Greed, Lack of Transparency Caused Financial Crisis, Says Greenberger

The Epoc Times ^ | 11/15/ 2012 | Gary Feuerberg

[sergeantdave]

“You need to distinguish the difference between “breaking the law” and “there are no laws”.

No, I don’t need to do anything. I’m reporting what the court and regulators have found concerning the Libor scandal. If you have a difference of opinion, your beef is with court and regulators, not me.

[Lumper20]

You are correct. These Keynesian clowns Obama uses are in total denial that it is supply and demand.

[ex-Texan]

* BUMP* !

[ex-Texan]

* BUMP * !

[elkfersupper]

You’re getting bad info, buddy.

Well, I've only been in the banking business for creeping on 40 years, so I guess I'm just ill-informed.

It is a consensus based on who has how many chips in the game. It may be the consensus of 2, or it may be the consensus of 40. Depends on who is playing and in what amount on any given day.

Day-to-day market transactions is the way it works.

If you don't like that, amass hundreds of billions of dollars that you control and change it.

[sergeantdave]

“Well, I’ve only been in the banking business for creeping on 40 years, so I guess I’m just ill-informed.”

I’m sorry. I didn’t take into account your omniscience.

I’m willing to sit back and listen to you explain the Libor mess. My apologies.

[supercat]

Your post makes more sense to me if you switched from being a liberal to being a conservative. Perhaps that is what you meant to say.

It is indeed. I used to be a liberal, and believed that when politicians said that their programs would do various things, they actually had realistic plans for how to achieve those claimed outcomes; if my limited understanding suggested that there would be problems, that simply meant I didn't understand enough about how to overcome them. I've increasingly come to realize that when politicians offer up plans which will appear to work toward solving a problem, but will in fact make it worse, the "in fact make it worse" part is often not an accident--it's the true objective.

[supercat]

As I understand it, mutual funds are derivatives,

The term "derivative" usually refers to agreements by someone to pay various amounts based upon what happens with assets which are owned by someone else. To use an analogy (which should actually make clear the problem), suppose a building owner buys a fire insurance policy on his building. The policy represents an agreement by the insurance company to pay whatever would be necessary to repair the building in case of a fire. In some sense, the owner of the building now owns two things: the building, and the insurance policy. The theory behind derivatives is that the building and the policy should be regarded as separate assets, so that the holder of the building would own something whose value might be greatly reduced in case of a fire (since he would no longer receive payments to cover his losses in such cases) while the holder of the policy would have something that would only have value if the building caught fire.

If the idea of someone holding an insurance policy on a building in which they have no property interest doesn't smell right, that's because it shouldn't. While regarding the building and the policy as separate assets might make seem superficially to make sense, it's fundamentally broken. An insurance policy on a building doesn't just represent an unconditional cash payout if a fire occurs. It gives the policy holder the right to demand cash in exchange for transferring to the insurance company the right to recover the loss, by salvaging damaged property, suing a negligent third party who caused the fire, etc.. Only the holder of the property would have the right to attempt such recovery, and thus only the holder of the property would be able to trade such right for a cash payout.

While one could set up an "insurance policy" which didn't require any attached rights of recovery, that would still leave another problem. If someone starts of a company and sells 1,000 shares, and subsequently the company goes bust and has to be liquidated, the value of those shares will be 1/000 of the amount by which the monies brought in by liquidation exceed its debts. Whether liquidation brings in money far in excess of the debts, or whether it brings in nothing, there will be no question of whether the company's assets will be sufficient to pay its shareholders what they are owed, since what the shareholders are owed is defined in terms of the company's assets.

The problem with derivatives is that since they aren't attached to any type of asset, it can often be difficult, and in some cases impossible, to determine whether the issuer will actually be able to pay them. Essentially, what happens is that the issuers of derivative accepts various wagers; if they lose, they may make good on the wagers or--if they lose more bets than they can pay--be forced to welsh on them. A company that accepts wagers on which it would not be able to make good on effectively cheats the other person even when the company legitimately wins and doesn't have to pay out, but there's no general way by which the other person could know that. Given that, it's not difficult for someone to formulate a combination of wagers such that they have a 99.99% chance of winning something significant and a 0.01% chance of losing a thousand times more than they could possibly pay. Such a combination would have a 99.99% chance of yielding enough "mostly-free" money to allow a person to set up an off-shore haven to which they can flee in the 1-in-10,000 case where their bet goes bad. The possibility of being caught short isn't an accident--it's a deliberate strategy.

[supercat]

IMHO, the biggest problem with derivatives is that government regulators and credit reporting agencies regarded them as acceptable collateral for backing other financial instruments. A risky financial asset and a derivative which promised to pay any shortfall if the asset's value fell below a certain level would be regarded, together, as a secure financial asset whose value could be relied upon (with AAA-level certainty) not to fall below that level. Since some companies sold credit default swaps (the aforementioned derivative) at a price which was less than the difference between the monitored asset's sale price and its guarded value, and since AAA-rated securities can often sell for near face value, this created a near-zero-risk arbitrage opportunity for companies to buy a risky asset along with a covering CDS for well below face value and then sell the combo closer to face value. Once the combined asset was sold, all financial risks associated with the bundle would be assumed by the purchaser.

If government regulators and credit rating agencies had refused to regard credit default swaps as having any value except to the extent that the issuer could demonstrate that each swap had assets exclusively dedicated to backing it, the crash of supposedly-AAA-rated securities would not have occurred. I have no idea why Moody's et al. were willing to accept such assets as being adequate backing for AAA-rated securities, since it should have been obvious that the "secure" value of an obligation is a function of the ratio of the "secure" value of the issuer's assets to its outstanding potential obligations. If the latter quantity isn't bonded, that ratio could be arbitrarily close to zero.

[jdsteel]

Re-read your own post. My problem is your lack of logic. Banks and the mortgage industry are highly regulated. That's a simple fact. If a bank gets in trouble for breaking the law that does not mean banks aren't regulated. A law degree isn't required for simple logic so your suggestion that I re-try a case is nonsense.

[ChessExpert]

Thanks for the thoughtful replies.

I've seen some nice houses lately and mortgage interest rates are low. I've joked to my wife that I should apply for a 100 year mortgage. (She sees no humor in this.) The idea of a mortgage that exceeds one’s expected remaining lifetime somewhat resembles the situation you describe in your last paragraph.