Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. (Repost from Feb. 25:) Goldman Sachs and GreeceDear blog readers: This is a restored version of one of the posts, from Feb. 25, that we lost when our blog got !@#$%&ed up in the past couple of days. I have figured out how to fix the half-dozen posts that were broken, and how to post new ones, but it involves a laborious fix (posting; going onto our server; downloading the resulting html file; deleting a string of javascript code that is somehow being generated now but wasn't a week ago; re-uploading the html file). If anyone's an expert on blogger or wants to help us (pro bono?) migrate our blog to some better blogging software (e.g. WordPress would be my preference), give us a shout.Today's New York Times has two stories about Greece: one on the front page about how banks, including some that helped the Greek government hide its bad debt, are now using credit default swaps to bet that Greece will default on its debt (thereby making this more likely to happen); and another, on p. A13, about the massive protests against budget cuts in Greece, including the country's second 24-hour general strike in two weeks. (In the second article, an accompanying photo appears to show tens or hundreds of thousands of protesters, but is accompanied by a caption mentioning "thousands" of protesters.) We have been meaning to do a post about an interesting item posted to Naked Capitalism earlier this week, by fund manager Marshall Auerback and L. Randall Wray, from the UMKC economics department (one of the main heterodox departments in the United States): Memo to Greece: Make War, Not Love, With Goldman Sachs Read the original post. Labels: blogger, Credit Default Swaps, Goldman Sachs, Greece Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More on the FCIC HearingsHere is something from The Nation; it is somewhat in contradiction to what I posted late last week (here), which portrayed the hearings as letting Wall Street off the hook, whereas this piece finds the testimony (and the quesstioning?) pretty damning of Wall Street, regulators, and ratings agencies, but says that the media have stopped covering the hearings. Sheila Bair's testimony was great; click here for a pdf of her full testimony.Financial Crisis Inquiry Commission Turns Up the Heat By Greg Kaufmann | January 15, 2010 Two days of Financial Crisis Inquiry Commission hearings have me rattled about how little has changed about our financial system and how much is still at risk. They also have me wondering this: where the hell are the media? For the first day of panels, reporters were squeezed together in the back rows after filling more reserved seating than I've seen at any prior hearing during this session of Congress. But as I wrote previously, after the banksters had preened for the cameras and recited their testimony like four schoolboys BSing their way through an oral report, the press vanished, missing out on more candid and informative witnesses. Yesterday, day two of the hearings, maybe a dozen reporters attended, fewer than were at for the press conference afterward. What did they miss? For starters, FDIC Chairman Sheila Bair testified that the credit-default swaps (CDS) market still poses a systemic threat and that even she can't access CDS information to accurately assess financial institutions' exposure. Bair and SEC Chairman Mary Schapiro were in agreement with Commission Chair Phil Angelides's assessment that the credit rating agencies were "proved to be worthless and remain so today," given that they are paid by the very Wall Street firms who are profiting from AAA-rated securitized assets. State attorneys general Lisa Madigan of Illinois and John Suthers of Colorado revealed that not only were their warnings about unscrupulous and predatory lending practices ignored but that their investigations were actively thwarted by federal regulators who in turn did nothing--under the guise of pre-emption. Madigan also described how rate sheets reveal that Wall Street paid mortgage brokers and loan officers more for risky mortgages--with low teaser rates, pre-payment penalties, low or no documentation--because the consequent higher interest rate paid by the borrower would bring in more income. Wall Street wasn't the victim of bad underwriting that it claims to be; indeed, it incentivized it. Denise Voigt Crawford, a Texas securities regulator for twenty-eight years, discussed the revolving door between agencies and the industries they regulate, and the "chilling effect [it has] on the zeal with which you regulate." Schapiro, Bair and Madigan argued that Wall Street should have to "skin in the game" when securitizing assets. As things stand now they sell them with a bought and paid for AAA-rating, and then take their profits even if the underlying assets are worthless. Madigan said of mortgage-backed securities, "At the end of the day, the people who had the risk were on the very front end, the borrower, and on the very back end, the investor. All the other market participants were paid along the way, and they didn't hold on to any of that risk." Bair said the agency that could have done something about subprime products early on--when it had a report on problems back in 2000--was the Fed. "I think the only place to tackle that on a system-wide basis for both banks and non-banks was through...the Fed [which had] the authority to apply rules against abusive lending across the board to both banks and non-banks," said Bair. "If we had had some good strong constraints at that time, just simple standards like you've got to document income and make sure they can repay the loan--not just at the start, but at the reset rate as well--we could have avoided a lot of this." So why didn't the Fed and other federal agencies act? "It can be very difficult to take away the punch bowl when, you know, people are making money," said Bair. She also talked about "pushback" from both the industry and the Hill--as late as 2007-- when the FDIC tried to "tighten up" on subprime mortgages and commercial real estate. Reforms discussed included a systemic risk council, a consumer financial protection agency, an industry-funded mechanism so that large firms can be broken up and sold off without taxpayer money, greater disclosure of compensation structures and a single clearinghouse for derivatives like credit-default swaps. But the task of this commission isn't to open its hearings by announcing the necessary reforms. It's to tell the story of what caused this meltdown, which should galvanize public demand for the necessary reforms. In that regard I think the commission is off to a decent start. They are breaking down tough concepts, showing the interconnectedness between Wall Street, legislators and regulators and fishing with dynamite when it comes to exposing bad actors. But time is short--the FCIC's report is due in December of this year. It's going to have to be fearless, and build momentum quickly by bringing in big players and asking them tough questions. That's the only way a bipartisan populist backlash will fight for reform--and it's the only way the media might consider showing up too. Read the original article. Labels: Credit Default Swaps, financial crisis, Financial Crisis Inquiry Commission, Sheila Bair, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street Digs InGood online piece from Newsweek from a while ago (April 10th). The subtitle is confusing, though: clearly Obama is getting the message (from Wall St.)!Wall Street Digs In The old system refuses to change. Is Obama getting the message? Michael Hirsh | Newsweek Web Exclusive Not long ago, a group of skeptical Democratic senators met at the White House with President Obama, his chief economic adviser, Larry Summers, and Treasury Secretary Tim Geithner. The six senators—most of them centrists, joined by one left-leaning independent, Vermont's Bernie Sanders—said that while they supported Obama, they were worried. The financial reform policies the president was pursuing were not going far enough, they told him, and the people Obama was choosing as his regulators were not going to change things fundamentally enough. His appointed officials and nominees were products of the very system that brought us all this economic grief; they would tinker with the system but in the end leave Wall Street, and its practices, mostly intact, the senators suggested politely. In addition to Sanders, the senators at the meeting were Maria Cantwell, Byron Dorgan, Dianne Feinstein, Carl Levin and Jim Webb. That March 23 gathering, the details of which have gone largely unreported until now, was just a minor flare-up in a larger battle for the future—one that may already be lost. With the financial markets seeming to stabilize in recent weeks, major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression. At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it's very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month. The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash. Geithner's financial regulation plan, announced April 2, does address some of these concerns. The Treasury chief wants all standardized over-the-counter trading of derivatives to go through an industry clearinghouse, which will give the government more oversight. Geithner said he wants to require "systemically important" firms to reserve more capital. He also wants to rein in "customized" derivatives contracts—those agreed to privately between firms. Whereas once these trades went totally unregulated, Geithner would require that they be "reported to trade repositories and be subject to robust standards" for documenting and collateralizing, among other new rules. But it's unlikely this will do much to change Wall Street. Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges. The response favored by the administration, the Federal Reserve and even many in Congress is to create a new all-knowing "systemic risk regulator" with as-yet-undetermined powers. Is such a person sitting at 30,000 feet really going to be able to keep up with all this onrushing complexity, especially as over-the-counter trading resumes in quiet places around the world? It is a triumph of hope over experience to think so. Meanwhile, up in Manhattan, the New York Fed has been conducting meetings on future regulation with a group of major Street insiders and their traditional regulators. At the most recent meeting, on April 1, they agreed on creating central clearinghouses for trading and "trade-information warehouses" that will track market data far better than before. But they have resisted anything more dramatic, like requiring all trading to occur on publicly recognized exchanges. Geithner has also put his stock in clearinghouses; he says he only wants to "encourage greater use of exchange-traded instruments." That has placed Geithner at odds with another Democratic senator, Tom Harkin of Iowa, chair of the agriculture committee, who wants all futures contracts traded on exchange. "The senator feels that what he's offering in his bill does include more integrity and transparency than the current Geithner plan," a Harkin spokesman told me. Officials at the firms who took part in the New York Fed meeting and at the Fed maintain that there is little difference between clearinghouses and formal exchanges; both are regulated and both are industry-run, they say. But that misses a major point, says Michael Greenberger, a former top official at the Commodity Futures Trading Commission who has been a critic of the administration's reform efforts. Exchange trading gives the government authority over fraud and manipulation and emergency powers to stop trading, he says, and it creates the kind of public transparency that isn't possible in a privately run clearinghouse. The White House and Treasury Department did not immediately respond to my requests for comment on these issues or on the March 23 meeting (beyond confirming that it took place). But it's noteworthy that more than a month and a half passed before Obama agreed to the meeting, which was prompted by a letter that Dorgan sent in early February. The senators were invited after one of the group, Sanders, put a hold on the nomination of Gary Gensler, Obama's nominee to be head of the Commodity Futures Trading Commission. In an interview, Sanders said he opposes the nomination because Gensler has spent much of his career in Washington working for Wall Street's interests. Gensler, in testimony, has said he has learned from his past mistakes. "At this moment in our history, we need an independent leader who will help create a new culture in the financial marketplace," Sanders said. Instead, the old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show. Among the outsiders is Nassim Nicholas Taleb, the trader and professor who wrote "The Black Swan: The Impact of the Highly Improbable." Taleb wrote in the Financial Times this week that a fundamental new approach is needed. Not only should firms be prevented from growing too big to fail, "complex derivatives need to be banned because nobody understands them and few are rational enough to know it," he said. Yet even as we are still picking up the debris, we seem to be ready to embrace that world once again. Read the original article. Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Timothy Geithner, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Weaponizing Credit Default SwapsAnother lovely investment strategy for tough times. From Friday's Financial Times:Speculators are being armed by banks to hurt Main St By Mark Sunshine Published: November 28 2008 02:00 | Last updated: November 28 2008 02:00 Warren Buffett called credit default swaps "financial weapons of mass destruction" and they are about to annihilate Main Street. In a disturbing new trend, international banks are creating syndicated credit facilities that "weaponise" credit default swaps (CDS) by using the trading price of a borrower's CDS to set the interest rate paid by the borrower. Unfortunately, banks don't understand that they are arming speculators to ambush and kill unsuspecting and otherwise healthy companies. Regulators are oblivious to this danger as are the victims. CDS are unregulated derivative instruments that are essentially a bet on the creditworthiness of a company. CDS are traded in an unregulated, opaque over-the-counter market, where prices have questionable value and can be easily manipulated and misrepresented. Recently, it was reported that banks have started tying commercial loan interest rates to the price of a borrower's CDS. This seemingly innocuous loan provision allows speculators to bet that a borrower's stock price will go down while insuring that the bet pays off by manipulating the borrower's CDS prices upward. Read the rest of the article Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Financial Times, Mark Sunshine Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith on a Big PuzzleShe blogs today about a real mystery in financial markets, i.e. why Lehman's CDO auction didn't turn into a disaster. This is rough going, but this issue is key to understanding how events have progressed since the Lehman Bankruptcy:WEDNESDAY, NOVEMBER 5, 2008 "Credit Swaps Top $33 Trillion, Depository Trust Says" Even though the (supposed) supervising grownups in the credit default swaps market keep making reassuring noises about the credit default swaps market, I am not entirely convinced, mainly because the picture is still somewhat murky. Witness the Bloomberg story today, which tells us that the CDS market is smaller than we thought, roughly $34 trillion in notional amount according to the DTCC versus a not-long-ago report of $62 trillion from the IMF. The Bloomberg story create the impression that the new smaller number is solely due to the netting, when other factors may have played a role. First, we have also four large settlements (Freddie, Fannie, Lehman, and WaMu). Second, my impression is that most CDS agreements run three to five years. With spreads widening massively in the credit crunch, plus certain formerly important protection writers no longer active (AIG, Ambac, MBIA, Bear) and hedge funds (another important source) less active in aggregate, one would imagine we have had some runoff, as outstanding agreements have matured and new ones have not been written in the same volume. The part that leaves me scratching my head is this: Read the rest of the post Labels: Credit Default Swaps, financial crisis bailout, Lehman Brothers, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Uncle Sam v. McWorldThe wonderful Yves Smith with yet another great post. Note that US Treasury bonds appear, ever so slightly, and in an unusual sense (reflected in value of CDS swaps, and not according to comparison with the benchmark US Treasury yields: i.e. you can't compare US Treasury performance to itself) to be mimicking the emerging-market sovereign bonds that have been getting so hammered lately. In this light, I recall that a few weeks ago McDonald's bonds too, were a better value than treasury bonds.Sunday, November 2, 2008 CDS Pricing in Increasing Treasury Default Risk We have noted that Treasuries (and the dollar) are the remaining bubbles, although some doubts are starting to surface on the Treasury front. Paul Amery at Prudent Bear gives a good recap: The tectonic plates underlying the whole superstructure of debt have started to shift. On the surface nothing remarkable is happening--the 30 year US Treasury bond yield recently hit an all-time low of 3.88%, as investors sought a safe haven during equity market turbulence. Yet while nominal bond yields have declined, the credit risk component of US Treasuries has been on an increasing trend since last year. According to data provided by CMA DataVision, the credit specialists, the 10-year credit default swap spread--a form of insurance contract against issuer default--has risen steadily - from 1.6 basis points (0.016%) in July 2007, to 16 basis points in March 2008, to 30 basis points in September, to over 40 basis points on October 27--see the chart below for the spread history so far this year. In other words the cost of insuring against a US government default has risen by 25 times in little over a year. Similar trends have been evident in the UK and German government bond markets. Read the rest of the post Labels: bond market, Credit Default Swaps, financial crisis bailout, McDonald's, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
