Magic numbers: retirement/investment coffers

The SEC is the wrong watchdog to take to task. This is not about the traditional "securities" function of the IBs so much as it about the gigantic stupidity of those firms in accepting the premise that Mortgage Backed Debt Derivatives were 'special'. These guys have dealt with / in other kinds of "credit default" obligations for quite some time and they have known that they can go from low risk, to higher risk to junk bond to toxic waste is a dramatic fashion. They have elaborate models of what happens when issuers of this debt get downgraded, they have decades of experience in spreading out that risk and even some success in 'turning things around' in other liquidity crisis situations. This works ONLY when the underlaying debt is something that CAN BE UNDERSTOOD AN MODELED! I literally cannot stress this enough. The EXACT same sort of "turn off brain" problem is what imploded LTCM. http://en.wikipedia.org/wiki/Long-Term_Capital_Management The truly insane thing is that former Senator, now NJ Gov Jon Corzine was one of the guys that WORSENED this madness. In the rush to 'legislate a solution" Corzine actually thought it was smart force the IBs to record every temporary 'devaluement' to their holding in "mark to market" accounting that highlights every down turn AND prevent these firms from linking info from the traders directly back to research / modeling guys. The thought was that too much linkage was how Enron had a self reinforcing positive feedback loop. Unfortuntely cutting that link did not allow these guy to see that the trader's feedback was better than the bullshit rating the modelers were sticking with...

I have another big damned problem with the idea that this is exclusively a "laissez faire" problem. Look at the doofuses that ought to have known better. I mean my gawd Bear Stearns Chairmen literally was PLAYING CARDS while his firm melted down! WTF kind of regulation can prevent that? http://en.wikipedia.org/wiki/James_Cayne I mean sure he took a personal hit of $940M, but $61M is still damn good mattress stuffing. And don't tell me the way to 'fix" that sort of problem is with prosecution. Look at the way that AIG's deposed king pin came to power. The "old man" that was running the place was made part of sex fiend Elliot Spitzer's campaign of dropped charges. http://en.wikipedia.org/wiki/Maurice_R._Greenberg#Fraud_allegations After that the whole damned board was made of "dot the i's and cross the t's" regulation fanatics, Bob Willumstad probably just did not have the insurance guy chops to keep the wheels on. They have gone to bring the old "Good Hands" guy out of retirement, Ed Liddy. His head might just explode if you tell him that more regs will make it easier to re-right that ship...

If you want to argue about the regulation I have no problem arguing thusly:

1) Hedge funds, where crazy rich people can do whatever the fsck they wish ought to remain as unregulated as all get out. They will attract some crazy people and once in a while have some spectacular blow-ups. Those blow-ups are not going to be backstopped by anyone other than other crazy rich people.

2) Investment banks are not hedge funds. If they want to place SOME money with them so be it, but that portion of capital placed will NOT count to any regulatory requirements and will never be subject to 'rescue'.

3) Commercial banks should be DISCOURAGED from directly owning Investment Banks -- the water we are sailing into now is BASS ACKWARDS compared to the prior era! If commercial banks should get sucked up in the losses of IBs there is no "firewall" to keep trading loses from burning through the "money in the vault" that come from / flows to paychecks. This thing could devour FDIC and the whole g-d FRB if someone does not pull their head out of their ass real soon now. Existing regulation is being ACTIVELY BYPASSED and at the worst possible time...

4) GSEs are a big mistake. You want a mortgage you go to a commercial bank. Easy peasy. They say you're a bum then you go to the FHA and they give you a nice VANILLA loan that you can afford. Extra scrutiny/support for borrowers and verification of the scruples of sellers is what FHA does and it ought to be the only "government backed" way that home ownership is "encouraged". There is some awful damned ugly shit about just how much the 'overseers' of Fannie & Freddie were told to pound sand while the executives of those firm had paydays every bit as lavish as the dudes at Wall Street, all while they were supposed to be working for the "common good".

This is not a "freer markets" vs "nanny state" arguement. This is "keep risk where is belongs" arguement and the failure was/is spread out far and wide.

The invisible, retarded hand of the marketplace.

JW:

It was not "invisible" as there have been months and months of trouble brewing. I hate the "conspiracy" types but I do think that maybe there is / was some sense of "let's blow this sucka open while dubya is still around". I mean that. Look way back up in the thread to like April and it was clean that the Fed did their damnedest to "contain the carnage". Paulson even did a rough draft of new regulatory frameworks. At that time he said he expected those frameworks to be used by THE NEXT administration. Those frameworks were/are known to all the parties and I have sneaking suspicion that a whole lot of the parties that would be subject to the regulations all said "rut roh" when they looked at how far they are from what the regs what to do...

I had great hope that the GLOBAL mood was to unwind these things SLOWLY but somehow that changed. "Better to deal with the bastards you know that the bastard behind the curtain" is often the operating philosophy at work.

The marketplace is not retarded either. You may have heard that the several traditional commodity hedges have blown up. United Airlines has a giant hole on their balance sheet where their long position on oil futures used to be. Even General Mills has a big red spot where their position on grains used to be. Whoops! Playing games with commodities is NOT something that you can do part time. The trading platforms for those things are now setup with ultra-low latency for a very good reason -- these bastards are running automated trades into the exchanges that litterally reverse their holdings dozens of times a second. The old fashioned voice out cry and nail biting has been replaced with program trading that have no emotions and no way to read who is "playing poker" to knock a penny off of a bushel. These new breed commodity firms don't care if you actually want to breathe, they will trade against the market if the broader data tells 'em that is the way to profit...

btw, that last point should result in mercifully smaller rises in food prices. At least you can eat Cheerios. Gold is not as useful...



Edited 1 time(s). Last edit at 09/18/2008 10:48AM by stan adams.

It seems to me that the problems we are experiencing now are the result of the removal of previous regulatory standards and utterly predictable (at least in broad strokes) events. (Real estate bubble burst? Who'da thunk it?) I stand by the invisible, retarded hand of the marketplace comment.

Don't forget emotion and (ir)rationality.

But indeed, if you're creating profits out of thin air, the results are pretty predictable. (hint; try it at home, see if it works)

You could argue that calling the 'hand of the marketplace' retarded is paying its mental capacity something of a compliment. The 'hand of the marketplace' is interested in maximising one thing: profit this quarter. If doing this means the whole show craters the following quarter.... so be it. It's much like evolution in that it's not concerned with 'good' but 'good enough right now.'

Exactly.


Stan, when you say 'someone is trying to stick it to Dubya', well, for starters they (the GOP) had it coming as they've been ruling in the last 8 years if I'm not mistaken. Also, while the battery pack that they tried to start the dead economy with earlier this year was a bi-partisan effort, all it really did was postpone current events. One might ask if the real reason behind that was to postpone it just enough so that things would come down after the change of guard.

more like "stick with" than "stick it to" -- I mean the experience that everybody went through while Bear was not pleasant for the parties involved, the damage was mostly contained -- the results from today's trading has lots of people feeling not too bad -- market it is up.

The feeling very well might be "lets get this done with the guys we know before they are gone"...

I don't think any of the people that have the power to hasten / delay these kind of things really want to go through the same thing with a new crew.

The SEC is underfunded, undermanned and neutered. Most similar regulatory bodies in the world (in model free-market economies anyhow It needs to be replaced by a regulatory body with broader powers and real teeth. It needs a catchy name like the "Financial Integrity Commission". It needs to have the power to step in and say "no, you cannot do that."

I want to see lots of people go to jail over this. Alan Greenspan would be a good start. The orgy of basically free credit with no questions asked was bound to bring out every shonk and charlatan with an "investment scheme". It was an endless coke and hookers party funded by a string of credit cards passed around until someone had to clean the mess.

I want to see a heap of very serious heavy-handed financial regulation brought into place. CDOs should be banned and the greedy bastards who cooked up the idea should be lined up and shot -- they were really just a very fancy pyramid scheme. The credit ratings agencies that went along with this and would "rate a cow if you paid them" (that's direct quote from a govt report) should be banned/fined/broken-up and the CEOs should do jail time.

We need to take a long hard look at private equity -- is it ever a positive forced in the marketplace? If it is, what regulatory oversight does it need to not adversely affect shareholders/investors and the broader economy? And then there's hedge funds, I've always been a bit dubious about these greed machines, they're certainly not there to help the retail investors who buy into them (especially with their high fees) and they certainly don't help the companies they short-sell. Does the market really need them? If they actually serve a useful purpose (I'm struggling to think of any that an everyday managed fund can't do) what regulatory oversight and limitations do they need to ensure the market performs smoothly? Should "naked" short-selling be banned or should institutions be required to disclose their short positions? Should short-selling just be banned outright?

The financial world has grown increasingly more complex, a long way from the days of "puts, calls straddles and babble" - and this is part of why the SEC and other agencies failed, there was such a bewildering trail of paperwork that they were outbaffled and snowed under. When a new "financial instrument" like a CDO comes onto the market questions should be asked like "why do we need this?" and "why can't this be done with existing products"? If compelling answers why aren't given, regulatory bodies should outright ban them.

I realise that as an investor I'll never complain when growth seems to be going to well (well, actually I did say this was unsustainable years ago) and that the radical changes I'm calling for will be met by cries of "but this will hamper growth/hurt investment/encourage communism etc etc".

But you know the only worse thing than the terrible problem of having to cope with only single digit growth?

Having to cope with double digit losses...



Edited 1 time(s). Last edit at 09/18/2008 08:27PM by Tony Leggett.

Tony

Doubt that will happen, most of the folks that caused this mess will get their 200 million golden parachutes and laugh at the rest of us.

Daniel

Re: new financial products.


As we still have full mortgage interest deduction over here (some parties have put it in their constitution, so it's political suicide to even talk about it) the banks invent new names and schemes for the same old tired mortgages every year. They award each other with 'mortgage product' of the year.

I paid a consultant 400 euros for a fast track course mortgages in one afternoon and now I'm able to see through all the cunning schemes these crooks come up with. I've got more than one colleague who was conned into one of these hybrid products (interest only loan with a life insurance tacked on where the premiums are paid into a savings account and into a stock scheme, after 30 years you've supposedly got enough to pay off the loan). Needless to say, after 10 years they discover that 40% over their money had been taken away from them for 'fees' and the other 60% wasn't really doing well with interests below zero and now the bottom out of the stock market.

The people need to be protected from these criminals. Period.



Edited 1 time(s). Last edit at 09/18/2008 09:08PM by tliet.

Oh come now Tony. Short selling, hedge funds, private equity all to be lined up and shot? Where would MoveOn get all its funding from?

But seriously Soros and those like him are under no obligation to go stupid and try and eek out that last stretch of potential profitability. Those that do see that greater risk is not always desirable generally do rule the markets. To suggest that "draconian regulation" is an answer is to ignore the lessons of the "War on Drugs" -- if the result of regulation is turn those looking for innovation in finance into outlaws they will have even more incentive to build their empires not in London, NY, and Hong Kong but instead Dubai, Yemen and UAE. I hear that one can raise an army of zealots over there for pennies too...

Short selling can be a very legitimate way to lock in floor prices for securities and commodities. Further even such cool heads as Warren Buffet agree that the direct and magnitude of shorts helps to point out instances were a company is being run poorly or accounting for their profits fraudulently.

The reality of the SEC's small staff and funding can be directly linked to the lobbying by the large investment houses and the exhanges themselves. They throw money at the law makers and seem to have lost sight of the fact that even demolition derbys have guardrails -- in my view the "three ring circus" of CFTC SEC FRB FBI NSDA and other alphabet soup commissions and agencies is EXACTLY what serves both DC's desire for a big fat payroll of duplication at the low level and a thin pool of talent at the high end. The smart insiders move to a top slot and have the clout to say "but lok how many federal workers(in the pocket guaranteed votes) would be hurt if we restructure...

We need some one outsider enough to blow it up, but not so wild eyed as Ron Paul or Kucinich as be unelectable if we want this to stop.

Well, short selling financial stocks is verboten in the short run now in most important markets. I suppose it helps getting the swings a bit more under control.

For now everyone seems euphoric about the plan to create a toxic loan landfill, let's see how long that lasts.



Edited 1 time(s). Last edit at 09/19/2008 05:18AM by tliet.

well, the trillion or so the financial crisis may cost (op cit) could do what the iraq war, tax cuts and all couldn't quite do: achieve the club for growth dream of nearly bankrupting the federal government, "getting it out of our lives".

ddt

The "socialization of bad debt" is a horrible idea. Aside from the philosophical damage, the warping of government priorities (as ddt eludes to), and difficulty of actually finding any set of human beings that can fathom this mess, there is the problem of "fixing the locomotive while the tracks are being torn up" -- I still am not convinced that "bad mortgages" are the root cause here.

As the link that ddt posted from the Financial Times states: " there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt."

I understand the "panic" psychology is what would (is already?) drive (ing) such a crisis, but of course it is also NOT REAL -- I mean my gawd Municpal debt? Go stand by a friggin' toll road and see the transponder lanes SEAMLESSLY suck in hundreds of thosands a day with no effort. Those bonds are not going to go into default unless people stop driving. Not going to happen unless there is no where to drive to -- it would take a whole heulluva lot to idle the country.

The "growth" thing is needed. People want jobs. They want to see their income increase. The forces of "anarchy" might break a few windows on Gap Stores and Starbucks, but the real battle of Gap vs Hollister and Starbucks vs Caribou (McDonalds?) is the real engine of competition and growth.

You won't "starve the beast" but loading it down with toxic waste. That will only give ammunition to those who wish to increase the size of the government. Look at how swimmingly the TSA thing is working -- air travel is like trying to renew your driver's license. Do we really more of that?

I just hate how we have to go in debt for saving the world economy. I wish they would have waited a week just to see how many paris of Depends Putin would have gone through.

I'm just excited planning what I'm going to do with my parts of AIG and Morgan Stanley.

What if everyone who has a bad mortgage was being bailed out by the government, I mean, that's some drastic measures to get the US back on its feet!

Quote
John Willoughby
I'm just excited planning what I'm going to do with my parts of AIG and Morgan Stanley.

I know what I want to do with my piece of AIG.

http://www.mokers.org/blog/archives/sports/hey-manchester-united-i-will-enjoy-your-new-logo.php

Tliet, you know that we only bail out corporations.