What an amazing house of cards with no intrinsic value, an escalating series of betting on the outcome of bets. Sad that when all this imaginary value collapsed, it ultimately crushed the underlying entities with actual intrinsic value.
I think you are a "Patriot" to take this heat from our "do as I say not as I do" Congressmen at this recent hearing on the Hill for only $1 a year as salary. I admire your backbone and willingness to serve our country in this tragic state of the economy. I commend those who received and are willingly returning their bonuses and I respect you for looking out for your people who are not as eager to part with the dough by not revealing their names for obvious safety. Unfortunately, there are just too many ignorant Americans who hear only part of the story before going on rampage and wanting to lash and kill someone. If only they would take the time to become fully informed. In addition, I think a great many of our Congressmen are "Pinheads" and are in need of a comeuppance. Their votes on all the raises in salary and exhorbitant benefits is no different, in my mind, than what they're accusing those receiving these bonuses of. Look how terribly they've failed us, their greed, lies, deceit, personal conduct unbecoming of a Congressmen; their behavior is certainly not what I would consider to be worthy of a role model. They are using AIG as scapegoats for their own incompetence!!! Their behavior was despicable!!! I'm embarrased that they are supposedly our nation's leaders!!!
... they are not ticking time bombs, what would that be?
(1) The issuing party would have the CDS liability backed by financial assets sufficient to meet its liability obligations, and
(2) Only those with an insurable interest would be eligible to buy them.
(2) protects against the systemic risk that widespread losses creates liabilities far in excess of the original losses, amplifying systemic risks during a downturn (exactly when you want a shock absorber rather than an amplifier), (1) protects against the fundamental moral hazard in any contract to take a stream of income in return for an uncertain but potentially large liability.
But then they are insurance (for one thing, under (2) they are not tradeable) and with the costs of compliance with (1) and (2) offer no discount or other benefit compared to conventional insurance.
And short of that, they still amplify systemic risk.
The replacement suggested by the U.N. as I understand it is
a global currency. (This is not practical in the short term.
Consider how long it took the E.U. to finally be able to issue the Euro.)
that said that State and municipal pension funds should be strongly persuaded to invest in PPIF. This hedge fund said that pension funds should invest in the riskiest class: whole loans.
@&*)$@, wonder if this guy robbed the family savings jar in the cupboard to go gambling periodically....with the justification that money was "just sitting there"?
There are also "different CDSes" as I understand things so far (but we're now deep in the financial jungle so it's easy to step on a snake and not realize it!)
Right I believe that capital requirements in the case of a default are one of the reforms.
I also am hoping that the potential liability is on the books in the case of a default. My understand is they just counted the premiums, the fees and never put on the books the payout amounts in the case of default.
I have some other obvious one, which is you cannot allow unlimited CDSes on one underlying asset to then be traded like baseball cards.
That's insane it's like issuing 1 million insurance policies for 1 million different parties that Joe Smith's house will not catch on fire and burn to the ground.
Even worse, these CDSes are being used as a "metric" for other CDOs, not historical default data.
On modeling framework, there are assumptions and then there is beyond belief "bad math".
As I understand things normally Academia, the field itself challenges and reviews itself so I don't know what happened in this case but there needs to be some sort of regulation
of the actual financial mathematics, i.e. the models.
I cannot believe they let "products" based on such obvious mathematical flaws out onto the market.
... composed of banking operations each of which have a balance sheet that enables it to raise funds if a credit-worth borrower walks through its doors.
Regarding bankruptcy:
As for the iliquid ones, well unless our goal is to bankrupt these banks in some attempt to punish them, we will have to facilitate either a suspension of FASB 157 for these or some hybrid.
... having those banking operations is of far more important to the economy than the identify of those operations. If given money center banks are in reality insolvent, and need a fiction to avoid bankruptcy, then what we need rather than a fiction is a process for reconstituting a functioning, soundly financed banking operation from out of that mess.
Given those sound banking operations, we can leave the original shareholders and bondholders to sort out the mess under normal bankruptcy proceedings.
It ain't 1934 anymore. This is beyond bad news and maybe we need another post reminding people what happens if the United States is no longer a reserve currency.
Maybe I should let all of those referrer spammers through who are pushing "buy gold".
... they are an insurance-equivalent that pretends to not be an insurance-equivalent so that people with no insurable interest can take out insurance, to allow them to hedge or speculate, and so that firms can issue insurance-equivalents without meeting the balance sheet requirements imposed on an insurer.
And in this case, it makes little difference which it is allowing, hedging or speculating, because allowing firms to hedge with cheap CDS contracts where they ought to be hedging with liquid reserves against contingencies is part of the process of amplifying systemic risk.
In the mainstream marginalist economic fantasy, the most serious systemic risks are assumed out of the models (for example, a long term period of massive unemployment), and therefore are not allowed on the agenda for consideration. But being unable to discuss a systemic risk in the modeling framework that has been adopted is not a protection against systemic risk as much as an indictment of the modeling framework.
What's happening here is the collision of several realities:
You had institutions, who years if not decades, believing the hype they built themselves to sell to their clients. I remember several years ago reading about how when Goldman Sachs was expanding in the City of London, they would make themselves out to be bigger than they were through various stunts like having all their employees even come in on the weekend while their competitors were closed. In a way, what you saw in these financial institutions was similar to what happened to Christopher Walken's character in the Deer Hunter. Problem was, AIG and others thought they were dealing with a 100 chamber gun with one bullet, not a hundred chamber gun with one empty chamber.
That you can't simply create your own damn financial instrument to meet a client's needs. This could work if you wanted to create an index fund or a mutual fund that only invested in dividend-paying stocks. But often these were mean't for a wider audience and that means at the very least putting it on an exchange. What happened here was that mark-to-market was not instilled immediatly because they tried to make each CDO "unique". When you invent a new financial instrument, it should be done with care especially in regards to counterparty risk. Everytime an exchange like the Chicago Mercantile Exchange (CME) comes up with a product, they don't just launch the damn thing, it's put through it's paces with folks who do clearing. These boutique investment firms thought they could essentially be an exchange and a broker. Yes, you'll get that tailor-made product for your financial needs, but give up something in the end, nothing is truly risk free.
Derivatives products work when they are designed well and implemented on a regulated environment. Farmers have been using futures, for example, since the 1800s (actually Japanese farmers going back to the 1500s have been doing something similar), you never had a blow up like you see today. Credit Default Swaps can and would work, if implemented on an exchange mechanism. What you need is a standardized contract, clearing to assure counter-party risk, and a pricing mechanism. You actually had a pricing mechanism for CDSes, you even had an OTC exchange. What you didn't have though was clearing.
Many of these items will never be liquid. This brings us to today. The reality of the situation is that we now have to be discriminating between those derivatives that are somewhat liquid and those that aren't. The former can have mark to market, but there needs to be a proper exchange for these things. Both the CME and ICE are going to have such a thing, and these banks should be made to trade them on it to get these things off their books. As for the iliquid ones, well unless our goal is to bankrupt these banks in some attempt to punish them, we will have to facilitate either a suspension of FASB 157 for these or some hybrid. Now if there is a suspension or a hybrid, then I think that each of these will have to be re-engineered to reflect the reality of risk. As you all know, 99% of these were developed in a way where it was always assumed that REI would go up. That needs to change. If they can come up with a risk model in the form of the Black Scholes formula for something like options, they can for CDSes and CDOs.
Banks holding on to these illiquid derivative step children, that must be re-engineered, will have to realize they won't get all their money back. Indeed, if after the re-engineering it is deemed tradable, then place these fuckers on the exchange. The goal is to work on these things so as to make them tradable, to go from completely illiquid to just having crappy liquidity. There are many futures contracts that have drek for liquidity, but are still traded. No different here, just that the banks are going to realize they won't get all their money back.
Lastly, new accounting rules and financial regulations must be in place to keep in check the establishment of new positions. In futures trading, you have a margin system, for example for corn it is $2025/lot to open a trade and $1500/lot for maintenance. If you don't have the 2k to open, guess what you aren't doing the trade. For sellers of CDSes, its really like selling a naked PUT option. If I wanted to sell an at-the-money Put, I better have the margin. The same should be for these institutions who want to establish a new CDS. Fine, you can so long as it can be traded on a regulated exchange with clearing AND you have the financing to back up the claim of the contract.
He's out after this term, anyway. Doubtful he'll even run.
He's lying, of course. He has enough friends on the inside to divert and weather this one, most likely. I could be wrong. G said it earlier (I think it was G...): they didn't think it would take this long to "unwind" AIG. Now, things are starting to unravel and it's likely to get ugly. But Obama will referee. (Good thing Hilary's off and away from this dirty mess.:-)
G...you raise the point of doubling quantity of dollars with the same number of goods. How would this impact the surplus supply business, like Overstock, or even a thrift store? In many ways we have so much sheer crap here, much imported. China's excess capacity and global excess productive efficiencies with new automation and the internet seem like a huge problem. Hate to sound like a Luddite. We have been consuming chatchkies at a flea market. Just seems like there are just too many people all needing the basic essentials and now more and more people are not necessary for production.
Years ago when Tenant, Columbia and others were building out their networks, they purchased thousands of local community hospitals. They were viewed as undervalued assets. These large health conglomerates issued bonds to finance their acquisitions, and the first thing they'd do upon purchasing a small community hospital would be to sell the land it was on to one of their REITs. The community hospital then would begin paying rent to the REIT, and that in turn ultimately financed the acquisition. Community hospitals were effectively refinanced and mortgaged, instead of being free and clear of debt burden. No longer did the community hospital operate as an entity standing on fully paid for land. Historically, before the massive reconsolidation by Wall Street, Community Hospitals paid no rent.
What an amazing house of cards with no intrinsic value, an escalating series of betting on the outcome of bets. Sad that when all this imaginary value collapsed, it ultimately crushed the underlying entities with actual intrinsic value.
I think you are a "Patriot" to take this heat from our "do as I say not as I do" Congressmen at this recent hearing on the Hill for only $1 a year as salary. I admire your backbone and willingness to serve our country in this tragic state of the economy. I commend those who received and are willingly returning their bonuses and I respect you for looking out for your people who are not as eager to part with the dough by not revealing their names for obvious safety. Unfortunately, there are just too many ignorant Americans who hear only part of the story before going on rampage and wanting to lash and kill someone. If only they would take the time to become fully informed. In addition, I think a great many of our Congressmen are "Pinheads" and are in need of a comeuppance. Their votes on all the raises in salary and exhorbitant benefits is no different, in my mind, than what they're accusing those receiving these bonuses of. Look how terribly they've failed us, their greed, lies, deceit, personal conduct unbecoming of a Congressmen; their behavior is certainly not what I would consider to be worthy of a role model. They are using AIG as scapegoats for their own incompetence!!! Their behavior was despicable!!! I'm embarrased that they are supposedly our nation's leaders!!!
There's a sucker born every minute?
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.
I don't see how they could be traded on an open market with reforms that are needed.
There is simply not enough capital in the world to fund our deficit spending.
... they are not ticking time bombs, what would that be?
(1) The issuing party would have the CDS liability backed by financial assets sufficient to meet its liability obligations, and
(2) Only those with an insurable interest would be eligible to buy them.
(2) protects against the systemic risk that widespread losses creates liabilities far in excess of the original losses, amplifying systemic risks during a downturn (exactly when you want a shock absorber rather than an amplifier), (1) protects against the fundamental moral hazard in any contract to take a stream of income in return for an uncertain but potentially large liability.
But then they are insurance (for one thing, under (2) they are not tradeable) and with the costs of compliance with (1) and (2) offer no discount or other benefit compared to conventional insurance.
And short of that, they still amplify systemic risk.
The replacement suggested by the U.N. as I understand it is
a global currency. (This is not practical in the short term.
Consider how long it took the E.U. to finally be able to issue the Euro.)
that said that State and municipal pension funds should be strongly persuaded to invest in PPIF. This hedge fund said that pension funds should invest in the riskiest class: whole loans.
Check this report out here
@&*)$@, wonder if this guy robbed the family savings jar in the cupboard to go gambling periodically....with the justification that money was "just sitting there"?
There are also "different CDSes" as I understand things so far (but we're now deep in the financial jungle so it's easy to step on a snake and not realize it!)
Right I believe that capital requirements in the case of a default are one of the reforms.
I also am hoping that the potential liability is on the books in the case of a default. My understand is they just counted the premiums, the fees and never put on the books the payout amounts in the case of default.
I have some other obvious one, which is you cannot allow unlimited CDSes on one underlying asset to then be traded like baseball cards.
That's insane it's like issuing 1 million insurance policies for 1 million different parties that Joe Smith's house will not catch on fire and burn to the ground.
Even worse, these CDSes are being used as a "metric" for other CDOs, not historical default data.
On modeling framework, there are assumptions and then there is beyond belief "bad math".
As I understand things normally Academia, the field itself challenges and reviews itself so I don't know what happened in this case but there needs to be some sort of regulation
of the actual financial mathematics, i.e. the models.
I cannot believe they let "products" based on such obvious mathematical flaws out onto the market.
bad math post
... composed of banking operations each of which have a balance sheet that enables it to raise funds if a credit-worth borrower walks through its doors.
Regarding bankruptcy:
... having those banking operations is of far more important to the economy than the identify of those operations. If given money center banks are in reality insolvent, and need a fiction to avoid bankruptcy, then what we need rather than a fiction is a process for reconstituting a functioning, soundly financed banking operation from out of that mess.
Given those sound banking operations, we can leave the original shareholders and bondholders to sort out the mess under normal bankruptcy proceedings.
It ain't 1934 anymore. This is beyond bad news and maybe we need another post reminding people what happens if the United States is no longer a reserve currency.
Maybe I should let all of those referrer spammers through who are pushing "buy gold".
... they are an insurance-equivalent that pretends to not be an insurance-equivalent so that people with no insurable interest can take out insurance, to allow them to hedge or speculate, and so that firms can issue insurance-equivalents without meeting the balance sheet requirements imposed on an insurer.
And in this case, it makes little difference which it is allowing, hedging or speculating, because allowing firms to hedge with cheap CDS contracts where they ought to be hedging with liquid reserves against contingencies is part of the process of amplifying systemic risk.
In the mainstream marginalist economic fantasy, the most serious systemic risks are assumed out of the models (for example, a long term period of massive unemployment), and therefore are not allowed on the agenda for consideration. But being unable to discuss a systemic risk in the modeling framework that has been adopted is not a protection against systemic risk as much as an indictment of the modeling framework.
Pension Funds for his Private-Public Investment Fund?
What's happening here is the collision of several realities:
latest here.
and Politico is confirming it was "the Treasury", i.e. Tim Geithner.
Another factor needed to be discovered is are the bonuses really given to those who created the mess....or the ones hired to clean up the mess.
and in turn it's being turned to the federal reserve, i.e. Ben Bernanke.
AIG specifically said the Fed is on every meeting at AIG in today's hearing.
Big difference.
Or maybe doesn't realize one shouldn't use all caps and instead format!
But I am sure it true on Dodd. I believe he's been the financial sectors personal representative for some time.
He's out after this term, anyway. Doubtful he'll even run.
He's lying, of course. He has enough friends on the inside to divert and weather this one, most likely. I could be wrong. G said it earlier (I think it was G...): they didn't think it would take this long to "unwind" AIG. Now, things are starting to unravel and it's likely to get ugly. But Obama will referee. (Good thing Hilary's off and away from this dirty mess.:-)
G...you raise the point of doubling quantity of dollars with the same number of goods. How would this impact the surplus supply business, like Overstock, or even a thrift store? In many ways we have so much sheer crap here, much imported. China's excess capacity and global excess productive efficiencies with new automation and the internet seem like a huge problem. Hate to sound like a Luddite. We have been consuming chatchkies at a flea market. Just seems like there are just too many people all needing the basic essentials and now more and more people are not necessary for production.
Years ago when Tenant, Columbia and others were building out their networks, they purchased thousands of local community hospitals. They were viewed as undervalued assets. These large health conglomerates issued bonds to finance their acquisitions, and the first thing they'd do upon purchasing a small community hospital would be to sell the land it was on to one of their REITs. The community hospital then would begin paying rent to the REIT, and that in turn ultimately financed the acquisition. Community hospitals were effectively refinanced and mortgaged, instead of being free and clear of debt burden. No longer did the community hospital operate as an entity standing on fully paid for land. Historically, before the massive reconsolidation by Wall Street, Community Hospitals paid no rent.
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