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What the FEC couldn't figure out
March 20, 2009 11:16 PM   Subscribe

Matt Taibbifilter: Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world's largest insurer! This week's MeFi stories have generally failed to explain the reasoning that caused the recession, even though Jon Stewart was basically on the mark. Now, Rolling Stone's only reporter lays it all out The Big Takeover, a typical combination of zealous snark and the overlooked, damning facts needed to clear up a ridiculously complicated story.
posted by shii (111 comments total) 40 users marked this as a favorite

 
Taibbi is always good for getting the rage gland going, but at this point I'm also cynical about whatever Snidely-Whiplash-du-jour is offered up by the media. My desire to wish violence on Joe Cassano is mitigated by the zeal of the press to unmask the villains long after the damage they've done makes it irrelevant. Where was reporting like this when it might have done some good?
posted by fatbird at 11:22 PM on March 20, 2009 [3 favorites]


the baseline scenario is a must read blog on this topic. Simon Johnson is an IMF economist who's delt first hand with financial crises across the globe and is seeing the exact same pattern where the people who caused the problems claim that they are the only ones who can fix it, and about about tunneling where individuals try to cart off as much wealth as possible before the whole thing collapses (looting might be a better term :P).

That's exactly what we're seeing now. Rich bankers who caused the problem have spent their entire careers in the pursuit of money: for themselves. They have an entire ethos about how the pursuit of money is a higher calling. You can't expect them to turn on a dime and start working in the public interest. They think they are indispensable -- and they're wrong. They've been trying to make as much money as possible for a long time, and they're going to keep doing that.

The U.S. government owns 79.9% of AIG. When you buy a company, you have every right to make changes to make it run better. Lots of time in the corporate world, you have corporate raiders come in and fire the leadership of the company to try to get the real value out. Just look at Icahn and Yahoo earlier last year, he bought up stock in the company that then tried dumped the CEO he thought was doing poorly. We have every right to get rid of the dead weight and rot in those companies. And doing so is the only way to save the economy.

Regarding indispensability: I suppose making billions of dollars of CDS might require some heavy modeling, simply keeping the lights on doesn't require a bunch of math PhDs (and besides, the actual traders are not the ones with the PhDs anyway). I used a metaphor of a poker game in another comment, obviously if you play against the worlds best poker players, you'd get destroyed. And wall street may have been like that, the world's best poker players playing against each other. But almost anyone can understand the basic rules of the game. And many people can run banks if the only purpose is to stabilize the system, rather then win huge amounts of money gambling.

Regarding the ethos of the pursuit of money: You'd be surprised how many wallstreet types are actually Ayn Rand devotees. Alan Greenspan was an objectivist (who now admits there was a 'flaw' in his model. Turns out self-interested people are actually intrested in themselves, and not their institutions!)

Even those who are not so methodical in their greed so as to turn to a crackheaded philosophy seem to have the same attitude: that life is just a game and the "winners" shouldn't have to bail out the "losers" (per Santelli)
posted by delmoi at 11:39 PM on March 20, 2009 [29 favorites]


Taibbi is always good for getting the rage gland going, but at this point I'm also cynical about whatever Snidely-Whiplash-du-jour is offered up by the media. My desire to wish violence on Joe Cassano is mitigated by the zeal of the press to unmask the villains long after the damage they've done makes it irrelevant. Where was reporting like this when it might have done some good?

I think I've seen the 'four year olds playing soccer' metaphor thrown around about the press a lot. They're all just chasing the ball
posted by delmoi at 11:41 PM on March 20, 2009 [2 favorites]


You'd be surprised how many wallstreet types are actually Ayn Rand devotees.

You are so cute sometimes, delmoi.
posted by longsleeves at 12:11 AM on March 21, 2009


Bank A wants to hedge its mortgage risk in case the Pope can't make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope's mortgage if he defaults.
...
In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage.


Maybe, I'm not parsing "sells protection to" right, but what does Taibbi mean? That

a)if the Pope defaults, A looks to B for the money, which in turn looks to C for the money; or
b)if the Pope defaults, B owes both A & C the million

Option (b) doesn't make much sense, because how would C be involved with the papal loan but that's how I literally parse Taibbi's claim.
posted by Gyan at 12:12 AM on March 21, 2009


(b) is correct.
posted by PenDevil at 12:22 AM on March 21, 2009 [1 favorite]


And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

So right it hurts.
posted by Afroblanco at 12:24 AM on March 21, 2009 [24 favorites]


Tweedledum and Tweedledee
posted by Mblue at 12:41 AM on March 21, 2009 [1 favorite]


Option (b) doesn't make much sense, because how would C be involved with the papal loan but that's how I literally parse Taibbi's claim.

C is not involved in the original loan at all, that's why Taibbi calls the CDS "naked."

Basically the government was prohibited from regulating credit default swaps, which means that banks could write them however they pleased.

Imagine you're Ford, and you buy auto parts from a company that supplies both you and GM. You think GM looks shakey, and might not be able to pay back your supplier. You could buy a CDS insurance policy on GM's debt to your supplier so that if GM goes under, and your supplier goes under as a result, you have money that will cover the expenses caused by this problem.

A more obvious use of these "naked" (I've never heard anyone use that term before, how common is it?) CDS is just to gamble. You think GM is about to go out of business, you can take out a CDS to collect a ton of money if that happens.
posted by delmoi at 12:45 AM on March 21, 2009


Yeah, it's just like buying a lottery ticket. In Taibbi's example, Bank C is playing the lotto every time it pays the fee to Bank B - except that, instead of just gambling on a random sequence of numbers and letters they're betting that the Pope will fail to pay his mortgage.
posted by Kevin Street at 1:14 AM on March 21, 2009


I think a sports bookmaker is a better analogy than a lotto. Selling CDSes is like selling bets. Neither the bookmaker nor the bettor need have any relationship with the sports teams. Of course real bookmakers balance their risk so they don't get wiped out...
posted by ryanrs at 1:27 AM on March 21, 2009 [1 favorite]


I think the sports bookmaker is a great analogy to the insurance industry. Particularly the "simplest and fairest" one: the perimutuel system.
posted by christhelongtimelurker at 2:05 AM on March 21, 2009


Of course real bookmakers balance their risk so they don't get wiped out.

A fantastic analogy... except in this case the bookmakers are earning seven figures+, and are setting a line that can't be reasonably determined with public knowledge.
posted by clearly at 2:08 AM on March 21, 2009


Great article for putting this in context for those of us who Don't Get the jargony finance language. But the politics of it, that part I now understand just fine.
posted by harriet vane at 2:29 AM on March 21, 2009


And when bookmakers fuck up they get a bullet in the head, rather than a cheque from the government.
posted by Meatbomb at 2:53 AM on March 21, 2009 [9 favorites]


It's amazing. If there was some other kind of crisis - global warming suddenly drowning the coastal cities, say - the US government wouldn't just put climate scientists in charge of everything and let them fix it through any means necessary. They'd blame the scientists instead, and maybe even put some of them in jail for not giving enough warning. Doesn't matter how complicated the science is, you'd have people demanding accountability.

But when there's a financial crisis the first thing they do is give the finance experts free reign to fix things. Accountability falls by the wayside somehow, and its' decided that the only people qualified to fix things are the same ones who helped cause the situation in the first place.
posted by Kevin Street at 2:59 AM on March 21, 2009 [4 favorites]


SEC, not FEC.
posted by jscott at 3:17 AM on March 21, 2009


Yes, Kevin Street. Taibbi draws attention to that paradox with this part of his subtitle:

The global economic crisis isn't about money - it's about power.

In a nutshell, the financial marauders are saying that nothing can touch them,
not even disasters of their own making. Whatever happens, they get
paid and paid handsomely. That's power.
posted by telstar at 3:22 AM on March 21, 2009 [7 favorites]


To bad we here try and stamp out this kind of writing by undercutting their employer's advertising model by linking to their print version.
posted by srboisvert at 3:50 AM on March 21, 2009


delmoi: Basically the government was prohibited from regulating credit default swaps

By whom?

As per the Wikipedia entry on Commodity Futures Modernization Act:
"133 Democrats and 157 Republicans voted for the appropriations bill. 51 Republicans and 9 Democrats opposed the appropriations bill vote results in the house. The Senate version passed by "Unanimous Consent." President Clinton signed it into Public Law (106-554) on December 21, 2000."
posted by Gyan at 4:36 AM on March 21, 2009


I think the sports bookmaker is a great analogy to the insurance industry. Particularly the "simplest and fairest" one: the perimutuel system.
posted by christhelongtimelurker at 5:05 AM


Actually, wouldn't the parimutuel system have helped in this instance? Parimutuel betting is what occurs in horse racing, with the odds (and payouts) determined entirely by how much money has been wagered on each possible bet in a pool. If the crowd puts a huge percentage of that money on Frontier Franny in the sixth*, then the odds and payouts per dollar wagered on FF decrease, because there are more winning bets on FF sharing the losers' money.

In other words, the consensus of the group prices the risk. This is the sort of visibility that CDS didn't have. Whether there was one CDS traded on a specific bet or a million, the next investor/guarantor/gambler to want to engage in the same bet had an incomplete set of information to understand the rest of the market's perception of the risk.

No regulation = no central marketplace for trade = incomplete information. It's shocking to think these supposed masters of the universe were happier to do all this in the dark than with full transparency, but I guess they couldn't inflate this bubble to such ludicrous proportions if the risk would have been accurately priced and visible to all investors.

*Full disclosure, I won a lot of money a few years ago on Frontier Franny in the sixth.
posted by GamblingBlues at 4:58 AM on March 21, 2009 [5 favorites]


"No regulation = no central marketplace for trade = incomplete information. It's shocking to think these supposed masters of the universe were happier to do all this in the dark than with full transparency, but I guess they couldn't inflate this bubble to such ludicrous proportions if the risk would have been accurately priced and visible to all investors."

You hit the nail square on the head.

It's the result of the "Golden Rule". Those who have the gold make the rules. Naturally, they will write the rules to garner more gold. And - knowing that it's a fool's game they play - they write the rules to protect themselves and their gold, when it all comes crashing down.

This is where conservative thought and Karl Marx intersect. Conservatives tout the Second Amendment to the U.S. Constitution not because they believe in civil liberties, but because they have an infantile secret fantasy about engaging in Revolution Against the Big Bad Government. The irony of their position escapes them, naturally. Marx was closer to the mark when he pointed out that this all ends in Revolution anyway.

I don't think that this particular round in the game will end in Revolution in any of the industrialized democracies. The fundamental idea behind a working democracy is that regime change can be accomplished without violence. Nevertheless, this ignores the fact that the world is essentially a plutocracy, with the real power held not by elected officials, or even governments, but by the plutarchs and oligarchs that put them into power. The leaders can be dispensed with in an election, but the power mongers continue on, hidden from view.

Or, to paraphrase Marx, "Democracy is the opiate of the people."
posted by Xoebe at 5:58 AM on March 21, 2009 [2 favorites]


Shoot the motherfuckers. I'm serious. Line them up -- or a handful of the big bosses -- right in front of the bull on Wall St. Blindfold them. Give them a cigarette and a last word. And blow their brains all over the street. 20 or 30 like that and we'll have the attention of these criminal masterminds at last. Fuck the rule of law. We need some serious mob rule in this country for a year or two.

I love Matt Taibbi. Grrrr.
posted by fourcheesemac at 6:39 AM on March 21, 2009 [7 favorites]


We need some serious mob rule in this country for a year or two.

La terreur n'est autre chose que la justice prompte, sévère, inflexible.
posted by Ritchie at 6:48 AM on March 21, 2009 [11 favorites]


Shoot the motherfuckers. I'm serious. Line them up -- or a handful of the big bosses -- right in front of the bull on Wall St. Blindfold them. Give them a cigarette and a last word. And blow their brains all over the street. 20 or 30 like that and we'll have the attention of these criminal masterminds at last. Fuck the rule of law. We need some serious mob rule in this country for a year or two.

the problem is that we DO have mob rule. it's just the Wall Street Gang (we're-not-JewsTM-we're-Dutch-Reform) which is making the rules.

Here's the key 'graph:
But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more "business-friendly." Wall Street responded by flooding Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks.
one of the reasons why the Repub's have been going slowly apeshit is that the Dem's, starting with Clinton, have been stealing away their natural constituency: Wall Street bankers. Those hedge funds gave a lot of money to the democratic party.

Prediction: 2012 is going to have a evangelical Peronist-Republican (i.e. Huckabee) in polyester candidate facing off against Obama in a conservative gray suit. Your head is going to explode: people on the left sometimes get confused about which party does populist class warfare in the US.
posted by geos at 6:58 AM on March 21, 2009 [4 favorites]


Good post. Thanks for this.
posted by Toecutter at 7:03 AM on March 21, 2009


SEC, not FEC.

Oh, I dunno ... Fucking Exchange Commission could probably be called a descriptivist definition at this point.
posted by YoBananaBoy at 8:05 AM on March 21, 2009


I want to shout this article from mountaintops.

We knew Bush wasn't a big reader, but does Obama and company read this stuff?
posted by JHarris at 8:33 AM on March 21, 2009


We knew Bush wasn't a big reader, but does Obama and company read this stuff?
Nope. And if they do, it's dismissed because it doesn't fit with their world view.
posted by vivelame at 9:10 AM on March 21, 2009


what we're seeing for the first time is the actual power-base of not just BushCo but the neo-cons who've controlled this country for the past 30 years.

when people saw 2008 as the end of BushCo, we thought that "the regime" and "the cause" of the crisis was coming to an end. now it's clear that was just the beginning.

in BushCo we still have the "Co" part of the regime, the real power base that kept the war and corruption going on as long as it lined their pockets. does anybody remember the rally on Wall Street that happened right after Bush announced the invasion of Iraq?

the political neo-cons may have been term limited but the ones with the real power were the financial and banking elites who are sacking the treasury for all what they can get.

they're showing they're not going down without a fight and this "bail out" is not just ransom money. the bail out is the first "coup de trésorerie".

in other words, this is a coup d'etat, US-style.
posted by liza at 9:14 AM on March 21, 2009


I just wish people would not always characterize these toxic mortgages as McMansions owned by meth-heads and ex-cons and other flavours silly/dangerous poor people. I expect that a big percentage of this toxicity is going to be found to be made up of people who bought into a market that was made hyper-competitive by low interest rates. The young professionals who won a bidder's war to pay a half a million for a downtown 2 bedroom, is still going to be stuck with a toxic asset when the real estate value drops below the mortgage they hold. Throw in a bunch of middle management job losses and we're in for a bumpy ride.

And it won't be all the fault of poor people.
posted by bonobothegreat at 9:38 AM on March 21, 2009 [6 favorites]


Q: Those geniuses who are the only ones who understand exactly how they looted our financial system -- What kind of retention bonus should they get?

A: *
posted by ericb at 9:44 AM on March 21, 2009 [1 favorite]


It's amazing. If there was some other kind of crisis - global warming suddenly drowning the coastal cities, say - the US government wouldn't just put climate scientists in charge of everything and let them fix it through any means necessary. They'd blame the scientists instead, and maybe even put some of them in jail for not giving enough warning.

What? What on earth leads you to think this? It's absurd. The U.S. Government would blame climate scientists if global warming suddenly kicked up? It's insane to think that.

And by the way DARPA is looking into geoengineering right now, that is looking at how technology can directly reduce the earth's temprature as opposed to (or in addition too) trying to reduce carbon emissions.
posted by delmoi at 9:57 AM on March 21, 2009


No, it won't all be the fault of the poor people. And there will be many, many well intended people around the world that will pay a consequence from the lack of real separation and oversight of shared financial systems (banking, investment, insurance) over the last two decades.

I know it's an overly simplistic view, but my gut began telling me that banks were becoming disconnected from the communities they served in the US once interstate ownership and operation began to lift in the 1980's.

I stopped trying or investing in anything once I couldn't understand it. The only thing I have to show now is that I have no debt. No substantial assets either, but no debt.
posted by michswiss at 9:58 AM on March 21, 2009 [1 favorite]


As a 24 year old I can't wrap my head around how the generation that brought me up has left my generation with no real future aside from cleaning up the shit they've left in their pants. The only thing I can think of to make things right is to hold them accountable in history books as some of the absolute most evil men to ever walk this earth. I'm becoming more and more speechless.
posted by pwally at 10:02 AM on March 21, 2009 [6 favorites]


James K. Galbraith will scare you to death: No Return to Normal: Why the economic crisis, and its solution, are bigger than you think. (Washington Monthly).

We're so screwed.
posted by fourcheesemac at 10:06 AM on March 21, 2009 [4 favorites]


pwally, you're generation will screw up just as bad or worse, and when your 50, some 24 year old kid will be bitching about it. Count on it, happens with every generation, just the specifics change.
posted by stbalbach at 10:10 AM on March 21, 2009


This is stupid. An article that hits you with ignorant industrial nostalgia in the first paragraph doesn't have anything to teach you about finance.
posted by grobstein at 10:13 AM on March 21, 2009 [1 favorite]


As a 24 year old I can't wrap my head around how the generation that brought me up has left my generation with no real future aside from cleaning up the shit they've left in their pants.
Oh, you'll be fine. Even if you do have to clean up some shit, you're ignoring the fact that you don't have to do it in the snow uphill both ways.
posted by Flunkie at 10:17 AM on March 21, 2009 [2 favorites]


pwally, you're generation will screw up just as bad or worse...

Calling it a bit early, I think.
posted by voltairemodern at 10:26 AM on March 21, 2009


An article that hits you with ignorant industrial nostalgia in the first paragraph doesn't have anything to teach you about finance.

Maybe Joe Cassano can start teaching us finance at Michael Milken U.
posted by ryoshu at 10:40 AM on March 21, 2009


This is stupid. An article that hits you with ignorant industrial nostalgia in the first paragraph doesn't have anything to teach you about finance.

That response is so funny it hurts. Like a knife* right in the back.

*knife manufactured in china where they don't need industrial nostalgia.
posted by srboisvert at 10:46 AM on March 21, 2009 [2 favorites]


In This American Life , The giant pool of money episode 355, we read some mind boggling info.

Adam Davidson ( NPR’s International Business and Economics correspondent) recorded some conversation at the Ritz Carlton in lower Manhattan, with interesting people such as:
Mike Francis: My name is Mike Francis. During the beginning of the mortgage implosion, I was an executive director at Morgan Stanley on the residential mortgage trading desk.
who also sold tranches of mortgage backed securities, and said
Mike Francis: it was unbelievable. We almost couldn’t produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce. That was our difficult task, was trying to produce enough. They would call and ask “Do you have any more fixed rate? What have you got? What’s coming?” From our standpoint it's like, there's a guy out there with a lot of money. We gotta find a way to be his sole provider of bonds to fill his appetite. And his appetite’s massive.
So it is in his interest to find as many products to sell ASAP. Of course one would have to look at the quality of the underlying loans, are they likely to pay or not ?
Mike Francis: All the data that we had to review, to look at, on loans in production that were years old, was positive. They performed very well. All those factors, when you look at the pieces and parts. A 90% NINA loan from 3 years ago is performing amazingly well. Has a little bit of risk. Instead of defaulting 1.5% of the time it defaults at 3.5% of the time. That’s not so bad. If I’m an investor buying that, if I get a little bit of return, I’m fine.
NINA stands for "no income no asset" loan , that's clearly bottom of the barrel, high risk loan. Yet these failure rates, to a superficial reader, appear nice. Those rates are, of course, based on historical data from loans made in the past. Except that (emphasis mine):
Adam Davidson: As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that foreclosure rate is generally below 2 percent. So they figured, absolute worst-case scenario, the foreclosure rate may go to 8 or 10 or 12 percent. But the problem with is there were all these new kinds of mortgages, given out to people who never would have gotten them before. So the historical data was irrelevant. Some mortgage pools, today, are expected to go beyond 50 percent foreclosure rates.

Alex Blumberg: To be fair, they knew there were risks. But investors have a system to assess those risks. They’re these special companies. Credit rating agencies. Moody’s, Standard & Poor’s, Fitch. Their job, their main job, is to assess risk for Wall Street and the global pool of money. They rate every kind of bond according to its risk. Triple A is the safest, then there’s double A, single A, all the way down to single B and below.
And that’s all most investors look at - the letter grade. They trust the credit rating agencies. And these agencies blessed most of these mortgage-backed securities. Gave them AAA ratings - which means they were considered as safe as a US government bond. This was the magic of this whole system. You could take a pool of thousands of risky mortgages, and create a security that was called money-good, as safe as any investment out there. At least that's what people thought. But now we know those agencies relied on the wrong data. That same historic data that had nothing to do with these new kinds of mortgages.

I don't belive, not for a second, that credit rating agencies and employees of Morgan Stanley are likely to commit the very basic, very investment error every other Joe makes : that of thinking that data in the past, however analyzed, is going to reflect the future.

The average Joe is blinded by greed as anybody else, but those pro guys are taught to not to buy into their own greed and take cautious approaches. The only overriding factors could be "orders from above" to ignore risk so blindly and go ahead.
posted by elpapacito at 10:46 AM on March 21, 2009 [5 favorites]


pwally, you're generation will screw up just as bad or worse, and when your 50, some 24 year old kid will be bitching about it.

i'm 51 and i agree with him - our generation HAS screwed things up - in fact, it's been screwing things up ever since it turned the summer of love into the me decade - true, the world we got in the 60s and 70s wasn't in all that great shape - but it was better than what we seem to have now and that's OUR doing
posted by pyramid termite at 10:59 AM on March 21, 2009 [3 favorites]


The people who have spent their lives cloistered in this Wall Street community aren't much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don't know what the hell LIBOR is or how a REIT works or how to use the word "zero coupon bond" in a sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them.
I'd just like to thank a few people - Mutant and Malor at the top of the list, but others - for treating us like mature and intelligent people who, with a little work, do in fact understand this stuff.

I work for a Major Financial Institution (in IT, not in anything dealing with Actual Money or even Fake Money), and people here do this, and it pissed me off no end.
posted by mephron at 11:03 AM on March 21, 2009 [2 favorites]


I'd just like to thank a few people - Mutant and Malor at the top of the list
I'll drink to that.
posted by elpapacito at 11:07 AM on March 21, 2009 [1 favorite]


Am I the only one who thinks TALF, as it's being described, is a recipe for further disaster?
posted by ornate insect at 11:12 AM on March 21, 2009 [1 favorite]


Am I the only one who thinks TALF, as it's being described, is a recipe for further disaster?

It's an absolute windfall for the looters.
posted by ryoshu at 11:22 AM on March 21, 2009


"As a 24 year old I can't wrap my head around how the generation that brought me up has left my generation with no real future aside from cleaning up the shit they've left in their pants. The only thing I can think of to make things right is to hold them accountable in history books as some of the absolute most evil men to ever walk this earth. I'm becoming more and more speechless."

Oh, this is just how it happens. This is a cyclical thing. About 70-80 years, we have another huge financial calamity. Bubbles happen more often, but this seems to be a cycle which depends on the generation which last experienced it dying off, so there is no collective memory about the event. It's silly to blame an entire generation, as if there was any meaning in it.
posted by krinklyfig at 11:36 AM on March 21, 2009


It's not just "further disaster". Merely announcing plans to "buy toxic assets" (i.e. give taxpayer money away to people who took bad risks) can cause disaster before the plans even take effect. If the market is partially gridlocked because owners are reluctant to sell at no-longer-inflated prices, the last thing you want to do is tell them that their reluctance might eventually be rewarded with public funds.

A friend of mine is trying to buy a house that's up for a short sale. No word back from the seller's bank yet, but if they aren't happy with the seller's full asking price I can't blame them. If the alternative to losing some of their mortgage investment was an eventual foreclosure and even greater loss of their investment, it would be a no-brainer. Getting only 90% of their money back would be a cheap lesson, as "be extra careful about lending during a housing bubble" lessons go. But what if they can sell the whole "troubled mortgage" to a government-backed program and leave us holding the bag? "Wait until the feds print more money so you can get 100% back" is an even cheaper lesson (for the bank, if not for the public).
posted by roystgnr at 11:39 AM on March 21, 2009


Am I the only one who thinks TALF, as it's being described, is a recipe for further disaster?

Krugman agrees.
posted by wemayfreeze at 11:40 AM on March 21, 2009


I don't belive, not for a second, that credit rating agencies and employees of Morgan Stanley are likely to commit the very basic, very investment error every other Joe makes : that of thinking that data in the past, however analyzed, is going to reflect the future.

The average Joe is blinded by greed as anybody else, but those pro guys are taught to not to buy into their own greed and take cautious approaches. The only overriding factors could be "orders from above" to ignore risk so blindly and go ahead.


Don't be so quick to assume massive intelligence at the top of the financial food chain. I prefer applying the line Deep Throat had in All The President's Men: "The truth is these are not very bright guys. And things got a little out of hand."
posted by jonp72 at 11:52 AM on March 21, 2009 [5 favorites]


when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town

I like this. I can just hear the Dude saying this as if he was talking about Bunny Lebowski. "They owe money all over town!"
posted by grapefruitmoon at 12:06 PM on March 21, 2009


AIG execs satisfy public demand by elevating their collective morality.
posted by Rumple at 12:35 PM on March 21, 2009 [1 favorite]


Don't be so quick to assume massive intelligence at the top of the financial food chain.

Sure, I don't expect 90% of them to hold a doctorate in econometric modeling or maths, or to still remember how to walk the walk after long years of lobbying and representing.
On the contrary I expect many of them to be coopted as capital representatives, while the really bright ones are working in lavishly fournished trenches, but still trenches, in which they received the order to go "business as usual", skepticism and alarm bells of analysist notwithstanding or silenced with bonuses to yes men.

Yet I don't believe they couldn't possibily know that historical data can't be used if the very nature of the mortgage they represent has changed, as similar notions are taught in Statistics 101 , maybe even in the so called liberal arts colleges.

Also consider that the very name of the underlying loans, called NINA (no income no assets) immediately suggest that they are likely to be very very volatile to anybody who has worked for a few months in any financial institution. Double or triple checking that kind of business makes a lot of sense at any management level, top cats included.

Unless, of course, you have a golden parachute proportional to how much money the business has churned, even if its deferred compensation. Jail for criminal negligence is the least of the punishment, clawbacks are a minor disincentive when such damage can be done by so few and their lobbied acolytes.
posted by elpapacito at 12:45 PM on March 21, 2009


delmoi, I was just speaking hypothetically. My point is that, if some other really complicated system were to break down, there would be a lot of people out there demanding punishment for the scapegoats. But when this system breaks down, the breakers seem to get a free pass.
posted by Kevin Street at 12:53 PM on March 21, 2009


James K. Galbraith Reponds to Geithner’s Toxic Asset Plan
posted by homunculus at 1:47 PM on March 21, 2009


Oh, this is just how it happens. This is a cyclical thing. About 70-80 years, we have another huge financial calamity. ... It's silly to blame an entire generation, as if there was any meaning in it.

Speaking as another speechless 24 year old, it's not so much a matter of blaming specific arbitrary generations, but of situating ourselves among broad historical currents. As a species and as a culture we are fucked now in ways never before conceivable, this is a precipice at least six thousand years in the making and it's about a lot more than just Boomer resentment. I don't want to sink into apocalyptic raving, and maybe it's just youthful narcissism/hysteria on my part, but our current predicament seems a lot more than just the manifestation of a simple generational anxiety.
posted by kaspen at 2:05 PM on March 21, 2009 [2 favorites]


Although I retract my derail of conflating this particular instance of cataclysm with other ongoing and incipient catastrophes. I thought this article was exemplary for being more than the violent entertainment Taibbi typically provides, putting in the plain language the full import of everything better than any of the slew of other explanations floated so far. Really great stuff, but as someone asked up thread about whether Obama reads this stuff, apparently not says Krugman. We're going to keep pretending this is a temporary anomaly and the system is a-ok. Which is pretty tragic, since what Taibbi describes is a historic coup, and I can't see another democratic event like Obama occurring again any time soon to remedy this madness.

From the article's conclusion: "Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below."
posted by kaspen at 2:36 PM on March 21, 2009


but our current predicament seems a lot more than just the manifestation of a simple generational anxiety.

Of course it's not simple generational anxiety. We aren't even talking about the elephant in the room, which is that our industry is rapidly exhausting the natural capital of the entire planet. In only a century and change, we have taken more than earlier generations thought it was possible to ever take, and now the Earth is precariously close to being catastrophically exhausted. We have swept the sea clean of food to harvest, and replaced it with poison. We have squandered hundreds of years of stored solar energy, sequestered deep underground, and the consequenses of burning it imperils the stable climate we rely on completely to feed the teeming billions modern industry has allowed, for now, to live on this planet in relative saitey.

We have spent an inheretence saved for millions of years, most of it in a single generation, and what little we have left we are eager to let ride on one last roll of the dice. We have spent ourselves beyond penury into debt. The utility man is cutting off the power and we are preoccupied with the repo man taking our fancy new teevee away.
posted by [expletive deleted] at 2:40 PM on March 21, 2009 [12 favorites]


i'm 51 and i agree with him - our generation HAS screwed things up - in fact, it's been screwing things up ever since it turned the summer of love into the me decade - true, the world we got in the 60s and 70s wasn't in all that great shape - but it was better than what we seem to have now and that's OUR doing

Oh come on, things are far better now then they were in the 70s. Remember the vietnam war? Watergate? Americans have far more wealth, civil rights have far advanced, etc. You could argue that things are worse then then were in the 1990s, perhaps.

The human condition has been improving decade on decade for at least the past few hundred years.

In the long run, things will be fine (but we'll all be dead). By the way here is a chart showing unemployment today vs. the great depression. In this measure, it's not even comparable.
posted by delmoi at 3:02 PM on March 21, 2009


expletive deleted: Agreed. I couched myself in indirect language because I was trying to speak to the frequently raised objection that "every generation goes through this, y'whippersnappers". But what we face is exactly what you describe, and blunter language is requisite. This exponential metastasis of self-destructive bullshit is peaking and unprecedented, and it seems the last fuck you of the generations who wash their hands of this world is to say "relax, this always happens, I'm fine and you'll be too".
posted by kaspen at 3:20 PM on March 21, 2009


Also, compare the living conditions of those in Eastern Europe, China, India, and even Africa to those 30 or 40 years ago. it's not even comparable. While the quality of life in The U.S. hasn't gone up as much (but it has gone up) those in the rest of the world are far better off.
posted by delmoi at 3:35 PM on March 21, 2009


By the way here is a chart showing unemployment today vs. the great depression. In this measure, it's not even comparable.

I admit it's not nearly as bad, but to be fair weren't they a hell of a lot more honest in computing jobless statistics back then? The numbers have been "massaged" in various underhanded ways in recent decades.
posted by marble at 4:23 PM on March 21, 2009 [1 favorite]


What Geithner’s TALF Plan Teaches Us
posted by homunculus at 4:40 PM on March 21, 2009


You'd be surprised how many wallstreet types are actually Ayn Rand devotees.

Not to dismiss longsleeves, but can you provide some details on this, delmoi? Greenspan's association with Rand is well-known, but I think of lots of other intellectual influences could be at work ranging from William F. Buckley to Friedrich Nietzsche to guys never losing the sense of entitlement they developed at prep school and the frat house. Are there really dozens of guys on Wall Street who worship smokestacks as the pinnacle of Man's Reason or who smoke cigarettes embossed with golden Objectivist dollar signs?
posted by jonp72 at 4:58 PM on March 21, 2009


Oh come on, things are far better now then they were in the 70s. Remember the vietnam war?

forget the iraq and afghanistan wars? forget that there weren't one billion vietnamese in other countries getting alarmed and pissed off about the way we were dealing with a world civilization?

Watergate?

i say the series of debacles from monica, to 9/11, to katrina, to the current financial clusterfuck are much much worse

for starters, the guy responsible for watergate got his ass kicked out of office - the guys responsible for this mess served out their terms

that's better?

Americans have far more wealth,

the crash isn't over yet and we may be in the process of losing it, seeing as much of that wealth is in stocks and real estate - and the bottom 40% really aren't doing that much better

civil rights have far advanced,

some certainly have - on the other hand, the average american's civil right to walk down the street without getting robbed raped or murdered has decreased in the last 50 years

etc. You could argue that things are worse then then were in the 1990s, perhaps.

economically and culturally, the 90s were a weak version of the 60s

until this mess gets turned around, these improvements you cite are in great danger
posted by pyramid termite at 5:00 PM on March 21, 2009 [2 favorites]


Oh come on, things are far better now then they were in the 70s. Remember the vietnam war? Watergate? Americans have far more wealth, civil rights have far advanced, etc.

You mean, things like the Iraq and Afghanistan wars, Abu Graib, the mysteriously disappearing WMDs, Gitmo, real wages going down for decades, global warming, resource depletion, etc, etc, etc.

How exactly are we better off today?
posted by Djinh at 5:44 PM on March 21, 2009


To bad we here try and stamp out this kind of writing by undercutting their employer's advertising model by linking to their print version.

oh boo, hoo. It is within Roling Stone's ability to control who gets access to the print version of the article. It is called the referrer header, and every web server worth the name can filter based upon the value found in that header. They don't filter because they don't feel it makes any difference to their revenue model.
posted by csw at 6:20 PM on March 21, 2009 [1 favorite]


You mean, things like the Iraq and Afghanistan wars, Abu Graib, the mysteriously disappearing WMDs, Gitmo, real wages going down for decades, global warming, resource depletion, etc, etc, etc.

How exactly are we better off today?


Vietnam casualties 58,913
Iraq War casualties 4,260
Afghanistan 667

Plus there was a draft. Just because things are "bad" today and they were "bad" then does not mean both were equally bad, you can actually measure how bad these things were. You can actually measure these things and young men in the U.S. were far more likely to get killed in Vietnam, and with with draft in place it could strike anyone, not just people who signed up for the military.
posted by delmoi at 8:01 PM on March 21, 2009 [1 favorite]


some certainly have - on the other hand, the average american's civil right to walk down the street without getting robbed raped or murdered has decreased in the last 50 years

Uh, in the past fifty years perhaps but violent crime rates are much lower then they were in the 1970s. And besides, not being the victim of a crime isn't a civil right. Violent crime only affects a tiny portion of the population, affecting between about 500 people out of every 100,000 or 0.5%. On the other hand, in the 1960s and 1970s, huge segments of the population faced routine racial discrimination, and women had all kinds of problems as well.

Again, there were problems then and there are problems now, but the problems then were much worse. Although I do think the political corruption of Watergate pales in comparison to what the Bush administration did. I think the whole DC culture today is far more synchophantic and idiotic.
posted by delmoi at 8:15 PM on March 21, 2009


Vietnam casualties 58,913
Iraq War casualties 4,260
Afghanistan 667


Strangely, you seem to have omitted non-American casualties from these lists...
posted by Slothrup at 8:17 PM on March 21, 2009 [4 favorites]


And besides, not being the victim of a crime isn't a civil right.

you have a peculiar notion of civility and of rights, one that most of us don't share - in fact, without the right to walk down the street unmolested by criminals there is no state of civility

it is a civil right and without it one does not have a functioning society

Violent crime only affects a tiny portion of the population, affecting between about 500 people out of every 100,000 or 0.5%.

from the wikipedia article you linked to - "According to U.S. Department of Justice document Criminal Victimization in the United States, there were overall 3,201,320 white and 507,210 black victims of violent crimes reported in 2005."

so that's over 1% - and of course, it's going to be different people every year that are victimized - and the family members, friends and neighbors of those who are victims also suffer some of the consequences, so the number of people affected is not a "tiny portion of the population"

your figures are wrong and your desire to minimize the suffering of crime victims is puzzling

ps - you might want to inspect the crime rate table in that article closely - our current rates are still over the rates of the 60s and some of the 70s, thus backing up my point
posted by pyramid termite at 9:06 PM on March 21, 2009


From the article: These people need their trips to Baja, their spa treatments, their hand jobs...

What exactly WAS going on in that office anyway?!
posted by clevershark at 9:07 PM on March 21, 2009


>The only thing I can think of to make things right is to hold them accountable in history books...

That'll show 'em.
posted by The Card Cheat at 9:11 PM on March 21, 2009


What exactly WAS going on in that office anyway?!

obviously screwing the american people isn't as satisfying for some as we'd think
posted by pyramid termite at 9:12 PM on March 21, 2009


Strangely, you seem to have omitted non-American casualties from these lists...

Well why don't you do your own fucking research?

The north and south Vietnamese military casualties According to Wikipedia (on the same article I already linked too) total 1,284,000. And civilian casualties are estimated from between 500,000 and 2 million (or up to 'several' million)

On the other hand the lancet study of Iraq war casualties estimates 600,000 killed. Vietnam had a population of just 30 million in 1960 and 52 million in 1979, so it had a larger population then Iraq does today, but the per-capita death tole was still higher.

your figures are wrong and your desire to minimize the suffering of crime victims is puzzling

What are you talking about? I'm not trying to minimize anything I am pointing out that the crime rates were worse in the 1970s then they are today, Perhaps not over the entire decade (but the murder rate was always higher) but throughout the 1970s the crime rate was increasing, and it peaked at a higher level then at any point in the 2000s.

Oh, and yes I do think violent crime is less of a problem then endemic racial discrimination. I mean duh. It's not even close to comparable and anyway, things were the same or worse on that front anyway, so it's not even a valid counterpoint to begin with.

Essentially what this boils down to is me saying "things were worse in the 1970s" and you guys saying "nuh-uh, things are bad now!" without actually offering any comparison.

Now, I'm sure there is something or other you could point too that was better then then today, AIDS for example, wasn't widespread. But in most measures, things are much better today then they were in the 1970s. Also, if you look outside of the United States it's not even remotely a contest. The living standards in China, India, and Eastern Europe have improved immensely, certainly there are places that have gone backwards due to regional wars or whatever, but over all there has been a tremendous advancement in quality of life.

This is all sort of beside the point, though.
posted by delmoi at 9:33 PM on March 21, 2009 [1 favorite]


So what would it take to actually *stop* the looting? Regulatory laws were thrown out - is it possible to reinstate them or make new ones? Does anyone have the authority to fire all of these ex-financiers from government positions? What kind of political pressure would have to be brought to bear to get this fixed?
posted by harriet vane at 10:11 PM on March 21, 2009 [1 favorite]


So what would it take to actually *stop* the looting? Regulatory laws were thrown out - is it possible to reinstate them or make new ones? Does anyone have the authority to fire all of these ex-financiers from government positions? What kind of political pressure would have to be brought to bear to get this fixed?

Well, congressional elections are in 2010, that will be the best opportunity to change things. I certainly don't want to see the republicans put back in power, but hopefully something can be done in democratic primaries to fix things.

The biggest problem with our political system, I think, is that people don't regularly primary out incumbents in safe seats.

There is an enormous amount of rot in the democratic delegation, and that needs to be cleaned out. Hopefully that can happen in 2010. I would love to see some kind of organized thing to do that.

Jane Hamsher, Glenn Greenwald and other liberal activist bloggers have started a project called Accountability Now to push out democrats who work against liberal values despite coming from very liberal districts (similar to getting rid of Al Wynn and replacing him with Donna Edwards). Supposedly the project is meant to be non-partisan, but obviously the people involved are all huge liberals.
posted by delmoi at 10:58 PM on March 21, 2009


I know it's completely irrational and doesn't positively contribute to the discourse, etc... but I kind of want to put most of you old people (Boomers) on ice floes and set you adrift. I hope you get eaten by sharks, thanks for nothing.
posted by Burritos Inc. at 2:27 AM on March 22, 2009 [1 favorite]


(Keeping in mind that I'm an Aussie and therefore not fully informed on all US details) I like that Accountability Now project, seems like a great idea. But will switching to better Democrats help if no members of Congress have the ability to curtail the activities of the finance sector? Or do they already have the ability, just not the motivation or understanding?

It's just that waiting until 2010 seems like a bit too long. *If* there were enough public pressure now, could something be done?
posted by harriet vane at 3:35 AM on March 22, 2009 [1 favorite]


there's also incarceration rates on top of un(der)employment (and racial discrimination, cf.) -- vs. 25% in the depression -- oh and gun sales (and, apparently, anger/outrage) are also on the rise... but yea, apples and oranges, media magnification, damn lies, etc.

re: poker

i like aeschenkarnos' "dollar auction" analogy wrt raising the stakes needlessly/irrationally...

also btw Will Somebody Remove Geithner From The Poker Table Please?
...what all this verbiage means, is that hedge funds will be allowed to establish investment positions, levered up to 10x with the government's aid, on which the funds will have only a stop loss of a certain percentage, and all incremental losses will be borne by you, dear (American) reader. And while this risk was "somewhat" acceptable for TALF 1.0, now that Geithner is opening it up to the whole morass of uber toxic and even more uber illiquid garbage floating on banks' balance sheets, the Treasury has just gone all in with taxpayer money in its bet that the market will recover. Geithner's Put has just been transformed...
of course - Geithner's job is safe. The president even joked that were Geithner to tender his resignation, he would say, "Sorry, Buddy, you've still got the job."

so to give you an idea of the type of assets that we, the people, will be on the hook for (and what's increasingly backing our federal reserve notes):this, btw, is setting the stage for a reflationary episode -- if not a good old-fashioned bank run -- when it could all be resolved at once...
posted by kliuless at 7:21 AM on March 22, 2009 [2 favorites]


Something I really do not understand from the article, which I haven't seen addressed in the comment stream:

When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

So, how exactly does that work? You call up Cassano and tell him you want to buy a million dollars of CDS, and he simply says "sure" and puts that in your account? At what point do you actually give him money for what you've purchased?

Or is this a shell game? You get Cassano to put the $1M worth of phantom assets into your account, and then you suddenly have a way to prove that you have $1M in assets, so now you can borrow money to pay off Cassano, using those very assets as collateral? Is that how we got to where there is $190K worth of this poison for every man woman and child on earth? By having non-central bank actors simply spinning new money out of straw and then passing off the counterfeit as real to anyone else further down the line?

Sounds like AIG was as big a ponzi scheme as Madoff. No, wait, MUCH bigger.
posted by hippybear at 8:56 AM on March 22, 2009 [3 favorites]


So does anyone have any plans to stop and repeal the Gramm-Leach-Bliley Act, that deregulated bank and insurance holdings?
posted by dilettante at 9:37 AM on March 22, 2009 [2 favorites]


Rachel Maddow Show: Deregulation for Dummies
posted by homunculus at 9:59 AM on March 22, 2009 [1 favorite]


Why Are We Still At This?
posted by homunculus at 12:42 PM on March 22, 2009 [1 favorite]


Sigh. Unfortunately, this all plays right into the hands of these people.
posted by limeonaire at 1:39 PM on March 22, 2009


The U.S. government owns 79.9% of AIG. When you buy a company, you have every right to make changes to make it run better. Lots of time in the corporate world, you have corporate raiders come in and fire the leadership of the company to try to get the real value out.

Damn straight. This is where we get to say "You guys are all fired. We are bringing in new staff, with leadership that is going to make sure this business is run for the good of the stockholders. We are taking it temporarily private. We expect to take this company back public on the stock market within five years."

It's basic Corporate Raiding 101. T. Boone Pickens and Carl Icahn-style. The only difference is that everyone ends up benefiting, because we are all stockholders.
posted by five fresh fish at 3:22 PM on March 22, 2009 [1 favorite]


"The biggest problem with our political system, I think, is that people don't regularly primary out incumbents in safe seats."

Hells yes. It shouldn't be possible that an incumbent would survive the midterms. Why wouldn't a challenger cherry-pick a dozen pivotal, easy-to-understand, pro-Wall Street votes made by his incumbent opponent and base a campaign on them? By 2010, voters won't just be angry, they'll be hungry.

What vexes me though, is that principal hasn't played out over the last 8 years. None of those pro-GWOT votes cast by still-sitting congressmen have ever come back to haunt them.

A sex scandal - no, a gay sex scandal - is the only way to lose a seat in congress.
posted by klarck at 4:07 PM on March 22, 2009 [1 favorite]


So, how exactly does that work? You call up Cassano and tell him you want to buy a million dollars of CDS, and he simply says "sure" and puts that in your account? At what point do you actually give him money for what you've purchased?

When you buy Life insurance, or Car insurance, how does it work? You call up the insurance company (or go to their website) sign the agreement and make the first payment, and then you're insured. It's the same with CDSes. The only difference is that you could buy insurance on other people's cars (or other people's lives). So if you got into a car accident, and 10 people had insurance on your car the insurance company would have to pay out ten times.
posted by delmoi at 5:23 PM on March 22, 2009


When you buy Life insurance, or Car insurance, how does it work? You call up the insurance company (or go to their website) sign the agreement and make the first payment, and then you're insured. It's the same with CDSes. The only difference is that you could buy insurance on other people's cars (or other people's lives). So if you got into a car accident, and 10 people had insurance on your car the insurance company would have to pay out ten times.

Question answered, but not the one I asked.
posted by hippybear at 5:30 PM on March 22, 2009


Gerrymandering of district lines is one of the big problems facing the American voter. Elected representatives have been moving the boundaries to best accomplish their singular task: to get themselves re-elected. They make it their job to get re-elected. They do not see their job as "serving the public's best interests."

A modern country should have a public agency which is mandated to ensure the public voting system is open and fair. Australia has a good model in their elections-operations public/private business. I believe it's a government-owned monopoly provider for the federal and state public elections, but sells service for smaller voting blocks (citys, corporate shareholder meetings, union votes, etc), thus breaking even and perhaps even generating profit.
posted by five fresh fish at 6:13 PM on March 22, 2009


So, how exactly does that work? You call up Cassano and tell him you want to buy a million dollars of CDS, and he simply says "sure" and puts that in your account? At what point do you actually give him money for what you've purchased?

Or is this a shell game? You get Cassano to put the $1M worth of phantom assets into your account, and then you suddenly have a way to prove that you have $1M in assets, so now you can borrow money to pay off Cassano, using those very assets as collateral? Is that how we got to where there is $190K worth of this poison for every man woman and child on earth? By having non-central bank actors simply spinning new money out of straw and then passing off the counterfeit as real to anyone else further down the line?


Well, like insurance, from the moment the CDS contract is signed you're protected. If you bought a CDS from something like a hedge fund, then you'd expect them to post a percentage of the total payout if the underlying defaulted as collateral, to prove that they could pay out. But AIG with a AAA rating didn't have to do that, they just said, "yes, you are now insured against default".
So indeed, you could put that CDS on your balance sheet as an asset, just like life insurance. The difference is that life insurance is heavily regulated, if I sell life insurance to 100 people, I need a certain amount of money set aside to pay out those policies. If I write out 100 CDS contracts, I don't.
This is what killed AIG: when it was noticed that they were in trouble, their credit rating was downgraded, when that happened, the CDS contracts specified that they had to post a % collateral with the counterparty. Of course, this was collateral that they did not have.
posted by atrazine at 7:54 PM on March 22, 2009


Well, like insurance, from the moment the CDS contract is signed you're protected. If you bought a CDS from something like a hedge fund, then you'd expect them to post a percentage of the total payout if the underlying defaulted as collateral, to prove that they could pay out. But AIG with a AAA rating didn't have to do that, they just said, "yes, you are now insured against default".

So indeed, you could put that CDS on your balance sheet as an asset, just like life insurance. The difference is that life insurance is heavily regulated, if I sell life insurance to 100 people, I need a certain amount of money set aside to pay out those policies. If I write out 100 CDS contracts, I don't.


I guess I still do not understand how the buyer of one of these CDS instruments could somehow gain an asset and "[not] have to show a dime", according to the original article. Am I missing something here? In any of these circumstances, either as a participant in a hedge fund, or whatever, am I mistaken in inferring that you are assume payment on behalf of the buyer in order to receive the asset, even if it is a partial payment, or first payment or whatever?

Or is the original article's author wrong on this count? And can anyone verify?

If I'm being dense, help me see beyond my blindness. Please!

(Is there a vote for "most elucidating and helpful fpp" on metafilter? I want to nominate this thread for minimal level of snark and maximum level of helping dunderheads like me grasp this situation!)
posted by hippybear at 8:18 PM on March 22, 2009


am I mistaken in inferring that you are assume payment

er, um... that you are assuming payment
posted by hippybear at 8:51 PM on March 22, 2009


But when you sell a $100 CDS guarantee, you don't have to show a dime.

Insurance is a contract between two parties. They're talking about the underwriter's side of the deal here. An underwriter gets two entries on a CDS:

* a liability , the money they have to pay in case of losses
* a revenue stream, the premium payments from the insured

So the underwriter's task is to have enough assets to cover liabilities. Sometimes this is formalized by having the insurer fork over a percentage of the insurance as "collateral". When AIG was rated AAA, they did not have to do this. When their rating was lowered, the contract calls for collateral to be handed over, so they suddenly had to find money to cover it. The Rolling Stone article suggests they did that once already, but the second rating drop ended them.

The other side is the person insuring the asset. They certainly do pay. You seem to be confusing the insured for the underwriter.
posted by pwnguin at 9:56 PM on March 22, 2009


You seem to be confusing the insured for the underwriter.

I was, and am no longer. Thank you.
posted by hippybear at 10:02 PM on March 22, 2009


Krugman's latest column: Financial Policy Despair

Krugman on Democracy Now.
posted by homunculus at 9:29 AM on March 23, 2009


Nothing will change substantially because those without money and or power are not yet willing to put violence on the table.
posted by Calloused_Foot at 10:31 AM on March 23, 2009


Geithner’s Toxic Plan: Making Government Corruption Respectable
posted by homunculus at 2:50 PM on March 23, 2009


Brad DeLong: I Think Paul Krugman Is Wrong
posted by homunculus at 4:07 PM on March 23, 2009


Nothing will change substantially because those without money and or power are not yet willing to put violence on the table.

I believe you are right. Look at the low standard of living that goes largely unchallenged in other (ie. third world) countries. If they're not rising up, there's certainly no reason to believe a comfy Westerner is going to actually resort to violence. The ultra-wealthy are going to essentially get away with having literally stolen billions of dollars from their fellow citizens.

When you start adding up all the financial disasters of this past decade or two, the bank failures from way back, the Enron scam, the humongous pyramid schemes, the derivatives scam, the bailout packages, many of the executive payout schemes with their golden parachutes and pensions — my gods, what a simply astonishing amount of wealth has been literally stolen from from taxpayers and from shareholders (including a lot of pension funds).

There's seldom any real long-term consequence when one steals a big enough amount.
posted by five fresh fish at 6:34 PM on March 23, 2009


Revolution in the Air
...might we might be seeing the first real rumblings of class warfare... In one corner are the technocrats not only in finance but also in government and the media: people who can understand the importance of distinguishing between a $250,000 base salary, a $2.5 million bonus, a $250 million bonus pool, a $2.5 billion bonus pool, a $250 billion bailout package, a $2.5 trillion monetary stimulus, and so on.

In the other corner are the real people, the angry people, the unemployed people -- and with them their elected representatives in Congress. They're not interested in such distinctions any more, they're not interested in what's fair or what's sensible. They saw their real wages stagnate for decades as the orgy of plutocratic self-congratulation reached obscene levels only to keep on growing. All they ever had was the American Dream... Now, of course, that dream is shattered...

They're not interested in constructive solutions or in leveraging private capital or in the sanctity of contracts: fuck that shit. Those days are over. They want to see jail time, confiscatory policies, and worse.

As inequality grew in America over the past 30 years, there was always the risk that it would snap back violently and dramatically. That day is not yet here, but it's closer than it has ever been, and its possibility cannot be discounted. Barack Obama smells the public mood, and is trying to respond to it in a grown-up and non-incendiary way. Congress smells it too, and is being rather less grown-up about things. And Wall Street still largely remains inside its bubble, watching the tour buses on the outside with fear and incomprehension. But unless some very senior executives start smelling the coffee sharpish, they might end up facing the biggest tail risk of them all.
The middle classes are revolting!
posted by kliuless at 7:14 AM on March 24, 2009


The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.
posted by homunculus at 9:28 AM on March 24, 2009


Let Geithner fail

How Geithner's Plan Leads to Nationalization
posted by homunculus at 9:47 AM on March 24, 2009


Senator Sanders Blocking Key Obama Nomination
posted by homunculus at 12:32 PM on March 24, 2009


Taibbi on Democracy Now.
posted by homunculus at 9:24 AM on March 25, 2009


BofA's Lewis Against Reinstating Glass-Steagall Act
posted by homunculus at 11:07 AM on March 29, 2009


The AIG Scandal, Brought to You by Light Touch Regulation

Citi and AIG Didn’t Still Don’t Get It
posted by homunculus at 11:08 AM on March 29, 2009


What to Watch For In the Administration's Financial Sector Reforms
posted by homunculus at 11:10 AM on March 29, 2009


Kucinich to probe $3.6 billion in Merrill Lynch bonuses
posted by homunculus at 9:48 PM on March 30, 2009


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