Posted on 10/15/2009 6:21:36 PM PDT by Kaslin
In the face of public outcry over the nation's financial crisis, a tried-and-true tradition of finger-pointing is under way in Washington.
Instead of taking a measured approach to identifying the root causes of our financial collapse, many in Washington are focusing on an easy villain that many Americans don't appreciate: the derivatives market.
This sentiment drove the House Financial Services Committee on Wednesday to pass new rules that could have far-reaching constraints on derivatives and may irreparably harm American businesses and consumers in the future.
Rather than the tool for gross financial manipulation it is portrayed to be, the derivatives market plays a very important role in solidifying the competitiveness of American businesses.
Derivatives enable businesses and investors of all sorts, especially nonfinancial corporations, to hedge risk efficiently. The benefits of successful risk management include greater confidence and predictability in the underlying business, which leads to more jobs and ultimately trickles down to consumers in the form of lower prices.
To be sure, Republicans believe that more transparency in the financial markets is always better. A system that requires companies to report their derivatives trades to a regulator monitoring risk makes more sense as long as that information is protected from competitors who could benefit unfairly if all hedging information were forced to be openly disclosed.
(Excerpt) Read more at investors.com ...
Whatta bunch of Kaa Kaa! The guys at Naked Capitalism are busting them out:
http://www.nakedcapitalism.com/2009/10/greed-is-not-good.html
So, what about greed then? Roger Bootle takes this on in his latest book, “The Trouble with Markets,” which I highlighted earlier in the week. Here is how the Telegraph quotes him:
The free-market vigilantes are already rushing to defend the unfettered market system. Their defence is based on one or other of three arguments. First, the market solution is to let failing financial firms fail. If the state intervenes to stop this, the blame for the resulting mess cannot be laid at the door of the market system. Second, banking has been a heavily regulated activity. The regulators have failed in their job. Third, the monetary policy authorities should have paid more attention to the growth of money and credit and the resulting inflation of the property market bubble.
In this way, they try to argue that what seems on the face of it to be a failure of markets is in fact a failure of government. So the solution, they say, is not less freedom for markets but more.
These people are dangerous. The idea of letting the financial system implode and then waiting for the market to bring spontaneous, healthy revival out of the wreckage might read well on the pages of a book, but in the real world it would bring human misery on a gigantic scale. In today’s society, people simply will not tolerate it. If that is what the market system is about then they will have none of it; and rightly so.
parsy, who says Wall Street probably has the fix in
I think Derivative abuse is a big factor in our problems and don't agree with the editorial.
What nonsense. Derivatives have been a way for JP Morgan, Citibank, Goldman SUCKS and B of A to offload their crap into our pants. We bail them out of their stupidity and burden our kids with it and now, a year later, record bonuses get paid and we STILL carry the cost.
They used to do this stuff in the dead of the night - now they do it right in front of us and they rub our noses in it.
We regulate and punish the actions of other thieves. There’s no good reason to allow the thieving of the “bailout,” welfare-recipient, Atheist plutocrats.
BTW, we’ll buy less and less of anything that we don’t really need. We’re going to crash your government and academic support of your global house of cards at all levels. The leftist women in free traitor families can learn to cook and clean for themselves again, because we will no longer be available for slavery.
Give up. Our working class families will stay intact, and we’re going to start breeding and enforcing morality again. ;-)
And again, the dollar will fall to equalize with third world currencies. Freight fuel prices will double or triple. Foreign product prices will rise. There will be wars, so men will be men of their houses again.
Move to China or something.
All this trickle down talk, and how it's going to help us all, when applied to derivatives, is nonsense.
It's not about lower prices finally, magically trickling down to consumers. (like THAT is really going to happen, after all these freeloaders are sucking all the cream! Ha!)It is all about letting the players on the sides, and the middlemen in particular (those dealing in derivatives) to those "on the sides" make piles of loot, with neither of the above adding much at all to the actual, underlying equations.
Somebody, somewhere, has to take the risk, has to do the work, produce the goods or services, has to hit a lick SOMEWHERE. The money to back this, isn't coming from derivatives. Those only come into play AFTER some other deal is done.
These derivative guys are more like johnny-come-lately vampires, than they are contributors. To hell with them. They are NOT helping. Cannot we see that by now? geez... What's it gotta take???
Derivatives are a way to loot your own company for stratospheric bonuses when you know the underlying, most notoriously subprime mortgages, is crap. The AIG story is an example.
The economy was doing very well without derivatives. They appeared on the scene rather late and quickly grew into the hundreds of trillions. But what did they actually accomplish? Zilch, except for a few big firms like Goldman Sachs and J. P. Morgan that managed not to get burned by them.
Greenblatt was warned about the consequences but refused to consider regulating them. The only problem now is that, under Obama, many of the top regulators are probably crooks. But derivatives should certainly be regulated.
I agree with you. But I think the problems go deeper and the danger is that they are simply going to limit the derivative market and not get to the root issues.
Cantor sounds like Little Red Riding Hood here — naive, weak, gullible. Limits need to placed on the amount of leverage a firm can use. Given our “too big too fail” ethos, large financial institutions can act imprudently because the federal government has their back. That being the case levering up 40 or 50 to 1 should not be allowed.
China’s imploding US ally (AIG)
09.17.08
http://www.freerepublic.com/focus/f-news/2084468/posts
AIG: Inquiring Minds Want To Know
February 23, 2009
http://www.freerepublic.com/focus/f-news/2192489/posts
(China)
Fed won’t say who helped by AIG rescue
3/5/09
http://www.freerepublic.com/focus/f-news/2200398/posts
Top U.S., European Banks Got $50 Billion in AIG Aid
3/6/09
http://www.freerepublic.com/focus/f-bloggers/2201213/posts
China appeals to Washington to safeguard assets
March 13, 2009
http://www.freerepublic.com/focus/f-news/2205693/posts
U.S. Federal Reserve to buy up to US$300B long-term Treasury bonds
Mar 18
http://www.freerepublic.com/focus/news/2209403/posts
Derivatives enable a party (buisness) to self-delude its mind to believe their losses are covered, so they can gamble with other peoples money without feeling any guilt, knowing that the ‘insurance’ covers essentially nothing. It allows the counterparty (AIG) to sell ‘coverage’ which it cannot possibly pay. AIG has in excess of 1 trillion in ‘derivitives’ (notional value). When the claim comes in, as it did from Lehmans, AIG simply said we fold our tent....we cannot cover the claim......So unless the Government wants to gamble the entire economy on our failure and the reaction it is sure to set off, and pay our bill, we will expect a check cut from Treasury to AIG. Good day.
For me, I have no problem with financial concerns buying insurance for their suicidal but highly profitable business transactions.
As long as the US taxpayer is not put on the hook via any form, manner, or implicit promise of .Gov Fiduciary Insurance.
When banks backed by the FDIC dabble in those instruments, the US taxpayer is subsidizing those Bankster’s risk..that is unacceptable in any form or fashion.
That would take a mirror for Congress. Mirrors are bad for the health of blood sucking vampires I believe.
Most revolutions end very badly for the people of the Nation. Americas first didn't, I wonder how the second one will turn out. This time they don't wear red coats, they are just red in philosophy.
I keep wondering why the good old “windfall profits tax” canard isn’t brought against Goldman and JPM. Could it be....?
I’m disappointed in the broad-brush painting of “derivatives” being expressed here. A derivative is nothing more nor less than a security or interest whose value is dependent upon the value of something else.
There is nobody on this forum who has not used derivatives.
A fire insurance policy is a derivative. If your house burns down, the value of your insurance policy is the reconstruction cost of house, or same less a deductible, or some amount up to the amount of whatever policy you buy. If your house does *not* burn down, the value of that policy is zero.
A “10% off” coupon used to buy a pizza or a shirt is a derivative. If you use it, it is worth the discount it provides. If you don’t use it, its value is zero. A 10% off coupon is worth more money in terms of redeemed face value if used on a $22 pizza versus a $16 pizza
A “$10 off” coupon is more loosely a derivative. It is worth $10 regardless of the cost of the purchased item. But no storeowner is going to pay you $6 to buy a $4 item that you don’t have to pay for.
However, all these definitions assume that the counterparty remains in business at the time the obligation is “put” to them. A fire insurance policy from a bankrupt insurance company is worth zero. As is a “10% off” coupon from a store no longer in business. And nobody would honor a 10% off coupon if you tried to use said coupon to buy the assets of such a store from a bankruptcy trustee.
The problem is not derivatives, per se. The problem is that there is no enforcement of our laws, in this and dozens of other areas. And the captains of the financial industry absolutely know this. They further know that they effectively own the government because they can threaten the government with destruction, as Henry Paulson did on TARP, in the event the government seeks to restrict their activites past the point of tolerance.
I completely agree with you except one point: “The repeal of Glass-Steagall is a problem.”
The reason is simple: Switzerland style banking would be a huge improvement for Americans because you have ONE account (known as an asset management account). From it, you can deposit your paycheck, buy stocks, bonds, real estate investment trusts, mutual funds, annuities, or whatever. Instead of having 5,000 accounts and 50 institutions, it all goes into ONE, simplifying your life.
This is already the case for the wealthy. My life is setup this way. Wells Fargo’s private bank sends one MASSIVE statement where your entire life is integrated into what appears to be a single account. A few other companies do the same thing for business. It is a huge improvement that drives cost savings and less paperwork.
The problem is the reserve requirements aren’t in place to support it. Had banks been required to keep sufficient tangible capital on hand (in the old days, at least 45% of capital was required to be kept in Treasury securities), none of the mess would have happened and we would still have the benefits of integrated accounts. Many of us work on a cash basis now; yesterday morning, for instance, I bought another 6,800 shares of GE derivatives (LEAPs, actually), that will pay off between 500% to 700% depending upon the ultimate price of General Electric but I paid 100% CASH for them. My total exposure is somewhere north of 25,000 to 30,000 shares. The key is that if they don’t work out, I only lose the $100,000 or so that was invested. There’s no systematic risk of failure because I’m dealing entirely with cash equity. Banks should be forced to do the same thing. If I were using the leverage that Goldman Sachs did, I would have purchased $3,000,000 in nominal value securities on my $100,000 cash investment; if they failed, of course, society would be on the hook for any of the $2,900,000 I couldn’t come up with so I’ve introduced systematic risk.
Frankly, though, 99% of the population has no idea what an asset management account is and the banks don’t push them because you see all of the fees on one statement. If it had been done to bring Swiss style banking here, as was intended, it would have been a great thing for the average man. There’s no way I’d give it up now, though.
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