Thread on the real issues of the Economic Crisis..

Discussion in 'West Mall' started by texas_ex2000, Feb 11, 2009.

  1. texas_ex2000

    texas_ex2000 2,500+ Posts

    This is not about political issues...bonuses, racial diversity of bank CEO, "stimulus" spending on pet government projects (so called infrastructure) distracting us from the heart and source of the Economic Crisis...our financial system. If you can't intelligently discuss the following topics (preferably every topic), don't post.

    1) Mark to market accounting and FAS 157. What are y'all positions on writing down assets (defined as trading assets and held for sale) that have not experienced any late payments? My view comes as an investment banker with regards to regulatory capital ratios. I'm sure traders might have a different view with how it relates to market transparency and liquidity. Personally, I find the argument to disband mark to market/model accounting (to protect against the deterioration of capital ratios in spite of timely paying assets) hard to accept, especially in bad times. Maybe it's a matter of reclassifying trading/held for sale/held to maturity?

    2) Exotic ABS. Do we really need things like CDO^n? If you deal with these securities, what purpose does it actually serve in the market? These crazy things seem like overkill to package and sell risk. My problem is the general idea of regulation on financial innovation. But at this point, with our current technology, maybe we've maxed out the complexity of our markets?

    3) Short-selling (specifically to financial institutions). In many Europe countries this is illegal. Short-selling on banks drives down their share price and closes off access to capital markets. This could lead to bank runs. Is the maxim of price discovery that untouchable?

    4) GSEs. Should the U.S. still give an "implicit" guarantee on agency MBSs? Frankly, I don't see how the local thrifts would be able to operate and extend credit without the GSEs. They play just too important a role in the housing market.

    5) Distressed assets. What the hell do we do with them? What's the problem with the Bad Bank idea (The Geithner public/private fund sounded like gibberish)? How complicated is the pricing issue and is it insurmountable? If these assets are truly distressed, the Treasury should be licking their chops to get these things. If the administration can turn around the economy, or at least produce signs of life within the next two years, those assets will skyrocket.
     
  2. DFWAg

    DFWAg 1,000+ Posts

    1) But they are not held to maturity so what is the point. These things are not trading and have significantly impaired values, so the owners are still technically insolvent no matter how we label their balance sheet. This is a claim of massive market inefficiency when the market maybe right in consistently passing on this pieces of toxic junk. The rules are showing the truth so need to obfuscate.

    2) Financial innovation is a good thing and I don't think the concept of CDOs are evil. Clearly a less corrupt group of ratings agencies, better management incentives, and (gasp! I never thought I would say this) better regulatory regimes would have headed off much of the destruction. As my first boss said, "I don't know why banks think up all these new ways to go bankrupt, they seem to be damn good and the old fashion methods." This was after the emerging markets crisis of the early 90s. Think of all that has gone on since then.

    3) Short selling is a fine practice and over the long run is a losers game. Insurance is a form of short selling, as it is the perfectly uncorrelated asset (your house value drops to zero from a fire, your insurance policy becomes lots of cold hard cash). I am all in facor of this ability diversify risk.

    Anyway, Short sellers had absolutely nothing to do with Enron and Worldcom collapsing and in this case there were much more legitimate reasons our banking system was shut off from capital. Lets not shoot the messenger?

    4) Yes, but their activities should be severely reined in. We should hang Franklin Raines ini the town square and set an example for what happens to corrupt scumbags that will pervert public institutions for personal gain. The sad thing about FNM/FRE is that it was such a slow motion train wreck. Sure they collapsed quickly but there were massive concerns about credit quality and the black box reporting going back to the mid-90s.

    5) I agree. We have nationalized in all but name. We should just seize these things and let the smart money (private equity firms are still massively flush with unspent funds) seperate the wheat from the chaff. That being said, dead banks should be dead banks, so not everyone should get off scot free.
     
  3. Shocking_News

    Shocking_News 100+ Posts

    1. In my view, at least some of the problems with mark to market would be solved by your suggestion of reclassifying different types of assets instead of lumping them all together.

    2. I believe that we need to get rid of many exotics. They should, at the very least, be better regulated. I think that just about everyone would agree with me on that at this point. I recently read John Bogle's new book "Enough". He specifically speaks to the point that these exotics add no value to society. The only real thing that they do is pad the wallets of the people selling them. Bogle advocates getting rid of them as well.

    3. I see nothing inherently wrong with short-selling so long as it is done within the person's/firm's fiscal limits.

    5. I agree with the Bad Bank proposal. It has worked, at least to some extent, in the past. I know that does not mean that it will necessarily work this time, but it is much less complex than Geithner's proposal. I also agree that these bad assets have a real possibility of becoming a huge profit stream.
     
  4. ousuxndallas

    ousuxndallas 500+ Posts

    1. Mark to Market: what's the point? It's supposed to provide more transparency into the assets of companies that hold financial instruments, correct? But CDOs/loans aren't liquid instruments, and there is currently no "market" for them. So, what purpose does MTM serve here, except panic investors.

    5. Distressed assets. Let the PE firms come in and start buying these. If the banks don't want to sell, make them. There is so much money waiting to purchase these assets that a fair market value will quickly be established. Plus, there are hedge funds with lots of whiz-bang analysts and models that can sort through the mess.

    Once the balance sheets are freed up, capital will flow to the banks once again. And sooner rather than later. As soon as the "market" is established for some of the assets (the first to sell), confidence will be restored, and capital will seek returns in the financials.
     
  5. texas_ex2000

    texas_ex2000 2,500+ Posts


     
  6. Oilfield

    Oilfield Guest

    It sure seems like changing the Mark to Market rule is one very easy way to ease the stress on the financial markets. Furthermore, it would not involve printing more money. [​IMG]
     
  7. zork

    zork 2,500+ Posts

    this would probably never work but all of teh loans should be re-underwritten as if the rules never changed in '98 or whenever the freddie/fannie fake backing of loans caused A- and worse loans to be coupled with A loans. spend a few billion to do that to get teh huge traunches of loans resegregated so actual value can be assessed.

    find a way to approximate that if it can't actually be done in practice.


    Give the A loans back some integrity by stripping all the crap away from those loans. That is not to say you strip loans that truly were A loans but failed due to market conditions, job loss, or whatever else. Taht is part of the risk.

    But you undo the facade of that fake backing by freddie and fannie to re-create the A loan market. Then you figure out what you have left and deal with it in teh best way possible while letting the A credit loan market begin to rebuild.

    Maybe you recreate the B and lower market with minimum 10% rates. Make there be some real penalties if you f**k your credit. You f**k your credit you get to pay 10% on your mortgage, and mandatory mortgage insurance too.

    Does that sound like it will bring teh industry back to the frenzy of the past 10 years? Hell no but it wasn't real either.

    We are trying to let the Enrons of teh real estate, mortgage, banking, you name it, get a second chance and I don't understand it. Throwing all these trillions of dollars at the problem won't fix it either.

    We need to restore integrity into the A rated loan market first and foremost. Prosecute the heck out of people who broke the law. Track down the people who refinanced in CA and moved somewhere else and bought houses in their new community while letting the CA loan die.(or miami, or other false bubbled markets where that kind of cashout refi to fraud took place) Or at least tax the hell out of those people who did that.

    I don't know if what I say would help but traditional or near traditional underwriting worked for decades.
     
  8. ousuxndallas

    ousuxndallas 500+ Posts


     
  9. bozo_casanova

    bozo_casanova 2,500+ Posts

    1) Mark to market accounting and FAS 157. What are y'all positions on writing down assets (defined as trading assets and held for sale) that have not experienced any late payments? My view comes as an investment banker with regards to regulatory capital ratios. I'm sure traders might have a different view with how it relates to market transparency and liquidity. Personally, I find the argument to disband mark to market/model accounting (to protect against the deterioration of capital ratios in spite of timely paying assets) hard to accept, especially in bad times. Maybe it's a matter of reclassifying trading/held for sale/held to maturity?

    I like your idea of reclassifying, but I think the entire set of mark to market rules needs adjusting, and not just for financial instruments. If I sell an warranty, for example I have to book the revenue in increments through the aging of that product, even though I have extensive actuarial data that tells me what my costs are going to be, and I already have the cash in hand.

    2) Exotic ABS. Do we really need things like CDO^n? If you deal with these securities, what purpose does it actually serve in the market? These crazy things seem like overkill to package and sell risk. My problem is the general idea of regulation on financial innovation. But at this point, with our current technology, maybe we've maxed out the complexity of our markets?

    Actually, if anything I think we need more ABS. They are a good innovation that could if regulated correctly help accurately value risk- the problem isn't the securities per se, the problem is a lack of transparency about what's in the bag. I'm tired of supposedly free market people saying they are opposed to "regulation". When regulation is aimed at perfecting the market (which greater transparency always does), I'm for it.

    3) Short-selling (specifically to financial institutions). In many Europe countries this is illegal. Short-selling on banks drives down their share price and closes off access to capital markets. This could lead to bank runs. Is the maxim of price discovery that untouchable?
    Yes it is, or at least for equities. Prohibiting short selling of stock is protectionism for incompetent managers.

    HOWEVER- price discovery is critical for stock because companies are ongoing businesses, not commodities. I'm not sure that it's wise for people who do not have a legitimate use for the raw materials should be able to speculate on the market for certain strategic commodities (oil, copper, etc) because they inhibit a direct transaction between actual supply and actual demand, which provides us with the most efficient mechanism of price discovery.

    4) GSEs. Should the U.S. still give an "implicit" guarantee on agency MBSs? Frankly, I don't see how the local thrifts would be able to operate and extend credit without the GSEs. They play just too important a role in the housing market.

    Well, now that we've nationalized FNMA, for all intents and purposes that's a moot point.

    5) Distressed assets. What the hell do we do with them? What's the problem with the Bad Bank idea (The Geithner public/private fund sounded like gibberish)? How complicated is the pricing issue and is it insurmountable? If these assets are truly distressed, the Treasury should be licking their chops to get these things. If the administration can turn around the economy, or at least produce signs of life within the next two years, those assets will skyrocket.


    Let some banks die (punishing poorly allocated capital is essential for price correction), buy the underlying assets at auction value, hold for a few years, sell to investment banks at a tidy profit to the taxpayer.
     
  10. Laphroaig10

    Laphroaig10 1,000+ Posts

    Bozo casanova's starting to sound like Milton Friedman. Now THAT's change you can believe in! [​IMG]
     
  11. bozo_casanova

    bozo_casanova 2,500+ Posts

    I've never made any secret of my monetarist tendencies, I just try to keep them under control with medication
     
  12. Laphroaig10

    Laphroaig10 1,000+ Posts

    So you're saying monetarism isn't a choice; you're born that way? I guess we're back to disagreeing . . .
     
  13. A'sD

    A'sD 500+ Posts


     
  14. texas_ex2000

    texas_ex2000 2,500+ Posts

    I agree with you that politicians worship at the altar of Keynes and the "socialization of investment" (i.e. government "stimulus"). However, the majority of bankers and financiers lean towards Friedman and Monetarism. The source of the matter was sub-prime lending euphoria. But the truer question is what was the cause of that? IMO it was the combination of huge global investment supply overhangs (China and Middle East Sovereign Wealth Funds) and ridiculously low interest rates. Maybe a contractionary monetary policy with some teeth could have headed off the overheating of the housing market. Instead the Fed Funds Rate dropped from over 6% in 2000 to an historically low sub 2% in 2005. Now we're back to the politics of the "G" in C+I+G+X-M=Y. I'm not saying Monetarism is The paradigm. The evolution of financial instruments following Friedman has made M1, M2, etc. difficult to classify and velocity of money even harder to estimate. But I think from a "smell test" standpoint, it's the better working theory.


     
  15. hornpharmd

    hornpharmd 5,000+ Posts

    IMO it may be better in the long run to let business fail and to have a depression than to have the government just giving big business free money to do whatever they want with.

    Small businesses should be the backbone of the entire US economy. I don't see them bailing out those guys.
     
  16. CanaTigers

    CanaTigers 2,500+ Posts

    More than anything else in the financial markets, I would like to see an end to the trading of commodities by people that don't use them. If a person can not take delivery of goods they should not be allowed to buy them on paper.
     
  17. A'sD

    A'sD 500+ Posts


     
  18. texas_ex2000

    texas_ex2000 2,500+ Posts


     
  19. ousuxndallas

    ousuxndallas 500+ Posts


     
  20. A'sD

    A'sD 500+ Posts

    Interesting graphic that accompanied this articleThe Link

    Wow look at Citi Group. They hold the most amount by a long shot of toxic derivatives. How can these guys even possibly be recapitalized? There is not enough global savings to get close.


    [​IMG]
     
  21. MaduroUTMB

    MaduroUTMB 2,500+ Posts

    Perhaps I am naive, but I feel that the lion's share of the blame in all of this lies at the feet of the ratings agencies. They were the safeguard intended to prevent nearly valueless assets from becoming the basis for complex derivatives schemes (which are not even involved in the present mess), and they did more than just drop the ball. They lied about value and in so doing provided the sand for the house to be built upon.
     
  22. UT1986

    UT1986 500+ Posts

    Here's the fix to the problem, presented by Karl Denninger, but the govt. and market regulators keep pissing on the towering inferno and expect to control the blaze. It's not going to happen until these balance sheets of the banks come correct and things are regulated a helluva lot better than they are now.

    "Here's the prescription to fix it now and forward - your platform on economics:

    Reinstate Glass-Steagall. No more "Chinese Wall" nonsense. If you're a commercial, government-backed bank that accepts customer funds (e.g. anything with an FDIC guarantee) you may not offer investment products of any sort (including insurance-style products such as annuities) nor may you have cross-ownership or control with a firm that does. Period. Banking - the fractional reserving of depositor funds and issued debt for the purpose of issuing loans - is a utility function and its plenty profitable (if a bit stodgy) when operated as one.
    Drop the 10% deposit concentration cap to 5%, and give existing banks that are over the 5% limit three years to get under it by splitting off or selling off assets. This applies to fewer than 25 institutions, and it needs to happen right now to control systemic risk. Bluntly, if you're too big to fail you're too dangerous to the banking system as a whole. See #1 above - commercial/retail banking is a utility function and should be regulated as same.
    Repeal the "Bankruptcy Reform" law. Consumers must have the same right to go bankrupt and discharge debts that corporations have. Banks and others who grant loans must have this Sword of Damocles over their head - you make a bad loan and the borrower can file Chapter 7 and stick you with it, without exception. This will immediately collapse the outrageously overpriced bubbles that remain and are credit-driven, including post-secondary education.
    Remove the obscure little change made in the EESA/TARP legislation that allows Bernanke to set the reserve ratio to ZERO for banks, and set it statutorily to 8%. Enhance the law by declaring that ALL funds taken in by a bank irrespective of their source are subject to the 8% reserve requirement (thereby removing the "sweeps" exemption that started this mess.) This will force leverage in the regulated banking system to no more than approximately 12:1.
    Set the lawful leverage limit to 12:1 for all investment banks and other entities including hedge funds. Any firm that wishes to be domiciled or operate in the United States must comply. Period. I know what the counter-argument is - "they'll go somewhere else." Fine! Go blow up some other nation's economy. We've had enough of it.
    Said 12:1 leverage limits must apply to all assets. Yes, even US Treasuries. If you hold it at most (for the safest assets) you can gear it at 12:1. Period.
    Ban all off-balance-sheet vehicles; no exceptions of any sort. If you have control of it or are responsible for it in any form or fashion you must consolidate it on your balance sheet. "Shell corporations" set up to evade this requirement that have no capital or assets of their own are deemed a fraudulent shell company. Close the SIV loopholes.
    No more Level 3 anything may count as "assets" and all model-marked assets in Level 2 must be disclosed specifically along with their pricing models and the inputs for same in quarterly and annual reports. The proper disinfectant for chicanery and fraud is sunlight. If a regulated or public company wishes to hold an "asset" without marking it to a market price they're free to do so - what they're not free to do is claim a value on it. This forces the recognition of the "worst case" value of all such "assets" at inception; there can thus only be upside surprises when they are eventually disposed of. Bingo - no more incentives to claim "value" that doesn't exist.
    Bar the trading of derivatives contracts by commercial banks except where those contracts are backed by or insure a hard asset (e.g. a CDS on an actual bond or mortgage) and they are exchange-traded with a central clearing counterparty and thus guaranteed "good". If some Hedge Fund wishes to write or hold naked CDS and immolate themselves that's fine, but they cannot blow regulated financial firms (including insurance companies) to pieces nor can they distort share and debt-pricing mechanisms in the public, regulated markets.
    Bar The Federal Reserve from any action that results in other than fully-collateralized lending. Further, force The Federal Reserve to publicly post in real time all transactions they undertake identifying the counterparty, the asset(s) taken in as collateral and the terms thereupon so that the public can verify that violations are not taking place and favoritism is not being employed.
    All derivatives traded by regulated financial entities must be cleared and traded through a public exchange with a central counterparty, nightly margin supervision and published bid/ask/open interest.
    Extend bank fraud statutes to explicitly cover actions taken by The Fed or any banking or financial institution in violation of statutory limits and name the members of the board of any such institution as personally responsible for violations. This stops the game-playing where institutions feel free to be "fast and loose" because all they will get is a slap on the wrist by FINRA or the SEC. With these offenses being federal criminal offenses the calculus changes immediately on what someone will and will not attempt.
    The Republicans are the party of "law and order." Calculate the economic impact of violent crimes and set penalties for financial and other "white collar" criminal offense commensurately. For "white collar" criminal offenses that have more financial impact than an actuarial analysis shows would be the case for a murder, the appropriate penalty is life imprisonment without the possibility of parole. Change the law to make it uneconomic to pull scams and many of the scammers will stop. Those who don't we lock up and the good news is that unlike most violent offenders the scammers have enough money to pay for their own incarceration via disgorgement proceedings.
    Stop trying to prop up asset (especially house!) prices. Instead, preach the truth - affordable housing means no more than 28% of your income goes toward all housing expenses, you should put 20% down, and you should not take anything more aggressive than a 30 year fixed-rate loan. For many areas this means median home prices must still contract. A house is shelter, not a speculative vehicle.
    Make the following changes to the ratings paradigm:
    Ratings agencies have no "speech" protection for opinions that prove flawed due to errors, omissions or acts of commission.
    All data used by said agencies must be made available for verification by individual or firm that wishes to verify a claimed rating (e.g. no "proprietary" lockdown on data which is inhibiting firms like Egan-Jones from being able to fully analyze deals)
    Purchasers of instruments may not rely on ratings soundness for "haircut" or "reserve" provisions under BASEL or similar regulations unless they paid for the opinion (that is, it was a "buyer's opinion", not a "sellers opinion".) Absent same the instrument is considered "unrated" for reserve purposes.
    NRSRO certification is removed; any firm that wishes to offer opinions on debt instruments is free to enter the business.
    Pledge to lock up all of the parties who engaged in fraud during the bubble years and to seek and obtain disgorgement of all of their profits, stock (restricted or not), salaries and bonuses during the time the fraud was going on.
    Ban all "dark pool" trading. You want to trade it, the market has a right to know about it. Transparency and honest markets require public disclosure of bid, offer and size. Period.
    The Fair Tax. Period. No more IRS. No more BS. No more lobbyists gaming the system. Nobody has to file a tax return ever again, save businesses who already do monthly for their sales tax returns. Taxation becomes completely transparent and voluntary based on your desired level of consumption. It is a radical step, it will create a huge boost to GDP as every firm that has fled the US for Bermuda and similar will repatriate and in addition it will cut the compliance costs out of every American's budget. Finally, it will tie government income inexorably to GDP, prohibit raising taxes without it being instantly visible to the public and provide incentives for capital formation - exactly what we need to create millions of new jobs."
    The Link
     
  23. UT1986

    UT1986 500+ Posts

    A'sD I notice you read Mr. Jim Willie. Dude knows his stuff. Good thing I've been reading him over the last few years, so now my 401K still remains a 401K and not a 201K. [​IMG]
     
  24. texas_ex2000

    texas_ex2000 2,500+ Posts


     
  25. bozo_casanova

    bozo_casanova 2,500+ Posts


     
  26. A'sD

    A'sD 500+ Posts


     

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