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.
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.