You now have to beware of "facts" on Yahoo's Finance site. Not merely a link, the blaring headline on "Yahoo! Finance" is misleading: Curbing derivatives might hurt, not help, Greece; Curbing derivatives could make it harder for Greece to dig itself out of debt, experts say.
Of course, parsing the title shows the statement is qualified with "might" and "could", but the message is clear. Here is the argument:
Hold on, many experts say: Credit default swaps -- contracts that insure debt --have actually prevented Greece's debacle from worsening. Without them, they say, investors would be less willing to buy Greece's debt. It would likely need a bailout to run its government and service its huge debt. That could threaten Europe's economic rebound.
Without defending Greece's fiscal (mis)management, Greece is correct on the following:
Greece favors banning "naked" credit default swaps on a country's debt. In naked trades, the buyers of the swaps don't actually hold the underlying debt. Yet they can still profit or lose money on the bet.
Papandreou likened this practice to buying insurance on a neighbor's house and then burning it down to collect. Without naming names, he said some U.S. banks that were bailed out during the financial crisis are using naked swaps to make "a fortune out of Greece's misfortune."
Such speculation, he warned, could trigger a "domino effect" of higher borrowing costs for indebted countries around the world.
And how traders love those domino effects.
If an owner of a bond doesn't like the bond, he/she/it can simply sell the bond. If an underwriter of a bond thinks the bond is overpriced (yielding too little), the underwriter can simply not be involved in the deal.
There is no need for "insurance" on defaults, especially when the "default" can be technical in nature (declining rating by rating agencies, as sank AIG). If there is to be this type of bond insurance, common sense dictates that it should be regulated as other insurance products are and must have reserves.
Credit default swaps (CDS) exist to generate fees for Big Finance. The more destabilizing they are, the more trading profits and transactional fees.
It is a sad thing to see Yahoo join ranks with the banksters. Yahoo has lost its mojo. While it never had an especially countercultural orientation, it did cultivate a hip image in its gogo days. Those days are long gone.
In any case, back to the technical CDS argument in the article:
Analysts acknowledge that heavy buying of swaps can temporarily drive up a country's borrowing costs. Greece on Thursday raised $6.83 billion through a 10-year bond issue. It paid a hefty premium to buyers willing to take the risk.
Yet without credit default swaps, the country's borrowing costs "would be even higher," said Brian Yelvington, head of fixed-income strategy at Knight Libertas.
Unable to hedge their bets on Greece's debt, lenders would demand punishing premiums from Greece, and would themselves have to pay more to offset the risk of such loans, said Mikhail Foux, a credit strategist at Citigroup in New York.
"It would be destabilizing for everybody," Foux said. "As soon as you restrict the credit default swap market in even a small way, it will be more expensive to borrow and more expensive to hedge."
Beware anybody from Citigroup opens his mouth. What emanates from it is likely to be stated only to benefit his or her employer, not you.
All this is manifestly false. If the seller of CDS protection actually intends the sale to ultimately be a profitable deal rather than a one-off means of generating a fee (think AIGFP), it will require an extra profit margin from the debt sale. That profit margin can only come by charging the borrower more, meaning a higher interest rate. Out of that excess interest cost comes the cost of the CDS transaction.
The basic rule of economics is that there is no free traded good or service. This applies to adding a CDS wrapper so that an institution can both purchase a debt offering and "insure" against default.
Come on Mr. Foux and all the shills for Big Finance. The world got along fine without CDS. In fact, it may have gotten along better without them than with them.
Either the sale of CDS should simply be banned or they need to be regulated insurance products. If the latter, they should only be allowed to be purchased by the owner of the debt product.
Copyright Long Lake LLC 2010
Showing posts with label credit default swaps. Show all posts
Showing posts with label credit default swaps. Show all posts
Wednesday, March 10, 2010
Friday, January 22, 2010
The Debt Monster May Threaten Governments More Than Corporations
Eurointelligence.com (free subscription) writes:
Investors (Ed.: have) more trust in companies than governments
CDS prices suggest that investors have less trust in government bonds than in corporate bonds, writes Der Standard. The iTraxx Europe index for 125 European companies is at 77.80bp, that is it costs $77800 to insure $10m in corporate bonds. By contrast, the respective European SovX Index for government bonds reached 83.90bp. This suggests that investors consider it more likely that euro area goverments go bust than European companies. The Greek CDS is currently at 350bp, Austria’s at 85.26bp.
Another writeup from Eurointelligence today explains:
FT Deutschland has an article according to which a growing number of market observers believe that the Greek government is very likely to run into financial difficulties. It quotes analysts as saying that the Greek government needs to raise new capital in the next three or four weeks merely to repay old debts. If this is not happening, the nervousness in financial markets is likely to increase proportionately. If the government announces a capital increases, but failed to raise the necessary funds, the situation would deteriorate dramatically, leading to default, or bailout.
(Note: this story only reflects views among analysts, but these views, correct or not, now seem to dominate market sentiment.)
In brief, the above is the reason why despite numerous misgivings, I have money in the stock market. Many companies are self-financing due to positive cash flow, and few governments are. And if one thinks of it, most of what modern Western governments do is transfer income from one pocket to another to allow the beneficiary of the transfer to purchase services from the private sector or in some cases from non-profits such as private universities. If government (at all levels) limited itself to providing for the national defense, public schools, a system of courts, public roads and other basic matters, it too could easily be self-financing through various user fees and tariffs. This was in fact the situation on the Federal level in the U. S. throughout significant parts of the 19th century. As late as about 1916, the total Federal debt was so small that John D. Rockefeller is said to have been able to have paid it off in full.
The major beneficiary of all the debt in society is the financial sector, that makes fees all over the place selling the debt and then endlessly creating line extensions either selling the debt or selling products based on the debt or the ability of the government to print money and therefore take on more and more debt.
Sometimes enough is simply enough, and we are at the "too much" point re debt. From a big picture systemic standpoint, the inmates are running the asylum.
Trying to stay sane in an insane world is a difficult challenge.
Copyright (C) Long Lake LLC 2010
Investors (Ed.: have) more trust in companies than governments
CDS prices suggest that investors have less trust in government bonds than in corporate bonds, writes Der Standard. The iTraxx Europe index for 125 European companies is at 77.80bp, that is it costs $77800 to insure $10m in corporate bonds. By contrast, the respective European SovX Index for government bonds reached 83.90bp. This suggests that investors consider it more likely that euro area goverments go bust than European companies. The Greek CDS is currently at 350bp, Austria’s at 85.26bp.
Another writeup from Eurointelligence today explains:
FT Deutschland has an article according to which a growing number of market observers believe that the Greek government is very likely to run into financial difficulties. It quotes analysts as saying that the Greek government needs to raise new capital in the next three or four weeks merely to repay old debts. If this is not happening, the nervousness in financial markets is likely to increase proportionately. If the government announces a capital increases, but failed to raise the necessary funds, the situation would deteriorate dramatically, leading to default, or bailout.
(Note: this story only reflects views among analysts, but these views, correct or not, now seem to dominate market sentiment.)
In brief, the above is the reason why despite numerous misgivings, I have money in the stock market. Many companies are self-financing due to positive cash flow, and few governments are. And if one thinks of it, most of what modern Western governments do is transfer income from one pocket to another to allow the beneficiary of the transfer to purchase services from the private sector or in some cases from non-profits such as private universities. If government (at all levels) limited itself to providing for the national defense, public schools, a system of courts, public roads and other basic matters, it too could easily be self-financing through various user fees and tariffs. This was in fact the situation on the Federal level in the U. S. throughout significant parts of the 19th century. As late as about 1916, the total Federal debt was so small that John D. Rockefeller is said to have been able to have paid it off in full.
The major beneficiary of all the debt in society is the financial sector, that makes fees all over the place selling the debt and then endlessly creating line extensions either selling the debt or selling products based on the debt or the ability of the government to print money and therefore take on more and more debt.
Sometimes enough is simply enough, and we are at the "too much" point re debt. From a big picture systemic standpoint, the inmates are running the asylum.
Trying to stay sane in an insane world is a difficult challenge.
Copyright (C) Long Lake LLC 2010
Thursday, August 13, 2009
Markopolos, of Madoff Fame, Warns of Worse Revelations to Come
Seen at Jesse's Cafe Americain, from the New York Post:
August 12, 2009
HARRY Markopolos -- the whistleblower on Bernie Madoff who proved to be much smarter than the SEC -- says there are evildoers out there who will make the Ponzi scum "look like small-time." Markopolos gave a speech to 400 of the faithful at the Greek Orthodox Church in Southampton and predicted major scandals will soon be revealed about the unregulated, $600 trillion, credit-default swap market. "To put it in simple terms, it is like buying fire insurance policies from five different insurance companies on your neighbor's house and then burning down the house," he said. After his lecture, Hampton Sheet publisher Joan Jedell reports Markopolos was feted at a dinner at Nello Summertimes hosted by John Catsimatidis and his wife, Margo, who were joined by Al D'Amato and Greek shipping magnates Nicholas Zoullas and Spiros Milonas.
This would likely be AIG/Goldman Sachs etc. It could also relate to the allegations that JPMorgan Chase and others deliberately brought Lehman down.
This blog has repeatedly pointed out that the payments--in full-- from the U. S. Government to those who purchased credit default swaps (CDS) from AIG were improper, and that the final payment, made during the early months of the Obama administration, was hidden by the hyped "controversy" over the vastly smaller bonuses to AIG personnel. Perhaps quixotically and perhaps incorrectly, EBR has also suggested that as with Watergate, the scandals attendant to the Great Financial Crisis will play out more publicly. Certainly what AIG and its counterparties did, dealing with CDS with no reserves and then having the Government make good on this "insurance" was very wrong. Will it be buried?
The Markopolos news item might signify movement in this story. I would neither hold my breath for another shoe to drop nor rule it out.
Copyright (C) Long Lake LLC 2009
August 12, 2009
HARRY Markopolos -- the whistleblower on Bernie Madoff who proved to be much smarter than the SEC -- says there are evildoers out there who will make the Ponzi scum "look like small-time." Markopolos gave a speech to 400 of the faithful at the Greek Orthodox Church in Southampton and predicted major scandals will soon be revealed about the unregulated, $600 trillion, credit-default swap market. "To put it in simple terms, it is like buying fire insurance policies from five different insurance companies on your neighbor's house and then burning down the house," he said. After his lecture, Hampton Sheet publisher Joan Jedell reports Markopolos was feted at a dinner at Nello Summertimes hosted by John Catsimatidis and his wife, Margo, who were joined by Al D'Amato and Greek shipping magnates Nicholas Zoullas and Spiros Milonas.
This would likely be AIG/Goldman Sachs etc. It could also relate to the allegations that JPMorgan Chase and others deliberately brought Lehman down.
This blog has repeatedly pointed out that the payments--in full-- from the U. S. Government to those who purchased credit default swaps (CDS) from AIG were improper, and that the final payment, made during the early months of the Obama administration, was hidden by the hyped "controversy" over the vastly smaller bonuses to AIG personnel. Perhaps quixotically and perhaps incorrectly, EBR has also suggested that as with Watergate, the scandals attendant to the Great Financial Crisis will play out more publicly. Certainly what AIG and its counterparties did, dealing with CDS with no reserves and then having the Government make good on this "insurance" was very wrong. Will it be buried?
The Markopolos news item might signify movement in this story. I would neither hold my breath for another shoe to drop nor rule it out.
Copyright (C) Long Lake LLC 2009
Saturday, August 8, 2009
Ringing a Bell at the Top?
Perhaps the frenzy for emerging markets is peaking, along with a possible China bubble. Bloomberg.com has an article out titled Russia Beats California as Default Swaps Favor BRICs , which states:
Investor demand for emerging-market bonds is driving the cost of insuring against debt defaults below industrialized governments for the first time.
Credit-default swap prices from Turkey to Indonesia are falling as bonds rise amid signs that their economies are recovering faster than developed nations. As the U.S. and U.K. borrow record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and China have $3 trillion in reserves, up 19 percent from January 2008 and now 43 percent of the worldwide total, data compiled by Bloomberg show.
The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day. Brazil swaps just had their biggest four-month slide ever. For China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.
“This would have been impossible to imagine a year ago,” said Dmitry Sentchoukov, an emerging-market credit strategist at Dresdner Kleinwort in London. “Now it’s clear emerging economies are going to outperform the Group of Seven in growth, and that makes investors comfortable with the idea that developing countries can be priced richer than developed.”
Swaps on California have risen more than three-fold in the past year as its credit rating was lowered two levels to Baa1 by Moody’s, the same level as Russia, which reneged on $40 billion of sovereign debt payments in 1998. Russian default swaps are near a 10-month low of 255 basis points, about 20 basis points less than contracts linked to California. The former Soviet state’s 7.5 percent, 2030 dollar bonds are at a 2 1/2-month high of 101.74 cents on the dollar.
“If California is issuing their own dummy currency in the form of IOUs, that’s not a good sign,” said Augustus’ McNamara.
Where we've been is not necessarily where we're going. It would be interesting to see a contra-trend, contra-popular opinion dollar rally. If the ECRI is correct, a strong cyclical rebound is coming in the U. S. Also cyclically, inflation declines as the economy begins to grow after a strong downturn, and we are starting from negligible inflation now. So, real interest rates in the U. S. are already attractive and could rise.
I'll take California over Russia.
Copyright (C) Long Lake LLC 2009
Investor demand for emerging-market bonds is driving the cost of insuring against debt defaults below industrialized governments for the first time.
Credit-default swap prices from Turkey to Indonesia are falling as bonds rise amid signs that their economies are recovering faster than developed nations. As the U.S. and U.K. borrow record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and China have $3 trillion in reserves, up 19 percent from January 2008 and now 43 percent of the worldwide total, data compiled by Bloomberg show.
The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day. Brazil swaps just had their biggest four-month slide ever. For China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.
“This would have been impossible to imagine a year ago,” said Dmitry Sentchoukov, an emerging-market credit strategist at Dresdner Kleinwort in London. “Now it’s clear emerging economies are going to outperform the Group of Seven in growth, and that makes investors comfortable with the idea that developing countries can be priced richer than developed.”
Swaps on California have risen more than three-fold in the past year as its credit rating was lowered two levels to Baa1 by Moody’s, the same level as Russia, which reneged on $40 billion of sovereign debt payments in 1998. Russian default swaps are near a 10-month low of 255 basis points, about 20 basis points less than contracts linked to California. The former Soviet state’s 7.5 percent, 2030 dollar bonds are at a 2 1/2-month high of 101.74 cents on the dollar.
“If California is issuing their own dummy currency in the form of IOUs, that’s not a good sign,” said Augustus’ McNamara.
Where we've been is not necessarily where we're going. It would be interesting to see a contra-trend, contra-popular opinion dollar rally. If the ECRI is correct, a strong cyclical rebound is coming in the U. S. Also cyclically, inflation declines as the economy begins to grow after a strong downturn, and we are starting from negligible inflation now. So, real interest rates in the U. S. are already attractive and could rise.
I'll take California over Russia.
Copyright (C) Long Lake LLC 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
Sunday, January 25, 2009
LIttle Change in Obama Reform Plan
The New York Times is reporting that "Obama Plans Fast Action to Tighten Financial Rules".
As predicted, the solution is going to be an expansion of Federal "oversight" activity, which is to say your tax money. It looks as though the incompetent Fed will be given greater power; this has it backwards. The Fed should lose power for enabling the housing bust and manipulating interest rates in chaotic fashion, almost always favoring borrowers over lenders.
Sadly, credit default swaps are going to be rewarded with a clearinghouse. They should instead be banned. Either they should be out-and-out insurance products and regulated within the existing insurance framework, or if they are between two parties neither of which has an economic interest in the loan failing, then they are gambling and are illegal depending on the jurisdiction; but in any case they then serve NO purpose.
In another disastrous trial balloon/shakedown/statist solution, "Administration officials have begun to study ways to control executive compensation".
Let us recall how the stock options craziness of the 1990s got going. The Democrats under George Mitchell (Senate Majority Leader) forced/persuaded Bush I to sign legislation eliminating deductibility of salaries over $1 M yearly. (Of course, Democratic-leaning high earners such as movie stars had their multi-million dollar salaries remained deductible.) In response, companies went to a "best practices" option-enhanced salary package. This led to an excessive effort to drive up the stock price, helping to lead to crazy stock valuations that had to fall.
Let us also recall that the non-scandal "scandal" that some wealthy people had enough tax deductions from time to time to legally pay no income tax some years led to the disgusting and widely-hated Alternative Minimum Tax.
There they go again. First the Government pushes money on banks, which either really, really needed it because they were insolvent and could have simply failed (and may yet fail), or which didn't need it and therefore were given an unnecessary and inappropriate gift from you and me; then it takes this poorly-thought out preferred stock position in these companies to propose to control what the executives earn. As with the AMT, let's think the implications of this control through. In one way or another, the Government is our partner in every legal business. Does that give it a right to control compensation? Even if the Government owns preferred stock, what right does that give it to influence salaries?
A much better solution is that companies that overcompensate their executives will pay the price in a free market.
While undoubtedly there will be positive aspects of the Obama/Democratic plan, the first quick take here is disappointment that it further legitimizes credit default swaps rather than getting rid of them or calling them insurance contracts plain and simple; that it apparently does not call for a real simplification of what derivative products can be marketed; and that it wants to be on compensation committees along with the elected directors of companies.
As predicted, the solution is going to be an expansion of Federal "oversight" activity, which is to say your tax money. It looks as though the incompetent Fed will be given greater power; this has it backwards. The Fed should lose power for enabling the housing bust and manipulating interest rates in chaotic fashion, almost always favoring borrowers over lenders.
Sadly, credit default swaps are going to be rewarded with a clearinghouse. They should instead be banned. Either they should be out-and-out insurance products and regulated within the existing insurance framework, or if they are between two parties neither of which has an economic interest in the loan failing, then they are gambling and are illegal depending on the jurisdiction; but in any case they then serve NO purpose.
In another disastrous trial balloon/shakedown/statist solution, "Administration officials have begun to study ways to control executive compensation".
Let us recall how the stock options craziness of the 1990s got going. The Democrats under George Mitchell (Senate Majority Leader) forced/persuaded Bush I to sign legislation eliminating deductibility of salaries over $1 M yearly. (Of course, Democratic-leaning high earners such as movie stars had their multi-million dollar salaries remained deductible.) In response, companies went to a "best practices" option-enhanced salary package. This led to an excessive effort to drive up the stock price, helping to lead to crazy stock valuations that had to fall.
Let us also recall that the non-scandal "scandal" that some wealthy people had enough tax deductions from time to time to legally pay no income tax some years led to the disgusting and widely-hated Alternative Minimum Tax.
There they go again. First the Government pushes money on banks, which either really, really needed it because they were insolvent and could have simply failed (and may yet fail), or which didn't need it and therefore were given an unnecessary and inappropriate gift from you and me; then it takes this poorly-thought out preferred stock position in these companies to propose to control what the executives earn. As with the AMT, let's think the implications of this control through. In one way or another, the Government is our partner in every legal business. Does that give it a right to control compensation? Even if the Government owns preferred stock, what right does that give it to influence salaries?
A much better solution is that companies that overcompensate their executives will pay the price in a free market.
While undoubtedly there will be positive aspects of the Obama/Democratic plan, the first quick take here is disappointment that it further legitimizes credit default swaps rather than getting rid of them or calling them insurance contracts plain and simple; that it apparently does not call for a real simplification of what derivative products can be marketed; and that it wants to be on compensation committees along with the elected directors of companies.
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