal of Obama's attempt to overhaul financial regulations: the prevention of taxpayer bailouts when banks implode, is a miserable failure, yet it will not stop countless hours of self-congratulatory, teleprompterized appearances by the president, the Congressman from Fannie Mae and the Senator from Countrywide. In other news, the bankers win again, and nothing changes. Next up: how to get bank leverage to 100x all over again, without alerting the general public that next (if not this) year's bonuses will be once again fully funded by the US middle class.

Huff Po's Shahien Nasiripour brings us [www.huffingtonpost.com/2010/06/15/volcker-new-government-po_n_612392.html] some more on this much under-reported scandal, whose outcome, unfortunately, was self-evident from the very beginning:

Former Federal Reserve Chairman Paul Volcker believes the centerpiece of the administration's effort to end Too Big To Fail -- the perception that the nation's largest banks will always be bailed out when in trouble -- will not actually apply to megabanks.

In a September 2009 speech on Wall Street, President Barack Obama said that the administration's preferred way to dismantle failing systemically-important firms is a new "resolution authority" outside the normal bankruptcy process. The authority, which would enable regulators to wind down failing financial behemoths, "is intended to put an end to the idea that some firms are 'too big to fail,'" Obama said.

His top economic adviser, Lawrence Summers, has said that ending Too Big To Fail is the administration's "central objective" in reforming the financial system, and that resolution authority is the "most crucial" part of that plan.

But on Monday, during a discussion on CNBC, Volcker, the head of Obama's Economic Recovery Advisory Board, said the proposed authority is a "workable proposition for anything short of these biggest banks."

According to Volcker, it isn't "workable" for the nation's megabanks.

As reported previously on Zero Hedge, dissent to the theatrical farce currently being peddled by Washington's most corrupt, has come from the very heart of the mafia syndicate itself: Dallas Fed's Fisher and Kansas Fed's Hoenig "argue that it doesn't end TBTF because it lacks a credible threat that policymakers won't step in with a bailout when a megabank faces failure."

Another perspective comes from William Isaac who said pervioust that "we have five banks that control over 50 percent of the banking system. No government can allow very large banks that control over half the financial system to go down."

Which means, dear taxpayers, that of the roughly 40% in taxes you paid last year, and this year, within 24 months at most, at least 50% of that amount will once again go to fund the compensation packages of the Blankfeins of the world. Incidentally, we wonder how long before Goldman pulls the plug by demand massive collateral from such counterparty institutions as the Illinois Teachers Retirement System, which we [www.zerohedge.com/article/61-underfunded-illinois-teachers-pension-fund-goes-broke-becomes-next-aig-waiting-selling-bi] discussed yesterday.

That leaves taxpayer-financed bailouts as the only option to deal with failing systemically-important firms.

Such firms -- which many observers believe to be Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley, among others -- enjoy the support of an implicit government backstop. This allows them to issue debt at a lower cost than their competitors because their creditors credibly believe that they'll be bailed out should times get rough. Collectively, the firms save billions of dollars a

---

Old and gray
Message #1524 - 06/15/10 09:30 PM



flow5



You're assuming no margin calls on the unregulated market. You are correct in the assumption; that is one of the big problems. And, you also mention another, no cancelling out. The unregulated market is basically composed of contracts between two private parties with each agreement transacted on its own recognizance, its own merits and for its own result. Hardly conducive to settling as per exchanges. The fact that there is no tie-in to an overall leverage is one of the reasons the global landscape has been strewn with the "collateral" derivative wreckage.

Everyone of these facts point to the weaknesses of derivatives. Whether there's any way to clean up the mess and bring it all onto a organized market is doubtful when you acknowledge that the dealers do not want to give up their involvement in or control of the markets.

Margin calls and settlements, sometimes, even on an intraday basis, do exist in the CCPs. How they'll serve the public is another matter. They are touted as independent entities, yet, every proposed set-up to date has them founded and funded by the dealers and/or participants. (It bothers me to read that they are "independent", therefore will serve the markets better. An outright lie with the proposed or existing setups.) None of the proposals to date have them set up to mimic any existing stock exchanges which are truly independent corporations. That being the case, if it's suggested they be operated in the same way the "self-regulating" NYSE, that suggestion will be opposed and there'll be nothing but delay until those unregulated dealers get what they want. Considering the magnitude of derivative business as pointed out by Mr. Jones, they have quite a bit to fight for. Consider that Jones reports about 2/3 the way through paragraph 2.1, to wit, " . . average daily turnover by April 2007 standing at US $2,544 billion." Individual brokers can't do that with equities. And in view of the reduced number of dealers in derivatives, that means more for each dealer.



(BTW, I have a copy of the artwork, Jones provided, but I haven't been able to paste it here. There's something about the procedure I don't understand. If one of the art wizards who have posted art work here could provide a description of the procedure, I'd be appreciative. It would enable me to add the graphic and help Jones's presentation along.)



Several posters used the word paradigm in describing the changing financial environment. Nothing has hastened that change more than the derivatives innovation. The banking industry has been suffering from three ailments - liquidity, credit and risk. Everyone who's written about the crisis has brought these terms into the discussion. No one seems interested in remarking that these weaknesses were supposed to have been patched by the use of derivatives. Yet, as their numbers grew and they brought in more participants and the market expanded, it was these three problems that sprung into the forefront, infecting banks, brokerages and insurance, the entire financial spectrum, until it was immobilized. Then, the illustrious Chairman of the Fed, stepped out and suggested all we need do to get the engine running again is solve liquidity, credit and risk. Never a word about treating the cause, only the symptoms. All of which indicates that they'll be back again in a more severe attack on the system no matter what kind of committees and councils we set up to prevent the recurrence.