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4 edits | Unemployment and Wall Street This animated map is powerful. It shows how unemployment swept over the US (by county, by month) starting January 2007, ending October 2009:
The Decline: The Geography of a Recession.
With that visual in mind, consider how Wall Street has been affected:
1. Problem? What Problem?
After Wall Street has instantly (by comparison to average Americans) regained profitability after falling into receivership to society (i.e., the bailout):
• Goldman Sachs intends to pay its 31,700 employees $23 billion in bonuses[1] That's over $700k per employee. If history is any gauge, they'll concentrate the bonus to the top 200 Goldman employees who will receive an average $5 million each.[2]
• In the midst of the financial meltdown we were told it was too early to reform the market. The premise sounded reasonable: When a house is on fire, you focus on preventing the fire from spreading to neighboring houses before reforming the fire code to prevent future fires. Last March, the US Treasury outlined reforms.[3] However, Wall Street is using it's socially-sponsored health to lobby against reforms[4] that would regulate the exotic OTC derivative market (Credit Default Swaps, Collateralized Debt Obligations, etc.) which contributed significantly to the meltdown.[5]
2. Returns to Old, Dangerous Ways
Wall Street has already returned to new levels of dangerous, unregulated and highly-leveraged uses of OTC (unregulated) derivatives:
• US Commercial banks now hold an all-time high of $203.5 trillion in derivatives.
• 97 percent ($197.4 trillion) of all U.S. bank-held derivatives are concentrated in just five institutions which received bailout money: JPMorgan Chase, Goldman Sachs, Bank of America, Citibank and Wells Fargo.
• Of the 97 percent of derivatives held by those five banks, JPMorgan alone holds 40% ($79.9 trillion).
• Of all U.S. bank-held derivatives, 96 percent are traded over the counter, outside any regulated exchange.
• Citibank is risking over twice its capital on derivatives. JPMorgan is risking three times. Goldman is risking over NINE times it's capital.[6]
• The derivatives held by insurance companies like AIG aren’t even included in the above tally. Yet, in a confidential memorandum leaked to the press earlier this year, AIG executives confessed that
"Systemic risk [triggered largely by derivatives] afflict all life insurance and investment firms around the world ... If AIG were to fail, it is likely to have a cascading impact on a number of U.S. life insurers already weakened by credit losses. State insurance guarantee funds would be quickly dissipated, leading to even greater runs on the insurance industry."[7] • Globally, derivatives are three times larger than that held by U.S. banks: According to the Bank of International Settlements (BIS), the worldwide total of just the unregulated, over-the-counter derivatives alone was $604.6 trillion at mid-year 2009. Although down from 2008 peak levels, it was up sharply from year-end 2008.[8]
3. Summary
The high-rolling Wall St. banks are back to exactly the risky investment practices that blew themselves up, taking the economy with them.[9] They're making money with risky, leveraged bets just months after their bets turned against them, and society bailed them out. All this while the country is reaching an apogee of unemployment, affecting Americans who didn't even participate in Wall Street (beyond working for a publicly-traded company, or keeping 2% of their wages in a mutual fund).
I'm surprised how little public outrage there is over this. In 1980 Ronald Reagan asked "are you better today than you were four years ago?" Since then disparity of wealth has increased, with the wealthiest Americans benefiting the most from two decades of deregulatory politics.[10]
We've been perfectly indoctrinated. Today, if anyone asks a question like Reagan's they're met with screams about "promoting class warfare," or "socialism."
In 1914, after a series of banking panics, President Woodrow Wilson supported creation of the Federal Reserve to end Wall Street's control of (and speculative excesses with) the nation's currency supply. Describing the conditions of the time he said:
A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the Nation, therefore, and all our activities are in the hands of a few men... We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world--no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of small groups of dominant men.
... Our banking laws must mobilize reserves; must not permit the contraction anywhere in a few hands of the monetary resources of the country or their use for speculative purposes in such volume as to hinder or impede or stand in the way of other more legitimate more fruitful uses. And the control of the system of banking and of issues which our new law is to set up must be public, not private, must be vested in the government itself so that the banks may be the instruments, not the masters, of business and of individual enterprise and initiative.[11]
Nothing's Changed. Using leverage, just 5 banks (not counting AIG) have once again committed over 14 times the nation's GDP into risky bets. Society will have to print the money to cover these bets if they don't pay off... just like last time. How is that any different than Wall Street directly controlling the money supply? The very thing Americans wanted to prevent when the Federal Reserve was created?
If you know anyone who's lost their job, house, etc. as a result of the financial meltdown, you should make sure they read this. People should be seriously angry.
Mark
[1] [NY Daily News] Goldman Sachs to pay mind-blowing $23 billion in holiday bonuses, one year after taxpayer bailout
[2] [Reuters] Goldman's bonus play underscores broader strategy
[3] [WSJ] Treasury Maps New Era of Regulation
[4] [Bloomberg] Wall Street Stealth Lobby Defends $35 Billion Derivatives Haul
[5] [Wikipedia] Financial crisis of 2007-2009
See also [Wikipedia] Late-2000s recession
[6] The preceeding points come from: [MoM] Summary of OCC Derivative Data, June 30, 2009. Discussed in [MoM] The Bigger and Riskier Monster
[7] [MoM] Leaked AIG memo "How Big is the Systemic Risk of Insurance?", Feb. 26, 2009.
[8] [MoM] Excerpt of BIS Quarterly Review, Dec. 2009.
[9] For information on the role played by derivatives in the meltdown, see:
[YouTube] The Crisis of Credit (Introductory visualization of terms and relationships)
[60 Minutes] Credit Default Swaps (may need to use Firefox to see it)
[60 Minutes] The Bet That Blew Up Wall Street (may need to use Firefox to see it)
[NOW on PBS] Credit and Creditablity
[PBS Frontline] Inside the Meltdown
[PBS Frontline] The Warning (Describes how Wall Street fought regulation of OTC derivaties in 1996, and even after the 1997 LTCM crisis largely due to derivatives.).
[Wired] Recipe for Disaster: The Formula That Killed Wall Street (Discussion of the "quant" formula used to assess risk of derivatives, and how it failed.).
[10] [Book] The Two Trillion Dollar Meltdown, Chapter 7:
"Between 1980 and 2005 the top tenth of the population's share of all taxable income went from 34% to 46%. Almost a 1/3 increase. The changing distribution within the top 10 percent, however, is what's truly remarkable. The unlucky folks in the 90th to 95th percentiles actually lost a little ground, while those in the 95th to 99th gained a little. Overall, the income shares in the 90th to 99th percentile population were basically flat (24% in 1980 and 26% in 2005).
"Almost all the top one-tenth's share gains, in other words, went to the top 1%, or the top centile, who doubled their share of national cash income from 9% to 19%.
"Even within the top centile, however, the distribution of gains was radically skewed. Nearly 60% of it went to the top tenth of 1% of the population, and more than a fourth of it to the top one-hundredth of 1% of the population. Overall, the top tenth of 1% more than tripled their share of cash income to about 9%, while the top one-hundredth of 1%, or fewer than 15,000 taxpayers, quadrupled their share to 3.6% of all taxable income. Among those 15,000, the average tax return reported $26 million of income in 2005, while the take for the entire group was 384 billion." See also [Book] Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill), pg. 11:
"Of each dollar people earned in 2005, the top 10 percent got 48.5 cents. That was the top tenth's greatest share of the income pie since 1929, just before the Roaring Twenties collapsed into the Great Depression. ...
"In 2005, the 300,000 men, women and children who comprised the top tenth of 1% of the population had nearly as much income as all 150 million Americans who make up the economic lower half of our population." See also [Econ. Pol. Inst.] CEO-to-worker pay imbalance grows:
"In 1965, U.S. CEOs in major companies earned 24 times more than an average worker; this ratio grew to 35 in 1978 and to 71 in 1989. The ratio surged in the 1990s and hit 300 at the end of the recovery in 2000." [11] Woodrow Wilson circa 1913-14, reprinted in Senate Doc. 23, 76th Congress, 1st Session, 1939, page 100. | | |
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1 edit | Obama's Jobs Tour a PR stunt - don't expect jobs »www.youtube.com/watch?v=SahVL0SJd7M
No small business people in jobs summit. Only union leaders; gov't flunkies; CEOs of big companies(like Google's Schmidt); and academics.
The group that creates jobs are small businessmen(which all admit) were sadly absent. | |
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| There is a bill floating around that would tax Wall Street trading to get the remaining unpaid TARP money back. HR 1068.
I think it's interesting because we had a transaction tax on Wall Street between 1914 and 1964. I've read that Britain has one.
The proposal says it would end when the bailout money is recovered. The author of the bill says he wants to amend it to exclude the first $100k annual trade activity so it won't hurt the average 401k investor, buy-and-hold types, etc.
It was proposed due to Wall Street fighting regulation of their practices (which amplified the crisis). But, now with a shortage of funds for jobs creation, re-training, etc., it looks like it could have merit.
Personally, it bothers me how quickly they came up with $700 billion plus all the Fed Reserve money to prop up treasuries and buy mortgages (to create liquidity). But, now, with millions unemployed largely due to Wall Street (and with Wall Street largely unharmed and back to its old tricks) we're told there's no money to put toward unemployment.
We ought to tax the heck out of Wall Street to pay for the damage caused to employment.
Mark | |
| said by amigo_boy:There is a bill floating around that would tax Wall Street trading to get the remaining unpaid TARP money back. HR 1068. I doubt this is going anywhere. It was submitted on Feb 13,2009 and referred to House Ways & Means Committee. And there it has sat with no action at all since then.
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Re: Unemployment and Wall Street Longest 1st post ever!!  | |
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| reply to fAcEtIOUs
Re: Obama's Jobs Tour a PR stunt - don't expect jobs said by fAcEtIOUs:I doubt this is going anywhere. It was submitted on Feb 13,2009 and referred to House Ways & Means Committee. And there it has sat with no action at all since then. That's what I thought too. But, it's been in the news again recently. For example, this is where the author says he's willing to add a $100k exclusion.
What caused it to come back to life is how we've been told there's no money for social stimulus (after we tapped ourselves out with financial-market stimulus). That logically leads to the question of why we're not forcing the payback and using it for other things?
I think it makes a lot of sense only because Wall Street has fought regulation. This law would remain on the books so that, when (not if) we have to bail out Wall Street again, there will automatically have to repay the bailout. It would constantly kick in to repay bailout money. Then sunset when it's paid.
Mark | |
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Re: Unemployment and Wall Street I am beginning to think it might be worth converting my money to gold, cause when the U.S. economy goes bankrupt and these companies lose out all together, only thing left will be gold. | |
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| said by David:I am beginning to think it might be worth converting my money to gold, cause when the U.S. economy goes bankrupt and these companies lose out all together, only thing left will be gold. Don't forget to stockpile a heavy supply of canned goods and ammo.  | |
| reply to amigo_boy
The $684 trillion derivatives market is insanely huge # but a fraction of that $ will actually change hands over a potentially infinite amount of time. I would be very interested to see a summary of outstanding pledges and exercisable dates, whatever they call that.
On the other hand, I am curious about what a "notational amount" means considering a potentially unlimited upside & downside.
I think that government intervention in the derivatives market is riskier than the status quo. Do not want illiquidity, which could = bond rating and balance sheet writedowns that freak out the market, cause collateral calls that bankrupt companies
Raising capital gains tax or equivalent trade-resticting measures discourage investment.
•According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008)[4]. Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform. according to wiki OTC_and_exchange-traded | |
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Converting all your money to gold now would be like jumping on the real estate band wagon in late 2007, or buying Pets.com stock in 1999.
Pay down debt, refinance & consolidate if you can. Don't buy anything big you don't need (car paid for? keep driving it).
Being able to keep your debt low, and sating employed are gold in and of themselves. Anyone who can do both will weather the Great Recession OK....
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3 edits | reply to hoyleysox
said by hoyleysox:I am curious about what a "notational amount" means considering a potentially unlimited upside & downside. This page briefly explains "notional" value. The difference between it and real value is capital. Whether it's real capital, or just the "notion" of capital.
Example: If I buy a bond for $1000 it has $1000 value. It will repay my principal at the maturity date (plus interest during its term).
However, if I enter into a "bet" with someone who owns that bond, that they'll sell it to me for $750 if interest rates rise 2% within a year (which would cause the bond's current market value to fall because you could get a higher return from a new bond) my bet would be a notional value of $750. But, all I had to pay was $10 a month during that year-long contract.
It's like you said at the opening of your post: Nothing actually changes hands. It's a side bet. Not an investment. I don't own the underlying asset (like the owner of the Chicago Cubs does). I only own a wager (that the Cubs will win the next game). A side bet's "value" is different than the owner's real value in the team.
That distinction is what makes OTC (unregulated) derivatives so bad. There's no visibility into anyone's exposure to bets. No visibility of how much one's net worth is based upon bets; or their liability understated due to poorly-conceived bets.
said by hoyleysox:I think that government intervention in the derivatives market is riskier than the status quo. Do not want illiquidity, which could = bond rating and balance sheet writedowns that freak out the market, cause collateral calls that bankrupt companies I believe we're talking about three things:
1. Leverage
The amount of leverage an individual or regulated bank can engage in (i.e., speculation) is limited even though it hurts "liquidity."
In the early 1900s we had what were called "Bucket Shops." Men spent the day in these establishments placing side bets on stocks without either party actually owning any wagered stock. It created tremendous liquidity (money passing between hands).
But, due to the excess of speculation Bucket Shops were credited with the 1907 market panic, and subsequently banned.
Similarly, capital reserve requirements were imposed on banks due to speculation and leverage of a bank's capital causing panics and runs.
Liquidity doesn't exist in a vacuum. The underlying market (which benefits from adequate liquidity) also benefits from being a legitimate market, with significant ownership in underlying assets that participants can be reasonably be expected to use to pay what they pledge.
2. Transparency
To me, this is the real problem. I don't really care what madness people engage in as long as they're informed of the risks.
Many derivatives are legitimate. They're traded over regulated commodities exchanges. For example, when someone writes a "put" option on 100 shares of stock, it's visible to the market whether that wager is backed by real shares of stock which the contracted seller owns. Or, if it's a riskier "naked put." A contract to sell a stock that the seller doesn't own. 100% pure speculation.
A great deal of the recent meltdown was the result of speculative wagers (side bets) like "naked puts." Where the party with the exposure to deliver didn't own the underlying asset being wagered on, and didn't have the capital reserves to pay its bets.
If transparency were required it would probably lead to capital reserve requirements. At that point, the gamblers selling the equivalent of a "naked put" would be more like an insurance company.
... Capital reserve requirements;
... Counterparties who actually own the underlying insured asset, (not side-bets with disinterested bystanders who suffer a form of Moral Hazard due to having all upside potential and no downside. No incentive to protect the underlying asset from a claim.).
Valuation
Because there is no real value, institutions engaging in unregulated derivatives use "Mark to Model" instead of "Mark to Market" to value their side bets.
During the meltdown, banks like Wachovia hadn't written down their derivative mortgage-backed securities because there was no market for them. The value at that moment was 0. Instead they used self-biased models to determine value which they could report to investors.
This is not only a transparency problem of the OTC derivative, but also the publicly-traded (regulated) institution who's unregulated assets can't be valued. Investors have no visibility to the regulated institution's true book value.
And, related to that problem, publicly-traded institutions use OTC (unregulated) derivatives to hedge their assets traded through regulated markets. They buy a Credit Default Swap against low-grade consumer debt. They use this "insurance" to improve the credit rating of some toxic consumer debt on their books.
Suddenly the toxic liability is AA-rated because all the risk was sold to someone else. But, because that transfer of risk (the buyer) is unregulated, investors in the publicly-traded (regulated) institution have no visibility into the creditworthiness of the insurer. I.e., is that junk-rated consumer debt really AA-rated? What kind of actuarial practices did the underwriter utilize to properly price the risk they were buying? Etc.
That really comes back to a transparency issue. Perhaps "notional" values can be reasonably priced. But, when everything occurs within a dark market there's no way to know how reasonable anything is priced.
Since it's regulated companies who are making the most of this dark market, this effectively causes regulated companies to become unregulated. But, the benefits of regulation remain. If they blow up again, society will rescue them again.
Summary
It's not a mater of whether derivatives should exist. But, should they be unlimited? Just what any buyer/seller agree to do based upon assumptions and greed?
Leverage is good. But, individuals, banks, etc. are normally limited to a percentage of liquid capital (cash and easily liquidated assets).
Stock options like "puts" and "calls" are good. They're a reasonable way to hedge something you own using something someone else owns.
The issue is reasonable limits and transparency so participants have reasonable expectations about the outcome of their derivative bets.
Wall Street doesn't want the OTC derivative market to be transparent because they don't want their competitors to know the positions they've taken. Goldman Sachs wants to be able to sell mortgage-backed securities to its clients at the same time it's placing huge bets against the mortgage market.
Is that the kind of market we want to promote? Especially for a publicly-traded company? Where being traded on the exchange is supposed to bring transparency and predictability?
Mark | |
| said by amigo_boy:If transparency were required it would probably lead to capital reserve requirements. At that point, the gamblers selling the equivalent of a "naked put" would be more like an insurance company. I am against changing the rules affecting existing hedges. The massive size of the derivatives market makes is dangerous and increasing regulatory requirements is like adding bricks to an already precarious jenga tower. Many derivatives contracts already contain provisions for capital reserve requirements, those requirements brought down AIG after they were downgraded and the reserves were not available.
Suddenly the toxic liability is AA-rated because all the risk was sold to someone else. But, because that transfer of risk (the buyer) is unregulated, investors in the publicly-traded (regulated) institution have no visibility into the creditworthiness of the insurer. I.e., is that junk-rated consumer debt really AA-rated? What kind of actuarial practices did the underwriter utilize to properly price the risk they were buying? Etc.
That 'transparency' was supposedly granted to the ratings agencies who did not exercise proper diligence and overrated the bonds. Though those rating agencies did a bad job, I am not convinced that regulatory agencies are a better substitute.
On the issue of transparency, I am not in favor of a publicly-available directory that has a line item for every hedge, too much potential for front-running.
While I do not think that the government should be involved in setting derivative prices because it cannot outlaw stupidity/bad bets, I do think that values of hedges should be 'accurately' summarized on balance sheet sheets.
Two issues I don't have a solution to:
Lehman represent a tricky issue, they facilitated so many contracts which became impossible to unwind once they failed. It is also uncomfortable that there can be more puts or shorts on a company than there are available shares. Not sure what to do about that...
Also, thanks for the notational value explanation. | |
| reply to amigo_boy
Re: Obama's Jobs Tour a PR stunt - don't expect jobs As an investor, I am not in favor of a transaction tax. A transaction tax would also hurt 401k holders. The government should not discourage investment. We already have capital gains. | |
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1 edit | reply to hoyleysox
Re: Unemployment and Wall Street said by hoyleysox:Two issues I don't have a solution to: 1) Lehman represent a tricky issue, they facilitated so many contracts which became impossible to unwind once they failed. Lehman was merely the first to be allowed to fail. Bear Stearns had the same problem, but was bailed out with a federally-backstopped guarantee to JPMorgan to takeover Bear's contracts.
For about four months it was known Lehman would be next. Treasury Secretary Paulson was in almost daily contact with Lehman's CEO, Dick Fuld, encouraging him to raise capital or find a buyer. Creditors wouldn't put money into Lehman because they saw what happened to Bear's creditors (who were wiped out). Competing banks wouldn't buy Lehman because they all wanted a JPMorgan deal (federal guarantee against Lehman's worst assets).
Paulson, reflecting the political reality at that time (but also due to his own "free market" subjectivism) wouldn't bail out Lehman. He wanted the other players to know that "free markets" aren't about bailouts.
Literally within hours of Lehman failing, Paulson had an "oh sh*t" moment. He realized how interconnected everyone was through derivatives. It suddenly became evident that AIG would have to pay the bets it made.
Even bailing out AIG two days later it didn't stem the panic. Within three more days Paulson and Bernanke went to Congress seeking bailout money, and warning that the entire financial system could collapse within days.
During all this Merrill Lynch arranged a hasty deal with BofA. And, JPMorgan came to the rescue of Washington Mutual, the largest regulated bank failure in US history to that point.
Goldman and Morgan Stanley were both sweating that they were next. They were both saved by
1) The government backstopping AIG's derivative "bets," which both were significant counterparties to.
2) The government made them both regulated "bank holding companies," making them eligible to borrow nearly unlimited amounts of money from the Fed's "Discount Window" (and subsequently anonymous auctions held by the Fed).
Those events (in the span of 2-3 weeks) brought to an end an era of Wall St. investment banking. They formally became regulated institutions. They agreed to it because, at the time, their assets were worth nothing. They had nothing to lose by changing their business model and submitting to regulation.
So, it's incorrect to say Lehman was unique, or none of the other participants in the financial sector posed "tricky" challenges.
If you want to sit through the entire thing, read Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves.
said by hoyleysox:It is also uncomfortable that there can be more puts or shorts on a company than there are available shares. Not sure what to do about that... At least short-selling stocks is done through exchanges. If I want to buy 1000 shares of a company's stock, I can easily see what the short interest is in that stock.
That's the value of transparency. The strong point of US markets are that they are regulated for *transparency*. That's why, as the global middle class rose during the past 5-10 years they wanted to invest in US markets. Our transparency means there is less opportunity for manipulation and corruption ("rigged" games, such as existed in the US in 1929 when investors knew the system was rigged, and were gambling that they could catch the crumbs falling off the table that the big boys were controlling).
That's the problem with the unregulated (OTC) derivative market. You can't see what kind of bets anyone's made. You can't see how much anyone has agreed to pay in bets (whether your underwriter is over exposed). Or, how they might be selling you a security product while taking a derivative interest against it.
said by hoyleysox:Many derivatives contracts already contain provisions for capital reserve requirements, those requirements brought down AIG after they were downgraded and the reserves were not available. I think you're putting the result before the cause.
The fact that derivative contracts contain capital reserve requirements is prima facia evidence that participants expect performance. That's an argument for regulation.
The problem with AIG wasn't that it was forced to pony up more collateral as its counterparty exposure (to paying claims on bad bets) increased. It was that it had made too many bad bets. Too much leverage was applied against existing capital.
In other words, that's a reason to have transparency and limits on leverage. The problem wasn't that AIG had the equivalent of "margin calls." It was that they started out from a highly leveraged (and optimistic) position that the housing market wouldn't tumble, causing systemic failure and resulting in massive claims to pay off its debts.
The way you describe it, when the same over-optimism (which led to massive leverage) existed in 1929, the problem wasn't massive leverage, it was the *margin calls* (capital reserve requirements) that wiped out so many investors. Proof that they were regulated sufficiently(?).
The result in 1929 was limits on how much leverage (margin) an investor could use as a ratio of their liquid assets. This reduced the potential for margin calls have such a negative impact on the speculator (and, counterparties would have a reasonable expectation of being paid).
That's what differentiates a market from a gaming parlor. Positions taken on knowledge, not odds. A level of transparency (like counting cards) that makes it less than a roll of the dice.
said by hoyleysox:I am not in favor of a publicly-available directory that has a line item for every hedge, too much potential for front-running. I can see your point. A hedge fund's livelihood is the strategic positions it takes in the market. Requiring them to disclose their positions would be like requiring Intel to disclose where it is spending its R&D money.
OTOH, the problem wasn't hedge funds per se. It was regulated institutions participating in unregulated derivative markets, essentially making themselves unregulated and their books (the whole point of regulation) untrustworthy.
I don't believe the self-interest of hedge funds should outweigh society's interest in transparent, trustworthy markets. Perhaps actual positions (counterparties) shouldn't be disclosed by an exchange agency. But, at least the exchange agency would have visibility into the positions and counterparty risk, and could somehow distill that information for investors, or to State insurance regulators who may have an interest in derivatives used as insurance.
The risk of doing nothing is like taking Greenspan's hailing of deregulation. Dogmatic market capitalists hailed that trend, none more enthusiastically than Greenspan. He claimed, implausibly, that a lack of margin requirements would "promote the safety and soundness of broker-dealers, by permitting more financing alternatives and, hence, more effective liquidity management." In the week before LTCM imploded, he told Congress, "Market pricing and counterparty surveillance can be expected to do most of the job of sustaining safety and soundness." And, in 2003, he told an investment conference:
quote:
"Critics of derivatives often raise the specter of the failure of one dealer imposing debilitating loses on its counterparties, including other dealers, yielding a chain of defaults. However, derivative markets participants seem keenly aware of the counterparty credit risks associated with derivatives and take various measures to mitigate those risks."
This is the same Greenspan who told Congress that the Fed had to intervene in the LTCM crisis, because:
quote:
"Had the failure of LTCM triggered seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own."
In other words, counterparty surveillance works fine, so long as you're willing to accept the occasional crash of "the economies of the nations." But given the enormous rewards that accrue to top-of-the-food-chain players like LTCM partners, true market-believers may find that a cheap enough price.
I think most people have had just about enough of two decade of derugulatory politics, and "free markets" as a Theory of Everything. We've repeatedly seen the ugly side of non-regulation.
Mark | |
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| reply to hoyleysox
Re: Obama's Jobs Tour a PR stunt - don't expect jobs said by hoyleysox:As an investor, I am not in favor of a transaction tax. A transaction tax would also hurt 401k holders. The government should not discourage investment. We already have capital gains. I don't believe a 1/10th percent transaction tax for 4-5 years would discourage investment significantly. As mentioned earlier, we had such a tax between 1914 and 1964. Looking at a chart of S&P 500 there was no noticeable positive effect on the elimination of the tax in 1964.
If it were me, I would probably exclude 401k and IRA trades as well as the first $100k in taxable trades. I think that would help target the transaction tax on the high-volume traders which it intends.
The problem is:
1. Wall Street is opposing regulation. I understand it's wrong to force traders to pay for Wall Street's bailout. But, it's even more wrong to force everyone to pay who don't even participate in the market.
The transaction tax would apply to those who participate the most.
2. Those who oppose the transaction tax tend to be the same people who oppose regulation.
That means they basically espouse the same worldview which Greenspan did. "Markets get it right." But, "when they don't, and we have to spend billions of dollars to rescue markets, and the top-of-food-chain beneficiaries, it's worth it" (And, "let's not put those two thoughts together in the same sentence.").
Mark | |
| reply to amigo_boy
Re: Unemployment and Wall Street I agree that there are good grounds for limiting the combination of leverage with hedges, especially if the company borrows from the fed.
I am not sure exactly what you mean by 'transparency.' I do think it was wrong for companies to have a seemingly strong balance sheet carrying massive liabilities associated with derivative exposure.
Surely companies' privacy could be balanced against companies' accountability to investors. In what form do you think 'transparency' should be implemented? | |
| reply to amigo_boy
Re: Obama's Jobs Tour a PR stunt - don't expect jobs I don't believe a 1/10th percent transaction tax for 4-5 years would discourage investment significantly. As mentioned earlier, we had such a tax between 1914 and 1964. Looking at a chart of S&P 500 there was no noticeable positive effect on the elimination of the tax in 1964.
If it were me, I would probably exclude 401k and IRA trades as well as the first $100k in taxable trades. I think that would help target the transaction tax on the high-volume traders which it intends.
One argument against transaction tax:
If the tax would not be 'noticeable', meaning not expected to change behavior, then why have the tax in the first place?
My second argument that I thought of:
That .1% tax would add up. Traders would pay it when they buy and when they sell. It would hurt the strategy of incrementally increasing or decreasing positions as prices adjust and be an incentive to go 'all in' or out with each trade.
Dividend reinvestments are technically a transaction that could be affected.
Assuming an investor expects 7.5% return, that .1% of the total trade would still assign a significant amount of profit to the government.
It would also provide an incentive for multinationals to trade on foreign stock exchanges to avoid that tax.
Though I appreciate that my 401k and low-volume of trades would not be subject to the transaction tax and that the tax amount seems low, I think there would be other unforseen and negative implications. | |
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2 edits | reply to hoyleysox
Re: Unemployment and Wall Street said by hoyleysox:In what form do you think 'transparency' should be implemented? Maybe levels of regulation:
1. All derivatives go through an exchange (clearing house, like futures contracts and put/call options do today).
At least then there would be some standardization and reporting about short interest in various things (interest rates, mortgage and consumer-debt defaults, etc.). At least regulators would have real-time access to who is exposed the most, both as a counterparty and underwriter (who might not meet obligations as conditions worsen).
That was part of the problem during the last meltdown. Really smart people like Paulson and Bernanke had no knowledge of just how deep the derivative market ran, or how interconnected everyone was.
To me, that was one of the most remarkable aspects of the meltdown. Sub-prime mortgages were just 20% of the total mortgage market. Just months before the meltdown Bernanke told Congress they posed no significant threat to the economy. He didn't realize how leveraged they were, and how bank books were cooked with Credit Default Swaps to make it look like there was no risk. He didn't know who had committed to pay defaults, or if anyone could.
The exchange could create indexes representing categories of derivative volume, volatility, current leveraged nature of underwriters (reflecting deteriorating conditions). Perhaps report real-time leverage levels of underwriters.
Using those indexes, the exchange could reflect deteriorating conditions of underwriters. In the same way futures exchanges settle contracts every day depending on current value of future contracts.
At least that kind of visibility of the market (participants, level of participation, trends, and health) would be step forward.
This level of regulation/transparency could lead to the commodities exchange enforcing margin calls (settlement) the same way they do with futures contracts. Counterparties have to settle the difference every day, depending on the direction of the contract. The exchange acts as an ongoing "escrow" account until expiration date, with funds continually deposited to meet the direction of the contract.
2. Corporations (publicly traded, thus voluntarily subjecting themselves to regulation and transparency) should be required to disclose more about the positions they hold, who their underwriters are, etc.
Investors in a corporation would know how exposed a corporation is to market conditions.
3. Banks (even more regulated for transparency and trust than publicly-traded corporations). Perhaps limited to participate in derivative contracts that meet certain regulatory requirements. That would feed back to #1, using the tools created there.
4. Hedge funds (unregulated). I'm ok with people operating outside the exchange. But, I don't believe hedge funds should be counterparties to those who are (should be) operating on the exchange (with more visibility, regulation).
That was part of the problem during the meltdown. Hedge funds underwrote derivative contracts (swaps). They had absolutely no concern about whether they could pay off. To them, it was all upside. They could collect premiums. But, if the world blew up, all they could lose was the capital in the fund (which would probably be gone anyway, as a result of such market conditions).
Hedge funds should be able to write things like that with you or me, private businesses, etc. But, I think banks should be prohibited from counter-partying with a hedge fund (who wants total anonymity) the way they did prior to the meltdown (and may be doing now).
Those are my thoughts. There should be a way to improve this highly-speculative market the same way we did individual stock-trading, futures, options, etc. Just because it won't be perfect shouldn't outweigh what is a huge potential to bring stability and predictability (integrity as opposed to corruption) to a market.
At least a stated attempt to achieve those goals. That's what's astounding. We've accepted that corruption (and the profits it can bring until it blows up) is better. There should be a way to balance the benefit of creativity in the market (developing new products and services) and the visibility of how that creativity is performing.
Mark | |
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| reply to hoyleysox
Re: Obama's Jobs Tour a PR stunt - don't expect jobs said by hoyleysox:If the tax would not be 'noticeable', meaning not expected to change behavior, then why have the tax in the first place? Read the law. It says that it's only purpose is to repay the TARP funds (which haven't been repaid yet). The tax stops when the funds are repaid. But, it remains on the books and could be used again the next time we have to intervene (which is a matter of "when," not "if.").
The response at this point should be, "but traders didn't cause the meltdown." I know. I agree. But, they're closer to the market (and presumably benefit more from it due to their use of it, otherwise they wouldn't use it) than the general population. So, it's "less wrong" to impact them than everyone.
I don't really like it. I wish we didn't have to have taxes on anything and we'd all sing the Coca-Cola song. But...
said by hoyleysox:That .1% tax would add up. Traders would pay it when they buy and when they sell. It would hurt the strategy of incrementally increasing or decreasing positions as prices adjust and be an incentive to go 'all in' or out with each trade. Actually, if you read the law, the transaction tax is applied to trading facilities. Not to traders. It would be up to them to pass it on, or absorb it as part of their operations (such as Goldman's $21 billion bonus pool).
I agree with you. I wish we didn't have to have it. But, millions are unemployed and all of a sudden Obama's worried about bankrupting the country. So, he's turned stimulus-light. If we can get that TARP money back, that would be a little more to use to help out the people who, unlike Goldman, haven't returned to their former glory.
You're right that if the tax is passed on to traders it should inhibit the practice "scalping." Round-trip trades that profit from small movements in price. Often highly leveraged to compound the fractional profit.
I don't know if that would be good or bad. It could decrease liquidity, increasing the bid/ask spread. I don't know if that's necessarily bad either (except to the scalper). It just changes the calculus.
Like I said, we didn't see any volume difference in 1964 when a transaction tax was lifted. We didn't have day traders then. But, it should have had some effect (if we're to believe it will have a significant effect today).
It's really a backdoor attempt to make the big Wall Street firms repay TARP by taxing their "quant" platforms which engage in high-speed trading.
Mark | |
| Correct me if I am wrong, but I believe that almost all of the companies that received tarp funds have paid it back or announced that they will pay it back soon, exceptions being citigroup, GM and Chrystler, who apparently cannot afford to pay it back and would be weakened further by a transaction tax.
A transaction tax would not be cataclysmic and its effects on investor behavior would be subtle, but I do not think it would bring a positive effect, aside from increasing tax revenue. If the goal is simply to increase tax revenue, I do not see how it would be preferrable to raising income tax or capital gains tax, which I am not in favor of either.
I do not consider the discouragement of speculative investments to be a worthy goal - too much of our economy is based on consumption, not investment. | |
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