The Wolves Of Wallstreet

Their boundless recklessness and their grotesque desire to be enriched for that recklessness are what have brought this country to its current sorry state.

Some think the wolves of Wall Street don't get it. Some think they are out of touch with ordinary Americans, who work hard and play by the rules and don't understand such naked greed.

But the wolves do get it. That's the problem. They get it just fine. Because the way the system is set up, they cannot lose. If you are a small-businessperson and you run your business into the ground, you go out of business. If you are a giant Wall Street firm like AIG and you run your business into the ground, you get $170 billion in bailout money and your executives get at least $165 million in bonuses.

What's not to get about that? The rich get richer. The fat cats get fatter. The rules are designed that way.

If you examine the tick-tock of who knew what when regarding the payment of those bonuses to AIG, one simple fact emerges: Everybody who had the power to block the bonuses knew about them in advance and didn't block the bonuses.

AIG Chairman Edward M. Liddy, who makes only $1 per year and turns out to be worth every penny, did not block the bonuses, and the Federal Reserve did not block the bonuses, and Treasury Secretary Timothy Geithner did not block the bonuses.

The debt model as you put it stems from men being unwilling to bear risks in their investments, themselves.

No one can make beats with other people's money with the bettor owning the upsides and the lender the downside, unless first a lender decides he doesn't want the upside, only a fixed senior claim.

If everyone took equity risk themselves there would be no leverage.

Men willing to take leveraged risk when those about them are not so willing, deserve every single penny they reap by it and then some.

And all the monday morning hangover crapstorm in the air right now, is nothing but boundless ingraditude on the part of timid fools.

The reckless risks taken by braver men than you, built every scrap of wealth you have ever touched.

“Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

~~President Andrew Jackson, on the 2nd National Bank

"Men willing to take leveraged risk when those about them are not so willing, deserve every single penny they reap by it and then some."

What you're saying is perfectly true, except in the case of the AIG-FP office. They sold credit default swaps knowing full well that AIG couldn't pay those swaps in the case of a default. Why? Because the value of the bonds covered by those CDS's was many times the value of the entire AIG Corporation. This is securities fraud of the highest order, and not an ordinary form of risk taking. However, the government is too busy selling us down the river to worry about it, and a public trial might be embarrassing to certain people.

Capitalism does require a fairly high degree of honesty and integrity, or sh*t like this happens. Let's not excuse thieves and criminals in the name of capitalism or conservatism.

Wrong, it is not securities fraud, it is something every insurance company does every single day. They just got their underwriting assumptions wrong and lost money in consequence.

Every insurance company there is writes more face value of policies than it has capital, by huge amounts. If e.g. a life insurance company were to face the bizarre circumstance that everyone it insured and only those people all suddenly died in the same month, instead of dying in statistically independent patterns spread over decades, then it would fail. It underwrites based on the assumption that the payout on most policies will be long deferred, and that they will generally be independent of each other. It assumes only a few percent at most will die in any given year. It charges premiums based on that guess, sufficient to earn enough in interest in the meantime, to eventually pay the full value of all its policies at face value, when they eventually do "hit", decades hence.

AIG did the same thing with AAA rated securities. Which past rating experience indicated would only default only at a rate of about one case in 500 in a typical year, with losses of less than half of the face amount. In reality the loss experience on many of the securities it insured were more like those on C rated "junk". Meaning on the order of 20-30% per year defaults with losses from 70 to 90% on each. It was wrong about the level of risk of the securities it was insuring. It over-relied on bad credit models, and it over-assumed statistical independence of loss experience on one bond and another, within the same stressed time-window (correlation risk).

These were honest mistakes and not fraud at all. If it had know the right order of magnitude of the loss experience on such securities, it would have demanded premiums 20 times as high as it did demand. It wasn't demanding much lower premiums than required to protect itself from loss out of any desire to lose more money than it had; quite the contrary. At realistic premiums for the losses actually seen, no one would have bought such insurance. The securities themselves would not have been created, had anyone involved actually foreseen the scale of losses that would occur.

That is the simple truth of the matter.

AIG has "float" of over half a trillion dollars. Meaning it has control of money eventually pledged to pay policies likely to actually occur in the future, on which it gets to earn and keep the interest, to that amount. That is enough to earn huge sums in the long run, and is the reason it remains solvant, despite not being liquid, after its CDS losses. AIG is enjoined against using the earnings of its subsidiaries that generate this "float" to offset losses in its corporate parent. That is meant to protect its other policyholders. But in the long run, that float produces net earnings which will duly pass to the parent company, and retire its past losses. And repay the UST.

Slander is cheap. Truth isn't.

Oh, the other aspect of AIG besides simply bad models and thus bad underwriting, was and is the simple need for exchange clearing of OTC contracts including CDSs. That simply reform (which by the way should have been there ages ago, was recommended by the CFTC over a decade ago, and was only blocked by a misguided desire to let markets decide whatever they liked without any interference or oversight) would have spotted the problem early, required margin capital sooner, and left all counterparties in the CDS market financially liable for any losing institution's inability to pay.

Since those counterparties are, necessarily, the winners on the same bets there is no way that can fail. That system has kept our other futures and options markets from making so much as a ripple in the functioning of the broader financial system for generations and it would deal with any systemic risks from mistakes of AIG's scale in the future.

We'll get this, no problem. That we didn't have it already was a legal framework error due to pols listening to lobbyists instead of the career civil servant regulators who told them so well ahead of time. Not fraud.

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