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Gretchen Morgenson has yet another excellent piece in today's NY Times; this time it's about efforts to regulate the credit default swaps industry: "Even in Crisis, Banks Dig in for Battle Against Regulation."

Morgenson tells us that on November 13th, 2008, a month after the nine biggest players in the derivatives market accepted bailout money, these same folks created a lobbying group: "The CDS Dealers Consortium."

The new group has been lobbying intensively this session to limit the amount of regulatory oversight that'll be imposed upon them by Congress with regard to their efforts to put a saddle on the credit default swaps industry.

Morgenson does a more-than-credible job providing us with extensive historical background on the matter. (The article's worth the read for this alone.)

We're told there are two schools of thought with regard to the development of legislation to impose stricter controls over the industry; two camps as it were:


"One camp, which includes legislative leaders, is pushing for trading on an open exchange -- much like stocks -- where value and structure are visible and easily determined. Another camp, led by the banks, prefers that some of the products be traded in privately managed clearinghouses, with less disclosure."

Treasury Secretary Geither is very much in favor of the Wall Street solution to this effort (privately managed clearinghouses with less disclosure).


Critics in both the financial world and Congress say relying on clearinghouses would be problematic. They also say Mr. Geithner's plan contains a major loophole, because little disclosure would be required for more complicated derivatives, like the type of customized, credit-default swaps that helped bring down A.I.G. A.I.G. sold insurance related to mortgage securities, essentially making a big bet that those mortgages would not default.

--SNIP--

"The banks want to go back to business as usual -- and then some. And they have a lot of audacity now that everyone has bailed them out," said Yra Harris, an independent commodities trader who was involved in an effort to regulate derivatives nine years ago. "But we have to begin with the premise that Wall Street doesn't want transparency, because more transparency means less immediate profits."

She cites an anecdote mentioned by Senator Tom Harkin (D-IA) about a visit Geithner made to the Democratic caucus on Capitol Hill about three weeks ago: "Mr. Harkin said, he challenged Mr. Geithner to 'define customized swaps.' Mr. Harkin said the Treasury secretary told him he would have to get back to him."

Harkin, discussing the government's efforts to more heavily regulate the credit default swaps' marketplace, said:


"The swaps and derivatives people are all over the place up here," Mr. Harkin said. "They sure are trying hard to win. A lot of money is on the line."

Morgenson reminds us that Wall Street forked over no less than $152,000,000 in political contributions in 2007 and 2008.  She also informs us that Representative Collin C. Peterson, (D-MN), has introduced a bill that specifically bars derivatives  trading in clearinghouses regulated by the New York Federal Reserve. Peterson said:


...a clearinghouse regulated by the New York Federal Reserve, which he said in an interview "is a tool of the big banks" that "wouldn't do much" to regulate the contracts.

--SNIP--

"The banks run the place," Mr. Peterson said. "I will tell you what the problem is -- they give three times more money than the next biggest group. It's huge the amount of money they put into politics."

In a highly publicized story about a month ago, the number two ranking Democrat in the Senate, Senator Dick Durbin (D-IL), said pretty much the same thing: "Frankly, banks own the place."

Are you okay with this? Isn't the long-term answer to this mess all about transparency? Real transparency?

It's simple, either we push for that now, not just with strong regulations with regard to the credit default swaps sector, but in terms of how we oversee the largely-unsupervised Federal Reserve System, as well. Legislation's been introduced of late to audit this entity; you remember them, right? They're surreptitiously distributing trillions of taxpayer funds now, and our government has next to no information about any of that. Are you okay with that, too?

I'm not okay with the status quo carrying on as they have up until now.  It would certainly appear the Treasury Secretary Geithner, despite his comments to the contrary, is in favor of keeping things pretty damn close to how they've been all along, despite words from him and others about heavier regulation going forward.

I'm tired of the lip service. Are you?

And, as Paul Krugman reminds us, also in this morning's NY Times in, "Reagan Did It," it's all about either letting Reagan's laissez faire policies continue, or putting a stop to that once and for all.

One of my favorite sayings applies. We can either "do what we've done,  and we'll continue to get what we've got," or we can push hard for real change right now. All of this legislation is being formulated and/or introduced into the House starting this week. A powerful financial services lobby is working hard to setup a scenario that is little more than one big "Groundhog Day" for Main Street. We've been watching that story, and it doesn't end well...at least not for us.

Let's not go there again. It is time to put a real saddle on Wall Street. And, if we don't scream about that right now, it's not going to happen.

Originally posted to http://www.dailykos.com/user/bobswern on Mon Jun 01, 2009 at 02:11 AM PDT.

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  •  Tips: Sane comments, please! n/t (203+ / 0-)
    Recommended by:
    skybluewater, Ed in Montana, chrississippi, Terri, coral, RedMeatDem, Peace JD, ferg, Sparhawk, mattman, rincewind, eeff, frisco, RFK Lives, lzachary, RubDMC, bronte17, KB, TracieLynn, afox, mentaldebris, Cassandra77, Euroliberal, ScantronPresident, CoolOnion, metal prophet, buckhorn okie, JuliaAnn, luku, wonmug, Jesterfox, bewert, wader, oldjohnbrown, Miss Jones, CitizenOfEarth, pat bunny, waf8868, hoplite9, johnnygunn, grrr, lcrp, riverlover, Pohjola, dkmich, Hillbilly Dem, Wife of Bath, xxdr zombiexx, Gowrie Gal, weelzup, luvmovies2000, G2geek, radarlady, 3goldens, greycat, unclejohn, irate, PBen, electricgrendel, panicbean, eightlivesleft, ChemBob, david78209, Jules Beaujolais, Pam from Calif, jimreyn, Overseas, lotlizard, blue jersey mom, FightTheFuture, alisonc, dazed in pa, deepsouthdoug, dsteffen, Indiana Bob, dancewater, Alan Arizona, zozie, RJDixon74135, New Deal democrat, tommymet, sherlyle, cybersaur, dharmafarmer, emeraldmaiden, Gorette, rl en france, kck, NBBooks, nilocjin, tapestry, CTLiberal, sceptical observer, MBNYC, profh, rsie, Clive all hat no horse Rodeo, chapel hill guy, Granny Doc, dochackenbush, markthshark, andrewj54, DBunn, bigchin, J Royce, phonegery, out of left field, xaxado, Ken in MN, donnamarie, Cronesense, dmh44, Searching for Truth, yoduuuh do or do not, CTMET, Jimdotz, terabytes, ezdidit, Unbozo, Seneca Doane, HCKAD, manwithnoname, mcc777c2, vbdietz, wilderness voice, millwood, Moderation, TexasTwister, Badabing, Bikemom, willb48, TomP, rmonroe, MKinTN, JaxDem, happymisanthropy, tamasher, valsagem, luckylizard, mary13L, DixieDishrag, dont think, In her own Voice, billybam, sydneyluv, shortgirl, legendmn, divitius, robbinsdale radical, Florene, Jacob Bartle, aufklaerer, ARS, An Affirming Flame, jaf49, leftneck, Stranded Wind, mkor7, IndyRobin, JesseCW, Little Flower, futureliveshere, BigVegan, p gorden lippy, flitedocnm, foolknot, HenryBurlingame, The Jester, UTvoter, Indie Tarheel, fidellio, chrome327, wvmom, Ronald Singleterry, your neighbor, polar bear, paradise50, Kristina40, axel000, WattleBreakfast, washunate, Actbriniel, jeanma, yellow dog in NJ, BrowniesAreGood, sturunner, Colorado is the Shiznit, annominous, Progressive Fury, Kid G, Susipsych, island in alabama, thethinveil, KVoimakas, felldestroyed, whoknu, MuskokaGord, borregopass, anothergrunt, daveusf, happenstance, Illustrious86, BioHazzard

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Mon Jun 01, 2009 at 02:16:54 AM PDT

    •  Ok, here's one: what EXACTLY is wrong with CDS? (7+ / 0-)

      Or, to put it another way, why would an exchange - rather than a clearing-house - be the right answer to the market's problems?

      I don't see anything in the crisis to make me think that an exchange is necessarily a better solution.

      The one big problem that the CDS market created was opacity around counterparty risk. In simple terms, nobody knew who had sold protection on what - or whether they'd be able to pay up in the event of a default.

      The contracts themselves are not problematic. The market performs a valuable function - nobody is disputing either of these points. What's at issue is how to fix the problem of counterparty risk between CDS participants.

      If you have a central clearing-house, it fixes that problem: what happens is that instead of having a web of exposures to a number of different protection sellers, every market participant ends up with a single exposure to the clearing house itself. In a market organised along these lines, if AIG had massively over-extended itself, the clearing house would be responsible for paying out to AIG's counterparties.

      And because the clearing house would be on the hook, it would require its counterparties to provide margin collateral on each trade - something AIG didn't have to do. In other words, AIG wouldn't have been ABLE to over-extend itself.

      •  One-word answer: TRANSPARENCY! (47+ / 0-)

        $39 trillion or $400 trillion in transactions...does it really matter...there's no freakin' transparency. Notice, the dialogue has shifted...it's not about "outlawing" CDS'. It's about handling them like every other damn transaction. And, Wall Street doesn't like it, as Morgenson tells us, because it's going to cost them more to have these handled on an open exchange.

        Where am I saying they should not be traded? Where is Morgenson saying this. The banks WON that one. But, at the very least, these need to be transacted in a manner which is far, far more transparent than they've been conducting business up until now.

        So, cut it out with the "defense of the financial instruments" meme...you won that one. Now it's just about having this stuff in a publicly-available environment.

        "Me thinks you doth protest too much...."

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Mon Jun 01, 2009 at 03:08:41 AM PDT

        [ Parent ]

        •  There was never any debate about outlawing CDS .. (1+ / 0-)
          Recommended by:
          sydneyluv

          And rightly so. The debate has always been about how to prevent another AIG.

          Personally, I think the simplest way to do that would be through a clearing house.

          You say you want transparency - so transparency about what, specifically? What information should be disclosed?

          •  I think there should have been a debate (20+ / 0-)

            betting on the failure of companies you don't have any investment in is not a financial strategy. it's gambling.

            •  That's such a dud argument ... (2+ / 0-)
              Recommended by:
              Sparhawk, burrow owl

              Apologies. Nothing personal!

              Think about it this way: any CDS trade has two sides. "Betting that a company would fail" means buying protection on it. If there was a significant chance that the company in question WOULD fail, who would take the other side of that trade? You could probably find someone to do it - but it would cost you a huge amount. I seriously don't think anyone was betting that a company would fail.

              What you DID see was banks going short a credit in the expectation that the spread would widen and their position would therefore become more valuable in mark-to-market terms. But that's NOT "betting that a company would fail", it's "betting that a company would be downgraded" and I don't see a problem with that.

              More to the point, I don't see any substantive difference between taking a position on the creditworthiness of a company and taking a position on the value of its stock. Aren't they both "gambling"?

              •  Your absoluetely wrong on this (17+ / 0-)

                in Fact CDss have been used heavily by creditors , banks and trade creditors, to virtually make the Chapter 11 process noting more than a way for attorneys to get the rest of the blood out of the carcass before it dies.

                Google Chapter1 1s and Credit Default Swaps. Read Businessweek's latest. Read my post downstream. People like you are the major problem here. You really have zero understanding of these things and how much of a mutiplier they have been that have taken a big problem and turned it into the bankruptcy of America.

                TRansparency is who has defaults on who wo we can see what motives they may have to cause the Swap to pay. Transparency is to see the realtive risk companies are taking on both sides of the trade which is off balance sheet so investors can see if that balancesheet turly represents the finacial condition and risk of the company. You think JPM is going to put their drivitives on their balance sheet?

                I can go into 20 reasons, But it's really a waste of time. Wall Street Owns Washington. The "greed is good" meme has never left and they really don't give a shit about anything but what's in their pocket at the end of a trading day.

                They will exploit and abuse anything until they start going to jail at which time we get a five year breather until the next round of Bullshit comes out.

                •  How, exactly? (1+ / 0-)
                  Recommended by:
                  Sparhawk

                  Sounds kinda vague to me.

                  Would you care to explain exactly how a CDS can be used as a way for "creditors, banks and trade creditors to virtually make the Chapter 11 process noting more than a way for attorneys to get the rest of the blood out of the carcass before it dies"?

                  What do you mean?

                  The Businessweek article only makes the point that if a company enters bankruptcy and some of its debt investors are covered by a CDS, those specific investors may not care whether the company is able to re-organise or not.

                  Just off the top of my head, I can think of two (rather large) problems with that argument:

                  First, only a small proportion of creditors would have their risk covered by a CDS. Most of a failed company's stakeholders have exactly the same interests that they always did.

                  Second, if the company DOES default, all the CDS holders get is a pay out on their bond / loan. In other words, if the company fails, they get paid. If it is reorganised, they also get paid. Where's their incentive to drive it into bankruptcy?

                  People like you are the major problem here. You really have zero understanding of these things and how much of a mutiplier they have been that have taken a big problem and turned it into the bankruptcy of America.

                  Forgive me for being a bit sarcastic here, but I'll need more than someone waving their hands and shouting "CDS! Chapter 11! Blood-sucking vampires!" before I'll concede the point.

                  •  skeletondisco are you a bank lobbiest? (6+ / 0-)

                    ...someday - the armies of bitterness will all be going the same way. And they'll all walk together, and there'll be a dead terror from it. The Grapes of Wrath

                    by deepsouthdoug on Mon Jun 01, 2009 at 07:32:18 AM PDT

                    [ Parent ]

                    •  No. Like I told someone else down-thread ... (2+ / 0-)
                      Recommended by:
                      Sparhawk, Lying eyes

                      ... I'm just fed up of people taking aim at the wrong targets.

                      Believe me, there are many, many targets I am happy to see people taking aim at: bank CEOs and boards, bank governance, risk management, bank regulators, central banks, investors, rating agencies, accountants. Fire away!

                      But the CDS market is a distraction, as far as I'm concerned.

                      •  CDS are a large part of the market problem (1+ / 0-)
                        Recommended by:
                        gatorcog

                        Hell they crashed the market.

                        NO insurable interest - NO bets!  They are nothing more than electronic versions of the good old  bucket shops.  

                        Thanks for the reply, but you do post like a concern troll.  

                        ...someday - the armies of bitterness will all be going the same way. And they'll all walk together, and there'll be a dead terror from it. The Grapes of Wrath

                        by deepsouthdoug on Mon Jun 01, 2009 at 08:01:47 AM PDT

                        [ Parent ]

                        •  They crashed the market? (1+ / 0-)
                          Recommended by:
                          Sparhawk

                          Ok - fine - tell me how.

                          How did CDS cause losses in CDOs and RMBS to far exceed expectations?

                          How did CDS cause the CP market to dry up?

                          How did CDS cause Merrill, UBS and co to report record losses?

                          •  NO insurable interest NO BETS (0+ / 0-)

                            All the other points you rasie are moot once one accepts that salient point.  

                            Which trolls like you can't of course.  

                            ...someday - the armies of bitterness will all be going the same way. And they'll all walk together, and there'll be a dead terror from it. The Grapes of Wrath

                            by deepsouthdoug on Mon Jun 01, 2009 at 08:40:55 AM PDT

                            [ Parent ]

                          •  How is that an explanation ... (3+ / 0-)

                            ... of how CDS crashed the market?

                            Seriously. You're calling me a troll for daring to question the conventional wisdom that CDS are evil ... but you're the one posting soundbites and ducking questions.

                            Come on - you reckon CDS crashed the market - so tell me how.

                          •  It wasn't counterparty CDS's, it was 3rd party... (0+ / 0-)

                            CDS's started as a way for a counterparty to insure performance. It turned into a way for unrelated third parties to bet on the failure of a specific debt instrument. AIG, for example, would sell CDS's on a specific Goldman Sachs MBS not only to the counterparties that actually invested in the MBS, but also to dozens of other unrelated third parties. When that MBS was downgraded or BKed, AIG had to make good to not just the counterparty but also to all the unrelated third parties that had purchased the CDS covering that particular MBS.

                            Multiply this thousands of similar cases and you see how the CDS market grew to hundreds of trillions of dollars in such a short time period. And why it melted down when the underlying MBS's started going bad.

                            Here is a great "This American Life" segment that features Wall St. folks explaining it far better than I can:
                            http://www.juniper-ridge.info/...

                            "I have no special talents. I am only passionately curious." A. Einstein

                            by bewert on Mon Jun 01, 2009 at 11:30:51 AM PDT

                            [ Parent ]

                          •  Skeletondisco is not a troll. (4+ / 0-)

                            He or she has been very forthcoming and rather kind in all of the responses I've seen from him or her.  I had some questions about how this all works and she or he was willing to take her or his time to explain them to me.

                            Don't go throwing around the troll label just because you're having a fit.  It's insulting to troll who put in real time and effort to earn the label. ;)

                            a consensual hallucination experienced daily by billions

                            by electricgrendel on Mon Jun 01, 2009 at 09:37:33 AM PDT

                            [ Parent ]

                          •  I really ... (2+ / 0-)
                            Recommended by:
                            electricgrendel, polar bear

                            ... appreciate that. Thanks.

                      •  Hardly a distraction... (1+ / 0-)
                        Recommended by:
                        deepsouthdoug

                        ...I'm thoroughly convinced now that you are a troll for the wall street and the banking industry.  You protest too much about something you don't understand at all.

                        Or...is it you do understand and are splattering other "targets" as the problem.  Hah!

                        CDS's are THE problem.  If you don't have transparency...say like in the options market...you have NO idea what all the "swappers" are gaming for.

                        What they did in the past is game the system by betting it would fail.  They set it all up to fail.  So now they "believe" they are owed in the neighborhood of $80,000,000,000,000 for all the cute little "swaps" they made...bets that it would all come crumbing down.

                        And now they want and EXPECT us to bail all of them out...and let them go their merry way back to just what they were doing before.

                        Put a cork in it skeltor.

                        "Ignorance is bliss only for the ignorant. The rest of us must suffer the consequences." --Paradise50

                        by paradise50 on Mon Jun 01, 2009 at 09:25:17 AM PDT

                        [ Parent ]

                        •  Are you kidding? (1+ / 0-)
                          Recommended by:
                          Lying eyes

                          CDS's are THE problem.  If you don't have transparency...say like in the options market...you have NO idea what all the "swappers" are gaming for.

                          You want transparency "like in the options market"?

                          Precisely what kind of transparency exists in the options market that doesn't exist in CDS?

                          Nobody in the options market discloses their net long or short positions on various underlyings. And they don't do it in the CDS market either.

                          •  Troll, troll, troll, troll... (0+ / 0-)

                            ...it is very easy to see how many longs and shorts there are in the futures market...you are either ignorant...or you're a shill.

                            Hummm...shill, troll, troll, troll...wall street whore.  

                            No, I'm not kidding...now go back to the cartoon you are...skeletor.

                            "Ignorance is bliss only for the ignorant. The rest of us must suffer the consequences." --Paradise50

                            by paradise50 on Mon Jun 01, 2009 at 10:16:22 AM PDT

                            [ Parent ]

                          •  So, now you're talking about the futures market? (0+ / 0-)

                            I thought you were talking about options?

                            And I'll reiterate my point, given that you've completely ignored it - individual dealers do not disclose their long or short positions on specific underlyings.

                            If all you want to see is general market activity in CDS, you can find it on the DTCC's website - they publish weekly reports.

                    •  PR trolls and their spiders (6+ / 0-)

                      Skeletondisco:  No diaries, first comment on 3/23, comment pattern shows a trend of trying to take over financial diaries by questioning other commenters' intelligence ad nauseum.  

                      The pattern is textbook trollish -- so commonly used to snuff out valid opinion on this site that I've often wondered if it is the same PR agency contracting to do the work in all cases, or perhaps even the same person under countless sockpuppet names.  I started noticing the pattern as a comment syndrome during the impeachment wars.  It always shows up with issues where a lot of corporate money is on the line, always on the corporate side.

                      My guess is that this person is not a banking industry member, because they don't seem to know very much about the subject, but rather a PR contractor specializing in blog trolling.  People like this often work in teams, I'm guessing in rapid response to keyword searches done by spiders.  In this case all it takes is "Bob Swern" to set the spiders quivering.

                      Personally, I think the PR trolls should be roasted over a bonfire, slowly.

                      The Shock Doctrine by Naomi Klein -- best book ever, I nominate for a Nobel Prize!

                      by xaxado on Mon Jun 01, 2009 at 07:46:50 AM PDT

                      [ Parent ]

                      •  There's actually a much simpler explanation! (6+ / 0-)

                        I'm a long-term reader of DKos who works in a pretty specific part of the banking industry and who became frustrated at the crisis-spawned profusion of completely ill-informed diaries that attacked things that have the square root of fuck-all to do with the crisis.

                        Eventually, I registered. Most of my comments have been limited to crisis diaries because that's one subject where I actually have some expertise and a strong opinion.

                        Far more specifically, you'll notice that I've pretty much confined my commenting to diaries on derivatives and structured products. That's my thing. I'm completely sincere in my views - all I want to do is TRY to set people straight (or at least give them pause for thought). I have no ulterior motives.

                        But thanks for trying to persuade people to ignore me.

                        •  HI SD ... (1+ / 0-)
                          Recommended by:
                          polar bear

                          Quick naive questions ...

                          What is the difference between a clearinghouse and an exchange? Simply that the process is more open in the latter?

                          "Self-regulation is to regulation as self-importance is to importance." Willem Buiter

                          by Bronxist on Mon Jun 01, 2009 at 09:43:32 AM PDT

                          [ Parent ]

                          •  Hi! (2+ / 0-)
                            Recommended by:
                            Bronxist, polar bear

                            In an exchange, you can only trade the set of standardised contracts that the exchange allows you to trade - they decide on the specifications.

                            In a clearing house, you could still trade bilateral contracts with specifications which had been tweaked by the two parties - but instead of trading with each other, those two parties would trade with the clearing-house. In other words, if Deutsche and JP Morgan swap the risk of IBM, in the current system, the protection buyer is exposed to the risk that the seller won't be able to pay up. With a clearing house in the middle, the counterparty risk is to the clearing house itself.

                            The problem you face is making sure that the clearing house is sufficiently well-capitalised to be able to make good on the commitments of one of its members if they collapse.

                      •  Professionals have been working the netroots (6+ / 0-)

                        Since before any of us were aware we even were the netroots.

                        Classic example.  Back in 2001, I spent a great deal of time on the old Yahoo boards.  Right after 9-11, within a week, a wave of new posters hit the boards, calling for a response to the attacks of:  invading Iraq.  Now, I thought this was truly odd, but I just chalked it up to some even more "out of it" wing nuts than usual.  After all, as I pointed out to them, not only was there no evidence of Iraqi involvement in the attacks, but everything we did know about al-Qaida on one side and the Ba'athists on the other suggested that they be mortal enemies.  Further, I pointed out, even the Bush administration hadn't said anything about attacking Iraq, it was all about Afghanistan.  Now I realize in retrospect that there was a coordinated effort going on even then to lay the groundwork for an invasion of Iraq.

                        "When the government becomes a lawbreaker, it invites every man to become a law unto himself." ~ Justice Brandeis

                        by ActivistGuy on Mon Jun 01, 2009 at 08:10:22 AM PDT

                        [ Parent ]

                  •  It's pretty incredible (1+ / 0-)
                    Recommended by:
                    polar bear

                    that you can argue with a straight face that people don't know what they are talking about, when your own set of facts are so screwed up.
                    Lets start with the 39 Trillion in CDSs which you later back tracked and cavalierly tossed off a figure of between 30-40 trillion. Only a few trillion off eh?

                    Now lets combine that with the Geithner approach of making good on the CDSs at 100%. We have never gotten a breakdown of the CDSs that were covered and naked that were paid in full. So if I understand you correctly you are all in favor of this insurance as long as taxpayers foot the bill for people who bet in the wrong direction because the 180 Billion consumed by AIG with more coming , all went to pay off CDSs. If the GOVT hadn't taken over AIG's book, the betters would have zero. Starting from zero is a good negotiating point . How ended up from there to 100% just boggles the mind.

                    There are also reports that AIG employees are handing Goldman Sachs and a few other entities the task of untangling the of the CDSs in exchange for 18 BPs on the pay off plus a 7 figure job for the employee. The more  Goldman pays on behalf of the Govt the more they make.  

                    Lets move on. During reorganizations it's common for bondholders to accept less than par during a reorganization to recap the company. In fact , you would be hard pressed to find one Chapter 11 filing where creditors, bond holders to secured trade creditors  got Par on pre bankruptcy debt.

                    On a CDS they get Par. Hence no interest in seeing a reorganization. I'm not going to do your research for you, but I spend a great deal of time in the weeds with bankruptcy events. So I feel totally comfortable in saying you absolutely have no idea what you are taking about.

                    Since 2005, Lawyers have used the reforms to grab inventory and equipment in bankruptcy that would normally be liquidated in a chapter 7 or they would give up a percentage of the invoice value if a reorganization was attempted. As far as CDSs, a sophisticated risk /credit manager with a large supplier would have no problem securing a CDS on their outstanding receivable to a company. It may have been cheaper in the early stages to buy that rather than credit insurance.

                    Particularly if the supplier was an equipment leaser. Imagine a GM reorganizing after a substantial amount of  their latest IT  manufacturing and design equipment had been repoed right in bankruptcy court. This is why Obama pounded the secured creditors. They knew exactly what they had planned. My guess is ; his baseball bat was the threat of regulating derivatives of all kinds and pushing  through a rule requested by Sheila Bair requiring the BHC's to unravel all their derivatives to get a true risk profile on the bank.

                    The Lease unit of a large Bank or finance company would have had a joy ride: Example:  a GE finance unit will , in effect, factor a receivable for full recourse to the original the manufacturer of the equipment and call it a lease with monthly payments over many years. They could then take a CDS on the full value and take possession of the equipment in bankruptcy, sell it off . Make the manufacturer pay the difference and then collect on the CDS.

                    For the big creditors, a bankruptcy notice doesn't mean bad things anymore, it means it's Christmas time. If the company has/had a valid chance of making it, that would be of zero concern to the creditor. In fact, taking it to the logical end, the creditor or Wall Street firm, may have taken out CDSs on the supplier companies which they may or may not have had any financial interest in. So a liquidation is a dead certain pay off of many times the value of the original receivable.

                    Your notion that pre-bankruptcy creditors get paid in full if a company makes it , big or small shows how little knowledge you have. What the CDS has done in consumer and in business is take the risk out of the extension of credit unless the counter-parties didn't have capital.

                    Then Geithner and Paulson selectively made good on those bets. The CDS market is alive and well thanks to the taxpayers and a govt full of idiots to elected officials who were outright bribed.  There is a reason People who think they know CDSs continually show their ignorance when the defend it; the CDS would no longer be of any use to anyone if the Govt hadn't stepped in and bailed the betters out. Why short a stock if the stock moves down, one covers and the brokerage and it's insurers go out of business.  

                    Backing out the macro picture, it's very possible that the US may go bankrupt to keep the banks in business based on these "Financial WMDs" you are defending. That's why premiums for CDSs on US treasuries have gone up 5 fold since this bail out started.

                    That's right, people placing naked bets with CDSs on the failure of the US because of The US  bailing out the CDS holders.

                    Somehow you think that's good? Somehow you think it's defensible? It's the rawest display of outright corruption and fraud since the bucket shops before the 1907 bank panic. That's why Phil Graham put in the midnight bill in 2000 to legalize them as people were starting to compare the sales of all of these derivatives as the modern day equivalent of a bucket shop whose side bets were outlawed until 2000  with Phil Graham's help, the market in it's formative stages, took off like fucking rocket.

                    They are cause and effect of a national debt that can never be repaid. No , I am not pulling guesstimates out of my ass like you were. The US is run on a Cash accounting method. This was originally invented as an accounting system for lemonade stands and similar business who did all their business in cash. No receivables, no payables, Just cash.

                    One a a Govt or a company takes on liabilities and assets that are not cash they must switch to accrual accounting. However the US has not done that. The picture we get from the US finances are just a fraction of how bad we are using GAAP ( Generally Accepted Accounting Principles). That 's why David Walker, the Chief accountant of the US quit as he could not get elected officials to own up to the true condition of the US. he is now advising people with large amounts of money about what a suckers bet it is to put money in this country. This isn't anything that was new. Anybody who had a top notch financial analysts could easily see the trouble we are in. But it was rare event indeed when the head accountant says "we are fucked".

                    There was never any surplus under GAAP. Not even close. That's why the statistics and charts that Bonddad posts here are so laughable. As we progressed through the first decade of the millennium,  Walker saw any chance of the US recovering slipping away as the stupidity of the US elected officials stripped away any chance of a recovery. We really jumped the shark probably in 2003-2005, but any chance of a miracle recovery was put to rest when Geithner and Paulson decided to bail out the buyers of CDSs.

                    Then the debt skyrocketed. Lets not fool ourselves into thinking this rally we are having in stocks is anything more then a mid bear market rally. The Debt of the US using GAAP exceeds the GDP by many many times. Last year was when the first real crack appeared. Yes, 2008 was just a crack. It was quickly coated with a light topping of cement so no one could see inside the crack. That's where the real horror story is.

                    Watch where you walk

              •  New York Stock Casino (2+ / 0-)
                Recommended by:
                phonegery, polar bear

                More to the point, I don't see any substantive difference between taking a position on the creditworthiness of a company and taking a position on the value of its stock. Aren't they both "gambling"?

                yes.

                See the Planet Money podcast about "knitting" (sp?) - in which companies hedged their CDS's across numerous other banking and insurance companies. AIG was ate up with CDS exposure, which is why Chrysler's creditors didn't care that they went into bankruptcy. they'd get their money via the CDS "insurance." And I'm sorry, but anyone who has no stock in a company has no business being involved in a CDS related to that company's financial health.

                The simple fact is there's no "there" there. Investing involves risk. Removing all the risk through CDS's has brought about much of the current crisis, just as has the Mortgage Backed Securities. Transparency is but one small step back toward financial sanity.

          •  There is a debate.... (2+ / 0-)
            Recommended by:
            mattman, polar bear

            ...but it is not taken seriously.

            I don't know too much about this to get into specifics, but I did see an interview by a high ranking Berkshire Hathaway exec who stated point blank the CDS's are a HUGE problem.

            I will try to find that link.....

          •  I wish there was a debate about some CDS. Any (2+ / 0-)
            Recommended by:
            phonegery, An Affirming Flame

            instrument that has one group of people rooting for the destruction of another group of people so they can make money should be illegal.

            In addition, I realize that commodities trading can be helpful to people who actually use the commodities.  But when their trading results in skewed fluctuations for the benefit of gamblers, that is not good for anyone.

        •  A different answer: leverage (22+ / 0-)
          Derivatives are instruments with a financial value based upon precisely nothing.  That's how tens of trillions of dollars of "assets" were created in the past decade or so.

          Institutions selling derivatives should be regulated as to type of derivative they can sell, and those derivatives should be rated as to quality.  More important, anybody selling derivatives contracts should have to have a capital requirement standing behind the contract, just as they must for conventional loans.

          These requirements would increase the price of derivatives contracts, which would limit their applicability to instances where they were worth the price to the purchaser.  This would be a good thing, and would prune the derivatives market back down to an useful and non-threatening size.

          Godwin is dead. Glenn Beck killed him.

          by Dallasdoc on Mon Jun 01, 2009 at 06:12:55 AM PDT

          [ Parent ]

      •  only if the clearinghouse is regulated strictly. (21+ / 0-)

        Otherwise it becomes merely another blackbox into which risk is transferred without accountability.

        And speaking of too-big-to-fail... an entity on that scale would be the mother of all too-big-to-fails.  

      •  This is hardly my forte, but I would like to (13+ / 0-)

        point out that AIG was also on the hook for its obligations and responsible for paying out to its counterparties.  When it lost its bet, it did not fail.  We bought it.

        What is to say that the same would not be true of a central clearing house?  It seems that we would do anything possible to prevent that bomb from detonating, and the masters of the universe know that.  The people running a clearinghouse would have no more obligation to behave ethically or responsibly than did the executive of AIG.

        a consensual hallucination experienced daily by billions

        by electricgrendel on Mon Jun 01, 2009 at 03:14:00 AM PDT

        [ Parent ]

        •  AIG did not provide collateral against the ... (8+ / 0-)

          ... exposures it took on. That's why it was able to build up a stupidly big position - it basically didn't cost the company anything. Market participants who traded with a clearing-house would be compelled to post collateral and make margin payments. There would be a clear cost to taking on risk.

          •  I see. So it sold contracts without putting up (4+ / 0-)

            collateral in order to guarantee that it could pay out in the event of the default of the underlying bond.  A clearinghouse, if managed correctly and regulated strictly (and in perpetuity), would collect and manage such collateral.

            Now, it seems as if the private aspect of the clearinghouse management is one potential problem.  Why could there not be a public clearinghouse that is managed by the appropriate government institution?

            Finally, to sort of take your own line of questioning, what value does a clearinghouse bring that an exchange would not?  I am guessing that in an exchange there is no collateral?  I'm not sure of that, so if you would clarify then I would be most appreciative.

            a consensual hallucination experienced daily by billions

            by electricgrendel on Mon Jun 01, 2009 at 03:48:13 AM PDT

            [ Parent ]

            •  All exchanges are private corps. (3+ / 0-)
              Recommended by:
              electricgrendel, JesseCW, polar bear
              They're non-profits in some cases, but still private.

              We are building a team that is continuously being built. - Sarah Palin

              by burrow owl on Mon Jun 01, 2009 at 04:03:52 AM PDT

              [ Parent ]

            •  A clearinghouse will have collateral (2+ / 0-)
              Recommended by:
              New Deal democrat, polar bear
              requirements.  The only difference is whether I'll be able to open the paper and see CDS prices like I do w/ stock prices.

              We are building a team that is continuously being built. - Sarah Palin

              by burrow owl on Mon Jun 01, 2009 at 04:09:31 AM PDT

              [ Parent ]

              •  Another benefit of a clearinghouse (12+ / 0-)

                is that only net differences in positions would have to be cleared.  If A Bank owes $100Bln in transactions to B Bank, and B Bank owes $100Bln to A, then the banks don't have to cought up $200Bln.  The net exchange is: $0.00.

                Some are asking, "why aren't we hearing more about this?"

                Well, who do you think is receiving all those bankster contributions?  Only GOPers?

                I've pointed out several times that Barney Frank is on record saying that financial reform is going to be slow-walked, and maybe it'll be ready next year (or never).

                "When the going gets tough, the tough get 'too big to fail'."

                by New Deal democrat on Mon Jun 01, 2009 at 04:21:10 AM PDT

                [ Parent ]

                •  they're almost all in on it. (10+ / 0-)

                  I don't trust any of them except maybe Marcy Kaptur and a few others to tell the truth and fight for what's in the People's best interests.

                  There's a tremendous amount of $$$$$$ being funneled into DC from these bad actors who have created the biggest transfer of wealth in our history from US to THEM since Ronnie Raygun first started us down this path.

                  And what, pray tell, are they expecting to buy with all that $$$$$$$? Color me skeptical, but it ain't a better shake for the middle class, I'll betcha.

                  When I saw Geithner put up for Treasury, I thought, Uh Oh, the fix is in. Another fox is in  charge of the henhouse.

                  This is the tradeoff that was made, IMHO, for getting the corporate-owned media to swing behind BHO and attack the Repubs just enough to seem to be behind the dem's. Their price was one of their own in charge of the moolah.

                  But maybe that's just me. I think they stink. I think they make tons of OUR money by doing nothing but playing shell games. They produce nothing, they just transfer it to themselves.

                  Fear is the mind-killer - Frank Herbert, Dune

                  by p gorden lippy on Mon Jun 01, 2009 at 05:20:48 AM PDT

                  [ Parent ]

            •  Yes, exactly. (2+ / 0-)
              Recommended by:
              burrow owl, electricgrendel

              It was absolutely insane.

              The standard practice in the CDS market was for banks to take collateral from each other (and also from hedge funds and other participants) but AAA-rated counterparties were deemed to be so safe that they didn't have to post anything by way of security.

              As such there was no restriction on AIG's ability to write protection - the protection seller doesn't have to pay anything up front. So they kept selling protection on securities that were believed to be default-proof, and collecting small fees from the protection buyer - and ended up with a vast amount of exposure to securities which turned out to be a lot riskier than anyone know.

              Completely nuts. And it could have been prevented very easily.

              Now, it seems as if the private aspect of the clearinghouse management is one potential problem.  Why could there not be a public clearinghouse that is managed by the appropriate government institution?

              I wouldn't have a problem with that - although I think I'd favour a system in which there were a number of competing clearing houses and a government regulator for them.

              Finally, to sort of take your own line of questioning, what value does a clearinghouse bring that an exchange would not?

              Well, as things stand, each CDS is a bilateral contract. If you want to buy protection on a bond issued by Company X - or on an index - or whatever - you can go to a bank and they'll create it for you. On an exchange, the only things that trade are standardised contracts - each one has to be set up by the exchange - and the exchange will only do that if they expect there to be a certain critical mass of interest in trading it. So, shifting to an exchange would prevent people from buying protection on as wide a range of assets. I've no idea how much of a restriction that would be - whether the number of reference entities would shrink from around 20,000 to 2,000 or to 200. I just don't know.

              The bilateral contracts can also be customised - you can make different specifications about collateral, for example, or about the maturity, the payment schedule etc. Again, no exchange would be able to offer a wide enough range of contracts to satisfy the market's needs. CDS would become less useful.

              It just seems to me that if you can solve the problems of the crisis without radically altering the way the market works, then that's what you should do.

              •  No. (7+ / 0-)

                It just seems to me that if you can solve the problems of the crisis without radically altering the way the market works, then that's what you should do.

                Like bobswern wrote:

                We can either "do what we've done,  and we'll continue to get what we've got," or we can push hard for real change right now.

                That is the fundamental difference going here in the comments.  You want it to stay the same, I want to completely change the game.  Unfortunately, since I've lost $150,000, mere peanuts to Wall St., but a sickening amount of money to me, I want serious change.  

                You're wrong for thinking I'm wrong, so that makes you wrong twice.

                by ohmyheck on Mon Jun 01, 2009 at 07:10:45 AM PDT

                [ Parent ]

                •  Two things ... (2+ / 0-)
                  Recommended by:
                  Sparhawk, polar bear

                  First, bear in mind that I am ONLY talking about the CDS market here. I'd be delighted to see bank regulation completely overhauled.

                  Second, putting in place a central clearing house for the CDS market would be big change. It's a pretty radical transformation which, I believe, would fix the market's problems.

                  •  I think banks that (1+ / 0-)
                    Recommended by:
                    polar bear

                    receive FDIC insurance should be independent corporations barred from issuing derivatives and with reserves placed in trust with the FDIC having the sole right of access to the legal minimum.

                    If the holding companies of the banks wish to create separate subsidiaries then their products must must satisfy all the insurance laws of purchaser's jurisdictions unless is merely a loan payment forwarding tool.

                  •  A poster below (1+ / 0-)
                    Recommended by:
                    polar bear

                    pointed out that derivatives/loan insurance makes creditors unwilling to work with debtors, increasing business failures and worker layoffs.

                    I think that loan syndication is the proper way to deal with large credit needs.

                    I no longer believe in or support loan insurance products.

                    •  Yep, I saw that ... (0+ / 0-)

                      ... and somewhere on the thread I posted a rebuttal :)

                      Basically, I'm not convinced that the fact that a handful of investors (out of a whole range of different creditors and stakeholders) have bought protection is going to make bankruptcy more likely.

                      And you could easily make exactly the opposite argument: it would be easier to arrange financing for a corporate reorganisation if the financiers are able to protect themselves by buying CDS.

                  •  Yes, I understand (1+ / 0-)
                    Recommended by:
                    polar bear

                    what you believe about the efficacy of CDS's.  But you wrote that you hoped "without radically altering the way markets work".  I am FOR complete, radicalized transformation of how markets work, because they DON'T work.  Anymore.  Period.  Don't ask me what/how/when, I have no idea.  I say dump the entire system and start from scratch-kind of transformation.  But that, of course, is completely insane.

                    I also believe that bank regulation and market regulation should go hand-in-hand. As in, not one without the other.  I don't think the world economy will be improved unless they both learn (be forced) to play fair.  As we know, playing fair does not make for exorbitant profits within minutes, though, does it?

                    You're wrong for thinking I'm wrong, so that makes you wrong twice.

                    by ohmyheck on Mon Jun 01, 2009 at 10:26:09 AM PDT

                    [ Parent ]

              •  SD, why buy protection on a stock or bond? Your (1+ / 0-)
                Recommended by:
                skeletondisco

                risk is in buying the stock or bond in the first place, no?  That's your bet: Company X will do well.  If it doesn't, you takes your lumps. Why build another level of gambling into this that pits people against each other even more (and in devious ways) than plain old competition of businesses?  

                I think people's wishes and thoughts can have a tremendous effect on our physical world, and I don't like to see huge groups with a vested interest in another group's utter failure, like Americans who bought homes.

                •  I can see where you're coming from ... (2+ / 0-)
                  Recommended by:
                  Lying eyes, polar bear

                  Your risk is in buying the stock or bond in the first place, no?  That's your bet: Company X will do well.  If it doesn't, you takes your lumps.

                  I have - on occasion - thought that the banking industry's biggest failure in this crisis was cowardice. I won't elaborate much here, but if senior management had been prepared to take more risk - rather than turning tail at the first sign of problems - then a lot of this mess could have been contained.

                  But, yep, plenty of people still DO just take the risk and sit on it. Not banks. What banks want to do is remove as much risk as possible by taking opposing positions. It was common practice, for example, to buy and sell protection on the same underlying asset - you'd buy it for less than you sold it and collect the spread between the two positions without actually running any credit risk. It's a smart strategy ... as long as you can trust your counterparty to pay up.

                  I think people's wishes and thoughts can have a tremendous effect on our physical world, and I don't like to see huge groups with a vested interest in another group's utter failure, like Americans who bought homes.

                  Again, I've got some sympathy for this. But people typically weren't betting on collapse: as soon as the risk of default becomes significant, it makes almost no sense to buy protection on it. It's just too expensive. What people mostly did was go short a credit in the expectation that the spreads would widen, therefore increasing the value of the protection and allowing them to book a profit.

                  And honestly - like I mentioned above - banks really didn't run a lot of one-way positions. It's pretty risky and bank credit desks (ironically) just didn't have much appetite for that kind of risk.

                  •  This is why banks need to be boring again. Leave (0+ / 0-)

                    the risk to the people and institutions who can afford to gamble, with no bail outs when they lose, and regulated so they don't get the rest of an economy into trouble.

                    (bring back boring banks from Krugman.)

          •  Without transparency (1+ / 0-)
            Recommended by:
            polar bear

            it would be extremely difficult to monitor that collateral and whether its sufficient.

            Why does the industry oppose transparency?  What's the harm?

            Private health insurers always manage to stay one step ahead of the sheriff - Sen. Sherrod Brown

            by Betty Pinson on Mon Jun 01, 2009 at 09:35:15 AM PDT

            [ Parent ]

          •  It would still have to be regulated or watched in (0+ / 0-)

            such a way that even a group of very wealthy investors (who could take on the risk) would not be able to root for the destruction of others, and possibly trigger such destruction.

      •  How can you place a value on a CDS? (4+ / 0-)
        Recommended by:
        mattman, Badabing, ohmyheck, polar bear

        The reason we got into the mess is because the banks who held CDSs as assets were unable to value them as such.  The value for such an asset is typically the "market" price.  But when each and every CDS is a completely different beast, and when your "market" is a Rolodex, it might be impossible to value a CDS appropriately.
        The reason for a "clearinghouse" or an open market is that every CDS would need to meet some sort of standard before it could be traded.  Anyone who purchased a CDS in the market (or through the clearing house) would have a rough idea of what they were getting into.
        Now, the minions on Wall Street might not like this idea for two reasons.  First, when a clearinghouse is established, they would have to submit all their CDSs for valuation by the clearinghouse, and (surprise!) we might just discover that those CDSs have nowhere near the value that the banks have claimed on their books.  Second, the whole purpose of Wall Street is to "game the system", and it sure is easier to game a system where you might know something that the other guy doesn't, e.g. the true value of a CDS that you're trying to sell.

        Don't be a DON'T-DO... Be a DO-DO!

        by godwhataklutz on Mon Jun 01, 2009 at 04:41:10 AM PDT

        [ Parent ]

        •  "The reason we got into this mess ..." (2+ / 0-)
          Recommended by:
          Sparhawk, burrow owl

          ... is because the banks who held CDSs as assets were unable to value them as such.  The value for such an asset is typically the "market" price.  But when each and every CDS is a completely different beast, and when your "market" is a Rolodex, it might be impossible to value a CDS appropriately."

          That's completely incorrect.

          I think you might be thinking of structured credit - CDOs, RMBS etc. That's where there were some serious valuation problems. The CDS market has remained liquid - and prices have been publicly available - throughout the crisis. In fact, the CDS market has been practically the only reliable way that people have been able to gauge credit risk for some market segments during the crisis.

        •  That's simple (1+ / 0-)
          Recommended by:
          polar bear

          You 'effin don't.

          Use them to hedge against loss, fine.

          You shouldn't be able to leverage them at all.

          They are not, or should not be viewed as, and asset.  They are an asset protection product.

          Crush the Horror.

          by JesseCW on Mon Jun 01, 2009 at 08:44:54 AM PDT

          [ Parent ]

      •  I dispute the value of the swaps. (5+ / 0-)
        Recommended by:
        coral, KConner, Badabing, JesseCW, polar bear

        They create an inherent moral hazard.

        So do shorts.

        The "choice" offered by capital is illusory. If you cannot afford the choice, you don't have the freedom to choose.

        by high bitrate on Mon Jun 01, 2009 at 04:43:13 AM PDT

        [ Parent ]

      •  If we have to have these things (6+ / 0-)

        and unlike many I do not think that the clear and open discussion of their value versus their real costs has taken place. But putting that aside, what about clearing houses?

        Offhand here are problems I see off the top of my head:

        1.) This allows information that should be available to investors to be disguised or hidden. While I'm not saying that the various municipal and pension funds that invested in the mortgage based swaps were performing due diligence, the question is how they could have really done that. And how does a clearing house system change that?

        2.) How do you regulate a system that is all about gaming it? Seriously, you aren't going to regulate the system, but you are going to regulate the clearing houses. How? You are going to demand transparency for the clearing house, right. You are going to demand that the all the records are there for the regulators right. Now what happens when the system is played for a fool by all the players out there, like we just saw happened? What happens when whatever reserve the clearing house is required to have doesn't half cover the next disaster. Of course, the 'banks' want a clearing house. History is that the tax payers will be on the hook for the shortfall and it will be in the billions because by that time the Clearing House(s) will be too big to fail.

        3.) This makes it too easy to game the system another way. A closed market makes it much easier for there to be fees, bonuses, and commissions coming and going.

        Nope, the clearing house system is a disaster waiting to happen. If I can see these pitfalls, believe me so can people who do finance for a living. Not only that, they can see dozens of other ways to twist it to their advantage and the loss of the average investor and taxpayer. That is why they are supporting them, they do not want a fair and clear playing field where they must be follow rules. Rules are for chumps.  

        So, since we are going to get a clearing house, how do we minimize the exposure to the tax payer and protect the investor?

        Rules I never expect to see happen.

        1.) Oversight to protect the investor must be allowed. The clearing house has to have full and complete records of all CDS transactions (including any due diligence involved in the interim transactions - no more forgetting to transport the loan certificates for instance.) Those records shall be available to the SEC, and any oversight entity immediately upon request. Without that any CDS can be immediately declared null and void.

        2.) The clearing house has to have reserves covering seventy per cent of the value of all CDS it clears. Their charters will require disclosure that CDS are gambling, and the house is only on the hook for that seventy per cent. Everything else will be immediately listed as a loss for the participants, and that such losses will be public information.  

        3.) It will be clear from the start that there will be no federal bail out for the failure of any clearing house. There will be a law making it illegal for tax monies (be it the federal government or the Fed) to be used to prop up, support, or bail out any clearing house.

        IOW, a clearing house with real regulatory oversight and limited exposure for the tax payer will never happen. And without that there is no point.

        NO SALE.

      •  Close, but no cigar. (1+ / 0-)
        Recommended by:
        polar bear

        it (the Clearinghouse) would require its counterparties to provide margin collateral on each trade - something AIG didn't have to do.

        Oh yes, it did - and that is why it needed to be bailed out.

        AIG had to post collateral once it got downgraded.

        The clearinghouse would require collateral to be posted from the get-go and that is a good thing.  But you don't need a clearinghouse to get that good result - all you need is to have all the CSAs write in thresholds for ALL ratings and you are done.

        Transparency in CDS is a good thing, but I am not sure how helpful it really is because there are an infinite number of combinations of protection and if you disclose all of them we would be drowned in that information and could never get the bigger picture.

        This is not such an easy problem to solve.

      •  Two BIG problems with Credit Default Swaps (1+ / 0-)
        Recommended by:
        polar bear

        First, they are a mis-allocation of capital. Wall Street and the financial system have been starving the real economy of credit needed for such things as, say, a grid for recharging electric cars, for three decades now. (In graphs below, NFCs means non-financial companies.
        NFC Capex from Financial Markets
        NFC Capex from Equity Markets

        Second, the holders of credit default swaps have a vested interest in the failure of the company the CDSs is based on. This is especially a huge problem because anyone can buy CDSs on any company. Take Citigroup, for example, which needs capital, badly. If Citigroup is holding CDSs based on GM bonds, what interest does Citigroup have in keeping GM out of bankruptcy? NONE! Citigroup will "profit" from the bankruptcy of GM.

        In other words, CDSs are a complete perversion of the incentive structure that is supposed to make capitalism work. Face the simple facts - Wall Street and derivatives like CDSs have destroyed capitalism.  

        A conservative is a scab for the oligarchy.

        by NBBooks on Mon Jun 01, 2009 at 10:37:58 AM PDT

        [ Parent ]

      •  They are de facto "insurance" (1+ / 0-)
        Recommended by:
        polar bear

        that evade the regulations -- notably, the requirement for adequate assets in case of a catastrophe -- that legally govern actual insurance.

        If CDSs were backed by actual sufficient reserves, this wouldn't be happening.

        They tortured people to get false confessions to fraudulently justify invasion of Iraq.

        by Seneca Doane on Mon Jun 01, 2009 at 10:57:29 AM PDT

        [ Parent ]

    •  notice also the complete betrayal of... (18+ / 0-)

      the most basic Libertarian principle of truly free markets.

      Transparency is an essential precondition to functioning markets, and these slimeballs are doing everything possible to block it.

      They don't want a transparent free market.

      What they want are backroom deals made in secret, so they can game the system.  

      To use Ayn Rand's phrase, "looters and moochers."

      •  If I am not mistaken, in capitalism businesses (5+ / 0-)

        are allowed to fail.  In the same vein, any society that wishes to live by capitalism should suffer the consequences capitalism.

        Capitalism without bankruptcy is like Christianity without Hell.

        a consensual hallucination experienced daily by billions

        by electricgrendel on Mon Jun 01, 2009 at 03:16:00 AM PDT

        [ Parent ]

        •  The problem, it seems, is that our (15+ / 0-)

          current version of capitalism is designed to fail.  Enterprises either derive profit from making other enterprises (competitors/contestants) fail or self-destructing to get rid of excess baggage (labor contracts).
          Also, one would think that a mature capitalist economy has arrived at a point where enterprise expansion and restoration is self-funding.  Instead, current assets are being wasted on bribes for CEOs and legislators.

          Two suggestions from an ignoramus: institute a transaction tax so that every trade and swap and insurance policy is taxed; restrict political candidates and office holders to accepting campaign contributions ONLY from individuals who are qualified (age, citizenship, residency) to vote for them.
          The argument that members of Congress make decisions affecting the whole nation carries less water now that they effectively block receiving communications from all but their district residents.
          I heard mention that Sotomayor considers all campaign contributions to be a form of bribery.  Anticipatory bribes is what I call them, especially the money collected by the DCCC and DSCC to help select and elect like-minded colleagues.

          How do you tell a predator from a protector? The predator will eat you sooner rather than later.

          by hannah on Mon Jun 01, 2009 at 04:02:37 AM PDT

          [ Parent ]

          •  oh my, no wonder the stink about (3+ / 0-)
            Recommended by:
            JesseCW, polar bear, annominous

            Sotomayor.

            Woo-hoo the big money guys must be quaking in their boots.  

            And yes, if our people in Congress are only accepting email from people who have postal addresses in their districts, then they should also be restricted by law to only accepting money from (same).   If as the present rulings go, money = speech, then speech also = money, and where one is limited, the other must be as well.

            Excellent catch there.  

          •  Hooray for Sotomayor. If this is true, she just (0+ / 0-)

            totally won my heart.

      •  Yep, and when there is transparency in (4+ / 0-)

        the current situation, there are going to be losers. No one knows who, but all the bankers are scared it is going to be them. And if the ones who are the losers are going to be very badly off.

        They will have to give up the private plane, the second summer house, sell half a dozen of their cars, cut down the number of holidays from six to four a year, and maybe even pull the kids out of private school. You're talking about people who got into Ivy League schools on the rich white brat affirmative action program and work for Big. Financial. Companies. They don't deserve to live in a state of poverty where they can only afford a cleaner and not a maid as well to do the ironing and the dishes.

        The FOX is a common carrier of rabies, a virus that leaves its victims foaming at the mouth and causes paranoia and hallucinations.

        by Calouste on Mon Jun 01, 2009 at 03:49:44 AM PDT

        [ Parent ]

      •  Yep all buyers and sellers are suppose to have (1+ / 0-)
        Recommended by:
        polar bear

        'Perfect Information'

        That's in theory!

        ...someday - the armies of bitterness will all be going the same way. And they'll all walk together, and there'll be a dead terror from it. The Grapes of Wrath

        by deepsouthdoug on Mon Jun 01, 2009 at 07:35:18 AM PDT

        [ Parent ]

    •  same as it ever was (5+ / 0-)

      no cramdown, no real regulation, tax breaks no enforcement of taxes for the risk, easy bail-out terms...

      ...may I point out the banks = the insurance companies, so no single payer either.

    •  Its simple, really (5+ / 0-)

      Take away the financial rewards to the banksters by taxing capital gains and other passive income at the ordinary income rate (same as wages), and increase taxes on all incomes over 2.5 million/year to a 70+ percent top marginal rate. The whole reason all of the money flowed to the rich and financial instruments is the favorable treatment they have received in the tax code. Get rid of the favorable treatment of finance in the tax code and it would go a long way towards getting rid of the excess. No wonder the financial sector got outsize when the super rich, as exemplified by the Forbes 400 (who derive most of their income from financial instruments) pay an effective tax rate half that of middle class wage earners).

      "There's a bailout coming, but it's not for me, it's for all the creeps watching the ticker on TV"-Neil Young

      by NoMoreLies on Mon Jun 01, 2009 at 08:11:52 AM PDT

      [ Parent ]

    •  The Banks themselves don't correct failure (1+ / 0-)
      Recommended by:
      polar bear

      If the Congress doesn't have enough backbone to regulate banks we know the banks won't do it.

      From my diary yesterday

      Catastrophic failures in Banking ignored by dysfunctional corporate governance

      I'm sure I wasn't the only one who was stunned to read how corporate CEOs and their corporate boards who's incompetence set the world wide financial meltdown in motion were left in place by a system of corporate governance that has grown so feeble in recent decades that even catastrophic failure is now treated as an acceptable outcome.

       

       Board Stiff

         When Citigroup and Bank of America held their annual meetings last month, shareholders were in an understandably surly mood. Even as the companies’ C.E.O.s apologized for past failures and vowed to do better, shareholders blasted the executives for their incompetence, and talked about the need for dramatic change. Yet, after all the venting and repenting was done, something weird happened: every member of each bank’s board of directors was reëlected to office.

         This may seem odd, but it was all too predictable. In the apportioning of blame for the financial crisis, corporate boards of directors have remained remarkably unscathed, even though they effectively approved the strategies that immolated so many companies

      nor can we consume the world's resources without regard to effect. For the world has changed, and we must change with it. - Barack Obama

      by Lefty Coaster on Mon Jun 01, 2009 at 08:34:14 AM PDT

      [ Parent ]

    •  Beginning of the End of Business As We Know It (1+ / 0-)
      Recommended by:
      polar bear

      http://bit.ly/...

      "...What we are seeing is a collapse of crony Capitalism...which is very different from free market Capitalism."

      Hard work doesn't matter. Doing or being better doesn't matter. What does? Connections, deep pockets, inside info, and — most perverse — a lack of ethics. The less ethics matter to you, the more you'll bid, for example, to run the government's books.

      It's a shame that our President — who's actually pretty bright — has turned out to be the economic equivalent of Dubya, at the time we needed economic competence the most.

      Business as we knew it is fast coming to an end. Here's what the Obamaconomy looks like. The government champions funds. Funds champion corporations. Corporations champion markets and industries. No one champions people (because they don't count).

    •  Public Service Announcement (1+ / 0-)
      Recommended by:
      polar bear

      For a truly informed discussion, you may want to read he best and clearest article on CDS I have seen on my internet travels.  It's by our own Devilstower.  Skip the intro if you must, but start reading at The Evolution of the Credit Default Swap
      http://www.dailykos.com/...

  •  Sane comments, so you have banned (14+ / 0-)

    Geithner and the bankers from commenting?  Good.

    "Neither a borrower nor a lender be"

    by HenryBurlingame on Mon Jun 01, 2009 at 02:33:28 AM PDT

  •  What I don't get is this does not work obviously (10+ / 0-)

    unless tax payers are continually committed to a bail out?  Who can vote for that--even crazy ideologues ought to get this will not fly.

    Do they really think fox is that effective?  It is over; this can no longer be sold around the world and we can't do it unless China pays for it.

    •  you'd think, youduuh, but it looks like we all (1+ / 0-)
      Recommended by:
      yoduuuh do or do not

      thunk wrong.  who wants to publicly finance campaigns?

      Not enough people to change things.  And as long as corporations "fund" campaigns, you will keep getting a country ruled by corporations.  I hate, hate, hate to say it, but I honestly do not believe we are a democracy anymore.  Just look at the bank bailout and health care.  

      By the corporations, for the corporations.  Totally sad for a lifelong activist.

  •  destination shitstorm, two paths (41+ / 0-)

    Path One: We require transparent handling of credit default swaps. Everyone sees that we have a $700 trillion mess against a global GDP of $50 trillion. Panic ensues.

    Path Two: Credit default swaps remain private, the taxpayers are on the hook for murky, problematic securities that have no basis in reality, and some other structural deficit in our financial system becomes visible before the CDS mess. Panic ensues.

      Did I miss anything in my summation of the situation?

    "Not dead ... yet. Still have ... things to do." -Liet Kynes

    by Stranded Wind on Mon Jun 01, 2009 at 02:38:49 AM PDT

    •  It's really that simple. Spot-on as usual SW! n/t (16+ / 0-)

      "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

      by bobswern on Mon Jun 01, 2009 at 02:40:09 AM PDT

      [ Parent ]

    •  The CDS market is $39tr - not $700tr (2+ / 0-)
      Recommended by:
      burrow owl, thethinveil

      And they have just as much "basis in reality" as any other financial contract.

      •  Great! Then we can regulate 'em like everyone... (19+ / 0-)

        ...else, too!

        Not sure to whom, exactly, you're talking here?

        This is about regulating CDS...because, quite frankly, I don't care if it's "only" $39 trillion. It's still a shitload of under-regulated/unregulated transactions...and left unsupervised or to their own devices (they will screw the pooch due to greed and nothing else) as Wall Street has proven to us time and time again.

        "Greed is good." Not so much.

        It's ironic that they're making a sequel to the movie, "Wall Street," right now.

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Mon Jun 01, 2009 at 02:56:48 AM PDT

        [ Parent ]

      •  oh, ONLY thirty nine TRILLion. (19+ / 0-)

        For that price we could solve the climate crisis, have full-on national health care, and build permanent colonies on the Moon and Mars.  

        Or we could bail out all those "financial contracts" and continue to let Wall Street run the country.  
         

        •  Oh, only $39 trillion? I feel so much better! nt (6+ / 0-)

          "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

          by bobswern on Mon Jun 01, 2009 at 03:00:48 AM PDT

          [ Parent ]

          •  Hey think of it this way: (6+ / 0-)

            Thanks to the Bushies, we've all learned so many new things.

            We learned to think in degrees Celsius, as the climate catastrophe continues.

            We learned how waterboarding works, and the meaning of the phrase "emergency tracheotomy."

            We learned how to count in trillions.  

            And that's just the ones I can think of at the moment; there are plenty more.

          •  False data has skewed this debate ... (1+ / 0-)
            Recommended by:
            burrow owl

            ... and I wanted to point that out.

            There's a big difference between $700 trillion and $39 trillion.

            •  roflmao! n/t (5+ / 0-)

              "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

              by bobswern on Mon Jun 01, 2009 at 03:27:02 AM PDT

              [ Parent ]

            •  How do you know it's ONLY 39 Trillion (2+ / 0-)
              Recommended by:
              JesseCW, ohmyheck

              That's the point of this transparency thing. How much of it is not being reflected on balance sheets?

              The fact is , you really have no idea. No one really has any idea. These are guesstimates and since it involves greed, you can always bet on them being WAY understated.

              They are traded through Instant Messenger services for cripes sake.

              •  There's a big difference between ... (1+ / 0-)
                Recommended by:
                New Deal democrat

                ... not knowing for sure, and a "guesstimate".

                I used the latest ISDA survey to get the $39 trillion stat. But I could just as easily have turned to the DTCC (the DTCC database contains 90% of the world's CDS trades) which puts the figure at $34 trillion. Any number of other companies / organisations also monotor the market - the BIS, for example, and the rating agencies. All the latest stats are in and around the $30-$40 trillion mark.

                The problem is that people end up confusing the CDS stats with stats for the derivative market as a whole (that's where the $700 tr figure comes from). And they also believe that CDS are commonly reported off balance sheet - that's not the case - it was structured credit like CDOs and RMBS which many banks held in off-balance-sheet conduits and SIVs.

                In short, there's a huge amount of misinformation flying around on this topic.

                •  You do understand how the derivative market (1+ / 0-)
                  Recommended by:
                  3goldens

                  was created right skeletondisco?  Please take the time to google David X. Li.  He was the Chinese economist who created a 'fake and unproven' formula that Wall Street jumped on with hideous glee.  Here is some information on Li:

                  For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

                  His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

                  Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

                  David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

                  http://www.wired.com/...

                  Also, here are some interesting Facts (not media fiction) about the Federal Reserve.

                    * The Federal Reserve is not a Federal Agency, so it is not a Government Agency but works in cooperation/partnership with the Government but not in terms that you think.
                    * The Federal Reserve is a Private Bank owned by other private banks, in hence it is a cartel.
                        * It was promoted to end the money trust of big banks, yet those who set up The Federal Reserve WERE the money trust.
                        * The Federal Reserve controls the interest rates of our economy not the free market.  In essence we do not engage in a true free market because the free market should dictate interest rates, not The Federal Reserve
                    * Since its inception in 1913 the U.S. Dollar has lost 96% of its value.
                    * 100% of individual income tax revenue goes directly to The Federal Reserve banks to pay interest only on federal debt.  Not one nickel is spent on Gov't services.
                        * The primary owners of The Federal Reserve are European.
                    * The Federal Reserve prints are money for a fee, Lends us money we pay them to print, Charges us interest on the loan, then sends our money over seas.
                    * The Federal Reserve has never been audited, NOR has our gold which they also control.
                    * They lend in excess to flood the economy, while at the same time pulling their money out causing our on-going financial crises.
                    * This on-going process keeps the U.S. Gov't constantly borrowing money and the American people constantly in debt.
                    * The more bailout money pushed into the economy with lower interest rates and more credit will result in hyperinflation and our dollar worthless.
                    * Remember our dollar's value is based on how much money is in the money supply.  Since the U.S. dollar has dropped 96% since 1913, The U.S. Dollar is worth a measly .04 cents on the open market.
                    * Money can be created out of thin air at any time.

                  The Federal Reserve is behind all that is taking place and according to the 1950 Accounting and Auditing act, Congress is not even allowed to audit the Federal Reserve.  Amazing huh?  Here's the point:

                  Here is a very different way to understand the problem: to restore the broken financial system, Washington has to fix the Federal Reserve. Though this is not widely understood, the central bank has lost its ability to govern the credit system--the nation's overall lending and borrowing. The Fed's control mechanisms have been severely undermined by a generation of deregulation and tricky innovations that have substantially shifted credit functions from traditional banks to lightly regulated financial markets. When the Fed tried to apply its old tools, starting in the 1980s, the credit system perversely produced opposite results--an explosion of debt the policy-makers could not restrain. In its present condition, the Fed may even make things worse.

                  Instead of frankly acknowledging the problem, Fed governors proceeded in the past two decades to engineer exaggerated swings in monetary policy--raising interest rates, then lowering them, in widening extremes. This led to the series of bubbles in financial prices--first stocks, then housing and commodities--that collapsed with devastating consequences, climaxing in the present crisis. In other words, the central bank's weakened condition and its misguided policy decisions have been a central factor in destabilizing the American economy. More to the point, the Fed's operating disorders are directly threatening to recovery; the economy is not likely to get well if the dysfunctional Fed is not also reformed.

                   

                  from: Setting an Agenda for Monetary Reform
                  D'Arista, Jane | 1/12/2009
                  Downloadfileadmin/pdf/working_papers/working_papers_151-200/WP190.pdf 304 kB

                  Facts are good.  Facts are your friends.  Facts and evidence as to who 'really' is behind the curtain that controls our nation is, I believe what Bob is trying to get across in this diary.  

                  B.

                  Violence is the last refuge of the incompetent. Isaac Asimov

                  by Badabing on Mon Jun 01, 2009 at 08:41:24 AM PDT

                  [ Parent ]

                  •  "Facts are good. Facts are your friends." (0+ / 0-)

                    I'm glad you feel that way.

                    Here are some facts:

                    David Li's copula pricing model was used to price structured credit instruments like CDOs. It has absolutely nothing to do with the genesis of the derivative market, which has been around for roughly three decades - nor is it used to price CDS, which are the subject of this thread.

        •  That's not how much they're going to cost! (2+ / 0-)
          Recommended by:
          burrow owl, freakofsociety

          The market doesn't need to be "bailed out".

          $38 trillion is the underlying amount of risk which the market has transacted against - some people have sold protection, others have bought. When a credit event hits (when one of the underlying bonds defaults, in other words) the protection seller pays up and the protection buyer has their loss repaid. Despite what you may have read, that market has continued to function throughout the crisis.

          •  Seriously misplaced rage here. Cut the crap. (10+ / 0-)

            This is about TRANSPARENCY. Period.

            I'm assuming you have a problem with that...because you're clearly going off the deep-end about something that isn't even really being touched upon in my diary!

            "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

            by bobswern on Mon Jun 01, 2009 at 03:11:14 AM PDT

            [ Parent ]

          •  and then add up the derivatives on those. (1+ / 0-)
            Recommended by:
            JesseCW

            By the time you're done, it adds up to a very large mountain, not a molehill.

            If these people were capable of paying off their transactions, they would not have pushed the panic button and caused the present crash.

            When all the poo hit the fan at once, it threw a shock load onto the system that the system was not designed to handle.  In engineering terms there were undamped positive feedback loops and rigid coupling, which are prescriptions for failure.  

            •  Add up what? (0+ / 0-)

              Derivatives on what?

              People can and are paying off the CDS they've sold.

              If you go here (http://www.creditfixings.com/information/affiliations/fixings.html) you'll find a complete historical list of all the CDS that have been triggered going back to 2005, and all of the results.

              •  Say what? (4+ / 0-)
                Recommended by:
                G2geek, Stranded Wind, JesseCW, annominous

                ever hear of AIG?

                "I am on nobody's side because nobody is on my side" -Treebeard

                by waf8868 on Mon Jun 01, 2009 at 04:46:54 AM PDT

                [ Parent ]

                •  Yes. (0+ / 0-)

                  And I've also heard of Ambac, MBIA, ACA and XL Capital - all of whom had similar (if less headline-grabbing) problems to AIG.

                  But the comment to which I was replying suggested that the market as a whole had taken on more exposure than it could handle. That's not true. We're talking a handful of cases - and there's a good reason why all of those cases were in the insurance industry: the regulatory regime they faced was completely different to the one that banks have.

                  •  It is borderline ridiculous (6+ / 0-)

                    to attempt to argue that the system as a whole has not taken on more exposure than it could handle......right now absent trillions in Fed and Treasury credit market support the entire system would have collapsed and may in fact still collapse.

                    And it was not solely due to CDS's or any other type of derivatives but they are part of the problem....it is systemic. And they were a key component in the daisy chain that allowed or enabled risk to be so mispriced.

                    "I am on nobody's side because nobody is on my side" -Treebeard

                    by waf8868 on Mon Jun 01, 2009 at 06:17:00 AM PDT

                    [ Parent ]

                    •  I wasn't saying that banks ... (0+ / 0-)

                      ... didn't have enough capital to cover their losses on structured credit. They clearly didn't.

                      What I was disputing was the suggestion up-thread that the market as a whole did not have the funds to meet their CDS commitments specifically. If you want to argue that point, let me know - because at the moment we're talking at cross-purposes.

              •  The CDS are being paid off with bailout dollars. (4+ / 0-)
                Recommended by:
                Jesterfox, waf8868, lotlizard, JesseCW

                That's borrowed money ... borrowed by the recipients from the Fed/Treas who borrowed it from future US taxpayers. The way the CDS are being paid off is just another layer on the pyramid scheme that has already brought us to our knees. Now that's transparency. /snark

                Your claim that you know the actual value of the CDS market is big news. It may be true that the underlying risk CDS were intended to protect against was $38T. However it has also been revealed that investors (gamblers) with no share of that risk purchased CDS (cheap) as hedge investments, which inflated the CDS "market" to much closer to the figure SW presents than to yours.

                You've hijacked almost every thread in this useful diary. Why? Are you a CDS broker? Do you have a dog in this fight?

                •  I think you're getting mixed up ... (0+ / 0-)

                  Not trying to be mean.

                  Here's where you're right: CDS market participants are able to buy or write protection on debt they don't own.

                  Here's where you're wrong: the $39tr figure I quoted is not the value of the underlying bonds. It's the total notional value of all outstanding CDS at year end 2008.

                  The size of the market is not "big news" in any way. It's always been known.

          •  Wouldn't that system allow for an almost infinite (6+ / 0-)

            amount of liability to be generated from a single credit agreement?  Now just pat me on the head and say "no," if I'm wrong as I have no background in finance and may not understand this correctly.  However, if anyone can sell an agreement to protect against the default of a credit arrangement, and anyone can buy that product, then can you not sell a value of protection that exceeds the underlying value of the credit arrangement?  

            Therefore- if the underlying amount of risk is 38 trillion, then could the amount of outstanding CDS related liabilities not be 10, 100, 100x that so long as there were sellers of "protection" willing to the assume the risk that the underlying credit arrangements will not default?

            a consensual hallucination experienced daily by billions

            by electricgrendel on Mon Jun 01, 2009 at 03:26:31 AM PDT

            [ Parent ]

            •  You're partly right ... (2+ / 0-)
              Recommended by:
              electricgrendel, polar bear

              No need for any head-patting :)

              Yes, the CDS market CAN generate obligations on a specific bond that are bigger than the bond itself. But that $39 tr figure is the total market size - it's the total notional value of all the CDS contracts - the total amount of risk that has been bought AND sold. I'm not saying that the market has $39 tr of bonds underneath it and a huge, unknown, mushroom cloud of extra exposure on top.

              •  When you say that the CDS market can generate (4+ / 0-)

                obligations that are bigger than the underlying bond, does that mean the market can generate individual obligations which themselves have a value greater than the bond that is being guaranteed and/or that it can create smaller obligations which in aggregate can exceed the value of the underlying bond?  

                Furthermore, as far as I understand there is not necessarily a central clearinghouse, outside of the balance sheets of the institutions that hold the CDS, that allows one to estimate the total outstanding obligation that is attached to a bond, right?  If that is correct, then let me ask you two more questions: how would an investor in CDS's know that total outstanding obligation attached to a bond (and, beyond the abiity of the insitution holding the CDS to repay in event of the bond's dfault, does that matter?)  And by extension, how are people interested in measuring the scope of the CDS market able to estimate the total value of that market?

                So- uh- three questions, really.  I was an English and now nursing major.  Not a counting major. :D

                a consensual hallucination experienced daily by billions

                by electricgrendel on Mon Jun 01, 2009 at 03:43:08 AM PDT

                [ Parent ]

                •  Well ... (3+ / 0-)
                  Recommended by:
                  Sparhawk, electricgrendel, polar bear

                  Does that mean the market can generate individual obligations which themselves have a value greater than the bond that is being guaranteed and/or that it can create smaller obligations which in aggregate can exceed the value of the underlying bond?  

                  The latter. The individual amounts being covered by each CDS are pretty small.

                  Furthermore, as far as I understand there is not necessarily a central clearinghouse, outside of the balance sheets of the institutions that hold the CDS, that allows one to estimate the total outstanding obligation that is attached to a bond, right?

                  Actually, the DTCC has a database which covers 90% of all the trading activity in the CDS market - they started publishing weekly reports last October (I think) which provides a pretty comprehensive overview of what's happening in any given week.

                  If that is correct, then let me ask you two more questions: how would an investor in CDS's know that total outstanding obligation attached to a bond (and, beyond the abiity of the insitution holding the CDS to repay in event of the bond's dfault, does that matter?)

                  As far as I'm aware, nobody knows how much protection has been sold on a single underlying reference entity. Does that matter? Well, conceivably, if you were buying protection on an asset which the market as a whole was universally "long" then it might make it less likely for the market to be able to pay up in the event of a default. But what you have to ask yourself is why everyone would universally sell protection on a single name?

                  And by extension, how are people interested in measuring the scope of the CDS market able to estimate the total value of that market?

                  Because dealers report the size of the CDS trades they've done - they don't report what the reference entity was. That's why we know how big the CDS market is, but not how much protection has been bought or sold on individual names.

                  So- uh- three questions, really.  I was an English and now nursing major.  Not a counting major. :D

                  Hehe! :)

                  As an aside - the world needs more nurses! Good luck with the studies!

          •  Only with the help of the Govt (2+ / 0-)
            Recommended by:
            JesseCW, ohmyheck

            If it hadn't bailed out not only AIG but many others your precious CDSs would have failed with everything else. The cause and effect meme comes into play too. Based on research, the reason we are are in such deep a mess  is a result  of CDSs.

            You are arguing for something that has no value unless you are being paid on them. Are you?

        •  Money is a figment of the imagination. (7+ / 0-)

          It mediates transactions much as words, made up of recognizable symbols, mediate the transfer of ideas from one person to another.  It makes as much sense to try to control the volume of transactions by restricting the money supply as it would to limit the number of words anyone can use.  Money is only effective as a mechanism of control if the volume of trade and exchange is to be brought to a halt.  That is, not enough money is a problem because it strangles trade and exchange; if there's too much money, it just won't be used.
          Wall Street playing with money had the ultimate effect of reducing the supply to a point where the economy crashed.  It also called the credibility of the dollar into question.  And that's a real problem because the value of money is determined by the trustworthiness of those who produce and use it.
          In my book, the American economy started to collapse when Bush/Cheney were installed.  We have had eight years of "planned/controlled destruction" perpetrated by people who believe that if destruction is inevitable, it's best it be controlled by man.  There's an underlying assumption to the creative destruction ideology that something bigger and better will automatically follow destruction (like the phoenix rising from the ashes), but that's just a sop to the worry-warts.  Creative destructionists are satisfied with the control they deploy (how great is it to have leveled the most ancient urban civilization?) and really have no interest in creating something else.
          It's possible that the driving "force" is simply laziness--that the party of "no" is made up of lazy people who prefer to destroy and rely on nature/magic to restore what they've wasted.

          How do you tell a predator from a protector? The predator will eat you sooner rather than later.

          by hannah on Mon Jun 01, 2009 at 04:24:43 AM PDT

          [ Parent ]

          •  Bush/Cheney was a 30 yr culmination in the... (4+ / 0-)
            Recommended by:
            G2geek, LI Mike, polar bear, annominous

            ...making.

            They were the inevitable result of Reaganism.

            The "choice" offered by capital is illusory. If you cannot afford the choice, you don't have the freedom to choose.

            by high bitrate on Mon Jun 01, 2009 at 04:49:18 AM PDT

            [ Parent ]

          •  the difference between money and words... (2+ / 0-)
            Recommended by:
            JesseCW, polar bear

            is that I can print my own words without committing a crime.

            Seriously:

            Speech is a positive-sum outcome:  the more the better, and my freedom to speak does not diminish yours.

            Money is a zero-sum outcome: too much in circulation produces inflation and it becomes worthless.  

            The way I view money is as a tool for mediating transactions and producing wealth, much as a contractor's tools mediate the relationship between building materials and a finished building, producing a home.

            But the tool has been allowed to become our master, and therein lies the root of our troubles.  

      •  To clarify: (5+ / 0-)

        "Any other financial contract" is a lien on wealth produced in the real economy. $700 trillion is closer to the amount of those financial contracts that want of piece of the action in a global "GNP" of about $50 trillion.

        Do the math. These ordinary financial contracts have sucked the real economy dry. The only problem with that is that we need the real economy to feed, cloth and house our families, who won't do so well munching, wearing and sheltering under financial contracts.

        We cannot win a war crime - Dancewater, July 27, 2008

        by unclejohn on Mon Jun 01, 2009 at 03:19:04 AM PDT

        [ Parent ]

        •  Sounds terrible. It's not accurate, though. (1+ / 0-)
          Recommended by:
          burrow owl

          What part did currency forwards, commodity options and interest rate swaps play in the crisis? How about variance swaps, stock futures and inflation swaps?

          The derivatives market was not the cause of the crisis. The problems came almost exclusively from the mispricing of real-estate risk, and its sale in the form of structured credit - and they came about because of a confluence of other factors including (but restricted to!) lax regulation, idiotic rating agencies, lazy investors, stupid accounting rules, interest rates that were held too low for too long, dumb compensation policies in the banking industry etc etc etc.

          Certain types of derivatives have felt the pain. Some specific types of instruments may have aggravated the problems. But the market as a whole isn't where you should be putting the blame.

          •  "mispricing of real-estate risk" (4+ / 0-)
            Recommended by:
            Jesterfox, unclejohn, JesseCW, annominous

            So the guys who set the betting lines screwed up.

            Close the suckers down.  They provide no value, inasmuch as they produced nothing.

            The "choice" offered by capital is illusory. If you cannot afford the choice, you don't have the freedom to choose.

            by high bitrate on Mon Jun 01, 2009 at 04:51:17 AM PDT

            [ Parent ]

            •  No. Everyone screwed up. (0+ / 0-)

              The borrowers screwed up. The lenders screwed up. The securitisers screwed up. The investors screwed up. The people who sold credit protection to the investors screwed up. The rating agencies screwed up. The central banks, the regulators, the accounting standard-setters - they all screwed up too.

              And they screwed up on some very specific things.

              The fact that so many people screwed up doesn't mean that securitisation as a whole (or the CDS market as a whole) is wrong or dangerous.

              •  Systemwide failure=Moral Hazard (1+ / 0-)
                Recommended by:
                polar bear

                The "choice" offered by capital is illusory. If you cannot afford the choice, you don't have the freedom to choose.

                by high bitrate on Mon Jun 01, 2009 at 05:44:12 AM PDT

                [ Parent ]

              •  HAHAHAHAHAHAHAAAA (7+ / 0-)

                JHC, You see no problems with CDSs when everyone simultaneously screwed up who had anything to do with them. Shouldn't they be renamed to Credit Screw Ups.

                Yes some people got very rich on Naked Swaps. I'm willing to bet you have a substantial financial interest in this. Maybe you have a few swaps that are troubling right now. Maybe you bet the wrong way.

                One hedge fund buys 6 Billiion and makes 28 Billion in one year. That was at the early stages. Then a strange thing happened. Real Capital to pay these flights of bullshit was no longer available which is when Goldman showed up at Treasury's door going "Hank ol Bud, we got a real problem here. Everyone thinks they are protected and they aren't. Now no one trusts anyone. Did I mention that stock we are holding in trust for you under the Name PIssInPants Trust with Goldman stock may become worthless if we don't get some AIG money right now?

              •  No sympathy for self-inflcited wounds (2+ / 0-)
                Recommended by:
                andrewj54, JesseCW

                The fact that so many people screwed up doesn't mean that securitisation as a whole (or the CDS market as a whole) is wrong or dangerous.

              •  There were a few who didn't screw up (1+ / 0-)
                Recommended by:
                Stranded Wind

                People like John Paulson. He personally earned $3.7 BILLION betting against the sub-prime derivatives, including using CDSs. There were a few more as well:

                John Paulson earned a record $3.7 billion last year to top Alpha's ranking of the 50 most highly paid hedge fund managers. The Paulson & Co. chief surpassed perennial powerhouses George Soros and James Simons, who ranked second and third, at $2.9 billion and $2.8 billion respectively. The top 25 on the list earned an average $892 million, up from $532 million in 2006.

                Paulson rocketed to No. 1 in Alpha's seventh annual survey by shorting the subprime mortgage market. He, Soros, Simons and the others who earned more than $1 billion — Philip Falcone and Kenneth Griffin — led what may well prove to be the greatest display of individual wealth creation in any year in the modern history of finance.

                The enormous riches being generated by hedge funds come at a time of extraordinary distress in financial markets, as millions of homeowners face potential foreclosure and the U.S. plunges into recession (see "Market Paranoia"). Undoubtedly, the huge paydays chronicled here are sure to cause a heightened level of envy and resentment toward hedge funds, and will draw additional scrutiny by Washington, which is already weighing whether to increase regulation.

                Without $400+ trillion in interest rate derivatives and $40 trillion (down half from a couple years ago) in CDSs to place even more leveraged bets on their direction, such obscene sums of money wouldn't have been sucked out of the economy into a handful of personal bank accounts.

                No matter how much you argue, your own arguments show that transparency is key. For instance, in one of your comments you stated:

                As far as I'm aware, nobody knows how much protection has been sold on a single underlying reference entity. Does that matter? Well, conceivably, if you were buying protection on an asset which the market as a whole was universally "long" then it might make it less likely for the market to be able to pay up in the event of a default. But what you have to ask yourself is why everyone would universally sell protection on a single name?

                Don't take it personally, but that is simply an asinine statement. That lack of transparency, that lack of knowledge of holdings among the various parties is precisely what brought down Bear Stearns, AIG, etc. because they would not trade with each other. For a few months it was very hard to find counterparties. And if rumors were started about someones holdings, as in the case of Bear Stearns, they were down for the count when they no longer could  find counterparties.

                If true transparency existed, much of this would never have happened.

                FYI for those reading this, to put those trillions above into perspective, the GDP for the entire US economy is around $14.5 trillion. As compared to $39.6 trillion in outstanding CDSs and $403 trillion in oustanding credit derivatives. Source-IDSA (This link has stat summaries since 1995. Reading through them shows just how stunning the growth in these financial instruments was over the last five six years.)

                "I have no special talents. I am only passionately curious." A. Einstein

                by bewert on Mon Jun 01, 2009 at 01:05:56 PM PDT

                [ Parent ]

          •  Their part in the crisis was to generate an (3+ / 0-)
            Recommended by:
            Stranded Wind, JesseCW, polar bear

            enormous amount of fictitious capital in search of a piece of the wealth created in the real economy.

            Real estate and the ensuing risk is only the bubble that broke the camel's back. This mess has been developing since the end of the post-war boom and the realization that productive investments weren't a good bet in a world that was over-endowed with fixed capital.

            If you focus on the individual speculative instruments that have been invested since the 70s you can't understand the first thing about how this crisis came about, nor even begin to think about how it might be resolved.

            I wrote a diary about the genesis of the crisis 14 months ago. What I wrote is still valid

            We cannot win a war crime - Dancewater, July 27, 2008

            by unclejohn on Mon Jun 01, 2009 at 08:46:10 AM PDT

            [ Parent ]

      •  "60 Minutes" said the estimate was $70Tr (2+ / 0-)
        Recommended by:
        JesseCW, polar bear

        and that was the best guess economists could make. No one really know because it's not regulated. Maybe it's double or triple if they were conservative in their calculations.

        Congress STILL stinks like a whore house at low tide.

        by CitizenOfEarth on Mon Jun 01, 2009 at 06:52:42 AM PDT

        [ Parent ]

    •  Path three: (22+ / 0-)

      The real economy of food clothing shelter and other tangible necessities, has been hijacked by the ghost economy of CDSs, derivatives, and other forms of high-stakes casino gambling.  

      Sometimes it's necessary to have a Big Puke to get rid of the poison.  Therefore:

      Let the banks crash and the bottom fall out of the markets, then declare a national emergency, nationalize the lot of 'em, and move toward socialism.

      There are ways to assure that people have food to eat etc. after the house of cards collapses.  For example, consider foreclosures: driving people into the streets in order for a bank to "have" an "asset" in the form of a boarded-up house with no one living in it, is just plain insane.  Ban evictions and let the people stay in their damn houses, and don't worry about money changing hands.  Same case for farm foreclosures, etc. etc.  

      Yes it's going to be majorly difficult for a few months to a few years.  But continuing to play as if biz as usual can be salvaged despite all the empirical facts saying otherwise, is complete insanity.  Reality is going to hit us upside the head whether we like it or not.  

      And one additional benefit of a deliberate economic crash is a rapid reduction in greenhouse gas emissions.  

      We have about six years left to get greenhouse gas emissions way down or we'll cross the +2 Celsius threshold and then it's down the drain from there.  

      So one way or another we are in for a shitstorm.  

      May as well get it over with now, when the shitstorm consists only of financial paper that humans created out of thin air, rather than wait until the shitstorm consists of the inability to produce food and water.  

      •  RECEIVERSHIP was one step away.... (4+ / 0-)
        Recommended by:
        waf8868, unclejohn, jimreyn, JesseCW

        Retail banking operations could have been funded for a tiny fraction of the shitstorm that has ensued. These assholes could have been downsized overnight! Paper billionaires could have been eliminated through their own suicides. I only wish President Obama had the stones for the job. I have my doubts that he will be seen as anything more than utterly mediocre.

        First they ignore you. Then they laugh at you. Then they fight you. Then you win. -M.Gandhi (see also, Republican strategy)

        by ezdidit on Mon Jun 01, 2009 at 03:09:40 AM PDT

        [ Parent ]

        •  i'm with you up until and not including (2+ / 0-)
          Recommended by:
          Stranded Wind, bloomin

          your last line.

          We do not know at this point, what Obama's underlying strategy is.  

          But I for one am happy to admit that he's smarter than I am.

          •  This started with Bush (3+ / 0-)
            Recommended by:
            Badabing, JesseCW, polar bear

            so it's been going on a long time with no regulation whatsoever.

            Members of congress had to know the economy was falling apart because of CDS's. Where were they? Maybe they were too busy being lobbied and handed big bucks by wall St. to ignore the warning signs

            Bush made a last ditch effort with his "stimulus checks" to prop up the economy a little longer. He was praying the public wouldn't know how bad it was until he left office.

            Did anyone notice the article on Cox at the SEC. Again, no regulation, just let the big companies screw the American taxpayer.

            So far, to me, Obama is is a big disappointment.

            •  Started with Reagan. (2+ / 0-)
              Recommended by:
              G2geek, polar bear

              The "choice" offered by capital is illusory. If you cannot afford the choice, you don't have the freedom to choose.

              by high bitrate on Mon Jun 01, 2009 at 04:52:27 AM PDT

              [ Parent ]

              •  The deregulation started with Reagan but (0+ / 0-)

                the CDS's shit started with Bush. Thus began, "The Looting Of America."  

                It's easy. Sell worthless collateral to other banks, so they can sell it to other banks, then take out insurance just in case you don't get your money back. A Wall St./Las Vegas approach.

                Plus you get to pay yourself millions and millions with no one looking over your shoulder. Genius!

                Ah, ha, along comes Obama and he puts Geitner in charge of the hen house. So a few hundred billion of our money props up the crooks while they look for ways to make a few million more,

                Fuck Main St. Fuck the average Joe. Give those billions to your buddies on Wall St.

                Hey Tim, can you spare a dollar?

      •  Along path Three (5+ / 0-)
        Recommended by:
        G2geek, sydneyluv, JesseCW, polar bear, bloomin

        we have to keep the factories producing, too. However, producing for need, not for profit. There's a big difference between the two, which would go a long way to dealing with the greenhouse gas problem.

        We cannot win a war crime - Dancewater, July 27, 2008

        by unclejohn on Mon Jun 01, 2009 at 03:25:46 AM PDT

        [ Parent ]

    •  All banksters into fraud jail !!! (11+ / 0-)

      These assholes deserve a view of concrete blocks for the rest of their miserable lives. Due diligence my ass. And Congress is about as crooked an establishment as you'll find anywhere - and at any time in history!

      I'll stop spitting on their shoes when they carry the peoples' water!

      Campaign finance reform NOW!
      STOP ALL CAMPAIGN KICKBACKS!!

      First they ignore you. Then they laugh at you. Then they fight you. Then you win. -M.Gandhi (see also, Republican strategy)

      by ezdidit on Mon Jun 01, 2009 at 02:58:45 AM PDT

      [ Parent ]

    •  The part I don't understand is Peterson (MN-07) (2+ / 0-)
      Recommended by:
      Stranded Wind, polar bear

      Who would've expected Peterson to be speaking truth to power?  I've only seen caricatures of him as a DINO in the pocket of big agri-business.  Does he have a populist side in bloom?

      •  Banksters aren't going to be loaning to farmers (3+ / 0-)
        Recommended by:
        Stranded Wind, JesseCW, polar bear

        At least not as much. Credit is contracting at every level of business.  That might be the reason for his comments.    

        ...someday - the armies of bitterness will all be going the same way. And they'll all walk together, and there'll be a dead terror from it. The Grapes of Wrath

        by deepsouthdoug on Mon Jun 01, 2009 at 07:48:57 AM PDT

        [ Parent ]

        •  farmers are stepping back (0+ / 0-)

          The banks are saying "We're going to need more collateral this season than just your crop." The ones who remember the 1980s are saying "I'm only planting what I can afford."

          And a lot of guys are still going to lose it all anyway.

          "Not dead ... yet. Still have ... things to do." -Liet Kynes

          by Stranded Wind on Mon Jun 01, 2009 at 01:44:11 PM PDT

          [ Parent ]

  •  Very important diary. Thank you. This needs lots (13+ / 0-)

    of attention.

    "But there is so much more to do." - Barack Obama, Nov. 4, 2008

    by flitedocnm on Mon Jun 01, 2009 at 02:42:30 AM PDT

  •  plug: http://theautomaticearth.blogspot.com (11+ / 0-)

    Can't have a finance diary without me plugging http://theautomaticearth.blogspot.com - all the financial news that's fit to print, rounded up and commented upon daily by the relentless Ilargi & Stoneleigh.

    "Not dead ... yet. Still have ... things to do." -Liet Kynes

    by Stranded Wind on Mon Jun 01, 2009 at 02:44:01 AM PDT

  •  Thanks Bob for keeping us up on this issue (11+ / 0-)

    I am frankly surprised there aren't more discussions on this topic here at DK.

    Thanks for keeping it alive.

    Mr. Geithner's plan contains a major loophole, because little disclosure would be required for more complicated derivatives, like the type of customized, credit-default swaps that helped bring down A.I.G. A.I.G. sold insurance related to mortgage securities, essentially making a big bet that those mortgages would not default.

    --SNIP--

    "The banks want to go back to business as usual -- and then some

    Not surprised on this.  

    But as you say, if there is one time to re-regulate, it would be now.

    "What is the robbing of a Bank compared to the FOUNDING of a Bank?" Bertolt Brecht

    by thethinveil on Mon Jun 01, 2009 at 02:46:52 AM PDT

  •  gotta 'how it works' ques (3+ / 0-)
    Recommended by:
    ezdidit, JesseCW, thethinveil

    this is an AMAZING diary. but when I rec'd it I noticed there's a bout 10 recs here, and its on the rec list, and its the first diary on recent. Now, how the hell did that happen?

    "so this is how liberty dies . . . with thunderous applause"

    by from the puggle on Mon Jun 01, 2009 at 02:49:18 AM PDT

  •  Disrespect for Congress (9+ / 0-)

    may lead to suspension of "off the record" rules of engagement with reporters.

    These effete elitist toadies - Congressmen and Senators - who carry water principally for their benefactors, have shown themselves to be nothing more or less than grafting pigs feeding at the trough of K Street.

    Name one honest broker!

    They're all on the receiving end of what is commonly called kickback!

    The whole 'campaign finance' scam is royally fucked. They have all been too goddamn greedy - the takers and the givers. It doesn't work this way.

    First they ignore you. Then they laugh at you. Then they fight you. Then you win. -M.Gandhi (see also, Republican strategy)

    by ezdidit on Mon Jun 01, 2009 at 02:51:51 AM PDT

    •  The simplest answer (1+ / 0-)
      Recommended by:
      polar bear

      Is to cap donations at 200 bucks per person per cycle to any candidate.

      80% of The People can afford that if it really, really matters to them.

      Still messed up, yes, and it would still limit important voices, but it would be much better than what we have now.

      Since the SCOTUS ruled caps legal, Caps can be reduced.

      How we keep the money out of the hands of the National Comittees is another question, of course.

      Crush the Horror.

      by JesseCW on Mon Jun 01, 2009 at 09:06:20 AM PDT

      [ Parent ]

  •  i'd put real transparency on a par (12+ / 0-)

    with single payer, in terms of both necessity and likelihood.  

  •  Simple solution. (9+ / 0-)

    No transparency, no more taxpayer money.
    Someone asked earlier why would we need transparency.
    Well it would preclude the "President just told us this very morning" debacle that was their excuse when the fecal matter first hit the cooling device.
    Everyone would know whats coming.
    If we're getting the bill then we have a right to know exactly what we're paying for.
    Do you give a car dealer 20 grand and trust that maybe you'll get a car?

    St. Ronnie was an asshole.

    by manwithnoname on Mon Jun 01, 2009 at 03:09:10 AM PDT

  •  Gore Vidal figured it out long (16+ / 0-)

    before Peterson, when he said:

    There is only one party in the United States, the Property Party...and it has two right wings: Republican and Democrat. Republicans are a bit stupider, more rigid, more doctrinaire in their laissez-faire capitalism than the Democrats, who are cuter, prettier, a bit more corrupt—until recently... and more willing than the Republicans to make small adjustments when the poor, the black, the anti-imperialists get out of hand. But, essentially, there is no difference between the two parties.

    We cannot win a war crime - Dancewater, July 27, 2008

    by unclejohn on Mon Jun 01, 2009 at 03:13:31 AM PDT

  •  Article make me realize the importance of (6+ / 0-)

    contacting your congresspersons. I also think that Daily Kos should put a commercial about CDOs. All we need to say is CDOs = Bailout. Once the American learn of this then there's no way congress will vote in favor of the banks.

    Conservatives are not necessarily stupid, but most stupid people are conservatives. John Stuart Mill

    by Micheline on Mon Jun 01, 2009 at 03:34:26 AM PDT

  •  Not a financial person here either (6+ / 0-)

    so you can pat me on the head, too. But, didn't CDS fail on their face as they didn't accomplish what their existence is supposed to accomplish? CDS is a way to mitigate risk and instead just served to spread risk? They're supposed to help lubricate the market, instead, they crashed the market.

    •  They didn't crash the market, though ... (1+ / 0-)
      Recommended by:
      Sparhawk

      That's precisely the problem I have with a lot of these diaries. It's just a bunch of people waving their hands and repeating stuff that they read in someone else's diary, which was based on something someone had written on a blog somewhere, which itself was a complete misunderstanding of a sketchy article in the press.

      The market crashed because of huge losses that banks suffered on structured credit - CDOs and RMBS - not because of the CDS market. The two things are very different.

      And the CDS market has functioned like it's supposed to. Just like it functioned properly back in 2001/2 when the tech bubble burst, Enron went under etc. It's a good market, a sound idea, and a helpful thing for the system generally - it just got too big, too quick and a few people (AIG, MBIA, Ambac etc) started doing stuff that was dumb. It's nothing that can't be fixed with some better regulation and better market infrastructure.

      •  Why keep something around (4+ / 0-)
        Recommended by:
        Dburn, deepsouthdoug, JesseCW, polar bear

        that really only is gambling?  The stated reason for CDS contracts is risk amelioration; that purpose has more or less vanished overnight.  Does anyone (besides the banksters) really need something whose only reason for existence is to generate fees?

        •  That's not its only purpose ... (1+ / 0-)
          Recommended by:
          Sparhawk

          A good chunk of the market is your "classic" CDS trading: people who own a chunk of debt (or a loan) and want to protect themselves against default.

          You saw how well the market worked in 2001/02 when a series of high-profile bankruptcies occurred but banks suffered manageable losses - the risk had been spread around the system by CDS and securitisation. That's what prompted Greenspen to wax lyrical in praise of both techniques a couple of years later when he said that they had made the economy more resilient and more flexible.

          Of course, he turned out to have bought into the story a bit too whole-heartedly!

          •  Problem is 3rd parties, not counterparties (2+ / 0-)
            Recommended by:
            TexasTwister, polar bear

            (Note: also posted this upstream)

            CDS's started as a way for a counterparty to insure performance. It turned into a way for unrelated third parties to bet on the failure of a specific debt instrument. AIG, for example, would sell CDS's on a specific Goldman Sachs MBS not only to the counterparties that actually invested in the MBS, but also to dozens of other unrelated third parties. When that MBS was downgraded, AIG had to make good to not just one counterparty but also to all the unrelated third parties that had purchased the CDS covering that particular MBS.

            Multiply this thousands of similar cases and you see how the CDS market grew to hundreds of trillions of dollars in such a short time period. And why it melted down when the underlying MBS's started going bad.

            Here is a great "This American Life" segment that features Wall St. folks explaining it far better than I can:
            http://www.juniper-ridge.info/...

            If we simply required that CDS buyers helds the instrument they were hedging, along with the transparency to make sure of this, the CDS market would go back to doing what it was envisioned for. Unfortunately, most of Wall St. wants as little transparency as possible, as it is easier to find and take advantage of arbitrage opportunities.

            It would also be helpful to remove the profit motive from bond rating somehow.

            "I have no special talents. I am only passionately curious." A. Einstein

            by bewert on Mon Jun 01, 2009 at 11:35:55 AM PDT

            [ Parent ]

      •  skeletondisco (3+ / 0-)
        Recommended by:
        Jesterfox, JesseCW, polar bear

        OK. but what about naked CDS? If I buy insurance on my neighbor's Harley Davidson I might feel bad for him or her if it gets wrecked, but I sure like the $ I make on the crash. Doesn't this distort incentives? (Unless I'm not understanding this.)

        •  You're not misunderstanding it ... (1+ / 0-)
          Recommended by:
          Sparhawk

          You CAN buy protection on a bond or loan (or an index) even if you don't have anything to protect. It's exactly the same as going short a stock - you expect the value to decrease rather than climb.

          But the idea that people were betting on companies actually collapsing - that's not something I've seen. And it doesn't make much sense.

          Here's why: say you think GM is going to collapse, and you want to make some money from that view, you could go and buy a CDS on GM bonds. If a default happens, the CDS pays out. BUT ... if there's a good chance that GM IS going to default, the amount you'll have to pay for the CDS would be huge. It's like backing a runaway favourite in a race - you need to put up a big chunk of cash to get anything back. And there's always the chance that they won't default - in which case you lose your "stake". No-one was taking those kinds of bets.

          •  I'll grant that I'm being educated by your (1+ / 0-)
            Recommended by:
            polar bear

            responses to my ignorances, but let's broaden the discussion. Does any of thise help the larger econony? The FIRE sector has grown massively in the last 60 years and from what I'm seeing we get terrific asset inflation for a while, and then bust. All those engineering and physics grads should find other more productive jobs. There's got to me more to our economy than banks, real estate and insurance companies.  

            •  Well, it depends where you're sitting ... (1+ / 0-)
              Recommended by:
              Sparhawk

              Securitisation and CDS together helped expand the amount of credit flowing into all sectors of the economy - and lower the cost of credit, too. For a long time, that benefited almost anyone you care to think of - subprime borrowers could get home loans for the first time, consumers could spend borrowed money on any one of their many credit cards, people whose houses had rocketed in value could sell up and retire, companies could report double-digit growth, hire more employees and expand overseas. It created a huge positive spiral of spending, growth and appreciating value.

              And, as ALWAYS happens, it went too far. It's the same story of boom and bust that we've seen a hundred times before. Plenty of people - all across society - benefited when it was on the way up. And plenty more people are suffering now it's on the way down.

              It would be nice to think that we could find a way to regulate these wild swings. And I do mean regulate - people like the Fed in the US, the FSA in UK, BaFin in Germany - they all need to take a much more aggressive line with banks. And the central banks need to be more confident in setting the tone.

              In China, the central bank actually tells banks where they can and can't lend. For a long time, that looked like a wildly draconian take on banking regulation. Maybe not any more :)

            •  You're being snowballed (1+ / 0-)
              Recommended by:
              bewert

              The line your being fed would only make sense if the person selling the CDS has all the information you do.

              The theoretical world in question does not exist and never has.

              To use your analogy -

              You know your neighbor can't ride for shit.  You've seen him almost wipe out comming down the driveway two or three times.

              AIG, selling the side bet, doesn't know that, and is far less able to accurately assess the Risk of a crash than you.

              Crush the Horror.

              by JesseCW on Mon Jun 01, 2009 at 09:13:06 AM PDT

              [ Parent ]

          •  It depends on when you bought them (1+ / 0-)
            Recommended by:
            JesseCW

            and you know it. If they were purchased 5 years ago the premiums would have been sickly low. Some of these have contract lengths of 18 years or more.

            If you are stating unequivocally that no one purchased CDSs on Companies, how much are you willing to bet right here right now.

            Today is payday for a lot of happy people as GM goes under. Count on it.

            •  This would be a lot easier if you didn't ... (0+ / 0-)

              ... read stuff into my comments that isn't there.

              Of course people bought protection on companies. My contention is that that's not the same thing as betting that the company would fail. You can refer to my earlier post for the reasons why.

          •  i have to disagree. Big financial players knew (1+ / 0-)
            Recommended by:
            andrewj54

            that the loans were junk--heck, the paperwork even disappeared on a lot of them. Ridiculous interest only and skyrocketing ARMS sold to uninformed and desperate consumers.

            They bought the "insurance" when the insurance was cheap because housing looked so good to most of the world.  Bought it cheap and when it started to fail, rooted for it to fail.  Not a good situation.

          •  Re: "No-one was taking those kinds of bets." (1+ / 0-)
            Recommended by:
            polar bear

            HEDGE FUNDS PROFIT OFF SUBPRIME COLLAPSE
            03.09.2007 12:54 Monday
            Funds Benefit From Decline in ABX Index
            Hennessee Group LLC, an adviser to hedge fund investors, today notes that while some hedge funds focused on mortgage backed securities have suffered well publicized losses related to the decline in the sub-prime mortgages space, many hedge funds have also been able to generate profits as a result of its decline.

            In an October 2006 press release, Hennessee Group reported that hedge funds have been using credit default swaps (CDS) in several ways, including purchasing CDS on sub-prime mortgage backed fixed income securities and indices intended to profit from deterioration in credit quality among mortgage borrowers.

            In what has been the best short sale theme since 2002, many hedge funds have greatly benefited from the collapse in sub-prime mortgages via their short exposure to mortgage lenders and sub-prime mortgage backed securities and indices. While some have focused on shorting mortgage lenders and buying credit default swaps (CDS) on specific mortgage backed bonds, others have elected to purchase CDS on indices of these securities (the ABX series), with most focused on those securities issued in 2006 under more relaxed lending standards. The ABX-HE-BBB- 06-2 Index (ABX Index of BBB- traunches issued in 2006) is now down –60% for the year (through the end of July). Several managers think there is still more downside for the lowest level traunches, as they believe cumulative losses for sub-prime mortgage securities could potentially cause the value of the BBB- traunches to be worthless....

            Source: http://fxtraders.eu/...

            "I have no special talents. I am only passionately curious." A. Einstein

            by bewert on Mon Jun 01, 2009 at 11:52:45 AM PDT

            [ Parent ]

      •  Nonsense (1+ / 0-)
        Recommended by:
        JesseCW

        It's nothing that can't be fixed with some better regulation and better market infrastructure.

        Absolute nonsense. You have no proof of it that statement nor could it be anything but a fantasy. CDSs and their cousins were the multiplier that turned a 300G foreclosure into a 3 million dollar problem multiplied by 5,000 a day.

        When the swaps insurance can be bet on any transaction by as many people who have the money then you have a multiplier. That multiplier caused the meltdown, otherwise known as CDSs. You won't find any one taking your side of the argument except Bonddad who is missing in action, and some other Wall-Street-Peter-Whackers like yourself. WPWs since you like Acronyms for theft so much.

        If you so confident, why not turn them into regulated credit insurance. That mitigates risk, while at the same time it ensures the buyer that the company is well capitalized enough to pay off on the risk which was one of the major problems you people had until Uncle Sam ,us , stepped in and started making good at 100% of face value of your bets.

        Anyone could take the bet and they ain't paying because they are gone. Who is to say the Billy the 12 year old Cracker didn't get into the Bloomberg terminals and have Citibank transfer premium payments on a 100 billion worth of mortgages. Can you say for sure? Then you can also explain why Citibank is in court suing for 100s of million on swaps that never were paid. That's just for the people they got service on. Who knows how many  are in Aruba right now enjoying the meltdown with beverages bought and paid for by us ?

        Enough with you. You are standing on the same stuff CDSs are made of with your pitiful arguments. Pure bullshit.

      •  Are you an idiot? I can't believe these totally (2+ / 0-)
        Recommended by:
        andrewj54, JesseCW

        ignorant statements you are making.  You are either a financial troll, or you are just misinformed.  Here's a clue:

        Jubak's Journal 3/20/2009 12:01 AM ET
        Fluke? Credit crisis was a heist

        Thanks to a complicit Congress, the reins were systematically loosened on the looters of the financial industry. And they're still at it, looking for new plunder.

        It was no accident.

        The folks in power in Washington and on Wall Street want to pretend that the current global financial crisis -- you know, the one that reduced household net worth in the United States by $11.2 trillion in 2008, according to the Federal Reserve -- was an accident caused by some unfortunate confluence of greed and asleep-at-the-switch regulators.

        What we're now living through, though, is the result of a conscious, planned looting of the world economy. Its roots stretch back decades. And it wouldn't have been possible without the contrivances of the bought-and-paid-for folks who sit in Congress.

        Of course, just because the plan blew up on the looters, taking off a financial finger here and a portfolio hand there, you shouldn't have any illusion that they've retired. In fact, in the "solutions" now being proposed -- by Congress -- to fix the global and U.S. financial systems, you can see the looters at work as hard as ever.

        http://articles.moneycentral.msn.com...

        Read all about it and stop trolling.  You are embarrasing yourself for gawdsake.

        Violence is the last refuge of the incompetent. Isaac Asimov

        by Badabing on Mon Jun 01, 2009 at 08:58:14 AM PDT

        [ Parent ]

        •  Yeah - I've read a lot of this stuff. (0+ / 0-)

          It doesn't tally with my experience - as a result, I've formed different opinions.

          Rather than just posting stuff you've found on the internet, perhaps you'd like to pick one of my statements and tell me exactly what you think is wrong with it, and why.

  •  Many of us have been trying to (9+ / 0-)

    get this point across for years:

    Until you end legalised bribery we will never be a democracy.

    We won the house, the senate, and the presidency. Look where that got us. The banks and wall street still get everything they ask for.  Congress is working on a law that will require you to become a customer of the insurance industry. No end to the Iraq or Afghan wars. The military budget is still insane. Polluters still pollute. Mining companies still remove entire Mountains from our geography. The oil companies are still robbing us blind...

    We will never be a democracy until we end legalised corruption.

    •  We also still do (3+ / 0-)
      Recommended by:
      cdreid, lotlizard, polar bear

      illegal renditions, torture is still happening, military tribunals will continue, we still are denying habeas corpus to our illegal prisoners, an amazing number of Bush appointees are still installed in their positions, Siegelman and others are still being prosecuted - while Ted Stevens, the epitome of political corruption goes free, and the Valerie Plame case joins the many other cases where the Obama administration takes up the Bush position.   What folks are saying here is 100% correct - there really is no difference between Republicans and Dems in the end.  They're both corrupted by greed and a system that has turned over power to corporations.  Progressives would do well to finally recognize, as I did, that Obama isn't what he portrayed himself to be in the election - that he's another Bill Clinton - campaigning as a progressive/Democrat, and governing as a corporatist conservative.

  •  They took our money, and they still give us crap. (4+ / 0-)

    You have exactly 10 seconds to change that look of disgusting pity into one of enormous respect!

    by Cartoon Peril on Mon Jun 01, 2009 at 04:36:57 AM PDT

  •  Just prohibit public companies from doing swaps (4+ / 0-)

    Close the casino.

    The "choice" offered by capital is illusory. If you cannot afford the choice, you don't have the freedom to choose.

    by high bitrate on Mon Jun 01, 2009 at 04:42:16 AM PDT

  •  Sane comment for a sane diary.... (5+ / 0-)

    Recommended...

    Obama - Real Leadership for a Real Change

    by dvogel001 on Mon Jun 01, 2009 at 05:03:55 AM PDT

  •  Nothing will change (4+ / 0-)

    until we get REAL campaign contribution reform and lobbyist reform. Just because Dems are now in power doesn't mean anything will change.

    Forget Health care reform, Financial system regulation, or anything else that could save this dysfunctional Democracy DemoFascocracy.

    Congress STILL stinks like a whore house at low tide.

    by CitizenOfEarth on Mon Jun 01, 2009 at 05:06:30 AM PDT

  •  I seem to recall back in October (5+ / 0-)

    Jerome a Paris said that unless the outstanding CDS contracts were voided the world economy was well and truly screwed. Looks like he was right again.

  •  Banks run the White House too - let's admit it. (4+ / 0-)
  •  what is Kucinich saying these days? (3+ / 0-)
    Recommended by:
    lotlizard, polar bear, Conure

    and what do you think will be the overall effect on the politics of finance of Ron Paul's new piece on the Fed investigation?

    Find your own voice--the personal is political.

    by In her own Voice on Mon Jun 01, 2009 at 05:38:56 AM PDT

    •  Audit the Federal Reserve's Response to Crisis (4+ / 0-)

      He's introduced a bill:

      Washington, May 15 - Congressman Dennis Kucinich (D-OH) has introduced legislation that would allow, for the first time, the government to audit and oversee the Federal Reserve’s  response to the economic crisis.  H.R. 2424, The Federal Reserve Credit Facility Act of 2009 would authorize the Government Accountability Office (GAO) to audit, review and investigate the activities of the Federal Reserve (the Fed) in response to the economic crisis gripping our nation.  The bipartisan bill is cosponsored by Chairman Ed Towns (D-NY) and Ranking Member Darrell Issa (R-CA) of the Oversight and Government Reform Committee, as well as Jim Jordan (R-OH), the Ranking Member of the Domestic Policy Subcommittee, which is chaired by Kucinich.  The bill has been referred to the Oversight and Government Reform Committee for consideration.

      "The Federal Reserve has been operating in a governmental netherworld, free from scrutiny or oversight. We know the Fed has printed and loaned trillions of dollars, but we don’t know where the money went. This bill will finally provide some transparency," said Kucinich.

      Traditionally the Federal Reserve has limited itself to setting the federal funds rate target (the overnight interest rate that banks charge each other) by purchasing government securities. Since August 2007, the Fed has drastically expanded its role in our economic stability by enacting programs to print and lend trillions of dollars directly into the economy.  

      "Despite the fact that the Fed’s actions are a centerpiece of our nation’s response to our economic recovery, we know almost nothing about how the Federal Reserve has addressed the crisis.  It’s time investors and taxpayers obtained a clear picture," added Kucinich.

      The Fed has enacted several new programs to address the financial system’s crisis including the Term Asset-Backed Securities Loan Facility (TALF), the Mortgage Backed Securities Purchase Program, and a number of other emergency lending programs that are not subject to Congressional oversight  

      Private health insurers always manage to stay one step ahead of the sheriff - Sen. Sherrod Brown

      by Betty Pinson on Mon Jun 01, 2009 at 09:20:03 AM PDT

      [ Parent ]

      •  Thanks for the info--I thought he would (1+ / 0-)
        Recommended by:
        polar bear

        be taking some action based on his comments back in September/October '08 about the bailout.  But I had heard Ron Paul introduced the legislation.  Wonder if he has introduced something different or is joining with Kucinich.

        Not at all a follower of Ron Paul, btw, but always curious about Kucinich.  There are few in the legislative branch of government who are not playing rhythm to the coins jingling in their pockets.

        Find your own voice--the personal is political.

        by In her own Voice on Mon Jun 01, 2009 at 10:16:36 AM PDT

        [ Parent ]

      •  Hi Betty, I hadn't seen this when I wrote my (0+ / 0-)

        comment on the same thing below.  I'm with you.  Hope someone does an action diary on it.

  •  Businessweek- Chapter 11 and Credit Default Swap (7+ / 0-)

    There is a good article in Business week about how credit default swaps make a chapter `11 reorganization far less likely. Creditor attorney have found ways for suppliers to seize goods , bond holders to not negotiate becuase they have no need to. They are covered. That makes it far more likely that a company who uses the bankruptcy laws to reorganize , especially from predator trade creditors who are seizing it's ability to operate, so they  fail and are liquidated.

    Here is an essay written on it that concerns large corporations. Businessweek also delves into the use of these instruments by attorneys to get credit covered by swaps from your basic trade creditor to a bond holder. Banks use them also. That bank that seems to be senselessly closing down a good business may have credit default swaps that pays them back in full if the business is closed.

    All of these means more lay offs. Anyone who thinks these things are good ideas it totally full of shit

    Credit derivatives transfer the default risk of an underlying debt instrument, without transferring legal title. These transactions have several benefits outside of bankruptcy. But once a corporate debtor enters bankruptcy - in particular, chapter 11 - it enters a bargaining process that was bottomed on a model of creditor behavior that may no longer hold because of credit derivatives. A creditor may not act like a traditional creditor if they no longer face the risk of non-payment because that risk has been hedged. In this essay I argue that credit derivatives will substantially alter chapter 11, at least with respect to large corporate debtors.

    Credit Default Swaps don't need some "tinkering" as one "expert" has written a diary on here. They need to be taken out and shot a long with the people who regularly abuse them for profit.

  •  same as it ever was... (4+ / 0-)

    ever since Reagan... tax breaks for the wealthy, break the unions, incerasing inequality, deregulate banks and everything else... no cramdown, no real re-regulation, tax breaks no enforcement of taxes for the risk, easy bail-out terms...

    ...may I point out the banks = the insurance companies, so no single payer either.

  •  Week of June 10 is outreach for ANWF (2+ / 0-)
    Recommended by:
    3goldens, polar bear

    A New Way Forward is doing an educational outreach during the week of June 10.  They have a video and some materials for use to anyone who wants to facilitate a meeting.  My Common Security Club will be meeting next weekend in our continuing discussion of the economy and what we can do locally to protect ourselves and stay connected to viable resources.  Common Security Club is one of the sponsors of A New Way Forward.

    Find your own voice--the personal is political.

    by In her own Voice on Mon Jun 01, 2009 at 05:50:46 AM PDT

  •  Great piece (3+ / 0-)
    Recommended by:
    bobswern, JesseCW, polar bear

    The "snip" in the Peterson block quote near the end makes it confusing; I thought he was saying that the banks run the Federal Reserve, which of course would not be news.

  •  I agree completely with James Burnham (3+ / 0-)
    Recommended by:
    phonegery, ohmyheck, polar bear

    http://www.k-1.com/...

    "... a truly democratic society has never existed and so far as we can see, never will exist. Society is of its nature oligarchical, and the power of the oligarchy always rests upon force and fraud. Burnham does not deny that ‘good’ motives may operate in private life, but he maintains that politics consists of the struggle for power, and nothing else. All historical changes finally boil down to the replacement of one ruling class by another. All talk about democracy, liberty, equality, fraternity, all revolutionary movements, all visions of Utopia, or ‘the classless society’, or ‘the Kingdom of Heaven on earth’, are humbug (not necessarily conscious humbug) covering the ambitions of some new class which is elbowing its way into power. The English Puritans, the Jacobins, the Bolsheviks, were in each case simply power seekers using the hopes of the masses in order to win a privileged position for themselves. Power can sometimes be won or maintained without violence, but never without fraud, because it is necessary to make use of the masses, and the masses would not co-operate if they knew that they were simply serving the purposes of a minority. In each great revolutionary struggle the masses are led on by vague dreams of human brotherhood, and then, when the new ruling class is well established in power, they are thrust back into servitude. This is practically the whole of political history, as Burnham sees it."

  •  Lets find a way to change this (1+ / 0-)
    Recommended by:
    polar bear
  •  there's only one reason for non-transparency (3+ / 0-)
    Recommended by:
    JesseCW, ohmyheck, polar bear

    And we all know what it is.  On the general theme of the diary, I read another interesting article last week on the suppression of Brooksley Born, whose attempt to regulate derivatives was beaten by a lethal combination of greed, sexism, and neoliberal orthodoxy rivaling any form of political or religious fundamentalism created to date.  Among the more comedic episodes:  Alan Greenspan lecturing Born that the industry didn't need a regulation protecting the public against fraud, because if a broker was acting fraudulently, a customer would find a new broker.  Somebody please tell me why we feted this man for years.

    A terrible beauty is born. --W.B. Yeats

    by eightlivesleft on Mon Jun 01, 2009 at 07:16:40 AM PDT

  •  It's a problem when financial industry profits (4+ / 0-)
    Recommended by:
    KConner, phonegery, JesseCW, polar bear

    are high, because the whole financial industry is really just facilitative, a form of utility for the economy.  

    The financial industries produce nothing.  They are needed by productive industries and by the economy as a whole, but when banks or insurance or brokerages or other financial industries become the most profitable parts of the economy, it is a bad sign.  It means graft, greed, and speculation are replacing and sapping the strength of work,  productivity and creation of new industries.

    If they are to be in private hands, financial industries should be highly regulated for protection of the common good, just as other utilities should be.

    Civil marriage is a civil right.

    by UU VIEW on Mon Jun 01, 2009 at 07:47:14 AM PDT

  •  Risk added tax (2+ / 0-)
    Recommended by:
    JesseCW, polar bear

    Time to add a fee to all financial industry transactions.  The fee basis should include a risk premium.  Outright illegal stuff like naked shorting should of course be punished by loss of a trading license.  Same for exceeding leverage limits.

    The risk added tax should be in an amount that insures the public against the fallout of systemic risk.

    Who's honest enough to calculate this amount?  I nominate Ilargi from The Automatic Earth.

    The Shock Doctrine by Naomi Klein -- best book ever, I nominate for a Nobel Prize!

    by xaxado on Mon Jun 01, 2009 at 07:54:04 AM PDT

  •  The best Congress (2+ / 0-)
    Recommended by:
    KConner, polar bear

    money has ever bought.
    Crisis in healthcare-- no response.
    Crisis in the economy-- no change.
    Structural damage to society-- no policy.
    Infrastructure neglected.
    I've heard that we have thousands of people we can't put to work.
    Isn't in convenient that they create a world in which so many can suffer and die prematurely?
    Don't look for subversives in the street.
    Look for them in high-rent office towers.

  •  It's not just the banks, (1+ / 0-)
    Recommended by:
    polar bear

    The fact is we have to get the money out of politics to enact real change.

    Enough of the Senate is bought off (either by banks, insurance companies, or polluters) that anything meaningful is blocked.

    Given the political environment, all you really need is 8-10 Senators on each side.

  •  Oh I'm very much in favor of the "super double (3+ / 0-)
    Recommended by:
    RustyCannon, JesseCW, polar bear

    secret probation, now you see it now you don't, I am the great and powerful banker - pay no attention to the man with the wheel barrow full of money walking out the back door of the cobwebby vault" regulatory plan. Aren't you?

    This is just to say Forgive us victory tastes delicious so sweet and so cold

    by Dave the Wave on Mon Jun 01, 2009 at 08:41:59 AM PDT

  •  let's listen to regulators (2+ / 0-)
    Recommended by:
    JesseCW, polar bear

    not deregulators. Those who value market-based economics, not bailout-based economics.

  •  Reid & Pelosi should step up (1+ / 0-)
    Recommended by:
    polar bear

    to the plate and use their authority to restrict lobbying and reduce the pressure on legislators.  

    Private health insurers always manage to stay one step ahead of the sheriff - Sen. Sherrod Brown

    by Betty Pinson on Mon Jun 01, 2009 at 09:26:06 AM PDT

    •  This lobbying is obscene, you are so right. (2+ / 0-)
      Recommended by:
      In her own Voice, Betty Pinson

      I wish someone had just 10 minutes a day on a popular show, detailing the money going from the lobbyists into favorite charities, campaign coffers and the like.  And how the bills end up (still!) being written by the lobbyists.  

      Maybe campaign finance reform would get very popular.

      •  We've had 100 years... (0+ / 0-)

        Of campaign finance "reform." It hasn't worked.

        It doesn't matter who "writes" the bills - Congress has to vote them up or down (or amend them). And I assume you're qually appalled by lobbyists from "progressive" organizations that help to draft legislation, lending their expertise and insights to the process, or is it just when people you disagree with are allowed to participate in the political process that you get all bothered?

        Campaign finance "reform" is a joke. Perhaps we should just follow the First Amendment and junk all this regulation?

        Sean Parnell
        President
        Center for Competitive Politics
        http://www.campaignfreedom.org

  •  Thanks, Bobswern. What a surprise that (5+ / 0-)

    Geithner is against transparency. Shocker.  

    You mentioned the Federal Reserve.  I have a couple of links i thought would make a good diary, but since i know little about economics and I haven't found the time yet, if someone else wants to diary this, you're welcome to it.

    It's about how leading Democrats won't support a bill to audit the Federal Reserve.  

    I'd love to audit the Federal Reserve, but apparently Pelosi, et al, are against it.

    The summary:

    2/26/2009--Introduced.
    Federal Reserve Transparency Act of 2009 - Repeals the authority of the Comptroller General to carry out an onsite examination of an open insured bank or bank holding company only if the appropriate federal regulatory agency has consented in writing. (Retains the authority of the Comptroller General to audit a federal agency.)
    Directs the Comptroller General to complete, before the end of 2010, an audit of the Board of Governors of the Federal Reserve System and of the federal reserve banks, followed by a detailed report to Congress.

    govtrack.us

    You can access the whole bill from the above link. As you can see, it looks like it also does away with a signature requirement before conducting an "an onsite examination," but from what Baker says, the important thing is that we need to audit the Federal Reserve.

    Here's an article by Dean Baker about it:

    Dean Baker

    •  And where are the Democrats (1+ / 0-)
      Recommended by:
      polar bear

      or progressives in support of this bill sponsored by Ron Paul and a co-sponsor list who are mostly Repubs?

      Betty Pinson said in this thread that Kucinich had introduced some similar registration. betty.  And now I see you've commented below Betty now...

      Find your own voice--the personal is political.

      by In her own Voice on Mon Jun 01, 2009 at 10:46:55 AM PDT

      [ Parent ]

    •  So much lip service from our elected officials... (1+ / 0-)
      Recommended by:
      polar bear

      ...but little of substance on this matter.

      Oh, and Dean Baker ROCKS!  And, the comments about the Pecora-style Commission rebirth downthread here...let's see where--if anywhere--they go with that.

      This entire matter really is about taking our government back from special interests...at the highest level, too (in terms of the special interests most effective lobby). Every other issue takes a backseat, in many practical ways. Idealistic? Yes. But, we have a rare moment here if we leverage public sentiment to its most effective end result...putting forth a truly progressive agenda.

      Transparency opens Pandora's box as far as the banks are concerned, and they know it.

      In many ways, it's sad, really. How could we have allowed this to get to this point? Again, the answer: $$$.

      "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

      by bobswern on Mon Jun 01, 2009 at 11:19:47 AM PDT

      [ Parent ]

  •  Either Obama does or does not... (3+ / 0-)
    Recommended by:
    phonegery, polar bear, Conure

    value transparency. Either he does or does not cave to the banks. He has caved as far as the GM bankruptcy goes:

    Here's the scheme.: Rattner is demanding the bankruptcy court simply wipe away the money GM owes workers for their retirement health insurance. Cash in the insurance fund would be replace by GM stock. The percentage may be 17% of GM's stock - or 25%. Whatever, 17% or 25% is worth, well ... just try paying for your dialysis with 50 shares of bankrupt auto stock.

    Yet Citibank and Morgan, says Rattner, should get their whole enchilada - $6 billion right now and in cash - from a company that can't pay for auto parts or worker eye exams.

    Preventive Detention for Pensions

    So what's wrong with seizing workers' pension fund money in a bankruptcy? The answer, Mr. Obama, Mr. Law Professor, is that it's illegal.

  •  Krugman gets it only half right: Reagan did it (1+ / 0-)
    Recommended by:
    polar bear

    with the strong bi-partisan support of lap dog Congressional Democrats.  Krugman references the "Garn-St. Germain Depository Institutions Act of 1982"... here's the comment I wrote to the Times in response:

    Fernan St. Germain, co-sponsor with Jake Garn (R-UT) of the Congressional Act referenced by Dr. Krugman, was a DEMOCRAT and the Act passed with broad bi-partisan support. In the House of Representatives, it was co-sponsored by CHUCK SCHUMER and STENY HOYER where it passed the Democratically controlled body by a vote of 272-91.

    And what was the stepping stone to this "New Deal" betrayal? Jimmy Carter's signing of the "Depository Institutions Deregulation and Monetary Control Bill" which, according to John Birger ( http://money.cnn.com... )

    "...abolished state usury caps that had limited the interest rates banks could charge on primary mortgages - and, in the process, gave banks more incentive to make home loans to folks with less-than-perfect credit.

    DIDMCB... did open the door to some predatory lending in low-income communities... deregulated the mortgage market and made home loans more available."

    I have never voted for a Republican in my life and Jimmy Carter was the first President I voted for as a naive young man. My point is not to defend Reagan and the GOP but to insist that NONE of it could have been accomplished without the help of Congressional Democratic majorities who very much participated in the destruction of the New Deal - the very foundation of the Democratic Party.

    Nothing will change, Dr. Krugman, if we fail to acknowledge that our current economic downfall was a not just a GOP engineered event. It has resulted from the failure of our DEMOCRACY and won't be fixed until we have a Democratic Party dedicated to Main Street - and the moral principles behind FDR's New Deal - not Wall Street.

    "History is a tragedy, not a melodrama." - I.F.Stone

    by bigchin on Mon Jun 01, 2009 at 10:30:24 AM PDT

  •  Why do I start humming the tune (1+ / 0-)
    Recommended by:
    polar bear

    The Fox Went Out on a Chilly Night
    every time I read a diary that mentions Geithner?

    Then the fox and his wife without any strife,
    Cut up the goose with a fork and knife,
    They never had such a supper in their life,
    And the little ones chewed on the bones-o, bones-o, bones-o,
    They never had such a supper in their life,
    And the little ones chewed on the bones-o.

    And why do my bones feel itchy?
     

    Justice, if not pursued, does not exist.

    by phonegery on Mon Jun 01, 2009 at 10:54:25 AM PDT

  •  did you guys know about this bullshit? (3+ / 0-)

    http://online.wsj.com/...

    A bipartisan group of legislators is pressing the Treasury Department to close a loophole that has allowed banks to seize Social Security and disability benefits from customers' accounts despite federal rules intended to protect these benefits from creditors.

    The loophole also has enabled some banks to seize from customers their recent $250 Economic Recovery Payments, payments to disabled veterans, and supplemental benefits to impoverished individuals from the Social Security Administration.

    Federal law says creditors can't take Social Security, disability, veterans' and children's survivor benefits to pay a debt. But the federal law doesn't say how money deposited directly into bank accounts is to be protected -- a gap that has given banks the ability to seize such funds.

    Bank of America Corp. froze the accounts of Ellistine and Roosevelt Thompson, a disabled couple in their 60s in Macon, Ga., whose only source of income is from Social Security.

    Because the Thompsons had no access to their money, they couldn't retain a lawyer. Bank of America turned over all the benefits, some of which they set aside for their burial, to a debt collector pursuing a debt from the mid-1990s.

    In April, for instance, U.S. Bancorp seized the Social Security survivor benefits of two children in Kalispell, Mont., when a creditor garnished the account for the children's unpaid medical bills (the family has no health insurance). The benefits are the family's primary source of income, following the death of the children's father in 2007.

    Unaware that the account was frozen, the children's mother, Nicole Murphy, 32, used a debit card to pay for gas and groceries for Easter. Each purchase triggered an insufficient-fund fee of $37.50. When the children's account fell below zero, the bank debited a negative balance fee of $8 a day.

    A lawyer with Montana Legal Services Association helped Mrs. Murphy unfreeze her account. But the bank again froze the account. On May 7, the U.S. Treasury deposited into the account a $250 Economic Stimulus payment, which the government sent to low-income households. But the payment was unavailable to the family because the account was frozen, and because the bank's fees had created a negative balance.

    Allene Bellendier, a disabled 70-year-old widow, used to have her Social Security benefit deposited directly into her SunTrust Banks Inc. account.

    But she closed her account last year after the bank froze it twice. Though she was able each time to get the account released with the help of a legal-aid lawyer, the process took weeks, leaving her without money for food, medicine or mortgage payments. When her food ran out, she says, she searched the house for loose change and found a few dollars in a piggy bank she was saving for Christmas presents.

    She had a heart attack and says she lost nearly $600 in penalties and fees to companies where she had bounced checks as a result of the hold. Mrs. Bellendier now has her granddaughter cash the check at Wal-Mart; Mrs. Bellendier buys money orders to pay her monthly bills.

    SunTrust declined comment.

    "the christian in me says it's wrong, but the corrections officer in me says, 'i love to make a grown man piss himself.'" - cpl. charles graner

    by mindtrafficcontrol on Mon Jun 01, 2009 at 10:58:31 AM PDT

  •  With Geithner and Summers running things (1+ / 0-)
    Recommended by:
    polar bear

    I think the Obama Administration has tipped its hand.

    If they had REALLY wanted change they would have taken over the failed banks and fired the asshats that run them, then they would have been beholden to none of them (banksters). In stead of the "Audacity of Hope" we got the "same O' Same O'".

    "be a loyal plastic robot boy in a world that doesn't care" - Frank Zappa

    by Unbozo on Mon Jun 01, 2009 at 11:15:45 AM PDT

  •  The article linked to in the diary seems to (0+ / 0-)

    lay some of the blame with CDS, though.

    Among the companies that expanded rapidly was A.I.G. Straying from its main business of providing property and life insurance, A.I.G. wrote a type of contract known as credit-default swaps that protected holders of mortgage securities against defaults. When millions of subprime borrowers stopped paying their mortgages, A.I.G. had to provide cash collateral that it did not have to clients that had bought its insurance.

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