So the one question I would ask CNBC, etc.: "Why do credit default swaps even exist now????"
http://www.nytimes.com/2011/06/23/business/global/23swaps.html?scp=1&sq=derivatives%20cloud&st=cse
Showing posts with label credit default swaps. Show all posts
Showing posts with label credit default swaps. Show all posts
Monday, June 27, 2011
Friday, May 28, 2010
Will Wall Street Go Free? - Opinionator Blog - NYTimes.com
(c) 2010 F. Bruce Abel; photo (c) 2009 Rebecca Abel Worple and owenemma.com
I've clipped the last paragraph of this very excellent detailed summary of the personages behind the Wall Street/world collapse.
Will Wall Street Go Free? - Opinionator Blog - NYTimes.com: "Now that the politicians in Washington have used Goldman Sachs as a bogeyman to help push through new legislation to re-regulate Wall Street — which is badly in need of it — the American people should now get the justice we deserve, in the form of prosecuting the people on Wall Street who had major roles in causing the financial crisis in the first place. Unless, of course, we would prefer to pretend that no one was responsible and it was just another one of those once-in-a-lifetime tsunamis we’ve been hearing so much about lately."
Wednesday, April 28, 2010
Goldman Sachs -- "Sociopaths"
(c) 2010 F. Bruce Abel
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
Wednesday, April 14, 2010
Morgenson -- One I Missed
(c) 2010 F. Bruce Abel
Looking for something else I read yesterday I came across this excellent piece. I was fascinated (although I knew the story line) and then was surprised to realize that this piece came out in December. Maybe when we were in Italy.
http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1
Looking for something else I read yesterday I came across this excellent piece. I was fascinated (although I knew the story line) and then was surprised to realize that this piece came out in December. Maybe when we were in Italy.
http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1
Thursday, April 8, 2010
Rubin -- Are You Just a Sandwich?
(c) 2010 F. Bruce Abel
If you were to ask me ten years ago to name my heroes in a quick moment Robert Rubin would be one of them -- out of a very few. Today before Congress Rubin is just a sandwich.
Of course this is troubling. Our world is so complicated that Robert Rubin can be paid by his company $100 million (as he was during the relevant time) and have no idea that his company is on the verge of bringing not just itself down, but the entire financial system down, with all that this implies.
We at this high level could not have been expected to get involved with the "granularity" of the bank's dealings, he says today to Congress.
This man saved the government from Newt Gingrich's plan to shut down government one weekend.
Was this done without "granularity?"
My Gawd.
This man saved Mexico through slogging through our debt package.
Was this done without "granularity?"
Maybe after all it was simply Young Goldman Sachs Men Looking Cool on the Beach. Robert Rubin is now not so young and he can't carry out on the granularity things?
Speaking of carry-out, Robert Rubin, here's a "granularity" assignment that would at least take care of lunch. Would you go down to Izzys and tell them to spread slices of bread with 1000 Island dressing; top each with 1 tablespoon sauerkraut and corned beef, lay cheese on top. Put in broiler and grill until hot ...
Meanwhile, mixing metaphors if not mega-phors, and, as Woody Allen would say,
"You are Citigroup; What are we, chopped liver?"
OK, put aside the above and read a stunningly good piece from the Washington Post by Ezra Klein:
Ezra Klein
The complexity problem
Earlier in the crisis, the line was that "too big to fail" was too big to exist. I'm coming around to an altogether more radical view: What if "too complex to understand" is too complex to exist?
Listen to Robert Rubin -- the former co-chairman of Goldman Sachs, celebrated secretary of the treasury and director of Citibank -- tell the Financial Crisis Inquiry Commission that
"All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work.”
Listen to Alan Greenspan -- former Federal Reserve chairman, holder of the nickname "The Oracle" -- say that we need regulations that kick in "without relying on the ability of a fallible human regulator to predict a coming crisis."
If you're an investment bank, the stock market has become a bit of a bummer. It's so transparent and user-friendly that there's really no place for a middleman to make major profits. That's normal: Efficient markets reduce margins. To put it another way: It's hard to make money doing simple things in a competitive market unless you have a monopoly. But Wall Street has leveraged incredible levels of complexity into something that's more like a monopoly than a market.
The really neat trick was that this worked even after the market crashed. Because no one could understand it, the people who crashed the place were also given a major role in the rescue effort. And that wasn't just true at the top level. Think back to the AIG employees threatening to quit and make it (theoretically) impossible to unwind the company's financial products division if they didn't get their retention bonuses. Their retention bonuses!
It would be one thing if this complexity had done great things for the country. But not so much, as we all know. Some innovations (pdf) have been good. But the opaque complexity that gave rise to credit default swaps and collateralized debt obligations and risk profiles that no one understood turned out to be almost unimaginably bad. Complexity helped bankers bully ratings agencies and regulators into signing off on products they didn't understand, it helped mortgage lenders entice consumers into contracts that they couldn't fulfill, and it's now helping Wall Street beat back necessary regulations because Congress is nervous about mucking with an industry they don't really grasp. And beyond all that, the complexity that allowed Wall Street to become a more profitable and significant segment of the economy also sucked talent away from other sectors.
How does this translate into regulation? I'm not really sure. It's not like there's a standard measure of unnecessary complexity or useless opacity. But watching these Wall Street titans tell the FCIC that they didn't understand what the banks were doing is making me a lot less sympathetic when their lobbyists tell Congress that Washington simply doesn't understand what the banks are doing.
By Ezra Klein April 8, 2010; 5:07 PM ET
Categories: Financial Crisis , Financial Regulation
Comments (not by me):
Restricting complexity ultimately translates into restricting interconnectedness.
Fundamental properties of structures in computer science and mathematics called graphs* show that at a certain level of interconnectedness, the corporate graph will show cyclical dependencies that are fairly intractable in terms of answering the questions we want to ask.
Compound this with the fact that you'll only be aware of a subset of the data structure at any time, and any densely interconnected financial system will be "too complex to understand".
*Note, this is very different from a plot or your common bar graph,
Posted by: zosima April 8, 2010 5:35 PM Report abuse
Ezra: I hope you do follow the TED conference and their videos. Two key speakers talks about the need to reduce complexity whether it's legal or societal.
http://www.ted.com/talks/alan_siegel_let_s_simplify_legal_jargon.html
http://www.ted.com/talks/barry_schwartz_on_our_loss_of_wisdom.html
Posted by: AD1971 April 8, 2010 5:48 PM Report abuse
From reading Michael Lewis it is clear that the subprime/CDO/CDS stuff was really complex--so much so that one had to have Asperger's and spend 6 months at it to understand it. It was way, way too complex, and deliberately so. Moreover, the Rubins and Princes didn't ask someone to explain the products to them. There were people in their firms who understood the level of risk, or at least how the products worked. In addition, there were people gaming the ratings agencies who knew that the towers of mortgages and derivatives were largely sh*tpiles. But no one wanted to upset the applecart, and the people with responsibility never wanted to inquire very far.
So what did Rubin do to warrant his $20 million? Provide access? Cachet? He ought to give most of it back.
Greenspan also won ;t acknowledge the role that low interest rates played in (1) fueling the housing boom and (2) encouraging savers/investors to look for higher yields in products like CDOs.
If we want to encourage genuine savings, higher yields were needed, and it would have provided a margin for easing when things went bad. Now, of course, we need low rates. But still. It is a hell of an environment for savers.
Posted by: Mimikatz April 8, 2010 6:05 PM Report abuse
This combined size and complexity is not manageable or controllable in a democracy.
We face very hard choices that we are not socially/politically prepared to make.
There are many aspects that need radical redos:
- numbers and types of biz's that financial firms are allowed to participate in
- max. size of a organization allowed before a anti-trust/anti-complexity trigger is hit that results in breakup into smaller pieces.
- regulators that are tailored to various segments of biz that are created after monoliths are outlawed.
- no financial innovation that isn't fully studied and pre-prescribed remedies are enacted to automatically kick in when inevitably things go awry in one of the newly arranged segments/sectors.
It is almost a fool's errand to think about this, since the beast controls the keeper in multiple ways. We haven't and won't learn from our mistakes. Denial is the order of the day. A return to democratic control of our society is probably now impossible.
Learn to love your financial masters, because they are now your destiny.
Posted by: JimPortlandOR April 8, 2010 7:01 PM Report abuse
The key to regulation is to make CONSUMER PROTECTION paramount. If rules are made with consumer protection in mind AT ALL LEVELS then it will eliminate most of the cheats frauds and loan sharks.
Especially if we take a broad definition of consumer protection to include pension funds and 401Ks. Protecting consumers by cracking down on loan sharks would have prevented the housing bubble.
Trying to regulate the banksters directly is unlikely to work. What can work is to protect small investors and the types of products that can be marketed. The cost of regulation will be small compared to the huge inefficiencies created by the cheats frauds and loan sharks.
Posted by: bakho April 8, 2010 8:01 PM Report abuse
I always though we should just make it a criminal offense to lose $X billion when you can't cover it with assets. Financial meltdowns causes much more societal damage than any particular single criminal act from drug use to trespassing to murder.
You designate a CEO and/or CFO or whoever to be responsible. If the losses include contracts made under a previous CEO, you include him or her.
This is effectively a leverage ratio of 1, but only coming into place when you leverage near the limit. Say, X = $50 billion dollars. I can leverage $4 billion in assets at 13:1 and still make it under the "cap" if it goes bad (4 x 13 - 4 = 48).
But I can only leverage $10 billion at just under 5:1, or else risk 20 years in prison.
But the best part is that no one has to calculate it until after the fact if it goes bad and it motivates people to get it right in the first place. The creditors will act as the police and bring it to everyone's attention because they are making the claims.
Not that I've worked out every aspect of this. You can mitigate sentences for bad luck or duped CEOs.
We used to throw people in jail for debts but got rid of it because it was inhumane for the poor. They can't leverage assets however, so they would just go bankrupt before they reached the limit.
I don't think debtors prison is inhumane for rich CEOs, though.
Posted by: JasonFromSeattle April 8, 2010 8:20 PM Report abuse
RobRub?
Posted by: pj_camp April 8, 2010 8:56 PM Report abuse
Post a Comment
© 2010 The Washington Post Company
If you were to ask me ten years ago to name my heroes in a quick moment Robert Rubin would be one of them -- out of a very few. Today before Congress Rubin is just a sandwich.
Of course this is troubling. Our world is so complicated that Robert Rubin can be paid by his company $100 million (as he was during the relevant time) and have no idea that his company is on the verge of bringing not just itself down, but the entire financial system down, with all that this implies.
We at this high level could not have been expected to get involved with the "granularity" of the bank's dealings, he says today to Congress.
This man saved the government from Newt Gingrich's plan to shut down government one weekend.
Was this done without "granularity?"
My Gawd.
This man saved Mexico through slogging through our debt package.
Was this done without "granularity?"
Maybe after all it was simply Young Goldman Sachs Men Looking Cool on the Beach. Robert Rubin is now not so young and he can't carry out on the granularity things?
Speaking of carry-out, Robert Rubin, here's a "granularity" assignment that would at least take care of lunch. Would you go down to Izzys and tell them to spread slices of bread with 1000 Island dressing; top each with 1 tablespoon sauerkraut and corned beef, lay cheese on top. Put in broiler and grill until hot ...
Meanwhile, mixing metaphors if not mega-phors, and, as Woody Allen would say,
"You are Citigroup; What are we, chopped liver?"
OK, put aside the above and read a stunningly good piece from the Washington Post by Ezra Klein:
Ezra Klein
The complexity problem
Earlier in the crisis, the line was that "too big to fail" was too big to exist. I'm coming around to an altogether more radical view: What if "too complex to understand" is too complex to exist?
Listen to Robert Rubin -- the former co-chairman of Goldman Sachs, celebrated secretary of the treasury and director of Citibank -- tell the Financial Crisis Inquiry Commission that
"All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work.”
Listen to Alan Greenspan -- former Federal Reserve chairman, holder of the nickname "The Oracle" -- say that we need regulations that kick in "without relying on the ability of a fallible human regulator to predict a coming crisis."
If you're an investment bank, the stock market has become a bit of a bummer. It's so transparent and user-friendly that there's really no place for a middleman to make major profits. That's normal: Efficient markets reduce margins. To put it another way: It's hard to make money doing simple things in a competitive market unless you have a monopoly. But Wall Street has leveraged incredible levels of complexity into something that's more like a monopoly than a market.
The really neat trick was that this worked even after the market crashed. Because no one could understand it, the people who crashed the place were also given a major role in the rescue effort. And that wasn't just true at the top level. Think back to the AIG employees threatening to quit and make it (theoretically) impossible to unwind the company's financial products division if they didn't get their retention bonuses. Their retention bonuses!
It would be one thing if this complexity had done great things for the country. But not so much, as we all know. Some innovations (pdf) have been good. But the opaque complexity that gave rise to credit default swaps and collateralized debt obligations and risk profiles that no one understood turned out to be almost unimaginably bad. Complexity helped bankers bully ratings agencies and regulators into signing off on products they didn't understand, it helped mortgage lenders entice consumers into contracts that they couldn't fulfill, and it's now helping Wall Street beat back necessary regulations because Congress is nervous about mucking with an industry they don't really grasp. And beyond all that, the complexity that allowed Wall Street to become a more profitable and significant segment of the economy also sucked talent away from other sectors.
How does this translate into regulation? I'm not really sure. It's not like there's a standard measure of unnecessary complexity or useless opacity. But watching these Wall Street titans tell the FCIC that they didn't understand what the banks were doing is making me a lot less sympathetic when their lobbyists tell Congress that Washington simply doesn't understand what the banks are doing.
By Ezra Klein April 8, 2010; 5:07 PM ET
Categories: Financial Crisis , Financial Regulation
Comments (not by me):
Restricting complexity ultimately translates into restricting interconnectedness.
Fundamental properties of structures in computer science and mathematics called graphs* show that at a certain level of interconnectedness, the corporate graph will show cyclical dependencies that are fairly intractable in terms of answering the questions we want to ask.
Compound this with the fact that you'll only be aware of a subset of the data structure at any time, and any densely interconnected financial system will be "too complex to understand".
*Note, this is very different from a plot or your common bar graph,
Posted by: zosima April 8, 2010 5:35 PM Report abuse
Ezra: I hope you do follow the TED conference and their videos. Two key speakers talks about the need to reduce complexity whether it's legal or societal.
http://www.ted.com/talks/alan_siegel_let_s_simplify_legal_jargon.html
http://www.ted.com/talks/barry_schwartz_on_our_loss_of_wisdom.html
Posted by: AD1971 April 8, 2010 5:48 PM Report abuse
From reading Michael Lewis it is clear that the subprime/CDO/CDS stuff was really complex--so much so that one had to have Asperger's and spend 6 months at it to understand it. It was way, way too complex, and deliberately so. Moreover, the Rubins and Princes didn't ask someone to explain the products to them. There were people in their firms who understood the level of risk, or at least how the products worked. In addition, there were people gaming the ratings agencies who knew that the towers of mortgages and derivatives were largely sh*tpiles. But no one wanted to upset the applecart, and the people with responsibility never wanted to inquire very far.
So what did Rubin do to warrant his $20 million? Provide access? Cachet? He ought to give most of it back.
Greenspan also won ;t acknowledge the role that low interest rates played in (1) fueling the housing boom and (2) encouraging savers/investors to look for higher yields in products like CDOs.
If we want to encourage genuine savings, higher yields were needed, and it would have provided a margin for easing when things went bad. Now, of course, we need low rates. But still. It is a hell of an environment for savers.
Posted by: Mimikatz April 8, 2010 6:05 PM Report abuse
This combined size and complexity is not manageable or controllable in a democracy.
We face very hard choices that we are not socially/politically prepared to make.
There are many aspects that need radical redos:
- numbers and types of biz's that financial firms are allowed to participate in
- max. size of a organization allowed before a anti-trust/anti-complexity trigger is hit that results in breakup into smaller pieces.
- regulators that are tailored to various segments of biz that are created after monoliths are outlawed.
- no financial innovation that isn't fully studied and pre-prescribed remedies are enacted to automatically kick in when inevitably things go awry in one of the newly arranged segments/sectors.
It is almost a fool's errand to think about this, since the beast controls the keeper in multiple ways. We haven't and won't learn from our mistakes. Denial is the order of the day. A return to democratic control of our society is probably now impossible.
Learn to love your financial masters, because they are now your destiny.
Posted by: JimPortlandOR April 8, 2010 7:01 PM Report abuse
The key to regulation is to make CONSUMER PROTECTION paramount. If rules are made with consumer protection in mind AT ALL LEVELS then it will eliminate most of the cheats frauds and loan sharks.
Especially if we take a broad definition of consumer protection to include pension funds and 401Ks. Protecting consumers by cracking down on loan sharks would have prevented the housing bubble.
Trying to regulate the banksters directly is unlikely to work. What can work is to protect small investors and the types of products that can be marketed. The cost of regulation will be small compared to the huge inefficiencies created by the cheats frauds and loan sharks.
Posted by: bakho April 8, 2010 8:01 PM Report abuse
I always though we should just make it a criminal offense to lose $X billion when you can't cover it with assets. Financial meltdowns causes much more societal damage than any particular single criminal act from drug use to trespassing to murder.
You designate a CEO and/or CFO or whoever to be responsible. If the losses include contracts made under a previous CEO, you include him or her.
This is effectively a leverage ratio of 1, but only coming into place when you leverage near the limit. Say, X = $50 billion dollars. I can leverage $4 billion in assets at 13:1 and still make it under the "cap" if it goes bad (4 x 13 - 4 = 48).
But I can only leverage $10 billion at just under 5:1, or else risk 20 years in prison.
But the best part is that no one has to calculate it until after the fact if it goes bad and it motivates people to get it right in the first place. The creditors will act as the police and bring it to everyone's attention because they are making the claims.
Not that I've worked out every aspect of this. You can mitigate sentences for bad luck or duped CEOs.
We used to throw people in jail for debts but got rid of it because it was inhumane for the poor. They can't leverage assets however, so they would just go bankrupt before they reached the limit.
I don't think debtors prison is inhumane for rich CEOs, though.
Posted by: JasonFromSeattle April 8, 2010 8:20 PM Report abuse
RobRub?
Posted by: pj_camp April 8, 2010 8:56 PM Report abuse
Post a Comment
© 2010 The Washington Post Company
Monday, March 29, 2010
The Big Short
(c) 2010 F. Bruce Abel
April 2, 2010
"How'd they do it? The answer is clearly spelled out in the footnotes to AIG's (nyse: AIG - news - people ) 2007 consolidated financial statement. "In most cases AIGFP (American International Group Financial Products) does not hedge its exposures related to credit default swaps it has written."
My notes from listening to the NPR interview of Michael Lewis by Terry Gross with Michael Lewis about 13 days ago:
The Big Short
[verbatim as much as possible]
So much written and reported about the collapse is through the eyes of the people "who had no idea" -- the Treasury Secretary, the Chairman of the Federal Reserve, the heads of the investment banks -- as the crisis was gathering force.
[Lewis got to "Ground Zero" and, in his own words, found that a handful of people were not clueless and were themselves the cause of the crash, after (supposedly--ed note) they tried to warn Wall Street and the NYT and the WSJ.]
"Everybody was working with same set of facts."
The vast majority of people in the markets painted a “very pleasant” picture from the set of facts.
"We 'see' what we want to see."
Michael Burry
Had been studying to be a doctor, was a resident on his way to being one.
Instead went full-time into investing. Formed a hedge fund. Began studying the bond mkt.
Had/has asberger’s syndrome. Didn’t know it at the time.
Having asberger's he studied the prospectuses of mortgage companies.
2003-2004, early 2005
saw the phenomenal growth of interest-only mortgages and negatively amortizing mortgages
“the lending couldn’t get any worse”
he saw the "end of the madness" coming and wanted to bet against it, but didn't know how.
he begins to bet against the subprime mortgage market
the bond mkt is "the wild west;" it's much less regulated and for the investor it's much easier to get ripped off; he’s aware of that. In corporate bond mkt there were a credit default swaps and had been for 10 years. He felt that Wall Street was "bound" to invent them on subprime mortgage bonds.
Michael Burry pesters Wall Street to create credit default swaps for subprime mortgage bonds
He is Ground Zero; "Patient No 1;" March to May 2005
Makes the "bet" (with GS) in March; gets a written contract in May.
GS – why willing? GS had persuaded AIG to sell GS
AIG had unlimited appetite. In a few months $20 billion, at very low prices; close to free,
GS took some on as a bet. Turned around and multiplied price by 10 and sold to Michael Burry.
All of sudden a big institution in the picture.
GS was already thinking along these lines. In other words it wasn't just Michael Berry.
AIG had been insuring corporate bonds for almost a decade.
In 2004 and 2005 GS comes (to AIG) with “diversified consumer loans”
“we’ll do that too.” (said AIG)
GS went to AIG with subprimes too. “Yep.”
Burry dealt with GS, Deuche Bank, Morgan Stanley, Bank of America, Merrill Lynch too. Wall Street firms were on the other side of the bets. For the most part they had sold the bets on and AIG was on the other side.
Charley Ledley and Jamie Mai
Cornwall Capital
Started with $100,000 in a Schwab Account.
“Wall Street underestimated the likelihood of unlikely events.” (they felt)
They bought options on extreme things happening. Each bet cost them very little. Wrong most of the time but right enough…
Stumble into the subprime mortgage mkt
For paying 2%/yr on dicey subprime mort loans
They knew nothing re bond mkt but they pieced together a picture
They go to SEC; NYTimes, WSJ “there’s fraud in the system.” Nobody understands or pays attention.
They ended up betting against financial instutions themselves – Bear Stearns, etc.
“Who’s taking all this risk?” they asked. Figured out that the WS firms themselves were the dumbest guys at the table. Afraid that BS couldn’t honor their contracts. So bought credit default swaps CDS’s on Bear Stearns too.
Turned $100,000 into $100 million.
None of these guys are natural short sellers. They wanted to be investing in the stock markets but they saw that these markets would be killed by what was going on in the bond (CDS, etc. market).
Personally, although they were making a fortune they had panic attacks; stressed (being right); a bet against an entire financial system; their insight that the system had become rigged; Charlie worried about riots
They were by nature ordinary stock investors; the world forced them into this position.
Herein, on April 2, 2010, I add the following from this, my blog, which indicates that one person,
Joseph Cassano
http://natgagu.blogspot.com/2009/03/joseph-cassano.html
was the cause of the meltdown. Read the whole interview above plus the link to Joseph Cassano, and you can see that we had a financial terrorist in our midst, one who started with Michael Milken.
And the NYT Article of April 1, 2010 adds to the list of names who make billions per year:
http://www.nytimes.com/2010/04/01/business/01hedge.html?scp=2&sq=soros&st=cse
And this review in the WSJ which served as the research for Lewis's book:
http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/tab/article/
But this reviewer says Michael Lewis has it all wrong:
http://www.huffingtonpost.com/yves-smith/debunking-michael-lewis-t_b_512542.html
April 2, 2010
"How'd they do it? The answer is clearly spelled out in the footnotes to AIG's (nyse: AIG - news - people ) 2007 consolidated financial statement. "In most cases AIGFP (American International Group Financial Products) does not hedge its exposures related to credit default swaps it has written."
My notes from listening to the NPR interview of Michael Lewis by Terry Gross with Michael Lewis about 13 days ago:
The Big Short
[verbatim as much as possible]
So much written and reported about the collapse is through the eyes of the people "who had no idea" -- the Treasury Secretary, the Chairman of the Federal Reserve, the heads of the investment banks -- as the crisis was gathering force.
[Lewis got to "Ground Zero" and, in his own words, found that a handful of people were not clueless and were themselves the cause of the crash, after (supposedly--ed note) they tried to warn Wall Street and the NYT and the WSJ.]
"Everybody was working with same set of facts."
The vast majority of people in the markets painted a “very pleasant” picture from the set of facts.
"We 'see' what we want to see."
Michael Burry
Had been studying to be a doctor, was a resident on his way to being one.
Instead went full-time into investing. Formed a hedge fund. Began studying the bond mkt.
Had/has asberger’s syndrome. Didn’t know it at the time.
Having asberger's he studied the prospectuses of mortgage companies.
2003-2004, early 2005
saw the phenomenal growth of interest-only mortgages and negatively amortizing mortgages
“the lending couldn’t get any worse”
he saw the "end of the madness" coming and wanted to bet against it, but didn't know how.
he begins to bet against the subprime mortgage market
the bond mkt is "the wild west;" it's much less regulated and for the investor it's much easier to get ripped off; he’s aware of that. In corporate bond mkt there were a credit default swaps and had been for 10 years. He felt that Wall Street was "bound" to invent them on subprime mortgage bonds.
Michael Burry pesters Wall Street to create credit default swaps for subprime mortgage bonds
He is Ground Zero; "Patient No 1;" March to May 2005
Makes the "bet" (with GS) in March; gets a written contract in May.
GS – why willing? GS had persuaded AIG to sell GS
AIG had unlimited appetite. In a few months $20 billion, at very low prices; close to free,
GS took some on as a bet. Turned around and multiplied price by 10 and sold to Michael Burry.
All of sudden a big institution in the picture.
GS was already thinking along these lines. In other words it wasn't just Michael Berry.
AIG had been insuring corporate bonds for almost a decade.
In 2004 and 2005 GS comes (to AIG) with “diversified consumer loans”
“we’ll do that too.” (said AIG)
GS went to AIG with subprimes too. “Yep.”
Burry dealt with GS, Deuche Bank, Morgan Stanley, Bank of America, Merrill Lynch too. Wall Street firms were on the other side of the bets. For the most part they had sold the bets on and AIG was on the other side.
Charley Ledley and Jamie Mai
Cornwall Capital
Started with $100,000 in a Schwab Account.
“Wall Street underestimated the likelihood of unlikely events.” (they felt)
They bought options on extreme things happening. Each bet cost them very little. Wrong most of the time but right enough…
Stumble into the subprime mortgage mkt
For paying 2%/yr on dicey subprime mort loans
They knew nothing re bond mkt but they pieced together a picture
They go to SEC; NYTimes, WSJ “there’s fraud in the system.” Nobody understands or pays attention.
They ended up betting against financial instutions themselves – Bear Stearns, etc.
“Who’s taking all this risk?” they asked. Figured out that the WS firms themselves were the dumbest guys at the table. Afraid that BS couldn’t honor their contracts. So bought credit default swaps CDS’s on Bear Stearns too.
Turned $100,000 into $100 million.
None of these guys are natural short sellers. They wanted to be investing in the stock markets but they saw that these markets would be killed by what was going on in the bond (CDS, etc. market).
Personally, although they were making a fortune they had panic attacks; stressed (being right); a bet against an entire financial system; their insight that the system had become rigged; Charlie worried about riots
They were by nature ordinary stock investors; the world forced them into this position.
Herein, on April 2, 2010, I add the following from this, my blog, which indicates that one person,
Joseph Cassano
http://natgagu.blogspot.com/2009/03/joseph-cassano.html
was the cause of the meltdown. Read the whole interview above plus the link to Joseph Cassano, and you can see that we had a financial terrorist in our midst, one who started with Michael Milken.
And the NYT Article of April 1, 2010 adds to the list of names who make billions per year:
http://www.nytimes.com/2010/04/01/business/01hedge.html?scp=2&sq=soros&st=cse
And this review in the WSJ which served as the research for Lewis's book:
http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/tab/article/
But this reviewer says Michael Lewis has it all wrong:
http://www.huffingtonpost.com/yves-smith/debunking-michael-lewis-t_b_512542.html
Thursday, February 25, 2010
Front Page -- II
(c) 2010 F. Bruce Abel
And read the comments to this article as well. As long as this derivative exists all government attempts to bail out the world will fail.
Banks Bet Greece Defaults on Debt They Helped Hide
By NELSON D. SCHWARTZ and ERIC DASH
Published: February 24, 2010
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.
Post a Comment »
Read All Comments (167) »
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.
Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.
A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.
On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.
“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.
But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.
Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.
On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.
“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.
In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.
European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.
That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.
Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.
Markit says its index is a tool for traders, rather than a market driver.
In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.
“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”
Some money managers say trading in Greek swaps alone, not the broader index, is the problem.
“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”
If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.
As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.
“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”
And read the comments to this article as well. As long as this derivative exists all government attempts to bail out the world will fail.
Banks Bet Greece Defaults on Debt They Helped Hide
By NELSON D. SCHWARTZ and ERIC DASH
Published: February 24, 2010
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.
Post a Comment »
Read All Comments (167) »
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.
Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.
A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.
On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.
“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.
But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.
Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.
On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.
“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.
In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.
European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.
That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.
Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.
Markit says its index is a tool for traders, rather than a market driver.
In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.
“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”
Some money managers say trading in Greek swaps alone, not the broader index, is the problem.
“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”
If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.
As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.
“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”
Front Page New York Times -- The Attention This Deserves
(c) 2010 F. Bruce Abel
Ok, so why does CNBC quote credit default swaps as though they are legitimate instruments? Why are they permitted...anywhere? How can any bailout work when they exist?
http://www.nytimes.com/2010/02/25/business/global/25swaps.html?ref=business
There are some topics so toxic that any writing about them pales.
Ok, so why does CNBC quote credit default swaps as though they are legitimate instruments? Why are they permitted...anywhere? How can any bailout work when they exist?
http://www.nytimes.com/2010/02/25/business/global/25swaps.html?ref=business
There are some topics so toxic that any writing about them pales.
Monday, April 13, 2009
Satyajit Das -- Remember This Name and Read!
On Credit Default Swaps and their dangers:
http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/12/Credit-Default-Swaps--Through-The-Looking-Glass
http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/12/Credit-Default-Swaps--Through-The-Looking-Glass
Sunday, March 15, 2009
A Contract is a Contract -- AIG
Disgusting!
http://www.nytimes.com/2009/03/15/business/15AIG.html?_r=1&hp
And further disgusting: We don't know the names of those counterparties being bailed out along with AIG, who are not innocent and therefore could not have won a breach of contract suit:
http://www.nytimes.com/2009/03/15/opinion/15sun1.html
http://www.nytimes.com/2009/03/15/business/15AIG.html?_r=1&hp
And further disgusting: We don't know the names of those counterparties being bailed out along with AIG, who are not innocent and therefore could not have won a breach of contract suit:
http://www.nytimes.com/2009/03/15/opinion/15sun1.html
Saturday, March 7, 2009
Rich -- One For the Ages
Yes! Read every word and click on Jon Stewart's program vis-a-vis CNBC:
http://www.nytimes.com/2009/03/08/opinion/08rich.html
Monday, March 2, 2009
Saturday, February 28, 2009
Wednesday, November 19, 2008
Why the AIG-Lehman Blow Up Apparantly Did Not Occur But Does Lurk
Remember Cramer's rant about the blow-up that was to come on a certain date, and then it appeared that it was only $6 billion? Well this very good article explains what happened and what is still to happen.
http://us1.institutionalriskanalytics.com/pub/IRAStory.asp?tag=319
http://us1.institutionalriskanalytics.com/pub/IRAStory.asp?tag=319
Wednesday, October 22, 2008
Lehman - Aig - Only $6 Million?????
4:58 AM 10/22/2008
OK is it the end of the world or is it $6 million?
First the URL, then my notes from same interview.
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=10316625&src=finance&ch=1316259
"1/2 a million; 1/2 a billion; 1/2 a trillion"
From yesterday:[CDS = Credit Default Swaps; market generally of $55 trillion; $360 billion of Lehman]
CDS Market RegulationFoxbusiness.com
Interview with Hampton Finer, Deputy Supt. NY Insur. Department
used to work for fmr NY Atty Gen Elliot Spitzer
So far we don't know of any of those [huge losses by sellers of protection].
AIG was a big directional player...sold a lot of Lehman CDS's
They are reporting $6.2 million in losses from the CDS's.
1/2 trillion CDS's of Lehman sold supposedly
Hartford was in this market. $50 million exposure. (i.e. no big deal)
won't know until end of the quarter
we don't who'se exposed. Whose hedged.
will not know until next summer.
not reported centrally. only a voluntary survey.
I have to think he's working with old numbers which have nothing to do with the present. But what a difference!
OK is it the end of the world or is it $6 million?
First the URL, then my notes from same interview.
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=10316625&src=finance&ch=1316259
"1/2 a million; 1/2 a billion; 1/2 a trillion"
From yesterday:[CDS = Credit Default Swaps; market generally of $55 trillion; $360 billion of Lehman]
CDS Market RegulationFoxbusiness.com
Interview with Hampton Finer, Deputy Supt. NY Insur. Department
used to work for fmr NY Atty Gen Elliot Spitzer
So far we don't know of any of those [huge losses by sellers of protection].
AIG was a big directional player...sold a lot of Lehman CDS's
They are reporting $6.2 million in losses from the CDS's.
1/2 trillion CDS's of Lehman sold supposedly
Hartford was in this market. $50 million exposure. (i.e. no big deal)
won't know until end of the quarter
we don't who'se exposed. Whose hedged.
will not know until next summer.
not reported centrally. only a voluntary survey.
I have to think he's working with old numbers which have nothing to do with the present. But what a difference!
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