Caroline Baum has an opinion piece about the administration proposals on "reform" of the financial system on Bloomberg.com titled Obama Bulks Up 'Too Big Too Fail' With Steroids. Here are two choice paragraphs.
In other words, the same folks who missed, or did nothing to prevent, the worst crisis since the Great Depression will definitely, absolutely, positively be able to anticipate the next one. Uh-huh.
It gets worse. Instead of eliminating the doctrine of “too big to fail,” which encourages risky behavior because of perceived government backing, the Obama plan defines, institutionalizes and expands on it.
It's a concise read which EBR generally endorses. EBR predicted in December that there would be a Bushbama continuity in the field of finance. The news continues to be bad in that regard. We learn today that the allegedly conservative Republican Robert Bennett of Utah would look positively at the appointment of Larry Summers as new Fed Chairman. Some populist Mr. Obama is turning out to be!
From the prism of 2001-5, with the country looking to be center-right politically, Jimmy Carter was remembered in many circles as a wild-eyed liberal. It was easy to forget that Sen. Edward Kennedy engaged in the unusual step of challenging a sitting President within his own party- and from the left, as not being liberal enough. The financial blogs I go to, which range from libertarian/center to left- has hardly a good word now to say about this administration's financial policies.
As predicted by EBR, the administration has accepted the recommendations of the G30, led by an AIG Vice President, for financial system reform. Mr. Obama is channeling the longest word we learned as schoolchildren: antidisestablishmentarianism. In short, this word means being pro-Establishment. One thing the Establishment does not like is change. It simply likes to change lipstick colors on the same pig.
Copyright (C) Long Lake LLC 2009
Showing posts with label G30. Show all posts
Showing posts with label G30. Show all posts
Tuesday, June 23, 2009
Tuesday, March 31, 2009
On Bucket Shops and Crises
Compliments of Naked Capitalism, here is a large excerpt from an article in today's Financial Times (London), by Eric Dinallo, New York State's Superintendent of Insurance, on some historical background relating to Credit Default Swaps.
Many compare this financial crisis to the stock market crash of 1929, but it is closer to the credit freeze and bank panic of 1907....
The bank panic of 1907 is remembered for J.P. Morgan forcing all the bankers to stay in a room until they agreed to contribute to fixing the crisis. What has been forgotten is one major cause of the crisis – unregulated speculation on the prices of securities by people who did not own them. These betting parlours, or fake exchanges, were called bucket shops because the bets were literally placed in buckets.
The states responded in 1908 by passing anti-bucket shop and gambling laws, outlawing the activity that helped to ruin that economy.
What has that got to do with today’s crisis? Credit default swaps are the rocket fuel that turned the subprime mortgage fire into a conflagration....AIG Financial Products, the unit that sold almost $500bn (€379bn, £353bn) of them, may therefore be viewed as the biggest bucket shop in history.
Credit default swaps started out as essentially an insurance policy. If you owned a bond in a company and were concerned it might default, you bought the swap to protect yourself....Banks bought them to reduce the amount of capital they were required to hold against investments – in other words, to avoid regulation. Because they owned the swap, banks claimed they no longer had the risk of a default of the bond. Others bought swaps without owning the bond to place a bet on a company’s future.
But there was serious concern that swaps violated the old bucket shop laws. Thus, the Commodity Futures Modernisation Act of 2000 exempted credit default swaps from these laws. The act also exempted them from regulation by the Commodities and Futures Trading Commission and the Securities and Exchange Commission. Unregulated, the market grew enormously.
Thus, one of the major causes of the financial crisis was not how lax our regulation, or how hard we enforced, but what we chose not to regulate.
Indeed, what we decided was old fashioned and in need of modernisation was, in fact, an effective check on an activity that for 100 years had been illegal, for good reason. As a result, we modernised ourselves into this ice age.
The fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money. We forgot that the biggest competitive advantage of the US financial system has always been safety, security and transparency. If we destroy that perception, the long-term cost to our society is incalculable.
The bank panic of 1907 is remembered for J.P. Morgan forcing all the bankers to stay in a room until they agreed to contribute to fixing the crisis. What has been forgotten is one major cause of the crisis – unregulated speculation on the prices of securities by people who did not own them. These betting parlours, or fake exchanges, were called bucket shops because the bets were literally placed in buckets.
The states responded in 1908 by passing anti-bucket shop and gambling laws, outlawing the activity that helped to ruin that economy.
What has that got to do with today’s crisis? Credit default swaps are the rocket fuel that turned the subprime mortgage fire into a conflagration....AIG Financial Products, the unit that sold almost $500bn (€379bn, £353bn) of them, may therefore be viewed as the biggest bucket shop in history.
Credit default swaps started out as essentially an insurance policy. If you owned a bond in a company and were concerned it might default, you bought the swap to protect yourself....Banks bought them to reduce the amount of capital they were required to hold against investments – in other words, to avoid regulation. Because they owned the swap, banks claimed they no longer had the risk of a default of the bond. Others bought swaps without owning the bond to place a bet on a company’s future.
But there was serious concern that swaps violated the old bucket shop laws. Thus, the Commodity Futures Modernisation Act of 2000 exempted credit default swaps from these laws. The act also exempted them from regulation by the Commodities and Futures Trading Commission and the Securities and Exchange Commission. Unregulated, the market grew enormously.
Thus, one of the major causes of the financial crisis was not how lax our regulation, or how hard we enforced, but what we chose not to regulate.
Indeed, what we decided was old fashioned and in need of modernisation was, in fact, an effective check on an activity that for 100 years had been illegal, for good reason. As a result, we modernised ourselves into this ice age.
The fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money. We forgot that the biggest competitive advantage of the US financial system has always been safety, security and transparency. If we destroy that perception, the long-term cost to our society is incalculable.
While I am sure that Mr. Dinallo's historical facts are correct, perhaps some points may be added.
One is that the buildup of debt is similar to 1929, and not to 1907; the global nature of the current situation is like that of the Great Depression, not thatof 1907; and there was intense stock speculation both in 1906-7 and in 1927-9. There are many parents to the current problem. In addition, what we have now that is unique to today is intense government money printing and borrowing to "stimulate" the economy.
The recommendation from EBR has been and is to simply ban credit default swaps. If you don't like the loan, don't make it. If it's to large for you to make but you like it, find partners. And make lots of loans, thus obtaining your protection. Unfortunately, the G30, which is led by an AIG Vice President and has Paul Volcker as a figurehead Chairman of the Board; and which is sponsored by Riskmetrics, is getting its way in that Timothy Geithner is using its industry-friendly viewpoint in his proposal for regulation rather than real reform of the financial industry. Thus will the seeds be ready to turn into tinder to fuel the next "banking" crisis.
Copyright (C) Long Lake LLC 2009
Wednesday, March 4, 2009
The Biggest Scam Ever?
If you look at the headline on Bloomberg.com titled "Bernanke’s AIG Blast May Mean More Curbs on Risk, Concentration" and read the following intro, you may be fooled into thinking that things will really change to a smaller, stable financial system that works behind the scenes to support wealth creation without dominating the scene. The piece begins:
Federal Reserve Chairman Ben S. Bernanke's blast at American International Group Inc. in Senate testimony yesterday suggests regulators plan further curbs on risk and concentration in the financial-services industry.
Yes, Dr. Bernanke claimed to have been shocked and disappointed that AIG wrote the insurance contracts called credit default swaps without providing reserves. Of course, he knows but does not emphasize that Clinton's Treasury Department explicitly refused to regulate these same credit default swaps. What is the Bernanke solution? It is to adopt a version of the recommendations of the "Group of Thirty" (or, "G30"):
Paul Volcker, chairman of Obama’s economic advisory board and a former Fed chairman, has also advocated curtailing risk- taking by systemically vital institutions. In January, Volcker led a panel of former central bankers, finance ministers and academics known as the Group of Thirty in calling for capital limits on proprietary trading and a ban preventing large banks from running hedge funds.
The G30 purports to be an authoritative source that diagnoses and can treat our financial ills. Guess who is the Chairman and CEO of the G30? Jacob Frenkel. Who is Jacob Frenkel (emphasis added)?
"Jacob A. Frenkel
(Israel), Vice Chairman, American International Group; former Governor, Bank of Israel
Dr. Frenkel is vice chairman of American International Group, Inc. (AIG). He also serves as chairman and CEO of the Group of Thirty (G-30). Previously, he was chairman of Merrill Lynch International. Between 1991 and 2000 he served two terms as Governor of the Bank of Israel. From 1987 to 1991, he was economic counselor and director of research at the International Monetary Fund, and from 1973 to 1987 he was on the faculty of the University of Chicago where he served as the David Rockefeller Professor of International Economics. Dr. Frenkel is a laureate of the 2002 Israel Prize in economics and the recipient of honorary degrees and awards from various universities and governments."
-Source: Council for Foreign Relations
What has been going on the past year is that Louis the cop has been allowed to win at Rick's crap game. He puts on a show of reforming Rick's when the heat's on, so the music and gambling stop for a while.
The G30 piece from 2009, "Financial Reform: A Framework for Financial Stability", was created by a group heavily weighted to input from members who were simultaneously very senior executives at the same financial companies that are being bailed out right and left. The Project Director was Stephen Thieke, of RiskMetrics. RiskMetrics is a private company. Just guess how it makes its money? Selling "solutions" to manage risk, that's how.
The same crew that caused this mess cannot be the crew that truly reforms the system. They are fighting tooth and nail to retain and, if possible, extend the dominance of finance in the U.S. and global economy. The cost of the war in Iraq is nothing compared to the costs of the bail-outs these people have exacted and are prepared to exact upon us in support of this fight.
Rather than Ben Bernanke ruining the balance sheet of the Federal Reserve Bank and claiming to be shocked while speaking to lawmakers who sat idly by accepting campaign contributions from companies such as AIG and Merrill Lynch that have undoubtedly made Dr. Frenkel a very wealthy man, they should be investigating these corporations and their leaders. They should have been researching the applicable laws, beginning with Depression-era securities laws and ending with Sarbanes-Oxley, to see how many fraudulent financial statements and incorrect public statements have been made by corporate executives broke the law.
They should be investigating why the SEC arbitrarily put short-selling restrictions in re financial or quasi-financial stocks twice last year, and then lifted those restrictions. Who benefited from these actions other than insiders? Certainly it could not have possibly made any difference to the ultimate value of the stocks.
Vast amounts of money were taken by insiders in the financial industry to feather many individual nests over the past decade since Glass-Steagall was repealed. Cumulatively this totals in the hundreds of billions or trillions of dollars. Now that the inevitable down-cycle is occurring, it is clear that little of any of this money was really "earned". They took their (good) money out and left the junk in the companies. Why that junk should be any of the taxpayers' responsibility or should end up on the Fed's balance sheet has never been adequately explained. Private companies have private owners of their equity, and these companies have also borrowed money as corporations from lenders. If the companies are bankrupt, it has always been the case that the owners and creditors of those companies take the hit.
These companies and their friends in the Fed and Government keep claiming to be shocked, and they keep threatening that the whole "system" will collapse if the unstable financial house of which they were both the architect and builder is not "strengthened" by "reforms" they want to create. Is this change? Do you believe in it?
Capitalism really does work well, but only when failure really fails.
The people should be set free.
Let any bankrupt companies go.
Copyright (C) Long Lake LLC 2009
Federal Reserve Chairman Ben S. Bernanke's blast at American International Group Inc. in Senate testimony yesterday suggests regulators plan further curbs on risk and concentration in the financial-services industry.
Yes, Dr. Bernanke claimed to have been shocked and disappointed that AIG wrote the insurance contracts called credit default swaps without providing reserves. Of course, he knows but does not emphasize that Clinton's Treasury Department explicitly refused to regulate these same credit default swaps. What is the Bernanke solution? It is to adopt a version of the recommendations of the "Group of Thirty" (or, "G30"):
Paul Volcker, chairman of Obama’s economic advisory board and a former Fed chairman, has also advocated curtailing risk- taking by systemically vital institutions. In January, Volcker led a panel of former central bankers, finance ministers and academics known as the Group of Thirty in calling for capital limits on proprietary trading and a ban preventing large banks from running hedge funds.
The G30 purports to be an authoritative source that diagnoses and can treat our financial ills. Guess who is the Chairman and CEO of the G30? Jacob Frenkel. Who is Jacob Frenkel (emphasis added)?
"Jacob A. Frenkel
(Israel), Vice Chairman, American International Group; former Governor, Bank of Israel
Dr. Frenkel is vice chairman of American International Group, Inc. (AIG). He also serves as chairman and CEO of the Group of Thirty (G-30). Previously, he was chairman of Merrill Lynch International. Between 1991 and 2000 he served two terms as Governor of the Bank of Israel. From 1987 to 1991, he was economic counselor and director of research at the International Monetary Fund, and from 1973 to 1987 he was on the faculty of the University of Chicago where he served as the David Rockefeller Professor of International Economics. Dr. Frenkel is a laureate of the 2002 Israel Prize in economics and the recipient of honorary degrees and awards from various universities and governments."
-Source: Council for Foreign Relations
What has been going on the past year is that Louis the cop has been allowed to win at Rick's crap game. He puts on a show of reforming Rick's when the heat's on, so the music and gambling stop for a while.
The G30 piece from 2009, "Financial Reform: A Framework for Financial Stability", was created by a group heavily weighted to input from members who were simultaneously very senior executives at the same financial companies that are being bailed out right and left. The Project Director was Stephen Thieke, of RiskMetrics. RiskMetrics is a private company. Just guess how it makes its money? Selling "solutions" to manage risk, that's how.
The same crew that caused this mess cannot be the crew that truly reforms the system. They are fighting tooth and nail to retain and, if possible, extend the dominance of finance in the U.S. and global economy. The cost of the war in Iraq is nothing compared to the costs of the bail-outs these people have exacted and are prepared to exact upon us in support of this fight.
Rather than Ben Bernanke ruining the balance sheet of the Federal Reserve Bank and claiming to be shocked while speaking to lawmakers who sat idly by accepting campaign contributions from companies such as AIG and Merrill Lynch that have undoubtedly made Dr. Frenkel a very wealthy man, they should be investigating these corporations and their leaders. They should have been researching the applicable laws, beginning with Depression-era securities laws and ending with Sarbanes-Oxley, to see how many fraudulent financial statements and incorrect public statements have been made by corporate executives broke the law.
They should be investigating why the SEC arbitrarily put short-selling restrictions in re financial or quasi-financial stocks twice last year, and then lifted those restrictions. Who benefited from these actions other than insiders? Certainly it could not have possibly made any difference to the ultimate value of the stocks.
Vast amounts of money were taken by insiders in the financial industry to feather many individual nests over the past decade since Glass-Steagall was repealed. Cumulatively this totals in the hundreds of billions or trillions of dollars. Now that the inevitable down-cycle is occurring, it is clear that little of any of this money was really "earned". They took their (good) money out and left the junk in the companies. Why that junk should be any of the taxpayers' responsibility or should end up on the Fed's balance sheet has never been adequately explained. Private companies have private owners of their equity, and these companies have also borrowed money as corporations from lenders. If the companies are bankrupt, it has always been the case that the owners and creditors of those companies take the hit.
These companies and their friends in the Fed and Government keep claiming to be shocked, and they keep threatening that the whole "system" will collapse if the unstable financial house of which they were both the architect and builder is not "strengthened" by "reforms" they want to create. Is this change? Do you believe in it?
Capitalism really does work well, but only when failure really fails.
The people should be set free.
Let any bankrupt companies go.
Copyright (C) Long Lake LLC 2009
Sunday, January 18, 2009
"It May Be Distasteful"
Banking remains at the epicenter of the economic news, unfortunately. The Establishment has been executing its plan over the last year to massively transfer national wealth to the financial giants. This transfer of wealth in this sort of quantity has never been overtly done to any other industry in my memory. (The closest one can come is to blame wars such as Iraq, Viet Nam and World War I on a desire to enrich the captains of industry, if one has that sort of belief. And even if such were the case, at least the companies actually provided goods and services in support of the war(s).) Here, the companies being aided are keeping the funds rather than producing anything with them (because they are more or less insolvent).
To keep things positive, before reading me beat up on a Bloomberg.com article, please consider reading two articles by the noted economist Willem Buiter (both published by the Financial Times.com:
No change, no hope: Obama’s Transition Economic Advisory Board
November 10, 2008 (this is actually an entertaining, witty writeup)
To keep things positive, before reading me beat up on a Bloomberg.com article, please consider reading two articles by the noted economist Willem Buiter (both published by the Financial Times.com:
No change, no hope: Obama’s Transition Economic Advisory Board
November 10, 2008 (this is actually an entertaining, witty writeup)
and
Time to take the banks into full public ownership
January 16, 2009 (more important and sober).
Dr. Buiter has impeccable academic, governmental and regulatory credentials (listed by his writeups) and is famous for having "spoken truth to power" last summer, as reported by Naked Capitalism: "Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street".
In any case, the Establishment continues to keep up a pathetic but in the aggregate effective drumbeat of concealed advertising in favor of the bailouts. To wit, from today's Bloomberg.com:
"Obama Bank Rescue May Make New Effort to Resolve Toxic Assets"
"President-elect Barack Obama is likely to back a financial-rescue effort that channels capital to banks and deals with troubled assets clogging balance sheets, according to people familiar with the matter."
“We have a deteriorating real economy and deteriorating financial sector feeding on each other,” said Raghuram Rajan, a former chief economist for the International Monetary Fund who’s now a professor of finance at the University of Chicago. “It may be distasteful but we need to put more money in the banks.”
DoctoRx here: No we don't. We should follow the lead of Sweden about 15 years ago and let the failed ones fail, no matter how big, but in an organized way. This will save the "system", and let taxpayers reap the profits from "Newco" banks that we will finance, grow, and privatize later on.
Another snippet from the article:
"Obama is set to take office on Jan. 20 and his advisers have been working to craft a comprehensive blueprint for overhauling the bailout."
The bailout bill was written entirely by Congress, under control by the Democrats, the party that has been led by Barack Obama since summer 2008. Mr. Obama voted for the bill; I recall that he expressed no reservations with the Reid-Pelosi-Frank etc. legislation at the time. Now Bloomberg is reporting without saying so that the bill, passed merely 3 months ago, has failed and needs an "overhaul". What Bloomberg should have been reporting is what I just wrote, not what it wrote. I have been writing consistently in my posts that Congress held no hearings of any substance in putting together this bail-out turkey. Oh, it was an "emergency" (such an emergency that the smart money starting exiting the financial stocks at least as far back as 2006 and the housing stocks in Q2 2005). Bush and Paulson are going, going, gone. They were good pinatas for putting the left-wing side of the Establishment in total control of the Federal Government. I have also been writing that the Obama Administration was going to continue the Bush-Paulson-Bernanke-Reid-Pelosi consensus policies on finance. These policies are to use all necessary efforts to continue the failing and flailing policies that support the Merchants of Debt.
I said yesterday in On "Financial Reform" that I would have more to report on the RiskMetrics/Volcker etc. G30 report and recommendations on Financial Reform. I have reformed my thinking. Please read that post and Dr. Buiter's posts referenced above. 'Nuff said.
What is going on now is momentous. Because the stakes are so high, the Establishment media such as the New York Times and Bloomberg.com are virtually ignoring the core issues. The same NYT that put Abu Graibh abuses on its front page for daily for well over one month should be doing the same with this issue.
Will society get back to where we once belonged, where people actually owned things free and clear and adjured debt? The profitability of selling debt can be seen in the unbelievable number of credit card solicitations sent out yearly even now and in the hysterical Establishment reaction to "save" the banks, "distasteful" though it is.
It is looking more and more as if the Obama Administration is going to simply re-market the same debt-based system that brought us to the most severe economic downturn since the Great Depression, but with more regulators sucking more money from you and me to support them. Mr. Obama now has the bully pulpit. If he were to issue a clarion call for greater personal responsibility, restraint in purchasing material goods until personal savings were available to properly pay for them or conservatively finance them, and took on the Merchants of Debt as Teddy Roosevelt took on the "malefactors of great wealth", his popularity would soar and he could become as transformative a President as was TR. He needs to decisively set the tone and put forth policies that guide the country from a finance-based economy to a 21st Century one. The outlines of a 21st Century economy are clear: medical technologies, information technologies, cost-effective energy-generating and energy-transmitting technologies: knowledge-based stuff. Stuff with real products such as life-saving drugs. No more creating "wealth" that is simply a financial construct.
To do this, he needs to clean house. Force the "too-big-to-fail" failing "banks" - which are really giant holding companies with no real interest in the boring job of taking insured consumer deposits and doing prudent (i.e. low-profit) things with them, to disclose all details of their "Tier 3" and even "Tier 2" assets. Don't have the Federal Government buy them. They should sell them for what they are worth. Then all institutions that have Government guarantees should be banned from holding illiquid assets such as those.
Who will buy these "assets"? I don't care and neither should you. A modest proposal: over the last decade, individuals working for financial firms have snarfed up hundreds of billions of dollars of personal income, perhaps trillions, from bonuses and capital gains made by building up this system that has now suffered a heart attack/stroke/short-circuit/disaster. Let these gentlemen, huge numbers of whom are rich beyond Croesus' imagination, buy them at the same price at which the former IMF official expects the Federal Government to buy them at. Let Bill Gates and Warren Buffett, who are so generous to so many non-Americans (and on occasion to Americans as well, to be fair), help us out and spend a portion their tens of billions of net worth on paying generous sums to these financial institutions for their troublesome assets. That would be an act of real charity to a suffering populace and to their country. Unlike Haim Salomon, who helped save the Revolution, and who died a pauper, they need not go quite so far!
It would be nice to believe that after a disaster of the current magnitude, there would be real hearings in Congress as well as an independent commission (not the G30), a la the "Pecora Commission" (see my Jan. 7 post, Where Is Jurassic Park When You Need It?) about the root causes of how matters came to the current sorry state.
Don't hold your breath. But please contact your Congressional representatives to let them know that you need your money, the Federal Government needs its money, and you find it "distasteful" and more than that for our money to keep being thrown down a rathole.
After taking the oath of office, President Obama will give a great speech Tuesday. Will that be associated with an Obama stock market rally? I don't know and I don't care. Because he has already signaled that in the fields of economics and finance, the candidate of change is not going to make any fundamental changes.
Copyright (C) Long Lake LLC
Saturday, January 17, 2009
On "Financial Reform"
Please considering reading the recommendations of the "Group of 30", also known as G30.
The recommendations are available by clicking on the title, "Financial Reform: A Framework for Financial Stability".
This is likely to be a very important document, headed as it is by Paul Volcker.
My quick read of its recommendations leads to the following first reactions:
1. Of course, some of its recommendations are positive.
2. It mostly misses the mark. For example:
A. It does not truly reform the Credit Default Swap system. CDS is either insurance or it is gambling. The world did very well without it. If an entity does not want to make a loan, or wants partners, or after making the loan wants to sell it, so be it. All a CDS does from an overall systemic standpoint is add costs. No value is created by a CDS and therefore it is inefficient.
B. The Project Director is the head man at a company called RiskMetrics. Unsurprisingly, the report calls for more risk management. My reaction is that fewer risks should be taken. If you take a look at the members of the G30, they are all insiders. Many work for JPMorgan Chase, Morgan Stanley, etc. To expect them to support a real downsizing of their industry is naive.
C. The report calls for more and better regulation of financial institutions that pose a systemic risk. I respond that such institutions should not be allowed to exist.
I will have more comments in the future.
Copyright (C) Long Lake LLC
The recommendations are available by clicking on the title, "Financial Reform: A Framework for Financial Stability".
This is likely to be a very important document, headed as it is by Paul Volcker.
My quick read of its recommendations leads to the following first reactions:
1. Of course, some of its recommendations are positive.
2. It mostly misses the mark. For example:
A. It does not truly reform the Credit Default Swap system. CDS is either insurance or it is gambling. The world did very well without it. If an entity does not want to make a loan, or wants partners, or after making the loan wants to sell it, so be it. All a CDS does from an overall systemic standpoint is add costs. No value is created by a CDS and therefore it is inefficient.
B. The Project Director is the head man at a company called RiskMetrics. Unsurprisingly, the report calls for more risk management. My reaction is that fewer risks should be taken. If you take a look at the members of the G30, they are all insiders. Many work for JPMorgan Chase, Morgan Stanley, etc. To expect them to support a real downsizing of their industry is naive.
C. The report calls for more and better regulation of financial institutions that pose a systemic risk. I respond that such institutions should not be allowed to exist.
I will have more comments in the future.
Copyright (C) Long Lake LLC
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