Skip to comments.Wall Street's Naked Swindle
Posted on 10/17/2009 6:09:52 AM PDT by WolfieEdited on 10/17/2009 8:54:23 AM PDT by Admin Moderator. [history]
On Tuesday, March 11th, 2008, somebody nobody knows who made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness "like buying 1.7 million lottery tickets," according to one financial analyst.
Taibbi is more of a disrepector of all who is looking for honesty and fair play on Wall Street. Look at his blog and he bats against right hand pitching and left hand pitching
He is not a leftist-Marxist punk. That is absurd
At first I was confused about your link. Right now the top article there contains a defense of Obama (Taibbi can't understand what's wrong with Obama bad-mouthing America all over the world.)
I am guessing that you meant to post the following link in which Taibbi demonstrates a trading terminal doing naked short selling:
Caught On Tape: A Naked Swindle
I don’t know this guy, he may be a lefty, but this article is spot on the money.
Sometimes I agree with him, not always.
that was the one :)
Taibbi was taken for a ride with that video
If's merely a loophole. If anything, it points to the failure of the GOVERNMENT regulation. All those people who run to the gov't for the rescue should stop and think, not about Golmans and Morgans, but about where on Earth will teh government get that perfect regulation?
Regulation has unintended consequence, and naked short-selling is one of them. That's all. So much for conspiracy to rob the "people." (Even that si wrong: profits from short-selling, as any other profit, accrue to shareholders, which ARE the people).
Indeed, even one of my fellow "conspiracy theorists" (FromLori) debunks Taibbi's "naked short selling" video linked in this thread. (Taibbi didn't bother to link it. Or maybe he had other tapes in mind? Who knows?)
I agree that the government is one of the guilty parties, but the way I see it, separating "the government" from "Wall Street" is impossible.
In 2004 the big Wall Street firms (Paulson was still at GS) pushed the government to allow much higher leverage ratios for the "big investment firms." Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley. But not for any other firms, because the SEC favored those 5 firms.
Now I expect someone will flame me for making an argument that Dems have also used, but I think we should be honest about the Bush years. Obama is much worse. I have no hope whatsoever that Obama will become an honest POTUS.
Regulation has unintended consequence
Very true. I say it is foolish to believe that regulation is always good.
I don't believe the 2008 crash had a single cause, and I would guess you don't believe that either.
This selectivity is truly problematic. As much that I am against the widespread regulation (I actually did and published some work in this field in peer reviewed journal), I am absolutely appalled at the accommodation of higher leverages. Joe and Jane in Peoria, whose failure will not affect the economy at all, are allowed a 2:1 leverage on their margin accounts, but Bear Sterns is allowed 33:1? That does not make any sense to me. None whatever. The leverage had to be held in check and, in my opinion, this is yest one more example of the government failure (SEC).
Having said that and to be fair to the motives of the lobbyists, one has to remember that higher leverage provides higher returns in good times. It is intellectually dishonest, therefore, on the part of most critics to point to the disastrous events of 2008 as the result of leverage and other "unreasonable risk-taking by the execs." They said nothing of a kind when their stocks were going up as a result of that leverage.
What I said here is not an excuse --- am still adamantly against the leverages assumed by the WS banks. The (minor) point is that the banks' management were true to their mission, the job they were given to do: to provide the highest return to their shareholders. It's the government, whose job is to care about the MACROeconomic consequences, to oppose that tendency (which manifested itself as lobbying). If the managers assumed that their companies would be bailed out as too big to fail, they were UNFORTUNATELY correct: that was the message consistently given to them (until Lehman) by the government at least since the 1908s S&L bailout.
So I see here two GOVERNMENT (rather than MARKETS failure, as the Left is trying to convince the public): conveying a consistent message that the "too-big" will not be allowed to fail, and being lax on the leverage ratios.
[Actually, there is a third: the mark-to-market requirement that actually brought Lehman down, but I don't want to expand the scope of discussion. The main GOVERNMENT failure --- the ONE that precipitated the crash --- was of oourse the Community Reinvestment Act that MANDATED bad loans that could not have possibly been repaid. The rest was the reaction to that force that moved the market in search of an unsustainable equilibrium]
" I think we should be honest about the Bush years."
Exactly. Thank you for standing on position of principle rather than taking sides.
In my own view, the government is almost totally responsible for the economic reversal (whatever you might want to call it).
Sure, investment banks would nagturally push for a higher leverage factor. That's their job. If a government is going to effectively regulate that market, then it's government's job to resist that urge -- and not favor one party over another.
Then, of course, we have Fannie Mae and Freddie Mac distorting the mortgage market beyond all recognition -- removing mortgage companies from any risk by buying any mortgage they might write. Then, multiplying the problem by bundling these risky securities into derivatives and re-marketing them to the financial community to raise yet more cash. To buy more mortgages...
Finally, under the peculiar cirmcumstances, Sarbanes-Oxley was an aggravating factor that made a bad situation worse.
It took the federal government to turn The Panic of '29 into The Great Depression. This time, the federal government is the primary miscreant who started the whole thing.
Exactly right and worth repeating. Seeing your post is like a breath of fresh air.
I completely agree here, too. It is worth clarifying, however, that Fannies and Freddie are qusi-GOVERNMENT agencies. They would never be able to stand on their own, nor would they pursue tactics they did if they were not MU to do so.
" Then, multiplying the problem by bundling these risky securities into derivatives"
It is a frequently repeated truism which is actually false. One cannot increase risk by pooling, and mortgage-backed securities (I presume you refer to them) are nothing but pooling of individual mortgages.
The markets proved this mathematical fact in the fall of 2008: when all credit and other markets froze, these securities continued trading (despite confusion about their ratings).
That is exactly right! Liberal historians such as Schlesinger started a Roosevelt myth, according to which he saved the country. As you pointed out so well, it was the (Republican) administration that instituted idiotic tariffs in 1928-1930 and the inaction of the Fed that made the decline so rapid. But it was the FDR presidency, which, just as Obama's administration, tried to REFORM the economy into a socialist one that turned a regular recession into a Great Depression. Like Obama, Roosevelt tried not to RECOVER the economy but to REFORM it. In Obama's $700B package only about $80B stimulate recovery.
"This time, the federal government is the primary miscreant who started the whole thing."
I cannot thank you enough for your insightful and thoughtful post. It is particularly appreciated amidst the current hysteria, which unfortunately affected even some people on this forum.
Best regard, TQ.
Perhaps, it would've been more accurate to say "multiplying the problem by bundling these securities into derivatives and re-marketing them, spreading the infection across the breadth of the financial markets".
If the problem had been confined to Fannie Mae and Freddie Mac, it would've been a.) more confined and b.) smaller in scope.