Magox Posted December 7, 2009 Author Share Posted December 7, 2009 Good luck writing regulations that say that exercising stock options of financial institutions should be treated differently than other industries. Even if by some chance you enact this legislation, the rocket scientists on Wall Street would have figured out a workaround within 15 minutes. And that's the biggest problem with the mindset. People think that getting redemption fixes things, and that's why the Spitzers, Cuomos and Bloomenthals get high grades from the ignorati. Until you take a step back and recognize that not only di they not fix things, but made it worse for the next crisis. Too much attention has been placed on the public lynchings instead of focusing on stabilizing the system and minimizing the probability of this happening again. The runaway fiscal mess is getting created because you're removing more people from the tax rolls and think that you can plug the deficit by taxing the remainder at higher rates. So again, you'll end up enacting legislation that will make people feel good without solving anything. Kind of like thinking that Trent Edwards would be the answer because he was better than JP Losman. I agree with just about everything you said, however I'm afraid that populism will prevail. Link to comment Share on other sites More sharing options...
Magox Posted December 9, 2009 Author Share Posted December 9, 2009 GG, this is what I was talking about http://www.bloomberg.com/apps/news?pid=206...NFXqo&pos=1 Chancellor of the Exchequer Alistair Darling imposed a 50 percent levy on banker bonuses and said he will increase income taxes after elections next year as the worst recession on record drives up government borrowing. The Brits have a leftist government in place, and they are facing similar budget problems as us and there are parallels that you can draw with their public anger that they have towards bankers with our situation. Link to comment Share on other sites More sharing options...
GG Posted December 9, 2009 Share Posted December 9, 2009 GG, this is what I was talking about http://www.bloomberg.com/apps/news?pid=206...NFXqo&pos=1 Chancellor of the Exchequer Alistair Darling imposed a 50 percent levy on banker bonuses and said he will increase income taxes after elections next year as the worst recession on record drives up government borrowing. The Brits have a leftist government in place, and they are facing similar budget problems as us and there are parallels that you can draw with their public anger that they have towards bankers with our situation. So much for trying to stabilize the City's financial sector. Frankfurt & Zurich are probably very happy about this. Good blog praising Bernanke - not all blame Link to comment Share on other sites More sharing options...
Magox Posted December 9, 2009 Author Share Posted December 9, 2009 So much for trying to stabilize the City's financial sector. Frankfurt & Zurich are probably very happy about this. Good blog praising Bernanke - not all blame Thanks for the article GG. I was a huge critic of Bernanke up until about a year, year and a half ago. I thought that he along with Paulson grossly understated or understood the risks of the subprime mortgages. March 28, 2007 Bernanke said "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," and Paulson on March 13, 2007 said "I continue to believe the U.S. economy is healthy," "We have had a significant housing correction in the U.S.," Paulson added. "You can't have a correction like that without causing some dislocations. It's too early to tell whether it's bottomed. I believe it has." "shouldn't be a surprise to anyone that there's some fallout in the subprime mortgage market ... but it's largely contained." So for this reason, they deserve a good bit of blame, not so much because I believe they caused it, but for not doing their jobs in understanding the risks, and giving a false sense of security that this situation was "contained". Having said that, Bernanke has taken some extraordinary steps that in my view have helped stabilize our economy, more than anything else. The jury is still out, some of the steps he took could have a huge impact on our economy in a few years, and I will reserve final judgement until then. But that is besides the point, the article focuses in on the populist anger, which is coming from both sides of the aisle and how that will most likely affect monetary policy moving forward. Which I do believe is extremely dangerous. Link to comment Share on other sites More sharing options...
GG Posted December 9, 2009 Share Posted December 9, 2009 Those quotes show precisely the problem. Nobody knew exactly the serverity of the problem. Even Cassandras like Taleb & Roubini didn't know the extent of potential damage on the financials' balance sheets. A Treasury secretary nor Fed chairman would make those statements if they had data that showed a bigger problem ahead. But in Spring 2007, the financials didn't show a concern, because all the subprime risk was mitigated away with CDS hedges with quality counterparties. No one was in a position to unravel each player's counterparty exposure to see how the dominos would fall. That's why the proposal for the new super regulator that will have power to pre-emptively break up a company that poses a systemic risk is laughable. It would be impossible to implement, because you don't know ahead of time what will tip over the company's risk management into the danger zone. It's like mandating the FAA that it ensures that airplanes no longer crash. Best way to do it is to mandate that no airplanes fly. Link to comment Share on other sites More sharing options...
Magox Posted December 9, 2009 Author Share Posted December 9, 2009 Those quotes show precisely the problem. Nobody knew exactly the serverity of the problem. Even Cassandras like Taleb & Roubini didn't know the extent of potential damage on the financials' balance sheets. A Treasury secretary nor Fed chairman would make those statements if they had data that showed a bigger problem ahead. But in Spring 2007, the financials didn't show a concern, because all the subprime risk was mitigated away with CDS hedges with quality counterparties. No one was in a position to unravel each player's counterparty exposure to see how the dominos would fall. That's why the proposal for the new super regulator that will have power to pre-emptively break up a company that poses a systemic risk is laughable. It would be impossible to implement, because you don't know ahead of time what will tip over the company's risk management into the danger zone. It's like mandating the FAA that it ensures that airplanes no longer crash. Best way to do it is to mandate that no airplanes fly. I agree. The more I look back at this crisis, an area of oversight that failed miserably were the ratings agencies. They basically gave the go ahead to investors and these CDS hedges to continue business usual. The motivations were more for self-interest than anything else and completely turned a blind eye to the risks of the toxicity of the assets that were being held by these so called responsible depository institutions. Link to comment Share on other sites More sharing options...
GG Posted December 9, 2009 Share Posted December 9, 2009 I agree. The more I look back at this crisis, an area of oversight that failed miserably were the ratings agencies. They basically gave the go ahead to investors and these CDS hedges to continue business usual. The motivations were more for self-interest than anything else and completely turned a blind eye to the risks of the toxicity of the assets that were being held by these so called responsible depository institutions. One thing to consider - even if the ratings agencies assigned incorrect ratings to structured instruments, they were not in the oversight or regulatory position. Once an agency assigns the rating, it doesn't know where the security ends up, and it's up to the regulators and auditors to ensure that the balance sheets are clean. The raters' biggest error was not assigning the high ratings on subprime, but the treatment of those ratings on par with other assets with a different risk profile. The agencies were chasing revenue, but it's not like investors didn't understand the game - as even AIG stopped writing CDSs on subprimes in 2005! The dirty industry secret that nobody wants to talk about is how did the regulators sign off in assigning the same risk attribution to a AAA subprime RMBS as they did to a AAA corporate bond, or a AAA government bond, when the default profile of each is vastly different. How did the banks' risk committees ok the overweight positions in subprime RMBS? How did the auditors miss the positions? The answer is that everyone thought that the risks were dispersed, because most management teams didn't appreciate the cascading risk of counterparty defaults. This was a centennial cluster of four parties (financials, regulators, auditors, raters) signing off on 3/4 of the risk, thinking that there's no way that the other guy would miss the 1/4 risk because missing that risk would devastate the business. Unfortunately, that assumption turned out wrong Link to comment Share on other sites More sharing options...
Magox Posted December 9, 2009 Author Share Posted December 9, 2009 One thing to consider - even if the ratings agencies assigned incorrect ratings to structured instruments, they were not in the oversight or regulatory position. Once an agency assigns the rating, it doesn't know where the security ends up, and it's up to the regulators and auditors to ensure that the balance sheets are clean. The raters' biggest error was not assigning the high ratings on subprime, but the treatment of those ratings on par with other assets with a different risk profile. The agencies were chasing revenue, but it's not like investors didn't understand the game - as even AIG stopped writing CDSs on subprimes in 2005! The dirty industry secret that nobody wants to talk about is how did the regulators sign off in assigning the same risk attribution to a AAA subprime RMBS as they did to a AAA corporate bond, or a AAA government bond, when the default profile of each is vastly different. How did the banks' risk committees ok the overweight positions in subprime RMBS? How did the auditors miss the positions? The answer is that everyone thought that the risks were dispersed, because most management teams didn't appreciate the cascading risk of counterparty defaults. This was a centennial cluster of four parties (financials, regulators, auditors, raters) signing off on 3/4 of the risk, thinking that there's no way that the other guy would miss the 1/4 risk because missing that risk would devastate the business. Unfortunately, that assumption turned out wrong I would definitely like to discuss this further and most likely will later on this evening, and you bring up an interesting point about the banks' risk committees and their risk management capabilities. Which will lead me back to the Repeal of GS and how some of these depository institutions weren't equipped and trained to do this job properly and should of never of been offering AAA subprime RMBS in the first place. But I will leave that for later on tonight, and I have a whole host of opinions on what you just posted, which I do largely agree with. However I do believe you are understating the role the agencies had in this mess. Also, this is a very good read from the St.louis Fed regarding the evolution of the subprime mortgage markets. It's a little lengthy but quite informative. http://research.stlouisfed.org/publication...omPennCross.pdf Link to comment Share on other sites More sharing options...
Pine Barrens Mafia Posted December 9, 2009 Share Posted December 9, 2009 Socialism has to be funded. People are so dumb when they voted for these creeps. It's a "Careful what you wish for" scenario if I've ever seen one. Was it you that said you were a canuck escaping their socialist regime? Link to comment Share on other sites More sharing options...
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