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Hey Brother Can You Spare Some Change I Can Believe In?
May 13, 2009 1:16 PM   Subscribe

President Obama has announced he will seek broad new authority to regulate the financial derivatives markets. As has been discussed many times previously here on the blue, the massive unregulated financial derivatives markets (estimated to be in excess of hundreds of trillions of dollars in overall scale) have been one of the major contributing and complicating factors in the current global financial crisis.

Warren Buffet once famously described derivatives as "Weapons of Financial Mass Destruction." And more recently, even stalwart anti-regulation crusader Allen Greenspan has had a change of heart, conceding that he was mistaken to oppose tighter regulation of the derivatives markets. So the real question now becomes: With an emerging consensus and executive support on the side of these reforms, will congress finally be able to get the job done?
posted by saulgoodman (43 comments total) 5 users marked this as a favorite

 
I have a bad feeling that this could start to drive a wedge between investing and outright gambling.
posted by mullingitover at 1:22 PM on May 13, 2009 [13 favorites]


So overdue. . . .
posted by Ironmouth at 1:25 PM on May 13, 2009


Allen Greenspan did what?! Has anyone taken his temperature, or checked under his bed for pods?
posted by shmegegge at 1:26 PM on May 13, 2009 [2 favorites]


A couple months ago Greenspan was saying nationalization would be a good idea.
posted by delmoi at 1:31 PM on May 13, 2009


This is pretty awesome. I recently saw a 60 Minutes special about credit default swaps that made my blood boil. I still can't believe a practice we had the wisdom in the 1900s to recognize should be outlawed was made legal again barely 100 years later.
posted by Marisa Stole the Precious Thing at 1:36 PM on May 13, 2009 [5 favorites]


Related:

The man who saw the banking crisis coming and warned about deregulation

Another guy who saw the Wall Street crisis coming, but who was sidelined for regrettable reasons
posted by ornate insect at 1:41 PM on May 13, 2009 [1 favorite]


paging dr. mutant. dr. mutant, please report to the blue.
posted by taumeson at 1:41 PM on May 13, 2009


What I find more amazing is the attitude Posner is taking to this whole thing. Its like he's a commie now or something.
posted by Ironmouth at 1:45 PM on May 13, 2009


FYI, your Greenspan quote is from October, but he's already back-peddling somewhat: yesterday he said that his policies did not fuel the housing bubble.
posted by ornate insect at 1:54 PM on May 13, 2009


yesterday he said that his policies did not fuel the housing bubble.

Well of course they didn't! What on earth could Fed policies designed to keep interest rates artificially low have to do with a sudden gush of home buying and real estate speculation?
posted by saulgoodman at 1:59 PM on May 13, 2009 [1 favorite]


Sixteen in the clip and one in the hole
Nate Dogg is about to make some bodies turn cold
now they droppin and yellin
it's a tad bit late
Nate Dogg and Warren G had to regulate
posted by chunking express at 2:01 PM on May 13, 2009 [9 favorites]


It is a little known fact that Dr. Dre created G Funk to curtail what he saw as an artificially inflated real estate market.
posted by Marisa Stole the Precious Thing at 2:04 PM on May 13, 2009 [10 favorites]


(estimated to be in excess of hundreds of trillions of dollars in overall scale)

That's notional, which never changes hands. After netting the notionals are much smaller. Some color.
posted by preparat at 2:10 PM on May 13, 2009


preparat: CDS aren't the only financial derivatives in trade, you know...
posted by saulgoodman at 2:17 PM on May 13, 2009


Brooksley Born, alarm sounder.
posted by wemayfreeze at 2:30 PM on May 13, 2009


saulgoodman: fair enough, but I assume we are not talking about currency forwards, or equity puts and calls. This is a bit dated, but Buffett's Berkshire Hathaway lost a good chunk of change last year on put options. The simple point I was trying to make is that notional alone only tells a small part of the story. That's all.
posted by preparat at 3:00 PM on May 13, 2009


Appropriate video.
posted by vibrotronica at 3:06 PM on May 13, 2009 [1 favorite]


preparat: it's not just vanilla derivatives like puts and calls, there are other kinds of swaps as well as credit default swaps. There are, for example, interest rate swaps, total return swaps, and a host of other hybrids and exotics out there. I have yet to see a good estimate of how large the credit derivatives market is, notional or otherwise, from any credible neutral source.
posted by The Bellman at 3:25 PM on May 13, 2009


The Bellman: Does this qualify as a credible neutral source? My first point was about notionals, and I mentioned CDS for context. Obviously there are more types, ABX, CMBX, CDX, LCDS/LCDX, CDOs, CDS on CDOs, MCDX and on and on. That's not the point, it's not about who knows more derivatives or acronyms, it's about understanding what should be regulated and why (and IMHO notional alone is not a good indicator of that).
posted by preparat at 3:49 PM on May 13, 2009


paging dr. mutant. dr. mutant, please report to the blue.

i love how we can't trust anyone who isn't an 'expert' in financial derivatives; it's not as if they and their trickery (not associating mutant with them at all, btw) didn't get us here in the first place.

i'm sick of the understanding of so-called expertise of the misery of our world-neoliberal system being left to people who are at the top of it, rather than at the bottom (or at last the middle).
posted by yonation at 4:14 PM on May 13, 2009 [9 favorites]


i'm sick of the understanding of so-called expertise of the misery of our world-neoliberal system being left to people who are at the top of it, rather than at the bottom (or at last the middle).

Even if a doctor is convicted of malpractice, I'd take his medical advice over a lay person. Just because he committed a crime, that doesn't mean his years of education, training, and experience is worthless.

And more to the point, this financial disaster was committed by a tiny, tiny minority of financial players for their own benefit. Many financial employees have now become collateral damage as a result.
posted by SeizeTheDay at 4:21 PM on May 13, 2009 [2 favorites]


i fail to see how your analogy works. if a worker in a maquiladora in mexico, a special economic zone in india, or a construction site in dubai complains about capitalism and elaborates their position vis a vis multinational corporations, their insights about the misery and inequality it not only generates but preserves with violence and power is, to me, just as important as the harvard and chicago-educated assholes who got us there in the first place.
posted by yonation at 4:26 PM on May 13, 2009 [1 favorite]


Even if a doctor...

I think the comparison between medical expertise and financial expertise is a stretch.

(Please note that I am not arguing we disregard all expertise. But a lot of financial expertise serves as a smokescreen for what amounts to gambling with other people's money...)

A doctor has to get a lot of education to practice. Joseph Cassano, the guy who brought AIG to its knees (and who made a mint doing so), had a political science degree from Brooklyn College before he went to work at Drexel Burnham Lambert for junk bond king Michael Milken.

In short, Cassano's likely a great guy to ask for stock tips, but like every Wall Street player he has an agenda--an agenda that is preternaturally such that, for instance, the idea of making Wall Street more transparent is not something he, or someone like him, would necessarily recommend. Lack of transparency has made a lot of people rich, and the mystique of expertise has sometimes helped keep that insulated culture afloat.
posted by ornate insect at 4:35 PM on May 13, 2009 [9 favorites]


I think you and I disagree on what the problem is. I think inequality, and the growing gap, is a negative externality (to keep with the economic terms) of the current system. I don't think the system was explicitly designed to preserve violence and power. I also don't think that our system is purely capitalistic (or even close).

I do believe that your examples' insights are useful and relevant, but only in addressing the inequality, and not the system itself. They're simply victims because they're starting on terms that are stacked against them. If the shoe was on the other foot, and they were calling the shots, I'm not sure we'd end up with a different system--just different faces playing the same game.

But a lot of financial expertise serves as a smokescreen...

Define "a lot". Please be explicit, because I really want to know. Take out securitization (which is virtually a dead market right now), derivatives (which will eventually be even more regulated), and make investment banks private companies again and tell me specifically what's "a lot".
posted by SeizeTheDay at 4:52 PM on May 13, 2009


Define "a lot". Please be explicit, because I really want to know. Take out securitization (which is virtually a dead market right now), derivatives (which will eventually be even more regulated), and make investment banks private companies again and tell me specifically what's "a lot".

The expertise of wall street traders basically amounts to evermore sophisticated means of ripping each other off. If you don't know what you're doing, you'll get ripped off, but not because the underlying system is inherently complex, but rather because these guys have built an impenetrable edifice of jargon.
posted by delmoi at 4:58 PM on May 13, 2009 [1 favorite]


Please be explicit

I'm talking about the culture of Wall Street and the mystique of financial expertise, investment advice, long-term capital management generally. A lot of the experts were asleep at the wheel. Why?

In the atmosphere documented by such insiders as Frank Partnoy and Michael Lewis (back in the old days of the 1980s), inside information is crucial for traders, but that's not what I'm talking about: I'm making the very uncontroversial claim that the increased complexity and exoticism of unregulated markets (like hedge funds) served to make the appearance of financial expertise even more valuable.

If very few people (regulators, executives, congressmen, central bankers, financial journalists) understood the new world of inter-related dynamic and volatile tools being speculated upon (i.e. very few knew WTF was being traded) in divisions like AIGFP, then part of the problem was the assumption that the "experts" must know what they're doing.

It's like the phenomena of rogue traders: half the time their direct superiors didn't know what they were doing. Thus, I'm talking about a culture of innumeracy that lets financial experts run things. That culture needs to change. We can't assume the experts understand all the risks.
posted by ornate insect at 5:09 PM on May 13, 2009 [4 favorites]


Even a crappy doctor has at least a general idea of how the body works. With economists that's not necessarily true.
posted by Pope Guilty at 5:22 PM on May 13, 2009 [2 favorites]


I'm talking about the culture of Wall Street

But that's not what you said. You said: But a lot of financial expertise serves as a smokescreen for what amounts to gambling with other people's money...

So if you think these people are experts, but were asleep at the switch, then we have nothing to discuss. I completely agree with you. If you think that Wall Street creates a mystique, then we agree here as well. I'd argue that many professions create that mystique, including accountants, lawyers, mechanics, doctors, physicists, etc. Some mystiques are more alluring than others, and Wall Street until last year was probably the most alluring of all.

Wall Street is understandable to those who study it. So is medicine, and the law, etc... Your problem seems to stem from the fact that the profession creates an aura to keep lay people from understanding it. But so does the American Medical Association and American Dental Association.

I'm not going to argue culture with you. I could give two shits that most traders and bankers judge me by my paycheck. They're still damn good at their jobs, some of them experts in their field. All I'm saying is that "financial expertise" is not a smokescreen. There are thieves and liars in every profession and Wall Street (and law) seem to attract a disproportional sum. But many are still experts (I say many because the entire profession can't all be experts).
posted by SeizeTheDay at 5:31 PM on May 13, 2009


many professions create that mystique, including accountants, lawyers, mechanics, doctors, physicists

Those other professions can't bring down the entire global economy, so there's a lot more at stake in parsing the jargon of the financial profession than there is in cracking the others. Also, the others did not just go nearly bankrupt and require propping up by taxpayer money.

Your problem seems to stem from the fact that the profession creates an aura to keep lay people from understanding it. But so does the American Medical Association and American Dental Association.

And if the AMA and ADA were as powerful as Wall Street, The Federal Reserve, and the Treasury, and if as much of our collective future hinged on their decision making, then yes I would demanding more clarity about the questions related to their profession. Also, btw, it's not just "my" problem: it's a problem that ensnares all of us.

They're still damn good at their jobs, some of them experts in their field.

Unfortunately we need to understand if part of the job of bankers/traders is in ripping off the average working taxpayer. Why? Because if a handful of insiders can destabilize the entire economy by trading on things like CDSs, then it's a good thing we all are better informed about what's going on.

Finally, I fail to see why you appear to bristle at anything I've written. Wall Street and the banking industry are in some sense a glorified casino (a very powerful one): that's not a judgement, it's an observation. The more we understand and begin to intelligently regulate that casino, considering what's at stake, the better.
posted by ornate insect at 5:45 PM on May 13, 2009 [5 favorites]


Is it true that the nominal value of these derivatives excedes the value of every object and natural resource on this planet?
posted by StickyCarpet at 7:00 PM on May 13, 2009


Those other professions can't bring down the entire global economy

This sounds like a dare. You're so on.
posted by allen.spaulding at 7:01 PM on May 13, 2009 [1 favorite]


Marisa: That 60 Minutes piece is interesting, but it doesn't do a good job of explaining why they're bad. The report is condemning in tone, but it states that the reason the market failed was that several financial institutions made many more bets, sold more CDs than they could afford to pay off on.

I don't get the connection between gambling and making bets you can't pay off. I agree that Wall Street shouldn't be in that business, but the report doesn't tell me exactly why it was bad. If a derivative is unrelated to the original investment, then how could it cause anything to fail, one way or another, just from the fact of its existence?

At the very end, the guy they had said it was the "lack of transparency" in the markets that caused the megafail, and that makes sense. But the piece didn't seem to me to be about transparency, not when they have senators up ranting about "casino capitalism."
posted by JHarris at 7:05 PM on May 13, 2009


JHarris: buying bogus unregulated "insurance" (CDS's, etc) enabled banks to excessively over-leverage themselves because hey, their investments were insured and they could keep playing with other peoples' money until someone broke up the party. And since CDS's could be purchased "naked," without actually owning what you pay to insure, the casino became a clusterfuck of greed and self-destruction.

Many banks "netted" their CDS positions by buying and selling the bogus CDS insurance ("if company X goes down, I get a billion, and I owe someone else a billion, while I'm making $40K a month in 'insurance' premiums), without the transparency that you speak of to tell them who was going to bring the whole game of musical chairs to its end and when.

The real problem is that the government seems to be convinced that it must make these banks and investors whole on their bets. Hence, AIG giving 9 billion to Goldman Sachs.

The alternative seems to be to allow the "too big to fail" banks to be broken up into pieces and to wipe out their investors and management, which for various reasons seems to be off the table, at least until we try giving away as much money (without the control or influence you get by buying capital -- stock) as we possibly can stomach, so that hopefully, once we've inflated our futures into oblivion, they'll give us more credit.
posted by aydeejones at 7:41 PM on May 13, 2009 [2 favorites]


The simple point I was trying to make is that notional alone only tells a small part of the story. That's all. sorry if it seemed like i was shooting that point down actually--it's a good one. i just happened to notice the links you cited only seemed to discuss default swaps.

If a derivative is unrelated to the original investment, then how could it cause anything to fail, one way or another, just from the fact of its existence?

As I've come to understand it, here's one simple example of how this becomes a problem. Suppose I take out a default swap contract on a commercial debt bond to insure against a loss in the event the bond becomes worthless (to hedge against the risk of the issuer defaulting on the debt).

Well, in a lot of cases, the entity that entered into the default swap with me (that is, the party who's obligated to pay out if the swap is triggered) might just turn around and take out a swap contract of their own on that same bond with some other party as a hedge against incurring a loss. Sounds reasonable, right? (In some cases, people took out swaps on bonds they didn't even have an that much of a stake in, as I understand it.)

Unknown to regulators and the unlucky bond investor, neither of those swap issuers ever actually had enough capital in reserve to pay off on the swap contracts they issued.

So now say the first swap is triggered. The company that issued the bond goes bust and writes off all its debt, making the bond worthless.

Instead of both the original bond buyer and the company that issued the first swap both being shielded from risk, they're both screwed. And so is the the third company. They've basically doubled the amount lost on the original bond investment: The first guy lost his original investment; the first company is now on the hook to the first guy for the face value of the bond, which it can't pay out because it doesn't have it; and the second company is on the hook to the first company for the same sum, which it also doesn't have.

AIG was all caught up in this sort of thing. They didn't properly account for how many swaps might be triggered at once. Making matters worse, there are also other exotic derivatives that bundle a whole bunch of default swaps into synthetic CDOs, which are another investment vehicle rated and traded like bonds. And you guessed it. Those can also have default swaps taken out on them.
posted by saulgoodman at 7:49 PM on May 13, 2009


Why are there thieves in the stock market? Well, because thats where the money is. To paraphrase Willy Sutton.

To discredit expertise in this realm is to discredit expertise in how many others, and in what circumstances? To me the problem is too many decisions being made by people who do not know what they are doing, not the opposite.

Everyone here has benefitted enormously directly and indirectly fromn the capital formation processes of the credit and financial markets over the last years. I don't care if you own no stock investments.

The AIG situation was a litmus test for the rule of contract law, and we could argue about that for hours. Don't forget these guys work for a living just like you and I. Sure some idiots/thieves gamed the system but to this is the beginning of the process to rearchitect the regulatory framework. The players are scared, the public is scared, but if the Administration handles this like they have done for many other problems, I'd be pretty confident that a large step forward can be achieved.
posted by sfts2 at 7:53 PM on May 13, 2009


And more to the point, this financial disaster was committed by a tiny, tiny minority of financial players for their own benefit. Many financial employees have now become collateral damage as a result.

Even more to the point, this financial disaster is the result of decades of deregulation of the financial markets, which opened things up to new and (as we now know) uncontrollable and unfathomable financial instruments, plus extremely weak enforcement of whatever laws did apply (hello, Mr. Madoff!). It's a structural problem and all of us are collateral damage.
posted by dogrose at 9:00 PM on May 13, 2009 [1 favorite]


Everyone here has benefitted enormously directly and indirectly fromn the capital formation processes of the credit and financial markets over the last years.

How so?
posted by larry_darrell at 9:53 PM on May 13, 2009


I don't give a good goddamn what Wall Street does, so long as they don't do it with my money. And that means meta-derivatives need to be traded using poker chips, not my nation's dollar. When they fuck up a raw gamble — and anything that requires sophisticated mathematics amounts to raw gambling: the value of a company is nothing so complex — let them screw up their own casino economy, not mine.

Or in fewer words: they can't be allowed to shit in the coffee pot.
posted by five fresh fish at 10:03 PM on May 13, 2009 [2 favorites]


America’s triple A rating is at risk
posted by ornate insect at 11:15 PM on May 13, 2009


The players are scared sacred, the public is scared screwed...

Couple of typos there.
posted by Civil_Disobedient at 5:22 AM on May 14, 2009


Sixteen in the clip and one in the hole...

It's the lone criterion I will ask of any woman I marry: she must know the entire Nate Dogg part.
posted by kid ichorous at 5:54 AM on May 14, 2009 [1 favorite]


"How so?"

I think thats obvious so I'm not going to belabor it unless forced by snark.

After a 10 second google on the top technical advances of the last 10 years, here's a taste - human genome, GPS, weather monitoring, HIV treatments, advanced water purification, advanced solar power, hybrid cars and advanced batteries and fuel cells, windmill power generation technology, pest resistant crops, I-ware, treatments for many diseases, blah, blah, blah, fucking blah.

We can argue relative merits of some of these advances or even if they deserve to be called advances, but the point should be clear.

CD - Thanks for fixing the typos - thats cute.
posted by sfts2 at 6:31 AM on May 14, 2009


What I find shocking is that there is still room for debate on this topic. How do you defend the status quo and not come off as a nut-job? How is it even difficult for Obama to push through regulation on this industry?
posted by chunking express at 7:25 AM on May 14, 2009 [1 favorite]


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