The latest quest for financial weapons of mass destruction (hint: try looking in Syria) has a concerted push against Credit Default Swaps. Michael Lewis, cranky former banker turned cranker former writer slaps them with a left handed insult or two in The Atlantic last week, and random blogs ranging from The Market Ticker to Deal Journal to the electronic memo press at Wachtell Lipton Rosen & Katz regularly throw up missives bemoaning the very existence of the CDS market.
This from The Market Ticker:
"Naked" CDS, that is, swaps written or purchased not to hedge a bond or other business relationship but instead to speculate on the firm's fortunes are effectively the same thing as a naked short, in that there are NO boundaries on how many CDS contracts can be written against a firm and by having them cash-settle they amount to nothing more or less than a gambling contract with no limit as to the leverage that can be employed.
We tend to be highly skeptical of any efforts to reduce pricing information. That is effectively what this is. Short selling bans and CDS bans only really reduce information available to the market. It is amazing to argue that credit default swaps (about the only counter balance to the insanity that was rating agency analysis) in the hands of evil hedge funds somehow precipitated the destruction of firms that were otherwise on the soundest of footing. Returning to Mark-To-Myth accounting and abandoning "What My Assets Are Really Worth At The Time Of This Writing" accounting amounts to the same insanity. Anyone who claims that such marks are "unrepresentative because they are at fire sale prices" is merely imposing their long-term price forecasting on accounting policy. We've seen how well these long-term forecasters predict prices, so we'd like to pass on that plan, thanks.
What most anti-short, anti-CDS proponents miss is that a firm with sufficient capital, a reputation for transparency and limited spin doctoring shouldn't have to worry about short-sellers or credit default swaps- or should use the dip caused by such panic to buy back shares and move on. If pricing information on a thinly traded CDS contract somehow swings equity prices in dramatic ways it is because the market gives the disclosures offered up by management and ratings agencies almost no weight. This is exactly as it should be. When you are in a leveraged business, credibility is absolutely essential. Lehman didn't fail simply because it was heavily leveraged. It failed because no one believed Erin Callan anymore and even a seriously interested party like David Einhorn was so obviously making so much more sense than Erin and the Lehman PR apparatus. Does anyone still doubt that the Lehman at $0.00 was the wrong price for that firm at the time?
Time to face facts. Propping up failed firms by artificially inventing prices (we are looking at you, Treasury) and then removing any ability of the market to contest those marks is Fantasy-Capitalism. We are all for a rich fantasy life. (Without it we wouldn't have Marcus Schrenker). This said, we'd like it kept out of our Capitalism Cheerios, 'kay, thanks. The CDS market is effectively the only market that was getting it right in the second half of 2007. Gutting it is a bad, bad idea(tm).
Posted by guest , Jan 23, 2009 12:31PM
Velly Solly, but you are incorrectly conflating the impact of short-selling stock, which according to rule must be borrowed, with purchasing CDSs on corporate debt, which can be done on an unlimited scale.
Big, big, big difference. It is called insurable interest. If CDS purchasers needed to buy or borrow the underlying corporate (or govt) bonds to match off with the skeptical CDS bet that would be an entirely different kettle of stinkfish.
Oopsies...
Posted by Equity Private , Jan 23, 2009 12:34PM
Sorry, I'm not sure I follow your point. Maybe you can elaborate.
You dislike the "unlimited scale" feature of the CDS market? Is that it?
(Also, watch your attribution).
Posted by guest , Jan 23, 2009 12:35PM
I still believe in LEH
Posted by Equity Private , Jan 23, 2009 12:39PM
@3 Log in, please, Muffie.
Posted by guest , Jan 23, 2009 12:39PM
I agree that blaming the demise of any institution on credit default swaps is silly. However, CDS's, which are effectively insurance products in the event of a default should be regulated as such.
Posted by guest , Jan 23, 2009 12:41PM
EP-
We need to adopt a policy initiative from an unlikely direction- Saudi Arabia.
Insurance is illegal in Saudi Arabia. If Allah wills that your house burn down, it needs to burn down. You protecting yourself from the Will of Allah is a sin.
If you have positions in custody with LEH London, it is God's will that you abandon your hedge fund and undertake another line of work.
If you think that AIG's financial products division may be foolishly underwriting risk, it is God's will that you help AIG out by paying higher taxes.
Issuers of junk securities are doing Allah's will. Those who have no immediately and directly identifiable insurable interest, as defined by the moron posting @1, can just blow up and take up preaching on street corners.
Posted by guest , Jan 23, 2009 12:43PM
Yes, we need more regulation. I'm sure the SEC would be a fantastic regulator if only we gave them more money. Oh wait, we already did that? And we still didn't catch Madoff despite a roadmap? Huh.
Posted by guest , Jan 23, 2009 12:44PM
How is speculating using CDS any different than speculating using OTC options? Should we ban that as well? Considering where asset bubbles have gotten us, shouldn't we be more concerned about speculating on the upside rather than the downside?
Posted by Anal_yst , Jan 23, 2009 12:44PM
Your argument, EP would be all well-and-good if all participants could interpret the signals inherent in CDS prices properly. However, now every media outlet (I'm looking at your CNBC, FT, etc) reports CDS price movement as-if its underlying price movement, and many of their readers/viewers simply take it as such.
The purpose of government/regulation, contrary to popular belief (I'm also looking at you, Treasury), is to protect idiots from themselves. I agree that false floors and other means of restricting information flow through price mechanisms is retarded, but the lassaize faire approach, at the extreme, simply doesn't fly, unfortunately.
Posted by guest , Jan 23, 2009 12:45PM
Why do you need to cover the purchase if you dont need to deliver anything? these are settling in cash right?
Posted by guest , Jan 23, 2009 12:46PM
This is making Dylan Ratigan very angry. You won't like him when he is angry.
Posted by guest , Jan 23, 2009 12:46PM
No offense EPpy but i dont think we should quote lewis, ever, he is the laziest chump on earth, living of shitting on the hand that fed him for all of three years.. the guy knows nothing (he was in sales god damn it the fucking loser) and only says what people want to hear; bankers are stupid, greedy, blablabla..
can we ignore this fuckstick forever from now on? pls?
peb
Posted by guest , Jan 23, 2009 12:53PM
activate the ponz-signal
http://www.chicagobreakingnews.com/2009/01/suburban-businessman-accused-in-22-year-ponzi-fraud.html
Posted by Equity Private , Jan 23, 2009 12:53PM
"Posted by Anal_yst, Jan 23, 2009 12:44PM
Your argument, EP would be all well-and-good if all participants could interpret the signals inherent in CDS prices properly. However, now every media outlet (I'm looking at your CNBC, FT, etc) reports CDS price movement as-if its underlying price movement, and many of their readers/viewers simply take it as such."
So the criteria for accepting a financial instrument as legitimate is that it be properly interpreted by the masses? That seems insane to me. If the market can't see that CDS prices based on 4 outstanding contracts totaling $2 billion notional is a trivial indicator for a company with a $20 billion market cap, then:
1. The market is starved for "real" information and the CDS is filling a confidence gap and transparency gap that management has created.
2. The market in this case is dumb money that we should bet against every time.
Two examples stand out perfectly.
Lehman - clear case of #1.
Berkshire (remember when everyone freaked out because CDS spreads on Berkshire debt spiked and there was all the talk of Buffet's evil put sale) - LOOKS to be a clear case of #2.
Unfortunately, your approach would leave us all looking to ratings agencies for SIMPLE pricing information. We know where that leads.
What's next, color coding? GE is rated ORANGE - High Risk?
Posted by guest , Jan 23, 2009 12:54PM
EP, @3 here. I was employing the use of sarcasm there as an ex-LEH employee...
Sorry not make that clear.
-Ex LEH PE
I guess I should sign up... How does "Muffie McFuld" sound as a Login to you?
Posted by guest , Jan 23, 2009 12:55PM
SHAMWOW! Vote Shamwow, vote for a change (in cleaning up wet stuff). http://www.cnbc.com/id/28812810/
Posted by guest , Jan 23, 2009 12:55PM
I don't believe in Beatles - I just believe in me.
Posted by guest , Jan 23, 2009 12:58PM
Great article EP, you nailed it. If I was a CEO of a stable company and some jerk-okk HF tried to bury my stock price by buying protection on me, I would laugh at him as I load up on cheap stock in my PA.
As for @1, Most of these contracts settle cash, so writing more protection on a bond than exists of that bond doesn't matter.
Can you blame CDS for taking down some companies? you certainly can, and that's what they are designed to do. If the whole market thinks your company is garbage, your company is probably garbage.
@9, you are right as well... the fucksticks in congress and on CNBC need to learn what a CDS contract is before they start running their ignorant mouths. Sen. Dole actually called them "CDS Securities", what an idiot... needless to say she was overwhelmingly voted out of office.
Posted by guest , Jan 23, 2009 12:59PM
You are analyzing the problem incorrectly. No one would argue that you need more transparency in the pricing - but how can you have $10bn in credit protection written against a company with $500mm of debt and expect either to behave rationally in a market. Without some form of clearing/tracking/disclosure on the amount of risk written/bought against a specific risk you are relying on a bank to manage the risk on their desk with their counterparties. Has anyone asked the big brokers how they are doing collecting on the protection they bought from hedge funds when the hedge fund implodes? Left as an untracked market - this will cause a second wave of financial implosion.
Posted by guest , Jan 23, 2009 1:00PM
I wonder what Andrew Cuomo thinks about this?
Posted by Equity Private , Jan 23, 2009 1:02PM
"You are analyzing the problem incorrectly. No one would argue that you need more transparency in the pricing - but how can you have $10bn in credit protection written against a company with $500mm of debt and expect either to behave rationally in a market."
The same way I can have $60 million on the NCAA championships and still expect the game to proceed apace.
Posted by Seaman Bodine , Jan 23, 2009 1:02PM
"We tend to be highly skeptical of any efforts to reduce pricing information. "
Who the fuck cares? You write a blog...and what's this quasi-academic lingo re pricing information...shut the fuck up.
And any blog retorting on a Michael Lewis blog is so gay on principle as to be truly worthy of a glory hole jizz wart.
Posted by guest , Jan 23, 2009 1:04PM
@ 19 hit the nail on the head. The argument that CDS prices bring companies down is ridiculous and we should move beyond that point.
The real question relates to adequately evaluating counterparty risk.
Posted by Equity Private , Jan 23, 2009 1:04PM
"And any blog retorting on a Michael Lewis blog is so gay on principle as to be truly worthy of a glory hole jizz wart."
Have you considered switching to a decaffeinated brand? They can be just as tasty as regular, you know.
Posted by guest , Jan 23, 2009 1:04PM
Why do you need to cover the purchase if you dont need to deliver anything? these are settling in cash right?
Posted by Seaman Bodine , Jan 23, 2009 1:06PM
You're the one with your panties all wet cause Michael Lewis said something stupid.
Posted by guest , Jan 23, 2009 1:07PM
"but how can you have $10bn in credit protection written against a company with $500mm of debt "
You are an idiot... you have obviously never worked on a trading desk, you have no idea what a derivative is and you don't understand cash settle. Go back to yahoo.
Why dont you ask "how can you sell more oil futures than there are barrels of oil"
Posted by guest , Jan 23, 2009 1:18PM
People are edgy today. I like it.
Posted by guest , Jan 23, 2009 1:23PM
@6: try buying life insurance on your neighbor and see how far you get. fun to see the look on your face as he quite justifiably chases you down the street with a baseball bat.
and for that matter please be so kind as to use provocative words like 'moron' a bit more judiciously, moron.
EP @2, sincere apologies if my comment involved incorrect attribution. yes, the idea of allowing unlimited purchases of default insurance with no underlying exposure to the company is a dumb one in my view. certainly CDSs did not magically by themselves cause the real economic mess and rising unemployment (especially in finance)we now see, but as the once-proud pigeons formerly at AIG can aver, CDSs did not help.
there is no doubt sound logic in maximizing transparency and the expression of skepticism in capital markets, but what makes sense at the micro-economic level when dealing with each poorly run public company may not make sense at the macro-economic level, when all the good babies get thrown out with all the dirty bathwater once every 50-100 years... this gets close to the 'flaw' that the erstwhile Maestro discovered after his retirement.
so what is amusing about @6's comment is that with a wee bit of restraint, regulatory or otherwise, the once profitable game he/she so loves might have continued apace. but that folly is the privilege of youth, and yes i am envious...oops, pardon that fart.
Posted by guest , Jan 23, 2009 1:24PM
"The same way I can have $60 million on the NCAA championships and still expect the game to proceed apace."
So CDS are gambling, pure and simple.
Posted by Anal_yst , Jan 23, 2009 1:28PM
@ EP
How do you forsee an unregulated CDS market working out, prey tell?
My point, which I realize is utopian and effectively purely a case of academic masturbation, is that there is an ideal level of regulation - not necessarily governmental - (but still > 0) which would ensure sh!t doesn't get COMPLETELY out of hand re: CDS markets.
The problem we see with determining and implementing policy though, is not for the "majority" of the time markets are "orderly", but for the tails at either end when there is little/no rhyme/reason for the magnitude, velocity, etc of price movements.
We still (very clearly) haven't figured out how to deal with this situation in more standardized and regulated debt and equity markets, so, I ask, how you suggest we deal with it in the relative free for all that is CDS?
Posted by guest , Jan 23, 2009 1:29PM
Seems to be reported over and over but CDS are not by definition cash settled. And for that matter, it's not particularly consequential. In a cash settlement, the settlement price would be determined by the price of the underlying deliverable instruments. If you had a profoundly larger notional of CDS swaps than bonds, the CDS market can be cheaply manipulated using the bonds. I've seen a lot of traders get burned by the bonds going bid because the company can formally defaulted and the bonds needed to be delivered.
Posted by Seaman Bodine , Jan 23, 2009 1:29PM
"try buying life insurance on your neighbor and see how far you get. fun to see the look on your face as he quite justifiably chases you down the street with a baseball bat."
ever heard of viatical settlements?
Posted by guest , Jan 23, 2009 1:29PM
Bravo EP - well said.
Posted by guest , Jan 23, 2009 1:30PM
"The same way I can have $60 million on the NCAA championships and still expect the game to proceed apace."
I think the issue has been one of leverage, people not able to settle in cash on these contracts, banks not necessarily balanced on the trade. A bookie taking the vig has been a better risk manager.
There are few bookies who would let you take that action on borrowed money and then not come after you personally for the cash with some penalties. Not many bookie's are going to accept your bankruptcy filing.
Posted by Suits , Jan 23, 2009 1:30PM
27,
Go talk to your insurance broker and ask if you can take out $10M policies on your neighbors houses and see what he says.
Posted by guest , Jan 23, 2009 1:31PM
Great posts all, but the larger points Lewis is trying to make in his interview (in its entirety) is that many many traders (and their entire "desks" supposedly managed by experienced MDs) took outsized positions relative to their firms' capital positions, had inadewuate reporting mechanisms and little to no oversight at the board level to rein in these risks. Just because bonuses are based on instruments traded or sold (such as CDS) that are deemed too remote to trigger VAR red flags doesn't excuse the risks to the firms' shareholders, counterparties and employees. See Thain, John for a recent example.
Posted by guest , Jan 23, 2009 1:32PM
Couple of issues. First, counterparty risk distorts CDS pricing, as there are few ways to hedge a CDS contract with a bank that are as cheap as a short CDS position on the bank.
If you buy more CDS when you see a bank's stock spiral the information about the CDS spread gets fed back into the stock price which gets fed back into the CDS price. Some credit models (KMV-ish) plunk stock prices into their mix, providing another link between equity market mayhem and CDS behavior.
A central counterparty, if it worked as advertised, would help. But now people are grumbling about costs and how to set appropriate margin requirements. Hope they sort it out.
Posted by shalimar , Jan 23, 2009 1:32PM
@30
As are any contracts that do not represent ownership of the reference entity.
i.e. most derivatives.
The justification for legalization (vs gambling laws) is that they provide risk liquidity for certain parties. Allows said parties to somewhat cover their asses for making stupid purchases elsewhere.
Posted by guest , Jan 23, 2009 1:33PM
@33-- SN Bodine that's a different story -- in a viatical, the insured himself sells his own policy to an investor -- the investor is NOT buying a policy on a stranger's life from a company. Doing the latter has been ilegal since 1774 -- if you do not have an insurable interest in the life in question, you cannot procure insurance on that life.
Posted by guest , Jan 23, 2009 1:34PM
Great posts all, but the larger points Lewis is trying to make in his interview (in its entirety) is that many many traders (and their entire "desks" supposedly managed by experienced MDs) took outsized positions relative to their firms' capital positions, had inadewuate reporting mechanisms and little to no oversight at the board level to rein in these risks. Just because bonuses are based on instruments traded or sold (such as CDS) that are deemed too remote to trigger VAR red flags doesn't excuse the risks to the firms' shareholders, counterparties and employees. See Thain, John for a recent example.
Posted by Seaman Bodine , Jan 23, 2009 1:35PM
@39
dude - suck it...what the fuck is the underlying then? a tree falling in a forest?
Posted by guest , Jan 23, 2009 1:37PM
Great posts all, but the larger points Lewis is trying to make in his interview (in its entirety) is that many many traders (and their entire "desks" supposedly managed by experienced MDs) took outsized positions relative to their firms' capital positions, had inadewuate reporting mechanisms and little to no oversight at the board level to rein in these risks. Just because bonuses are based on instruments traded or sold (such as CDS) that are deemed too remote to trigger VAR red flags doesn't excuse the risks to the firms' shareholders, counterparties and employees. See Thain, John for a recent example.
Posted by guest , Jan 23, 2009 1:37PM
"The same way I can have $60 million on the NCAA championships and still expect the game to proceed apace."
EP, this statement confuses me. Almost anyone wagering 60mm on the NCAA championship is going is either using inside information to make their decision, or is going to will employ shenanigans to affect the outcome. Perhaps this is your intention, and I've missed your subtle commentary once more.
Sure the game will proceed, but it won't exactly be a fair game
Posted by Seaman Bodine , Jan 23, 2009 1:38PM
@40
semantics
if I buy a viatical settlement (easy to do, yes?), I now own insurance on that junkie cancer HIV infected person, and basically want him to die pronto?
no?
Posted by guest , Jan 23, 2009 1:38PM
37, 41, 43-
KNOCK IT OFF
Posted by guest , Jan 23, 2009 1:39PM
@5 is the only one making a relevant argument here. CDS are insurance products and should be regulated as such. End of story. It's not an issue of hampering capitalism, or price transparency, or whatever - all economic terms are useless outside of an economic framework. It's a question of making sure that the product is sound, that a contract between two parties will hold. Without this, there is no confidence in the product and that leads to a deterioration of the product space itself. The free hand of capitalism doesn't mean no regulation. I wish people would stop getting confused about that.
Posted by guest , Jan 23, 2009 1:40PM
@45
Yes, but you are failing to grasp the concept that you can't do it without the consent of the underlying asset.
Big difference.
Posted by guest , Jan 23, 2009 1:40PM
CDS are fine with daily collateral exchange....weekly, monthly, quarterly or no collateral exchange is the problem. Futures markets w clearinghouses work fine. Need clearinghouses. We should clawback all the sicko bonuses all the cds guys made.
Posted by Investorcluzo , Jan 23, 2009 1:40PM
stop the presses (new topic)! have you seen the "slanket". clearly we have an imposter. while I prefer the "snuggie" on name alone, I question whether or not we need a bunch of folks making stuff only a grandmother could love.
http://www.youtube.com/watch?v=uU4MpwoWIKQ
Posted by shalimar , Jan 23, 2009 1:44PM
@42
An option is struck between two parties that have zilch to do with the company.
If you buy stock, you're technically playing into the system that hypothetically finances primary production.
Company DBKR gives up equity ownership in exchange for some claim to future profits. Pension chumps purchase the initial amount at price X with the assumption that they can flip in the secondary market. Eventually, a value investor purchases at X/10 at a 50% discount to fair value.
At any point in the process, if you own the stock, you still have a claim on the companies cash flows. Unless the rights agreement states (as if often does) that you have no rights.
Meanwhile, you and I have struck a side bet on whether chump N will pay Y price from DBKR on a certain date.
The process can be gambling depending on how you think about it. When I put you all in with a royal flush in my hand, I don't think I'm speculating. Yet several kids play poker with no idea what they're doing.
Posted by Seaman Bodine , Jan 23, 2009 1:44PM
@48
sweetness
Posted by Equity Private , Jan 23, 2009 1:44PM
"So CDS are gambling, pure and simple."
And your point is...?
(This is where a bible quote might be your best bet in continuing the argument, as would a detailed description of how going long a stock isn't also "gambling, pure and simple").
Get back to me.
Posted by guest , Jan 23, 2009 1:45PM
@ 45 -- not simple semantics -- there is a very big conceptual difference -- if Joe the AIDS ridden Crackhead already owns a policy on his own life he is allowed to sell EXISTING insurance that he has on his OWN life -- it's his own property and he can do what he wants with it. That's totally different from SN Bodine going out and buying a $10 million policy on Joe the AIDS-ridden Crackhead.
True, at the end of the day you are waiting for someone to die so you can collect, but all the law gives a fuck about is the existence of insurable interest at the INITIAL purchase of the policy.
Posted by Seaman Bodine , Jan 23, 2009 1:46PM
@54
see @52
Posted by shalimar , Jan 23, 2009 1:48PM
By the way Bodine, I'm neither anti-short nor anti-CDS.
The instruments are benign in themselves. How people use them / perceive them is what matters.
CDS have been used by certain short sellers to throw IB clients into panic. However, as EP points out, said clients should have better sources of information than an illiquid, easily manipulable asset class.
You can't really call the CDS purchasers fraudulent because other people's reactions are stupid. By design, they're a side contract and have no real effect on the operations of a company.
Posted by guest , Jan 23, 2009 1:51PM
27 - whens the last time you cash settled a CL???
Posted by shalimar , Jan 23, 2009 1:53PM
@53
By extension, any financial transaction with an expectation of gain without guarantee is gambling.
Semantics.
Posted by Seaman Bodine , Jan 23, 2009 1:54PM
@56
all i'm saying is Equity Private is a 'gina for reporting on michael lewis
and then i got educated on insurance
plus, i called out some douche who thinks derivatives are gambling
in closing, though, isn't all this jive ass bullshit, because the only meaningful debate here is on how much leverage someone can suck down?
Posted by guest , Jan 23, 2009 1:54PM
@45 - the mafia would love you, as well as every murdering ex-wife, embittered postal worker, and raging ex-football players.
Posted by Seaman Bodine , Jan 23, 2009 1:56PM
that's cause i am black dynamite
http://defamer.com/5138020/why-black-dynamite-was-the-most-nsfw-fun-we-had-working-at-sundance
Posted by guest , Jan 23, 2009 1:57PM
Lewis is partially correct! Whenever you buy CDS, the counterparty often hedges their risk by buying puts on the stock of the company. It adds to the pressure. I think there should be a limit on CDS (max 10x the total debt of the company) contracts on the a company like we have it in equity markets (one cant short beyond shares outstanding)
Posted by guest , Jan 23, 2009 1:58PM
@ EP 53 -- 30 here.
Prior to the panic of 1907 there existed so-called bucket shops, where side bets were made on the performance of equities. This practice led to speculation that distorted pricing and contributed to the crash. Bucket shop laws were enacted to prevent these trades and the CFMA in 2000 expressly exempted CDS trading from those laws.
I'm all for transparency in pricing info, but the CDS market is arguably divorced form reality -- CDS spreads on the default of the US government? Really? if it gets to that point anyone will be able to collect?
Posted by Equity Private , Jan 23, 2009 2:01PM
I'm all for a central (or a few central) counterparties. But, I might point out, the DTCC has settled a metric asston of CDS, including the Lehman and AIG fiascos, without much issue.
The issue boils down to this:
Either:
1. CDS leave a bad taste in your mouth because you have a moral issue with "speculators," and "gamblers" (and haven't yet figured out that you are a hypocrite if you don't also ban puts, calls, stock and about every other financial instrument).
2. You dislike what you perceive as the effects of CDS (and shorting and puts, and David Einhorn) because it spoiled the party being thrown by the permabulls in Fantasy-Capitalism land (they are opening Euro Fantasy-Capitalism land next month in the UK, btw) and need an explanation that doesn't include "I was a moron for not doing my own fundamental research."
3. You have issues with CDS collateral arrangements (but haven't bothered to examine DTCC's near flawless settlement record- one which surprises even me given the stresses on the system).
4. You think CDS create perverse incentives for market actors to run down companies and create "bear raids" (but haven't thought it through enough to realize that the same argument exists for "bull raids," pump and dumpers, and Dick Fuld, instead you are forced to argue that everyone who takes out insurance on a third party will evolve into a murderer).
5. You don't really have anything against CDS.
At least from the comments here, that's about where we stand.
Posted by guest , Jan 23, 2009 2:02PM
Too thought-provoking, didn't read.
But seriously, both original post and comments much more entertaining than the usual junior-high locker room drivel (oh, except you, Bodine).
Posted by guest , Jan 23, 2009 2:02PM
Today, I pay homage to EP.
Great lead-off, and great discussion.
Posted by Seaman Bodine , Jan 23, 2009 2:06PM
@62
i'm no barack obama, in this defining moment, but doesn't that just drive the price of the puts up? ... not nec. the underlying
i say that, because dispersion and other types of vol arb stuff seems to be money good, and probably comes from taking advantage of such distortions
and I can't believe in aggregate it amounts to much
Posted by shalimar , Jan 23, 2009 2:08PM
6. I have a problem with people who read into illiquid CDS prices as meaningful commentary on a company's ability to pay debt. These chumps enable #4 (the parties involved are merely shearing sheep).
Throughout '03-'06 (you were in school for the early bit dearie), you could purchase 5 yr CDS on homebuilders and RREITs at 5-20 bps. Definitely inaccurately priced on the flipside.
More recently, the MS 5s went to 1200 bps, before settling at 400. Incidentally, institutionals were calling up their managers in October and asking them to move away from MS PB.
Posted by shalimar , Jan 23, 2009 2:12PM
Einhorn doesn't even go net short most of the time. Unclear why people insist in equating him with short-sellers.
As of Sep 30, they were market neutral.
As of Jan 20, they were 68% long, 35% short (and were down 60 bps for Jan. tsk)
Love the man - unfortunately he hasn't been able to capitalize on his own calls.
Posted by guest , Jan 23, 2009 2:13PM
It is not the amount of CDS outstanding relative to the underlying security that is the problem. It is the ability of the counterparty to cover said CDS should they have to pay up. Having completely unlimited scale means someone can blow up by taking on too much risk (AIG, take a bow). Even the derivative markets have some kind of mechanism for preventing idiots from doing themselves in (and also the rest of the markets). CDS is a way around that.
In order to prevent this from happening again, we need to regulate the counterparty system and be able to track who has what exposure to CDS. Thus when someone does implode, we can have an orderly matching of claims and payments.
Posted by shalimar , Jan 23, 2009 2:14PM
@70
Or just prevent academics like Gary Gorton from gaining enough credibility to even suggest to AIG that they should sell protection against risks they can't gauge.
Posted by Equity Private , Jan 23, 2009 2:14PM
"In order to prevent this from happening again, we need to regulate the counterparty system and be able to track who has what exposure to CDS. Thus when someone does implode, we can have an orderly matching of claims and payments."
Change this to:
"In order to prevent this from happening again, we need to regulate the counterparty system in order to be able to track who has what exposure to CDS. Thus when someone does implode, we can have an orderly matching of claims and payments."
And you have my vote.
Recommendation: Long CME/ICE.
Posted by Anal_yst , Jan 23, 2009 2:18PM
@EP
I presume you were generalizing about #4, since I specifically brought up the fact that, to shamelessly quote myself,
"The problem we see with determining and implementing policy though, is not for the "majority" of the time markets are "orderly", but for the tails at either end when there is little/no rhyme/reason for the magnitude, velocity, etc of price movements.
We still (very clearly) haven't figured out how to deal with this situation in more standardized and regulated debt and equity markets, so, I ask, how you suggest we deal with it in the relative free for all that is CDS? "
Posted by guest , Jan 23, 2009 2:20PM
The CDS market is the only one working right now in fixed income. Any fixed income hedge fund will tell you the same. CDS wasn't the problem, structured products were the problem. When we started using CDS to make fantasy synthetic tranches of CDOs-cubed, people should have seen the writing on the wall. Of course, that was all made possilbe by the government-sponsored ratings agencies. With a big assist from Alan Greenspan's loose money policy.
Posted by guest , Jan 23, 2009 2:23PM
@29-
6 here.
Now that you're the etiquette arbiter, what was the purpose of beginning post @3 with words "Velly Solly"?
I stand by everything written in post 6. BTW buying protection on a company with whom you do business (but don't own the bonds of) is not the same as buying life insurance on your neighbor but thanks for the moronic analogy.
If you want to get protection on a company, you will need a counterparty. That counterparty may be a speculator. It turns out that without speculators, markets don't work. You probably read that somewhere and forgot it.
Posted by guest , Jan 23, 2009 2:25PM
@71, @70 here. No one should take on risks they cannot gauge, though that didn't seem to stop anybody.
@EP 72, yes, I think that's what I meant to say, but brain to finger synapses don't always work properly.
Posted by guest , Jan 23, 2009 2:26PM
Seaman Bodine = Keith Olbermann
Posted by kdenninger , Jan 23, 2009 2:27PM
I tried to post on this thread, it didn't work, so I wrote an entry on it.... and now it posts :)
Here it is....
http://market-ticker.org/archives/744-More-on-CDS.html
Posted by Equity Private , Jan 23, 2009 2:27PM
"The problem we see with determining and implementing policy though, is not for the "majority" of the time markets are "orderly", but for the tails at either end when there is little/no rhyme/reason for the magnitude, velocity, etc of price movements.
We still (very clearly) haven't figured out how to deal with this situation in more standardized and regulated debt and equity markets, so, I ask, how you suggest we deal with it in the relative free for all that is CDS?"
Oh, you mean the goal of eliminating market volatility entirely? To smooth returns into a consistent +14% annually? We've answered that question already. It is trivial using an age old financial tool: Fraud. (Of course, we haven't solved the long-term problem related to that solution.
Other than that, you are evaluating CDS by raising the bar to an unachievable standard (no market crashes) and then damning the instruments for not clearing it.
Personally, I think we might start on the way to your goal by not pouring trillions of dollars into a particular slice of the economy to downwardly distort risk pricing so as to deliver the "dream of home ownership" to the maximum number of constituents possible and re-elect the present political class indefinitely, but that's just me.
Laying market volatility on the doorstep of CDS markets is a bit thin, but it has the virtue of being difficult to falsify. That is, if that's a virtue in argument.
Posted by kdenninger , Jan 23, 2009 2:30PM
I tried to post on this thread, it didn't work, so I wrote an entry on it.... and now it posts :)
Here it is....
http://market-ticker.org/archives/744-More-on-CDS.html
Posted by Equity Private , Jan 23, 2009 2:46PM
Hi there, KD:
My issues with your initial post are these:
1. "Bar by executive order the writing of any new CDS on any firm that has taken TARP money, without exception."
I think it should be clear why I oppose this. It's pure intervention and not based on anything remotely like an understanding of the market. Also, I disagree with your premise that government should be in the business of imposing financial policy via their new found role as activist shareholder with the addition of sovereign powers. Government isn't very good at banking. (See: Housing crisis). Depending on this sort of rulemaking requires a level of faith in leadership (the Supermen and Superwomen of the political class) that I lack. In my experience, arguing this point devolves into a "Yes they are that smart," "No they aren't that smart" discussion. Let's consider that read and move on. You think you/our leaders are smart enough to properly enact bans on individual financial products. (You do this with a straight face while also railing on CDS markets as evil "gambling.") That's not credibility inspiring in my book, but I digress.
"Prohibit the collection of a CDS payout unless the holder tenders the underlying bond against which the CDS provides protection. This will immediately extinguish "speculative" CDS contracts while leaving those that were entered into as legitimate hedging transactions intact."
This is related to the "speculators are evil" part. See above. (Way above).
Let's examine your other ideas in the original post:
"As to how to pay for the new staff (which was asked on CNBC yesterday afternoon) I have a simple solution to that - get very aggressive with clawbacks and forfeiture actions. After all, most of the people who this group should be chasing (if they're doing their jobs right) have net worths in the hundreds of millions or even billions of dollars, and nearly all of that money was obtained during and as a consequence of their alleged illicit activity - and thus is subject to clawback or forfeiture."
So, let me get this straight. You want to give people with nearly unlimited prosecutorial authority a FINANCIAL INCENTIVE to find wrongdoing, and your motive seems to be an income disparity argument? You are commenting on the wrong website I think, as your time here will likely be utterly wasted.
And then there is this closing bit on CDS markets:
"It is time to put a stop to this outrageous practice by labeling it what it has become - an implicit threat to overthrow and destroy the United States Federal Government."
Recommendation: Long Aluminum Foil.
Posted by Equity Private , Jan 23, 2009 2:49PM
"Prohibit the collection of a CDS payout unless the holder tenders the underlying bond against which the CDS provides protection. This will immediately extinguish "speculative" CDS contracts while leaving those that were entered into as legitimate hedging transactions intact."
Oh, there's this:
What stops a CDS protection holder from just buying the defaulted bond at pennies after a crash, tendering it and collecting protection?
Nothing.
You've given this a lot of thought, I see.
Posted by kdenninger , Jan 23, 2009 2:52PM
1. I actually don't support government intervention AT ALL and have tirelessly worked (and spent thousands attempting to stop) the interference with the FREE MARKET mechanisms that we know work - the first and foremost of which is called "Bankruptcy."
However, having accepted (and it seems you and everyone else in America has, as I didn't see thousands of PE people nor bankers in DC REFUSING to take TAPR money!) that government HANDOUT then the banking and investment industry must accept that it comes with conditions. If the banks don't like 'em then they can return the TARP money - all of it - and they're free to do what they want. No protection, no "security blanket" against "too big to fail", just the cold hard reality of the market.
Your argument is that government money is fine but regulatory oversight is not. I disagree.
2. Prohibit payout w/o tendering the bond. Again, see above. You take government money, you subject yourself to the rules.
As for a financial incentive to find wrongdoing - why not? The fruit of a poison tree is NOT YOURS. This is a basic principle of the law.
Finally, before you claim "income disparity" I'm a former Internet age CEO; I've got plenty of income and wealth, and do this because I like it, not to make money from it.
I earn my money nowdays trading - that is, participating in the Wall Street Casino.
I simply believe that it is improper for the house to use loaded dice.
Posted by guest , Jan 23, 2009 2:52PM
CDS = scoring with someone you thought was really hot and then waking up with something really itchy.
Posted by guest , Jan 23, 2009 2:56PM
me thinks peb @12 is actually Dick Fuld.
Posted by shalimar , Jan 23, 2009 2:58PM
"I'm a former Internet age CEO; I've got plenty of income and wealth"
Don't you feel terrible for making money off those people who were overpaying for your company/services, "gambling" on the expectation that they'd at least break even on the trade?
Where was the oversight there, preventing Winstar from putting money in your pockets...
Posted by guest , Jan 23, 2009 2:58PM
CDS are good. Just look at AIG.
About one year ago:
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080218/REG/794188688
And we ended up bailing out the assholes, with no end in sight.
Quote:
AIG said last week that the change in estimated losses came after its auditor, Pricewaterhouse-Coopers, noted a “material weakness” in AIG’s internal control over the financial reporting and fair valuation of the CDS portfolio, which is held by its subsidiary, AIG Financial Products. The AIG subsidiary writes CDS on the super-senior tranches of CDOs on residential mortgage-backed securities.
AIG underwrote a little over $500 billion in super-senior CDS, mostly on securities such as corporate loans, but also including some $78 billion related to CDOs, which have some exposure to subprime and have been losing value.
Despite the losses, analysts estimate that AIG will be able to fulfill its contracts even in the event of widespread defaults.
End Quote
Analysts my ass.
Posted by kdenninger , Jan 23, 2009 3:10PM
Shalimar: Funny you mention that - Winstar got a hell of a deal. Clean books, 70% pretax operating margin, zero debt. That they essentially bought hardware on "Option ARM" financing from Lucent in sufficient quantity to blow themselves to bits (totally outside of and unrelated to the deal I did with them; we owned all our hardware free and clear) has nothing whatsoever to do with the acquisition of MCSNet, but it sure does have eerie parallels to what we're going through now with housing!
I have no quarrel with CDS provided they are traded on an exchange, bid/offer/OI is published and margin requirements are imposed and supervised against all involved.
Everyone who trades CBOE Options and CME Futures (that would include me, daily) has no quarrel with these requirements. Those limits and supervision insure that while I can blow myself up I can't blow up both my broker and the guy on the other side of the trade when I do something stupid.
The problem with CDS is that in the last few years they have turned into speculative products (fine) with effective infinite leverage (mathematically unsound) traded in the dark (rife for mischief and even fraud) by market participants who explicitly argued for being exempt from the very regulatory oversight that other similar products (E.g. listed futures and options) must undergo.
AIG is the poster child for exactly how dumb that practice was and we have over $100 billion of taxpayer money in that smoking hole as a consequence.
Oh, and before you argue for Lehman "not" resulting in that kind of liability perhaps you can tell me where the clearing advances that the NY Fed gave to them in the days following their bankruptcy filing are? I can't seem to find that money either, and its not a trivial amount.
Posted by shalimar , Jan 23, 2009 3:16PM
Side project on pricing efficiency in markets.
PALM equity is currently valued at $800m
PALM term loans ($400MM face) were trading at 25-35 earlier this month
Equity analysts talk about Pre hype
Credit analysts point to a Palm bankruptcy Bono can croon about
Who's right?
Posted by guest , Jan 23, 2009 3:24PM
I think you're making a valid point, that a run on the CDS can send the ratings agencies into a tizzy, thus enabling a downgrade and accelerating a vicious circle,sometimes into a death spiral.CDS can be the tail wagging the dog.The market needs a size disclosure so that we can tell if it's not being gamed by frontrunning brokers or their prime brokerage hedge funds.
Posted by kdenninger , Jan 23, 2009 3:24PM
Time will determine that Shalimar.
Odds are the credit side is right, but right or wrong that still doesn't justify writing swaps against their debt that you have insufficient capital to back.
If you write swaps against all $400m you should (today) have to post the 75 cents AND as that position changes in the market on a daily basis be subject to margin supervision against it.
Provided that happens in a transparent fashion so if I BUY such a contract I know I will get paid and it won't blow my counterparty to pieces, I'm cool with it.
The problem is that I have no INDEPENDANT third-party supervision of a CLAIM that my counterparty has adequate capital to cover the bet should the event occur and I go to them to collect.
If I am holding that debt and insuring it, but my counterparty doesn't have any money this means that I am carrying that debt at par due to my "coverage" that I bought and paid for, but that coverage is in fact worthless! I thus have an asset on my balance sheet at par that is in fact worth 25 cents, and thus YOUR failure (as my counterparty) destroys ME (who did nothing wrong.)
If I'm speculating then I have a contract that on the event has a value that I can (and will) book but its UNCOLLECTABLE - that is, that "asset" in fact has a NEGATIVE value (the amount I paid for the worthless swap)
This sort of thing is why all this "counterparty risk" and "systemic failure" problem arose, and there is only one fix - stop allowing people to write contracts they cannot cover.
We tried it the "self regulating" way and it didn't work.
Time to change the business model.
Posted by guest , Jan 23, 2009 3:53PM
The same way I can have $60 million on the NCAA championships and still expect the game to proceed apace."
The reason you can still expect the game to proceed apace is because the amount of bets on the NCAA championships do not affect the actual play on the courts. By that I mean if the line moves in the direction of one team, it does not increase or decrease the likelihood that either team will win the game. The movement of CDS prices has an indirect, but very real, affect on the perceived creditworthiness of a company, which in turn can affect credit ratings, stock prices, etc. Furthermore, there are prohibitions on gambling by players in the NCAA championships, which is one of the main reasons that you can bet $60 million on the NCAA championships and still expect the game to proceed apace, unlike the CDS market.
Posted by shalimar , Jan 23, 2009 3:57PM
"The movement of CDS prices has an indirect, but very real, affect on the perceived creditworthiness of a company, which in turn can affect credit ratings, stock prices, etc."
Just make sure that people who trade stocks, issue credit ratings, etc are smart enough to realize that CDS prices should just be one input into their decision.
Otherwise, you have the occasional wolf leading the lambs. As is appropriate.
Posted by guest , Jan 23, 2009 4:19PM
What bunch a huge BSDs.
Posted by guest , Jan 23, 2009 4:34PM
KD, so far all of what you have posted here refers to the need for counterparties to be able to pay. I agree that some kind of regulation/exchange/what have you is necessary to avoid the systemic risks we have now. But forcing banks who took TARP to not play in the CDS market doesn't solve the problem. True, they took government money and now must do what the government says. But I agree with EP. We are conferring superhuman powers to politicians who care more about their wealth than yours. While I think these banks should do what the government says for taking the money, I don't believe the government should micromanage them. Government's track record on managing anything clearly sucks.
Posted by kdenninger , Jan 23, 2009 4:49PM
No, I think you read it wrong #95
If the government is going to be the one "at risk" (that is, all of us) then I don't believe you should be able to WRITE a CDS on that entity.
Why?
Because it is effectively a CDS on the Federal Government (and you CAN buy or write those.)
The problem here is that the Government has not just injected money - they have pledged to do whatever is necessary to PREVENT triggering that CDS. There is thus no purpose to buying a CDS on that firm (by definition you've been told it can't and won't fail) UNLESS your intent is to game the capital structure somewhere else or force a failure of the US Government! That is, you're not betting on the event (since you've been told it can't happen) you're abusing the essential purpose of the contract to loot the Treasury or trying to force the failure of Treasury itself!
That simply should not be allowed; if you want to bet on the failure of the US Government, buy a CDS on US Government debt. (Oh, and its a hell of a lot cheaper too, paying many times more what you'd have to pay to buy a US Government Bond CDS belies your true intent!)
Posted by Equity Private , Jan 23, 2009 5:10PM
Why is buying a CDS on Treasuries legal (if stupid) and buying a CDS on a bailout firm illegal (and kind of smart)?
Because we are evil for betting "against" the Government? I do it every day.
I mean are you seriously devolving into a the morass of the "shorts are unpatriotic" argument?
"Force the failure of the Treasury?" I don't think we have to do that. They are doing a fine job themselves and I, for one, intend to get a little insurance against their total lack of competence. God forbid I use the currency markets to bet against the United States Treasury. Their failure right now is one of the the best bets going. In fact, and I cannot WAIT until put options on OMX go live. (OMX might be the shortest lived index in history if delisting standards even remotely apply to it).
I tired of your poorly reasoned and thinly researched views of the patriotism of financial regulation.
While I'm on the subject, KD: I'm sure you were an excellent Internet CEO and I'm pleased that you've managed to find a pleasant hobby for yourself in trading and keep yourself busy and out of trouble elsewhere-- however, just a hint here, you might want to spigot off the financial regulation proposals until you have a better grasp of the underlying issues and mechanics. We have enough people out of their depth working on that project already, thanks.
If you really don't want to take the time to bring yourself up to speed, then you are going to need to embolden your inner hype-child. (I sense you have one, and the dot-com boom must have honed those skills).
You could learn a lot by watching Mark Cuban, for instance. Not that Mark is perfect, but given his beginnings, he's come a long way. (Starting with an SEC suit based on your trading or some allegations of rule violation for a rule that you've been decrying for years is a good beginning- you might have to back date some blog posts to get here).
Here are some suggestions:
1. Really work on avoiding the quasi-conspiracy discussion. It marks you as a member of a less-than-credible political underclass. True, this is manifestly unfair, but "'dem's da breaks." Avoid discussing plots by evil market actors and "speculators," to overthrow the government with credit default swaps. Seriously. No... seriously. Lose that noise. Really, whenever you say "speculators" you sound like Waxman. That's not good. Trust me here.
2. When you pontificate on a topic that is over your head, leave yourself an out (how you missed this given your tenure in the internet age is beyond me). Your CDS arguments here were badly underhedged and anyone here at Dealbreaker who understands them (a significant fraction of our readers actually trade them) is going to peg you immediately as paper thin. Unfortunately, since our link has doubtless increased your exposure to these experts, your previous half-baked plans (like ex post presentation of debt instruments to qualify for CDS protection payout) will be revealed. You might wish to cull your existing posts of these before they are found. Google Cache can make this difficult but I'm sure you are resourceful.
3. Pontificate on easier targets- particularly with reference to your audience's bias. Instead of bolstering the SEC, skewer them. Offering to give the SEC a commission structure like the Marketing Director for a CDO isn't going to go well on Dealbreaker. Try "Democratic Underground" with that stuff.
4. In your position (or what you claim is your position- wealthy former Internet CEO trading for the fun of it), engaging in class warfare is going to get you about as far as the French Aristocrat who complains while on the way to the National Razor, that they always sent those leftovers not given to the dogs to the servant doors for the peasants to eat. Avoid the temptation. If Mark Cuban isn't a man of the people despite owning a basketball team, you are not a man of the people. Stop pretending. It will be easier on everyone.
5. Make sure that your own house is in order before you start calling for total transparency. Seriously, how embarrassed would you be if an options backdating issue emerged after you called all this attention to transparency. That'd be like gunning to be head of the Treasury when you'd been dodging taxes for years, or something.
6. Chose your battles, and your battlefields. Mounting a discussion of "counterparty risk" on a financial discussion board can be hazardous to your health. (See #2).
7. Be careful with examples. You've stepped in it three times with AIG. You should do some reading there before using it as the example you've been using it as.
I'm sure that you'll quickly recover from the missteps here, but you might have to get a new account to reset your reputation capital.
Good luck!
Posted by guest , Jan 23, 2009 5:21PM
Ow.
Posted by guest , Jan 23, 2009 5:24PM
does anyone else get seriously aroused watching ep methodically defenestrate an unarmed opponent? where in the hell did this ep come from? what happened to the lazy one-liner ep?
Posted by Equity Private , Jan 23, 2009 5:30PM
"OMX" should have read "QGRI"
Posted by shalimar , Jan 23, 2009 5:34PM
EP,
Apart from the few occasions where you've been caught blushing after your Booth '05 classmates bring up the EP blog, you're rarely had your "reputation capital" at stake.
Speaking of which, whatever happened to private equity tales and the Debt Bitch. Slow days at Sub Rosa, or have the doors shut?
S
Posted by guest , Jan 23, 2009 5:35PM
Hello EP, @1 here:
"We have enough people out of their depth working on that [financial regulation] project already, thanks."
Uh, beg pardon, but how is that different than what we had until recently working for megabucks on the street until they collectively blew up the game?
You are correct that the road to hell may be paved with good intentions, but like democracy in governments, good intentions may be better than the alternatives.
Why stifle government innovation? Hey, a new oxy-moron, just for @6! Pip, pip, cheerio.
Posted by Equity Private , Jan 23, 2009 5:44PM
Shal: I wasn't at Booth, sorry. Nor was I '05. Nice try though.
@1 / 102: "Uh, beg pardon, but how is that different than what we had until recently working for megabucks on the street until they collectively blew up the game?"
You won't catch me claiming there was any difference. I bet against them too.
Posted by guest , Jan 23, 2009 5:47PM
What stops a CDS protection holder from just buying the defaulted bond at pennies after a crash, tendering it and collecting protection?
Nothing.
Everyone else who has a CDS that'll be worth a dollar if they can get their hands on a bond and so bids fifty cents. Or the people who sold enough CDS that it's cheaper for them to make the coupon payments to prevent default than it is to pay out on the protection.
Didn't Bear try something along those lines?
Posted by shalimar , Jan 23, 2009 5:48PM
@102
Some of the wrappers didn't actually know that they were selling negative value products. I've had MDs explain the upside of selling AIG CDS at 50 bps. Their intentions were not malevolent - merely ignorant.
A lot of the asset inflation, and wealth misallocation was caused by several of these ignorant players coming together.
The problem EP alludes to is that of stupidity in the system, which is damaging regardless of intent.
Fiefdoms run by prince scholars is the governing system of choice.
Posted by shalimar , Jan 23, 2009 5:49PM
@102
Some of the wrappers didn't actually know that they were selling negative value products. I've had MDs explain the upside of selling AIG CDS at 50 bps. Their intentions were not malevolent - merely ignorant.
A lot of the asset inflation, and wealth misallocation was caused by several of these ignorant players coming together.
The problem EP alludes to is that of stupidity in the system, which is damaging regardless of intent.
Fiefdoms run by prince scholars is her governing system of choice.
Posted by shalimar , Jan 23, 2009 5:49PM
@102
Some of the wrappers didn't actually know that they were selling negative value products. I've had MDs explain the upside of selling AIG CDS at 50 bps. Their intentions were not malevolent - merely ignorant.
A lot of the asset inflation, and wealth misallocation was caused by several of these ignorant players coming together.
The problem EP alludes to is that of stupidity in the system, which is damaging regardless of intent.
Fiefdoms run by scholar princes is her governing system of choice.
Posted by Equity Private , Jan 23, 2009 5:52PM
Not really sure how "Fiefdoms run by scholar princes is her governing system of choice," is a position that emerges from anything I've advocated.
"Speaking of which, whatever happened to private equity tales and the Debt Bitch. Slow days at Sub Rosa, or have the doors shut?"
They remain open, actually. How's the liquidation going over there? Clients going to get their money by end of quarter as promised?
:)
Posted by kdenninger , Jan 23, 2009 5:55PM
EP: The game is up.
Simply put, buying CDS on a bank that has been deemed "not able to fail" isn't a bet on the bank not failing.
It is a bet on the government being UNABLE to prevent the failure.
Ergo, what I stated originally - it is a bet (perhaps with intent to try to FORCE the outcome) that the government itself will fail.
Heh, if you want to run that line, have at it. Good luck getting paid in US Dollars if you succeed in forcing the failure - what, exactly, are you intending to do with those dollars your "winnings" are paid in if your bet "succeeds"?
Yes, I know how CDS work, I know how netting works, and I'm well aware that Lehman's failure, while "anticipated" to cause the implosion of the free world didn't - and why.
That doesn't change a thing in that the CDS "industry" has escaped regulation imposed on other speculative and hedging instruments for the precise purpose of preventing the sort of disaster that we're in now.
"Systemic Risk" isn't created by single-party failure, and proper margin supervision (and when appropriate position limits) keep single-party failures from cascading. As evidence for my viewpoint I present the regulated listed options market in 1987 (and in 2008!), in which there were widespread fears of systemic failure - that failed to materialize. With one exception in the form of a dealer who had to be "supported" in 87 everyone who held PUTs on that fateful October day got paid.
Fancy that.
I speculate daily in the markets, including today. "Evil shorts"? Gee, where'd all that profit come from last year on my P&L (hint: it sure wasn't from long positions!) I've no problem with positions long or short. I have a major problem with claiming to be able to cover a position when the capital to do so doesn't exist and pretending you're good for it all the way up until you detonate in a $100 billion+ demand on taxpayer funds.
The issue is in permitting the creation of obligations against which the writer not only can't make good but in aggregate exceed the monetary base. What 'ya gonna pay with? More vacuous credit backed by hot air? That's how we got in this mess - making claims that someone's credit was "AAA" when they were an $8/hour hairdresser buying a $500,000 house. This sort of nonsense doesn't happen in the listed options and futures markets because every night you're marked to the market and if your equity is negative you either post that margin call, close the position voluntarily or get liquidated.
I do, however, understand how and why people "in the business" wouldn't like the government calling a stop to their musical chairs game.
If we forced the writers of these contracts to fall under margin supervision and marked them nightly I'm willing to bet that we'd see a lot of smoking holes on Wall Street (and elsewhere) where various firms used to be. After all, that was the argument run by Treasury in the first place to get PASSED the EESA/TARP, and if you look at Fed statistics, it appears there may actually be a point to it. On-issue, if there's nothing to hide why not standardize and list all these contracts on an exchange where bid/offer/OI is visible to everyone and the margin clerk can trivially figure out what you need to have laying around to breathe air instead of water?
Guess what? The music has stopped and the people in this nation are tired of street firms playing fast and loose with leverage (all of Fannie, Freddie, AIG, Bear and Lehman were running with gearing more than double the previous IB limit prior to Paulson's entreaty when they blew up) and then sending the TAXPAYER the bill for their idiocy when the bet goes bad.
Got a chair?
PS: If you actually bother reading The Ticker you'll find that I spend plenty of time eviscerating the ratings agencies and street firms that were selling so-called "AAA" bonds out the front door and shorting the same bonds out the back, among other tidbits from the last couple of years. Stick around a while before you ascribe motives to me that don't exist.
PPS: MCSNet was privately held. Options backdating eh? Nice try. Next time do some opposition research before inserting shoe into mouth.
Now if you'll excuse me, I have work to do.
Posted by Equity Private , Jan 23, 2009 5:58PM
"Now if you'll excuse me, I have work to do."
Ah, indeed!
Posted by guest , Jan 23, 2009 6:07PM
@EP 97 -- love the hypocrisy of an anonymous blogger claiming that one of "her" commenters is lying about his biography.
You're an amusing writer, EP, but you have no credibility if you continue this charade of your secret identity. Maybe you're a private equity associate. Maybe your an unemployed writer who used to be a financial analyst. Don't care either way, but you really should have a byline.
Posted by Equity Private , Jan 23, 2009 6:08PM
I notice you posted that anonymously.
Posted by guest , Jan 23, 2009 6:28PM
@111, You Sir are an idiot, a maroon even, she does have a byline, its "Equity Private". Wow... check it out. Its actually attached to her posts.
What we, the rest of this forum have noticed, is that every chance you get, you post a tirade about her choice of byline. She can chose to not unmask herself. Knowing that her name is Jane Doe does not change a single iota of the content of her words.
You Sir, are an anonymous coward who is incapable of figuring out who she is, so you attack her in the forums. Grow up or get smarter.
What was your score on the Asberger test again?
Posted by guest , Jan 23, 2009 6:32PM
"Ah, indeed!"
Come now, Equity Private. After being thoroughly schooled by the "pontificating" Denninger, I believe it is internet tradition that you end your post instead with the ever so snooty "Cheers!"
"Ah, indeed" just doesn't cut it.
Posted by Equity Private , Jan 23, 2009 6:32PM
(S)he's not a coward, (s)he just works at one of the last remaining former bulge brackets that would likely skewer him(her) if they knew (s)he was posting and (s)he (wisely) has elected not to end up a permanent part of the internet record while expunging some caustic vitriol on a finance gossip board. Any (prospective) employer who does a google search may, after all, discover it one day.
In short, s(he) uses anonymity for -exactly the same reasons I do-.
Posted by Equity Private , Jan 23, 2009 6:34PM
"'Ah, indeed' just doesn't cut it."
Awww, well, shucks. You might just have to live with the disappointment.
Posted by guest , Jan 23, 2009 6:47PM
Karl Denninger is wrong on his assumptions that regulation is the fix-all for CDS problems.
In a free market system, companies driven to the ground by reckless CDS underwriting should be treated like banks whose traders make un-authorized trades.
In other words, overleveraged companies in CDS markets should be allowed to fail, fair and square.
Once your counterparty fails in OTC derivatives contract, you are left holding the bag, a risk which would promote sane mortgage underwriting by the banks and related debt holders before they unload risks associated to the derivatives market.
The real problem is that the U.S. is not a free-market system anymore, and the real CDS is now underwritten by the treasury on the whole of the underlying CDS market (which will lead to the demise of the country, given the size of the derivatives related failures to come).
Posted by Anal_yst , Jan 23, 2009 7:20PM
Well ladies and gents, I hope all of you (including those who received a thorough - whether they know it or not - a$$ whooping) enjoyed yourselves on this here thread, I know I did.
Posted by guest , Jan 23, 2009 7:46PM
KD is like a blind man describing a painting, who can describe the frames but can't describe where its value comes from; just because you trade a financial instrument does not mean you understand it's value.
Posted by guest , Jan 23, 2009 7:51PM
Re: AIG
They fucked up and made bad bets. Triple-AAA counterparty=no margin calls? Maybe get rid of this rule then...
Don't hate tha game hate tha playa.
Posted by guest , Jan 23, 2009 7:57PM
CDS need to be on a regulated exchange. Most taxpayers have no interest in backstopping failed counterparties.
Allen C
Posted by guest , Jan 23, 2009 9:10PM
Jesus Christ. Really do you fucking idiots think the US is a "free market system?" Jesus. Name one industry that is not government sponsored ie one industry that does not get government subsidies, contracts, tax breaks, guarantees, licensing, backstops or in the case of CDS special exemptions? What idiots.
Posted by guest , Jan 23, 2009 9:16PM
Name one industry that does not benefit from corporate charter grants conferring limited liability via the munificence of government.
Posted by guest , Jan 23, 2009 9:59PM
EP - thanks for a great post. Michael Lewis is the Al Bundy of Wall Street. While he is an entertaining writer, his claim to fame is similar to scoring four touchdowns against Polk High in his senior year of high school. Twenty plus years later, his Wall Street experience comes across as tired and irrelevant. The movie Trading Places provides greater insight into Wall Street and human nature in general than anything Lewis has written and is more entertaining. Reading many of the above posts argue that CDS is an insurance contract or that there should be a limit on the amount of contacts that can be written on a particular entity is like listening to an Amish person describe wireless internet - it becomes immediately apparent that they don't know what they are talking about and are in the deep end of the pool without their floaties on.
- Fixed Income
Posted by guest , Jan 23, 2009 10:11PM
contacts = contracts. Damn it!
- Fixed Income
Posted by guest , Jan 23, 2009 10:31PM
I'm pretty sure most if not all of the posters on this thread know more than I do about CDS, but I know a bullshit argument when I hear one.
Most of the comments here seem to side with EP. However, it's clear to me KD has the better argument here.
For one thing, EP spent the entire argument misquoting and/or misinterpreting KD's arguments, and then pretending to rebut them. I believe they call that a strawman argument. Then there was the snotty, "I know more than you do, so there!" tone. Very schoolboy-ish, and not very persuasive.
I could list at least 10 statements EP falsely attributed to KD, but all you have to do is scroll back a bit to see what I'm talking about. EP comes off like a child molestor trying to defend his crimes by saying it's natural and normal, while at the same time accusing the anti-molestor crowd of being "anti-sex". It just doesn't wash.
Posted by guest , Jan 23, 2009 10:50PM
Equity Private seems to have a problem addressing the gravamen of Denninger's arguments. I found KD's thesis compelling and sound.
If EP cannot intelligently rebut KD he simply should have skipped it and gone out for a drink.
I found Equity Private's response to Denninger merely a condescending, smarmy, ad hominem ... it was a failure to address that which was advanced. In additon, throughout this thread, he has made inappropriate assumtions and employed inapposite analogies. Sadly, a total avoidance of rational debate.
Here's tip EP ... always keep your mouth shut until you know the score.
Posted by guest , Jan 24, 2009 1:32AM
@127
If you are surprised don't expect anything better from EP. Trying to engage some anonymous character (who should have a byline) in a rational debate can lead to a colossal waste of time as this thread has demonstrated. Though I agree with you that Denninger's thesis is solid and I've noticed that it's shared by many participants in the market. On the other hand EP's adolescent dogma is obsolete and fastidious.
Posted by guest , Jan 24, 2009 1:42AM
1st.
Posted by guest , Jan 24, 2009 6:23AM
@122
Rearden Steel!
Posted by guest , Jan 24, 2009 6:33AM
@124
Your argument is clearly not grounded in reality. Al Bundy scored four touchdowns FOR Polk High, not against. Give the man his credit where credit is due. Next thing you're going to try to convince everyone that he didn't drive a Dodge and that he enjoyed his job as a shoe salesman.
Griff
Polk High Class of '66
Member - NO MA'AM
"It is OK to call hooters 'knockers' and sometimes snack trays"
Posted by guest , Jan 24, 2009 9:01AM
@127 "Here's tip EP ... always keep your mouth shut until you know the score. "
As Spanish PM José Luis Rodríguez said, 'Before opening his mouth in future, Snr Trichet (the ECB idiot) needs to put his brain into gear'.
Or how about a 'King of Spain' moment?
http://www.huffingtonpost.com/2007/11/19/video-king-of-spain-tell_n_73318.html
Posted by guest , Jan 24, 2009 9:02AM
@127 "Here's tip EP ... always keep your mouth shut until you know the score. "
As Spanish PM José Luis Rodríguez said, 'Before opening his mouth in future, Snr Trichet (the ECB idiot) needs to put his brain into gear'.
Or how about a 'King of Spain' moment?
http://www.huffingtonpost.com/2007/11/19/video-king-of-spain-tell_n_73318.html
Posted by guest , Jan 24, 2009 10:48AM
Smart insiders know how to play the game and want no interference from outside. Too bad they've blown the system because smart insiders were not smart enough. Looks like we need substantial regulation here as outsiders don't understand why smart insiders don't see a problem whilst outsiders have to pay insane amounts of money to bail-out smart insiders. Does anyone really believe the party would still be going on without govt picking up the tab for AIG?
Posted by shalimar , Jan 24, 2009 11:32AM
@108
Actually, I meant I think that.
After an unexpected down 98% in '08 due to market conditions, our clients are confident we can post strong returns in '09 while preserving our management fee.
@111
Most financial analysts don't know half the stuff EP pens. She's probably a silverback giving back to the community.
@115
Stop giving away IP information on the forum.
@130
Kaiser Aluminum
Posted by Anal_yst , Jan 24, 2009 11:33AM
Odds that 126-128 are Denninger (and/or friend of his) posting anonymously?
I'll go 2:1, any takers?
Posted by guest , Jan 24, 2009 11:36AM
I agree that anything that reduces pricing information is not good for free markets but if someone can write infinite CDS contracts that he or she cannot back on the D-day then those were not legitimate contracts to begin with. Of course there is two sides to each trade and the fact that there were buyers with collateral is the other argument. The contract buyers are fairly playing while the sellers are playing with imaginary money so it seems like for a third party the prices are not correct/fair. But in our system of credit where one can have no savings but borrow against his/her future a house of cards is bound to be created. In case of CDS one can think that the writer is borrowing from his future unlimited amount of money to make good on the d-day if it arrives. Hey, in case of AIG it worked out because the Fed took care of their "borrowing."
Posted by guest , Jan 24, 2009 11:55AM
@136
Anal, I'm @128 and you are full of shit. I've never heard of Denninger before. I did go to check his blog a few minutes ago. He has quite a few readers. He's sort of like Mish, but not exactly. I happen to read Mish. And here's a July 2007 post by Mish on CDS:
http://globaleconomicanalysis.blogspot.com/2007/07/whos-holding-bag.html
Posted by guest , Jan 24, 2009 12:48PM
Denninger wanted to destroy our oasis and wanted us enslaved dear finacial friends. If you dont wanna beg in street corners or shoveling asphalt for a living you will rally against him.
- BB.
Posted by guest , Jan 24, 2009 12:54PM
Denninger is doofus.
Last year he:
1. did not believe US government will take over monstrous financial institution such as the GSEs.
2. Waged a crusade against precious metal such as gold.
3. alienated the best contributors in his blog.
His credibility has for the most part, declined drastically in the last 3 months.
Posted by guest , Jan 24, 2009 1:05PM
I think Bush has made Iraq a safe place. Bush' accomplishment:
1. Secured Iraq
2. Secured Afghanistan
3. Humanely treated terrorists in Guantanamo.
4. Created hundreds of thousands of jobs that will bring international perspectives for youths otherwise working in walmart and mickeydee in Podunk, PA.
He should have been elected the 3rd time. We feel a lot more secure with Bush.
http://headostate.com/
Posted by guest , Jan 24, 2009 1:09PM
KD - why are your posts so effing long? I don't want to hear you ramble old man.
@120 - Agreed. What's required is too thin. And why is everything ratings based?
@124 - a CDS IS an insurance contract. Maybe you shouldn't have fallen asleep during training. And, thanks for all the metaphors.
Posted by Anal_yst , Jan 24, 2009 3:00PM
@ 138
Denninger makes a few good arguments (that no one disagrees with him on, as it were), like the need for centralized/organized trading and information exchange, for example.
However, some of his points are nothing more than rambling non-sequitors, at best.
@ 142
Re: Why is everything (still) ratings based?
Because its easy to tell investors/pensioners/endowment boards/etc that because you're only buying/holding AAA or whatever Rating+ paper that their $ is safe, and many of these sheeple, being financially ignorant, lazy, etc, seem to accept this as a-ok.
Back in the realm of reality though, ratings are but a (poor) proxy of the default (etc) risk of the paper, and the agencies have proven themselves to be at best guilty of gross incompetence, and criminal negligence at worst.
Unfortunately, as far as I know, very few institutional accounts have taken action to free themselves of the garbage adherence to ratings for investment criteria.
Again, when you rely on someone else to do the work (diligence/research), you deserve to get burned.
Posted by shalimar , Jan 24, 2009 4:00PM
@143
Why do investors/pensioners/endowments etc trust these idiots with their money?
When you purchase a product (regardless of advertising), you share the blame.
There's too much "trust" in this country, which exacerbates the lack of basic intelligence.
The $50b bill might have Madoff at the tip, but his "investors" and their clients are equally liable for the destruction of wealth. Extend the same logic to all the inflation schemes afoot.
Posted by guest , Jan 24, 2009 4:46PM
@144
Your comment is absurd with regards to the Madoff case. Investing has its risks, but fraud is the responsibility of its perpetrators. Why is swindling any different than robbing a bank? Let me give you a hint, prosecutors don't care about the difference, only about the laws that were broken. And in swindling cases most of the time the victims have not committed any crime.
I do think this mentality that only the lesser fool is to survive is what is wrong with Wall Street. There are no professionals in Wall Street because they don't have the best interests of their clients as their top priority. Their sense of professionalism is nil. Smart aleck individuals rule. And their conceit knows no bounds.
Posted by guest , Jan 24, 2009 5:47PM
@136
#126 here. I don't know KD. Never met him, never talked to him, never posted a comment on his blog or any other blog he ever posted on (until this one). I'm not even in the finance industry, nor a trader. I just read his blog, as well as Mish, Calculated Risk, Russ Winter, Naked Capitalism, Roubini, and a few others. Not saying that makes me any kind of expert - far from it, and I will be (and was, @126) the first to admit it. Just saying I'm not a friend of KD nor a KD follower.
I'm just a guy who can tell when someone (EP) is dodging an argument with straw man arguments and ad hominems.
Between KD and EP, I don't know who's right about CDS. I tend to buy KD's argument more, but it would have been nice if EP had given a decent rebuttal for me to consider, instead of just getting snotty and dodging every point KD made.
Seems to me that although CDS contracts are apparently monstrously complicated "financial instruments," the core issue is one that any layman such as myself can easily comprehend. That being, of course, that gambling and/or speculating is one thing, but when a bunch of idiots making bad bets they can't cover has the potential to bring down the entire system, that's another thing entirely. I have no problem with you or EP or anybody else gambling and speculating away to your heart's content, so long as I don't have to pay the bill when your bets go bad.
Perhaps the most egregious and idiotic argument EP made, in my mind, is equating KD's call for regulation with a belief in the superhuman powers of the government. That's a false dichotomy. Whether he/she intends to or not, EP implies that you either have a 100% "free" (ie, completely unregulated) market, or you have meddlesome government intrusion, and there's no middle ground. That's an absurd viewpoint.
As much as market snobs like EP may look down their noses at amateur investors, the markets should not be the personal playgrounds of the financial elite, where none but the most savvy insiders can extract any semblance of truth from a company's financial statements. I don't care how many years you've devoted to learning about financial markets, nor how hard you've worked to reach whatever high perch you've reached in the financial sector. That doesn't mean that novice investors deserve to be preyed upon and robbed blind through various forms of deceit or fraud, such as companies lying about earnings, banks hiding liabilities in off-balance-sheet "vehicles", insiders manipulating stock prices, etc. And I would add to that list writing a ton of CDS that you have zero backing for and will never be able to cover if those bets go bad. Not because gambling and speculation is bad or evil, but because allowing people to write CDS without limit has the potential to bring down the whole system.
Ensuring a level playing field, and protecting the entire system from imploding due to the irresponsible actions of a few idiots is not "meddling", it's the proper domain of government.
Free market ideologues who never saw a regulation they didn't hate always strike me as disingenuous. I don't think anybody actually believes that "self regulation" hogwash. I think people who make their livings by gaming the system just don't want the games to stop. If you've spent your whole life learning how to game a corrupt system, the thought of a truly fair market, where everything is open and transparent, and where all market players have access to the real numbers, must be your worst nightmare.
Posted by Anal_yst , Jan 24, 2009 7:32PM
@145
Since you're apparently a few weeks behind here re: Madoff, let me briefly summarize:
For 10 +/- years, its been reported that there is no possible way Madoff could have performed as he claimed, doing what he claimed to do. People invested with him, regardless. Thus, they were either 1) stupid, 2) lazy, and (not or) 3) greedy.
Agree with Shalimar, obviously, if you take someone else's word for it, then you shouldn't be surprised when shit goes bad.
@126/146
You've hit a good number of topics in one shot, which I'm way too unambitious right now to address, however, a few stick out, in no particular order:
1. I'm not sure (although it did sound like it there for a while) EP was only considering polar regulation/free market outcomes, which while I don't think was her exact intent, I will agree with you is absurd. The optimal way to approach this is for market participants to come together in central clearinghouses, where information is shared and markets operate transparently; give up some control/secrecy and gain more legitimacy and trust.
2. You mention that understanding finance shouldn't just be left to people who've dedicated their lives to it, that the amateur should still be able to play. Unless I'm missing something, I have to call that out as complete and utter bullshit. I appreciate complex engineering, however, I don't for a second presume that I should be able to design and build a nuclear reactor or top speed Bonneville drag car. Nor should amateur traders and investors expect to be able to play with professionals (themselves, often not even that good, but I digress).
3. Fraud/lying, that my friend is an entirely different story altogether, one which even your beloved regulation has clearly failed to prevent or really even address.
Posted by guest , Jan 24, 2009 7:44PM
Regarding @64 ...
Not being a Christian, or a member of the Republican party, I normally don't like to lecture other people on morality, but it's clear that EP, and most of his readers, have so little on reserve (morality, that is), that an immediate infusion is absolutely necessary.
1) I do agree that there's hypocrisy out there amongst many who wish to scapegoat CDS, while playing in other similar games. Buffet didn't say CDS, exclusively, were the Financial WMDs. He said "derivatives". For the most part, I agree.
2) It's ridiculous for EP to say that one can't have moral issues with the status quo in CDS without also "banning" stocks and about every other financial instrument. You people have completely lost sight of why your industry is in existence in the first place. To quote Ralph Nader, "[Wall St.] was supposed to be a source of capital for factories that produce real things. Now, it's a gambling casino." Stocks and bonds (and some other instruments) are very different from CDS. Stocks and bonds present investors with a way to grow their money at variable levels of risk, while funding the growth of companies who issue those instruments. CDS have turned into speculation for speculation's sake.
3) If you don't think there are moral issues, and pragmatic reasons, to limit the extent of "traditional" gambling, then you're a moron, or have never been to a real casino. It's not like the tuxedo and martini crowd you see in 007 movies. Mainly, it's white trash, and old people in plaid pants, pissing their money away. The financial sector isn't any different - you guys just dress better, and play with your clients' money. Hence, it's completely appropriate for any and all financial instruments to be TIGHTLY regulated, just as traditional casinos are (know what their reserve ratios happen to be?) ... especially since the players involved are gambling with enough money to need taxpayer rescue when they guess wrong.
4) This notion that EP promotes (and is widely held) that somehow by gambling on others' defaults, you've provided a "service" by evaluating risk for us, is nonsense. The players in CDS fall into two categories:
a) those legitimately hedging against their own position in a loan agreement (which Denninger's proposal would not restrict)
b) arbitrage leeches just looking to suck money out of the system, leaving nothing but INCREASED volatility in return
Do any of you have any clue as to what it actually means to add value to a system you participate in?
And please, don't respond by saying that you pay your taxes. We all do that (except Geithner, of course). Being part of a society means contributing a little more.
Posted by guest , Jan 24, 2009 8:48PM
@147
You badly misquoted me in your point #2. I never said "understanding finance shouldn't be left to people who've dedicated their lives to it." I never said anything close to that.
I said amateur investors don't deserve to be cheated out of their investments by fraud or deceit by people who think their superior knowledge of finance somehow entitles them to do so.
I NEVER said investors shouldn't have to do their due diligence and know WTF they're talking about before they risk their money. I'm all for people owning up to the consequences of whatever risk they take on.
Nor am I bemoaning the fact that some people have an edge due to their greater knowledge and insight. If you dedicate yourself to learning about finance, then whatever extra gains you make are merely the fruits of your labor and are rightfully yours. So long as you made those gains based on your knowledge and abilities, and NOT by lying, cheating, or stealing. I have no problem whatsoever with anyone cashing in on hard-earned experience or skills.
Perhaps you should scroll back and re-read what I wrote. My point was that many people in the finance industry have a tendency to rationalize all the fraud and deceit by claiming that novice investors DESERVE to get robbed. While I would agree wholeheartedly that anybody who loses his shirt because he didn't understand the risk he was taking deserves (in a sense) what he gets, that does not by any means excuse fraud, lies, and deceit.
As for your point #3.... First of all, you sound like an intelligent enough person, so I'm guessing you can argue a point without resorting to lame attempts to label me with loaded phrases like "your beloved regulation." Secondly, the fact that regulation has "clearly failed to prevent or really even address" is due more to the corruption of those charged with enforcing those regulations than by some inherent flaw with the regulations themselves, no? I mean, sure, not all regulations are good regulations, but are you seriously going to argue that we should throw the baby out with the bathwater and not have any regulation at all? I suspect even you wouldn't go quite that far.
I'm not calling for the government to take full control of the economy, or any such nonsense. I want the government to do its damn job for a change and stop letting themselves be bought off by the banking lobbyists. I want the government to stop turning a blind eye to violations of law. I want the government to reinstate a lot of the regulations that have been systematically dismantled in the past 10 years by the corrupt influence of the banking lobby on our politicians. And, yes, I want a couple new regulations here and there to ensure this kind of crap doesn't happen again.
I find it absurd and ironic that after decades of lobbying for financial deregulation, all these "free market" idiots finally get what they want, the whole system collapses as a direct result, and then those same idiots turn around and point fingers at the failure of regulation.
So go ahead, play that same line over and over again. Paint me as "pro government intervention", or "anti free market", or go on about how my "beloved regulation" has failed. Or, for that matter, you might as well go all-in and start calling me a "commie" or a "socialist". That's all a crock of shit.
So, if the market is as you think it should be in terms of regulation and the rules of the game, then congratulations. Maybe you don't personally give a rat's ass about a level playing field. Maybe you're perfectly fine with the fact that most companies' financial statements these days are pure fiction. As long as you're smart enough to read between the lines, then all is good, right? We don't need no stinking regulation!
Be careful what you wish for. Amateur investors will get tired of being screwed, and conclude that the game is fixed. When they do, they'll just take whatever money they have left and go home. Then all that will be left of the market will be a swimming pool full of sharks where there used to be an entire ocean.
Posted by guest , Jan 24, 2009 9:00PM
@147
You and Shalimar can't resist the urge of blaming the victims even in the case of outright fraud. There are many financial products that require "professionals" to represent the interests of their clients who have money to invest. It is the behavior of those professionals that is under indictment in this discussion. Some of these professionals, like Madoff, are just criminals, while the vast majority just take satisfaction at how lazy, stupid and greedy their clients are, and therefore deserve to be ripped off.
Wall Street has created a huge image problem for itself and therefore many years of poor business results will follow. You'd expect that the big bosses would be setting an example to help their people clean up their act, but each day we find that the big guys can't do any better than to continue their old ways. It's like reality hasn't hit them yet.
The "free market" saints will have to take a breather here. Their false ideology became totally irrelevant the minute Paulson demanded money to bail out the industry. The backlash is going to be tremendous as more and more people realize they have nothing left to lose.
Posted by guest , Jan 24, 2009 9:04PM
Addendum to #149:
It's easy to rail against regulation when you're not the one being taken advantage of.
It'll be interesting to see how many of these free market proponents change their tune all of a sudden when somebody screws them.
If our regulatory system continues to be eroded, and Average Joe investors continue to flee the market, eventually the fraudsters will run out of sheep to shear, and be forced to turn on each other. And no matter how smart you think you are, there's ALWAYS someone smarter.
Posted by guest , Jan 25, 2009 12:01AM
@147, to quote "I appreciate complex engineering, however, I don't for a second presume that I should be able to design and build a nuclear reactor or top speed Bonneville drag car. Nor should amateur traders and investors expect to be able to play with professionals"
This is, of course, utter nonsense, but very typical for some of the financial "professionals" that need to cling onto the hope that somebody actually believes the BS.
Professional money managers can't beat the S&P 500, Citadel goes down for the count the minute stock markets go sour (despite market neutral long/short strategy!) and nobel winning traders in LTCM did not know jacks*** about actually making money.
Meanwhile, investors that use common sense without any magical ingredient, just plain hard work in going through the figures, like any person able to read can do, such as Jim Rogers and Warren Buffett, are the real players in the market.
Posted by guest , Jan 25, 2009 6:49AM
From this morning's NY Times:
The [Obama] administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.
Officials said that the proposals were aimed at the core regulatory problems and gaps that have been highlighted by the market crisis. They include lax government oversight of financial institutions and lenders, poor risk management efforts by banks and other financial companies, the creation of exotic financial instruments that were not adequately supported by their issuing companies, and risky and ill-considered borrowing habits of many homeowners whose homes are now worth significantly less than their mortgages.
“I believe that our regulatory system failed to adapt to the emergence of new risks,” Mr. Geithner said in a written response to questions that was made public on Friday by Senator Carl Levin, Democrat of Michigan. “The current financial crisis has exposed a number of serious deficiencies in our federal regulatory system.”
The regulatory changes are a major piece of a broader package being prepared by the new administration to address the market crisis. Another piece to be issued soon will provide the strategy for how the government will go about repairing the declining banking industry.
http://www.nytimes.com/2009/01/25/us/politics/25regulate.html?_r=1
Posted by guest , Jan 25, 2009 10:01AM
Also in today's New York Times, "Is Time to Unravel a Financial Knot":
Mr. Raynes’s resolution is more radical: unwinding all outstanding credit-default swaps through a process he calls inversion.
Under this plan, insurance premiums would be refunded to buyers of credit protection from the entity that wrote the initial contract. And the seller would no longer be under any obligation to pay if a default occurred.
The premium repayments would be made over the same period and at the same rate that they were paid out. If a contract was struck three years ago and charged quarterly premiums, the premiums would then be refunded quarterly over the next three years.
Mr. Raynes’s proposal would treat hedgers — buyers who bought C.D.S.’s to protect themselves because they actually hold the underlying debt — differently from speculators who bought C.D.S.’s simply to bet against a troubled company.
Those guys, the gamblers, would receive only the premiums they paid to an insurer. Hedgers would have their premiums refunded, in addition to the difference between the underlying debt’s face value and an independent assessment of its intrinsic value.
It won’t be easy: Wall Street and other beneficiaries of the current setup will scream. But since they are among those who helped bring our economy to its knees, let’s try ignoring their objections."
http://www.nytimes.com/2009/01/25/business/25gret.html
Posted by Anal_yst , Jan 25, 2009 2:08PM
@149
I absolutely agree with you; regulators NEED to be held accountable to actually do their job, for a change. The one distinction I want to make is that sometimes, victims of fraud do, in fact, get what they deserve, whether its the socially obnoxious rich people getting slaughtered by Madoff or joe & jane investor buying into some slick salesman's claims of outsized returns with lower-than-normal risk, the sort of classic bs scheme we've seen over and over again. If it sounds too good to be true, it probably is.
Regardless, as I've mentioned above, one of the most important rationales for regulation and government involvement is to protect idiots from themselves. That being said, yes, we need stronger enforcement efforts with stronger penalties so as to introduce perverse disincentives to fraud/corruption/etc.
@150
I agree with you also, to the point that yes, Wall Street has a largely self-inflicted image problem, and, due to several years (decades?) of screwing customers, has shot itself in the foot, so-to-speak.
@ 152
Are you serious? Did you really just selectively take only the part of my quote that could be used to prove your (non) point? I believe the complete phrase was:
"...(themselves, often not even that good, but I digress)."
You don't need to tell me twice that the mutual fund (and general retail) business is a complete fucking sham, you'll find no-one else who agrees more with that fact than I.
The vast majority of investors would be better served buying ETF's, straight fixed income securities, and various no/low-load index funds than whatever garbage their financial "advisor" is trying to peddle them at any given moment.
Also, I suggest that you read "When Genius Failed" (or re-read); your mention of it seems to indicate that you're missing a few pieces of the puzzle.
Posted by guest , Jan 25, 2009 4:54PM
Hi all, informative discussion going on here!
I'm just a student but can I ask a question: I've heard a commentator here in France saying lots of CDS would expire in february (or something like that) and that it was a new subprime-type catastrophy in the making, with many hedge funds likely to go down. True? If so what proportion is expected to implode: 10%, 30%? Thanks!
Posted by guest , Jan 25, 2009 7:42PM
Huh. After reading most of this comment thread, I'm still not sure what we should do about the CDS situation... but I AM pretty sure that this "Equity Private" dude is a real douchebag.
Posted by guest , Jan 25, 2009 8:11PM
@156
Just not true. CDS contracts have a fixed maturity (eg 5 yrs, 10 yrs etc) from the day they are traded so there's no reason to expect any more than usual to have their maturity in Feb. Furthermore these contracts are all private so how would this 'commentator here in France' know?!
And if CDS's expire then nothing happens and no more money changes hands! Hardly an event that will shake the financial world to the core...
Posted by Equity Private , Jan 26, 2009 1:02AM
"...but I AM pretty sure that this "Equity Private" dude is a real douchebag."
Got me pegged!
Posted by guest , Jan 26, 2009 6:05PM
Maybe central clearing not the answer:
http://www.risknews.net/public/showPage.html?page=836314
The clearing houses have a long history of keeping margins well below the level where they need to be, otherwise there's be -0- clearing fees ;)
Posted by guest , Jan 26, 2009 8:56PM
@131 - Griff, sorry about that. You're right.
@142 - While buying/selling CDS acts like a form of insurance for anyone who cares to play, if it were actually an insurance contract, each member of the salesforce would be required to become licensed to sell insurance in each of the states where their accounts are located since insurance is regulated on a state by state basis rather than by a national regulator (but you knew that). Perhaps this example might help - your personality is most likely a 100% effective form of birth control but your personality isn't regulated by the FDA.
- Fixed Income
Posted by guest , Jan 27, 2009 7:20AM
You go into a store and buy a pack that says 16oz Prime beef with a picture of prime beef on the outside.
You take it home, open it, only to discover 2oz of beef in a little internal packet, and 14oz of road chippings in the rest of it.
According to some in this thread, that scenario is not only 'fully acceptable' but admirable in the extreme.
There are other issues involved here besides the Weights and Measures one (you know, that regulatory vehicle of Government that every Nation in History has adopted, and people along the way that breached Weights and Measures, even got the death penalty for . . . ).
Some of you seem completely unable to grasp what those other issues are.
I would suggest that such people need to be kept as far away as possible from anywhere they can do any damage, and history tends to show universal support and agreement with such action.
There are a few choices available for adherents of such irresponsible, insane, and downright criminal practices, which history seems to favour, and 'padded rooms' where they can do no further harm even to themselves, and 'prison cells' spring to mind.
In some cases, of course, 'the gallows' remains an entirely suitable option . . .
Posted by guest , Jan 27, 2009 10:43AM
@162
Hey didn't I see you at the last cross burning?...yup'...thought I recognized that soapbox.
Posted by guest , Jan 27, 2009 2:53PM
@163
So you don't think criminality should go unpunished?
You wouldn't have a 'vested interest' in being 'a criminal' would you?
The point is, left beyond the reach of the law, it descends eventually to the mob and the guillotine to resolve matters, and the innocent get shorted at the neck along with the guilty.
Yeah I'm sure you would really love that dose of relearning history.
Posted by guest , Jan 27, 2009 3:02PM
Oh and what on earth has 'crime and punishment' got to do with 'cross burning' anyway?
Isn't that some obscure American cult fetish or something?
Frankly I'm not American and I could care less.
I do care about 'criminality' that ends up affecting the whole Planet though (and no, I'm not blaming Americans for this mess, as far worse was done elsewhere and for far longer).
Posted by guest , Jan 27, 2009 3:06PM
Hey 163, as you are the one that seems to go to these 'cult fetish' cross burnings, please enlighten us, what do you get up to at them?
Are they like BBQ's?
Do you have shrimp?
Or is it just burgers and dog meat sausages?
Posted by guest , Jan 27, 2009 3:27PM
Hey 163 what happens at these cult fetish cross burnings that you hang out at?
Are they like BBQ's? Do you have shrimp? Or just burgers and dog meat sausages (do you guys really eat that hot dog shit?)?
Are these cult fetish cross burnings the reason why Americans are so incredibly fat, unhealthy, and stupid?
Hmmmmm. How often do they take place these cult fetish cross burnings? I might have to fly over and film some.
I'm amazed I haven't seen cult fetish cross burnings covered on Bloomberg, so maybe I need to watch that even more stupid CNBC. What do you think?
Do you think Jim Cramer spends more time at cult fetish cross burnings than he maybe aught to?
Is it true Erin Burnett was spotted at a drive through cult fetish cross burning, and took out a chicken filet and a latte?
Tune in for updates at 23:00!
Posted by guest , Jan 29, 2009 7:25PM
A nerve has been struck, 3 posts in 25 minutes?! were you frothing or was it just spittle? and please don't fly over, stay in your poor excuse of a country...U S A! U S A! U S A!