Posted on 04/27/2010 7:52:07 AM PDT by MNJohnnie
Senators demanding answers on what caused the 2008 global economic meltdown were to grill Goldman Sachs chief Lloyd Blankfein Tuesday on the investment giant's alleged role in the collapse.
The US Senate Permanent Subcommittee on Investigations was to question Blankfein and other executives including Fabrice "Fabulous Fab" Tourre, the London-based French national at the heart of US fraud charges against the firm.
(Excerpt) Read more at news.yahoo.com ...
I’ve treated you with nothing but respect, but other than you don’t like the facts, you have nothing to complain about.
You tell me to go to open secrets.com, I go there and find facts you don’t like.
The reality of the situation is a newbie called you out for being wrong and your pride is wounded.
I know your type, you aren’t a conservative you are a Republican. You turned a blind eye to the profligate spending and fiscal irresponsibility and you want to put the blame on anybody but you and your fellow republicans.
I am a conservative, I refuse to sacrifice my principles to the GOP.
For any and all, one of the issues as I see it was the way the derivitives market, a largely unregulated market that Greenspan and others thought would be regulated by market forces ended up a total ponzi scheme.
Derivitives including Credit Default Swaps and Collaterallized Debt Obligations became an unimaginable market. In 2007, the last full year prior to the unraveling “the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined.”
This is a market for a vehicle that was on no significant size prior to 2002 and didn’t hardly exist before 1990 so it was largely created in the Clinton / Greenspan years and ballooned in the sub-prime and mortgage re-fi boom.
These instruments were idiotically collateralized by Banks. That means these CDS and CDO were treated like cash or like a backed-up insurnace policy and there were rating services that treated them to ratings based upon nothing but history of US mortgage defaults in general based upon regions and terms.
Then as the trading figures for 2007 show they were traded like vehicles with intrinsic or backed value with the parties at both ends selling the instrument.
EVERYONE made money until the fact hit home that none holding these obligations could pay if failure began — and so it did. Not only that but the companies trading, moving and holding them were publically traded and then as the crisis began to an obvious outcome they “shorted” each other with no up-tick rule or other shorting rules from the last 70 years as those had all been swept away in the 90s.
As the companies tanked the agents and partners made huge commissions but watched their stock in their firms (a large part of their wealth) disappear.
It was like Tulp Bulb Markets in Holland six generations ago.
Way ahead of the issue of ‘free markets’ conservatives believe in slow careful reform — better to preserve the culture and society we have inherited. The reforms of the 90s were not slow and not careful. There is not a political party or an economic interest that didn’t share the blame for this mess.
Thank you, it was a failure on both parties, and I’m glad that you mentioned it.
I know I gloss over the Dims involvement in this only because nobody on our side seems willing to accept blame.
1. What is wrong with making banks and hedge funds ‘securitize’ their own debt with a percentage of capital? I would say NOTHING is wrong with it. That is the way it should be. The American taxpayers sure as hell shouldn’t ‘securitize’ their debt. If they believe that their debt is securitized by the federal government(the taxpayer), they have no incentive to be conservative in their risks because the nanny state will pick up after what ever they screwed up. No Thanks....no more bailouts.
She is not proposing regulation to ‘unprecendented’ levels. I am not sure where you get that. I understand her plan as moving us back to a free market, Perhaps it will take some ‘regulated’ steps to get there, but that is where we need to be.
2.What is wrong with making firms hold cash in reserve to hedge their own liabilities? I don’t see a problem with it if it is applied across the board evenly. That’s why AIG went belly up..they didn’t have enough collateral on their debt. Asking for 10 billion on a 100 billion liability shouldn’t be that big of a deal on a company the size of AIG. The ratings companies can be bought..so a AAA rating should perhaps get you a good interest rate..but you still should be required to have a percentage of capital pooled for the risk.
3.Not sure what the problem with number 3 is either.
On your last point...why does she need to have a seperate rule for mergers acquisitions,etc.? I don’t understand it enough to see what the problem is. I think she does deal with that by saying the rules have to be applied evenly across the board.
What do you mean by keeping ‘small depositors’ at risk if say Goldman’s buys up a commercial bank? Both use our money for all sorts of things..they don’t have it sitting in the banks...lol. They only have a percentage of it and not enough of a percentage at that! That is why we had to bail them out. They didn’t have enough capital on hand to keep the markets from going into a freefall and posing a systemic risk to the entire system. And the big fear was that the government didn’t have enough cash to cover a run on the banks either.
I am not going to pretend to know or understand the markets fully myself..but I sure as hell don’t trust Congress...lol.
We are more at risk now than we ever have been with what the democrats have done to our fiscal debt and plan to do in this new WS bill. You act as if Wall Street is some giant monolith..it’s not. They don’t all run in lockstep, nor do they think alike.
Prudent statesmanship in crafting political structuring of government policies is perhaps too much a question of blame. This blame-game has been crafted by the media as it suits their market model and leanings.
No less a light than Hernando DeSoto (the Peruvian Economist, not the explorer) has spent a decade demonstrating how a free market alone does not make for prosperity -- first we must have the rule of law and definte property rights that must allow property to be securely, swiftly and accurately traded and capitalized. Hayek knew this but lesser lights have forgotten even amongst the Austrian crowd.
Thanks for your concise and easy to understand post. Slow careful reform is the way to go. We can’t undo this mess with more Barney Frank crap, more ‘Obama’ dollars(our money), and bigger bureaucracies. We can’t undo it overnight either. It is going to take careful planning and step by step approaches.
forgot to ping you to my #102 — not that I took your name in vain, but I would appreciate your insight into my summary as well.
You are welcome.
I know I am guilty of sometimes letting the warming flush of debate over power the true goal of clear honest communication. Because I know that limitation to a forum such as ours, I sometimes like to see if I can come late to the table and summarize my understanding of a complex issue and boil down our disagreements to specific choices in future policy.
Our big issue is that the government created entities, those proposed in Democrat remedies and larger entities such as Fannie and Freddie are reserved by that party for use as political instruments and they therefore will not put their existance and form on the barganing table in any honest reform measures. They use them as staff banks and cash cows for their freinds and themselves when out of office (see Frank’s “partner’s job with one) and they use them to serve as policy tools for leftist goals. They can murder our economy every ten years and they will never bargin an ounce of their weight.
With that limitation, honest reform is impossible while they hold politcal power. They must be put into the minority — nothing else matters until that happens.
Wow...those ARE pretty illuminating posts...lol!! You are right..they don’t sound even remotely conservative. They sound like every song and dance routine you hear when a lib tries to bulldozz over a conservative with DNC talking points.
Please note, I’m really enjoying this discussion with you, you are making me think.
I worked on Wall Street for 10 years, during the mid 1990’s to mid 2000’s. Wall Street marches instep. If they didn’t we wouldn’t have had this crisis. We wouldn’t have had the tech bubble either. There’s an old saying “The Market can remain irrational longer than you can remain solvent.”
In Wall Street, first comes the innovators, next comes the imitators, finally the idiots.
Ok, I need to help you clear up some terms. When we are talking about securitization, we are talking about packaging debt together and selling off the repayments. So for example when you bought your house, the bank didn’t keep your loan on the books, and wait until you repaid them, that would kill their business practice. If you put 20% down, then they probably sold your loan with a bunch of other people to Fannie or Freddie. Fannie then sold off investors in chunks. It wasn’t an exciting business, the investors didn’t make much money, but there was low risk. And this worked quite well for over 70 years. Securitization made it possible for affordable mortgages.
Now some investors might want a bit more profit, and a bit more risk. That’s the subprime lenders, Unregulated Mortgage brokers would target people with bad credit, low down payments, spotty neighborhoods. They would charge a higher interest rate, and higher fees to justify the risk. A traditional Fannie/Freddie security might pay 3%, a sub-prime might pay 10%. Greater risk, greater reward. People knew what they were getting into, Moody’s & S&P would give the sub-prime mortgages lousy ratings and low-risk investors would stay away from them.
Things went to hell when Wall Street decided to get creative and fraudulent at the same time. First they got creative, they figured they could divide up the sub-prime securities with three tiers, low risk, medium risk and high risk. When they talk about the CDO people usually mean this. And all that really meant was low risk people would get paid first at the lowest interest rate, medium risk would get paid next, and the high risk would get paid last but at the highest rate. Once again, that was pretty clever, risk=reward.
Then the fraud started. The Securitizers started hiring employees from the ratings agencies to package the mortgages to get AAA ratings. They were gaming the system. Moody’s & S&P knew this but didn’t say anything because they were making a ton of money. With the AAA ratings suddenly you were able to get High Reward with LOW Risk. The Holy Grail of finance. Pensions, Mutual Funds, Government treasuries, municipalities all flooded the market. With cash.
But there weren’t enough buyers for the the high risk portion of the CDO’s. Until somebody realized they could buy insurance (Credit Default Swap) on the entire CDO. Suddenly, if you had a lot of money, you could go to the investment bank, tell them you would buy the worst part of a CDO if they make it your way. So think about it, there a CDO worth 250 million, you buy the worst part of it for 50 million, your insurance premiums is 40 million. When it goes belly up you are paid 250 million. You know it’s going to fail. I repeat you know it’s going to fail. You will profit 160 million. You used your own capital, you bought 20% of your own security, that’s a pretty hefty %. Double it to fifty %, nobody on wall street is going to sneeze at a 85 million payday.
So Nicole’s first point really doesn’t work at reducing fraud.
And the same issue happens with her second point. It works if and only if AIG knows what they are doing. 10 Billion might be the right amount to have on hand if you are predicting a 10% failure rate on a 100 Billion of obligations. But if you are wrong, we are back where we started from.
In other articles she is advocating the regulation of all Financial institutions, an increase in capital requirements, the banning of all propriety trading and making many current financial tools illegal. This is a Radical departure from the last 40 years of Modern Conservatism.
A couple of points to add is that the “insurance” aspect of the swaps was imaginary. The underwriters weren’t held to insurance backing standards — BECAUSE IT WASN’T REAL INSURANCE, it was just touted like it was. So the CDS were being used as a collaterization or to balance against loans with the supposed reinforcement that it was backed by “insurance” but the “insurance” was bogus.
Additionally as the 90s brought us the “mark-to-market” accounting (partly due to the tax-man’s lust) the holders of all these various derivatives and lumped investments failed to accurately start marking down their valuse and massive distrust insued. The distrust fueled the short sellers and sharks, like the hedge funds — shorting rulls had be scraped in the 90s so it was a feeding frenzy as they beat down those not being deadly honest.
Much of the push to avoid honesty was that (as you pointed out to begin with) they were almost all public traded firms with quarterly reports and stock prices making up major compensation. Additionally, as they lost value in these investments on their books, now being marked to current market value, those that were finacially regulated firms had insuffient reserves so they went hunting for big cash influxes and those were limited by falling stock worth.
Tulips. I tell you it was just like Holland and the Tulip bubble.
Since government planned outcomes and planned economies were the cause, they are obviously not the solution. Regulation was not the cause however and neither was law. The too sudden change to regulation was contributory but the government planning of outcomes (hat-tip to Road to Surfdom) was the true cause and must not be used as the solution.
I guess we should also address what is “regulation” and what is government control and planned outcomes.
Like the abuse of the word “reform” which we didn’t address early and clearly when the Healthcare Federalization begun, we are hearing, and sometimes even supporting “regulation” (as you are doing prompting attacks on your true position) and what we are going to get is not regulation but Fascism — Gov’t Corp linkage, government planned and completely controled by arbitrary applications of planner power.
“In other articles she is advocating the regulation of all Financial institutions, an increase in capital requirements, the banning of all propriety trading and making many current financial tools illegal. This is a Radical departure from the last 40 years of Modern Conservatism.”
I would not consider the last 40 years a ‘conservative’ market. Not sure what you mean by ‘modern conservatism’. I don’t look at the market as conservative or liberal. The policies that help or hinder it could be considered such at times(like the CRA). ‘Free markets’ didn’t use to be solely a ‘conservative’ term until the progressives came along wanting to take people’s property and spread the wealth. After that outrage began, it was the natural thing for conservatives to gravitate towards defending their property from government theft. Free markets..true free markets worked. They kept our economy humming and competitive. This all fell apart, not with a free market,but big government manipulations imho.Can you really blame WS for trying to get ‘creative’ when they were forced to loan money to millions of people that they knew were bad bets on housing and credit cards? I am not excusing them mind you for putting our entire system at risk and now running to the taxpayer to bail them out...but the root of the problem lies with Congress..not the markets imho.
I get tired of the liberals throwing around the term ‘greed’ all the time too. It’s not ‘greedy’ to want to earn the most money you can in life..it’s the responsible thing to do imho. What true greed IS lurking around in the human soul cannot ever be ‘regulated’ out of existence anyway. It’s not a fixed pie. If you didn’t get your ‘share’..go make another pie...lol.
Your clarification on the term ‘securitization’ is appreciated. That has happened to all of my mortgages over the years with each home we bought, but I never knew the term..lol. I just knew they were selling my mortgage to another lender. To a casual observer, ‘securitization’ should mean a way to ‘secure’ your asset or debt with your collateral.I should have googled it before talking about it..lol.
Excellent points yet again.
I think that is what most of us novices in finance/economics understand intuitively. It’s not a ‘regulated’ market that we disagree with..it is the government picking winners and losers,confiscating our property and then using our tax dollars as partisan slush funds and power tools. We intuitively understand it as fascism...which it is. I watched the entire Goldman Sacs hearings yesterday and while they mostly were talking over my head, I could tell who the liars and charlatans were and most of them were sitting in the congressional chairs...lol. The young Goldman executives,especially the french dude, were the ‘fall guys’ for the big boys at Goldman Sacs. The sleeziest dude was the chairman of Goldman Sacs. He came off as a beady eyed crook because he refused to talk straight and answer questions. That’s because he is in bed with the administration and has been from the get go. Call it woman’s instincts..but that guy is not to be trusted and if I worked under him or at that firm..I would get out now in order to save my soul....lol.
75% of all subprime loans had nothing at all to do with the CRA. In fact, the way the law is written, Banks did not have to do risky lending to fulfill their CRA obligations. 75% of all Subprime loans were not covered by the CRA.
The CRA covered Bank of America did not make a single subprime loan in 2004 & 2005, and in 2006 & 2007 only 2% were subprime. WaMu on the other hand had 5.6 billion in subprime loans.
http://www.ocregister.com/articles/loans-20542-subprime-banks.html
The most important aspect is to find the real culprits of the bubble and the CRA isn’t it. I think the CRA outlived it’s usefulness - but claiming it’s responsible for this mess blinds us to what really happened.
There is no rational way we can claim wall street was run by progressives for the last 40 years, there’s been a steady stream of deregulation. Everything we’ve done has to remove regulation from Wall Street.
But think of it this way, if anybody actually did their jobs we wouldn’t have had this mess. If Mortgage Brokers didn’t write loans they knew would fail, we wouldn’t have had this mess. If Moody’s & S&P said “We can rate this stuff...”, we wouldn’t have had this mess. If the Pension & Mutual fund guys said “Hey, that doesn’t make sense a AAA rating with a really high rate of return?” we wouldn’t have had this mess. So why did they fail to do their jobs?
It’s late, but I want to tell you mark-to-market is the best way to expose the cheaters.
For example, your friend paid $500,000 cash for his house. He tells you how great everything there is. The Book Value would be $500,000.
But now say he wants to borrow money from you and use his half-a-million dollar house as collateral
You sir, aren’t an idiot so you decide to take a look at his house first. bedroom shack in-between a low rent trailer park and a nuclear waste dump. You wouldn’t pay more that $2,000 for that house - and only if you lost a bet. The $2,000 would be the mark-to-market value.
Do you make the loan to your friend based on the book value of his house or the mark-to-market value?
It is impossible to have a intellectually honest dialog with people who spew slogans and opinions as fact and then are more then willing to simply make up their own data rather then deal in the actual facts.
Once you catch them lying to you, you simply must assume they are lying about everything until they provide verifiable data you can cross check.
For example, MaddogProgressive here claimed “Wallsteet money is pouring into the GOP”. The exact opposed is true, when confronted with the actual facts, MD simply ignored them to cling to his emotion based political biases.
Here are the actual facts.
http://www.opensecrets.org/industries/indus.php?ind=F2700
That MD chooses to ignore the real facts to cling to his emotion based opinions is juvenile and contemptible.
Sorry..but I trust the WSJ,Investor’s Business Daily, and a boatload of other finacial experts more than I do this Orange County Register ‘reporter’. The CRA is a 30 year program and this writer only goes back a few years to do his ‘research’? Not buying it. We know what happened and there is plenty of blame to go around, but the root of the mess is the CRA and the easy credit.
Ronald Campbell
reporter, Orange County (CA) Register
rcampbell@ocregister.com
Ronald Campbell is a reporter for the Orange County (CA) Register. He worked at the (Fairfield, CA) Daily Republic and the Bakersfield Californian before joining the Register in 1987. Campbell started the Register’s program in computer-assisted reporting and has participated in many investigations, including loan discrimination,...”
It would appear that this ‘reporter’ has a dog in this fight. That pretty much disqualifies him from being a credible source.
The problem with rationalistic solutions is that they often prove to have unintended consequences. That is why the conservative tradition looks for empirical truths learned through time tested methods.
Jeff Skilling had one qualifier before he took the helm at Enron. Remember what that was? That Enron commit, and have its auditors commit, to using Mark-to-Market accounting methods.
MTM easily can become Mark-to-Make-Believe
Even your anology points this out if looked at from my view. Mark to Market allows that seller to name the value -- not the careful buyer. In the closed world of a company, the finacial officers say what he assets are worth and those outside have to guess if truth is there. Appreciation and related profits are made on paper before any real sale and can easily be lost without accounting for them if the pressure is too high.
Book value is always confirmed by audits or appraisals, both somewhat outside the control of the finacial accounting management although influenced by the Board.
Is there a place for some of that method applied in a careful manner -- surely, but lets not make it a panecia.
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