timmay says no to CDS regulation

we dont need no stinkin regulation

that will just mess up innovation

so let me see if i understand

the loans are bundled

then we pay off a ratings agency to give us triple A

then we slice

we assign each slice an interest rate and a payment sequence

the people who buy the highest interest rate slices take the higher risk

but hey , theres no risk because

its all AAA

we hook them up with a counterparty who sells them insurance (cds)

then we bundle the CDS we bought to insure our triple A

we slice that, and borrowed money is "acquired" to buy it (more leverage)

and we sell those slices to “investors” who again get their share of the premiums based upon

risk...which of course there is none, because we hedge these slices too

and of course everything being bought and sold here

every step of the way, makes me, (us) a commission

and is bought with OPM (borrowed money)

and so we are leveraged each step of the way

weeeeee doggie

now you see why these guys deserve their bonuses

cause they are so smart

and all this could be done without being regulated or eveen having to own an underlying security

cause man we ARE NAKED and lovin it

makes the hippies look like amateurs

mock turtle

we can all be millionaires

in response to a commenter who complained that krugmans desire for more regulation will snuf out productive innovative financial products

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yes i too would like to hear from LondonYoung or prof Hsu or any other person in defense of goldman about the observation LondonYoung made at the end of his comment speculating that the regulation krugman advocates might impair or halt "economically productive trading"

how about an explanation for just two of these "economically productive trading" schemes which i believe amount to nothing more than a casino model of modern finance

first question, how can a derivative market that dwarfs the volume and value of the real, underlying, market be justified?

whether it is gold, soybeans, oil or mortgage backed securities, when those who neither produce, nor process, nor market nor consume a commodity or product are able to deal contracts, sometimes buying and selling in seconds or less volumes many times the "real" market and then bubble, or crash a market... yes...do tell me... where is the economically productive trading

number two is the credit default swap, the so called insurance...not

since when can a person buy or sell insurance when they have NO insurable interest it would be like me buying an insurance policy on professor hsu's house from LondonYoung when niether of us live there, pay rent, make mortgage payments or have any identifiable fiduciary interest

but that is just what happened...financial concerns were able to place bets (buy fire insurance) on securities they did not own, taking out insurance policies (credit defualt swaps,CDS), from other financial concerns , who , it came to pass did not have the ability to pay in the case of a "fire"

the so called innovation was a dangerous numbers game invented by very smart people, and marketed by very aggressive alpha male CEO types who thought they had it all figured out

well, they didnt and the system is seriously messed up

thanks to people who thought they could play games with debt, leverage, and derivatives

why to hear some talk of it, we could all quite our day jobs and just make a living off of day trading...why we could all be millionaires, right?

this what krugman and others are decrying...the banking oligarchs have levied a tax upon the productive society...they demand a lions share of goods and services by way of their exorbitant compensation while doing less and less of real value

we are in this financial crisis because the richest most powerful financial firms played fast and loose with our financial system

the very crux of the point is that the goldman sachs of the world..and goldman is far from alone...mis-allocated capital to non productive, highly leveraged, very risky "investments" and their bets didnt pay off so now they enjoy government bailouts but refuse regulation

so again i ask those who embrace the apologia of goldman to justify the explosive growth in notional amounts of derivatives and exotic securitizations

and when you get that number, which is in the hundreds of trillions, a factor many times the worlds GDP, then tell me in an approximate dollar amount the value these geniuses have visited upon our society with their "innovations"

btw dont tell me about how the notional values all work out to zero and so theres no harm...the fees and salaries paid to originate these deals are huge, i.e. these guys get big bonuses

and if the notional value didnt matter then the way out of the crisis isnt to unwind all these securities etc, rather, the government could just decree that all derivatives are worth zero and all premiums are halted

that aint gonna happen

financially not e plurabus unum

at another web site a blogger londonyoung argued that the aig bailout did not benefit goldman significantly more than any other large financial institution and that absent the aig bailout goldmans other hedges and couter-parties would have off set the 13 billion flow thru goldman got from aig after the US gov aig bailout

my response

it seems to me that LondonYoung argues that one way or another goldman sachs would be made whole via a host of interwoven counter-party agreements except under the remote occurrence of systemic meltdown, in which case the governments bailout of aig was no more beneficial to goldman than many other financial institutions

the system is not a zero sum game contrary to the scientists among us who love elegance

the financial system just faced a day of reckoning with ponzi scheme economics...most everybody made money during the last decade off of casino finance, because money was literally being "made" as in fabricated rather than earned

if you doubt this all you have to do is track M3, which of course the federal reserve made very obscure two years ago (why do you think!)

this game of musical chairs the financial system was built upon,of late, was played to the tune of debt and leverage

some institutions leveraged on average 30 or 40 to one, and when the music stopped many were left without a chair

the idea that goldman was more deserving, or smarter, or obeyed more fundamental principles or had a better trading strategy is nonsense

in fact goldman sold securities and hawked them as great investments at the very time they were shorting those same instruments... fiduciary responsibility anyone?

goldman real expertise, or skill was its connectedness to the power structure by way of the rotation in and out of high government office of its executive management

goldman got to the head of the line, or the top of the food chain if you prefer, as an analogy

wikipedia goldman and look at the bottom of the article for the list of goldman and government incestuousness

as for LondonYoungs claim on a previous thread that probably the average middle class american was more the beneficiary of these financial innovations (ha more like schemes) than the elite...

it is intuitively obvious that such a claim makes no sense, but for those who disdain intuition consider this

the top 2 percent wealthiest americans own more than half of everything

financial services ebit accounted for the largest earnings of any corporate sector traded in the new york exchanges, and hedge fund managers are compensated best amongst all "professions" in america

if the system crumbles and we shall see who has farthest to fall

stepping into the elevator, "going down?"

anon 2 wrote over at calculated risk

"The standard of living of US citizens has only begun to fall. Their standard of living will continue to fall until it meets the rising standard of living of the developing countries. Not a pleasant prospect."

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so very true

and the american people are very unlikely wake up from their indolence until it is far too late...maybe its far too late already

but our leaders and the fourth estate are culpable

the news media has been captured by the oligarchs

proof

last night at 11pm pac time not one of the 5 major media outlets, not fox, not nbc , not cbs not abc and not public media (news hour etc) was reporting on their web sites front pages (and maybe nowhere..i couldnt find it)

that 4 banks had failed that day, two of them multi billion dollar banks...amazing, while all manner of garbage news stories made the cut

deregulate my bailout please

to professor steve hsu at information processing

its sad to see intelligent people propound the idea that deregulation is worth the occasional melt down

no amount of entrepreneurial genius can compensate the national and world economy for the wholesale damage done by GS and other bankstas

( see great depression 1929 thru 1945)

had not the taxpayers, ie the federal government stepped in goldman quite possibly would have been mortally wounded as a going concern...goldman would not have been alone

the government receivership and bailout of aig allowed for the pass thru of over 13 billion dollars from aig directly to goldman

http://www.businessinsider.com/henry-blodget-goldman-sachs-wins-big-in-secret-bailout-via-aig-2009-3

make no mistake about it, all of goldmans protestations that this money didnt matter because of other hedging schemes is pure bs...failure on the part of the federal government to step in would have meant systemic financial collapse,and the collapse of a broad array of counterparties with a huge cascading events following

in 2008 goldman had an EBIT (op revenue) of a little less than 2 and 1/2 billion dollars...the loss of 13 billion from aig would have been devastating

and goldman would not have been alone as the universe of US financials who were by-in-large heavily "invested" in casino securitizations

dont worry about whether or not im right about this...the government has only delayed the inevitable...the toxic assets, or (legacy assets as geithner calls it are still out there

we as a society will be paying for this for a long time to come including a diminution of the middle class...we probably deserve it