BBC2 now - Inside Job.
Discussion
I think one of the worst things was the bill passed to enable the bail out in the US
When it was first proposed it was voted out. It was a short 4 pager basically handing the banks the keys to the treasury no strings attached. That didn't stop Henry Paulson, he basically went over everyone's heads anyway and got it passed off as a piece of signed sealed legislation.
Basically side stepped a democratic process in my eyes, to get what him and his cronies wanted. The keys to the printing press. How they let that slide I have no idea.
Watch capitalism a love story. It's shown in there. I know it's Michael Moore but as MM films go, it's actually not too bad or over zealous. The congress member he interviews described it as a financial coup d'etat.
When it was first proposed it was voted out. It was a short 4 pager basically handing the banks the keys to the treasury no strings attached. That didn't stop Henry Paulson, he basically went over everyone's heads anyway and got it passed off as a piece of signed sealed legislation.
Basically side stepped a democratic process in my eyes, to get what him and his cronies wanted. The keys to the printing press. How they let that slide I have no idea.
Watch capitalism a love story. It's shown in there. I know it's Michael Moore but as MM films go, it's actually not too bad or over zealous. The congress member he interviews described it as a financial coup d'etat.
Edited by Otispunkmeyer on Thursday 8th December 19:59
Warren Buffet way back in 2002 said:
From the 2002 Berkshire Hathaway Chairman's Letter (p.13):
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.
Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives
transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables. Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the
creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either
industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.
Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Of course, both internal and outside auditors review the numbers, but that’s no easy job. For example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 14 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a
portfolio like that, expert auditors could easily and honestly have widely varying opinions.
The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually
tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”
I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a
company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more
downgrades. It all becomes a spiral that can lead to a corporate meltdown.
Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a
liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through
Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain.
When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred 15
people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for
weeks, was far from a worst-case scenario.
One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a
future date it will receive any gain or pay any loss that the bank realizes.
Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and
analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is
running.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles
caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,
however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.
Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives
transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables. Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the
creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either
industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.
Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Of course, both internal and outside auditors review the numbers, but that’s no easy job. For example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 14 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a
portfolio like that, expert auditors could easily and honestly have widely varying opinions.
The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually
tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”
I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a
company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more
downgrades. It all becomes a spiral that can lead to a corporate meltdown.
Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a
liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through
Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain.
When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred 15
people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for
weeks, was far from a worst-case scenario.
One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a
future date it will receive any gain or pay any loss that the bank realizes.
Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and
analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is
running.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles
caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,
however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
This fiasco is an utter disgrace to capatilism.
Banks should have never been allowed to securitise their mortgage portfolios. Allowing them to do so made them nothing more than mortgage brokers, only interested in the fees they were earning and not on the risk they were taking on board.
As for CDS's - I'm gobsmacked. These were effectively insurance products dressed up as 'derivatives' hence neatly sidestepping the fundamental requirements of insurance accounting to provide for future losses.
IMHO the world has been held hostage by the latter day equivalent of Robber Barons masquerading as financial gurus.
You don't get something for nothing - the medieval alchemists tried and failed. Unfortunately, the 20th century alchemists succeeded - but to the cost of the rest of the world.
Banks should have never been allowed to securitise their mortgage portfolios. Allowing them to do so made them nothing more than mortgage brokers, only interested in the fees they were earning and not on the risk they were taking on board.
As for CDS's - I'm gobsmacked. These were effectively insurance products dressed up as 'derivatives' hence neatly sidestepping the fundamental requirements of insurance accounting to provide for future losses.
IMHO the world has been held hostage by the latter day equivalent of Robber Barons masquerading as financial gurus.
You don't get something for nothing - the medieval alchemists tried and failed. Unfortunately, the 20th century alchemists succeeded - but to the cost of the rest of the world.
el stovey said:
Isn't what's fundamentally wrong is that banks were lending to people that couldn't ever pay it back.
With hindsight, yes.To some extent, though, that's like watching a boxing match, and saying afterwards that one of the fighters would have won had they dodged left at a critical moment, and thrown a cross.
NorthernBoy said:
Shay HTFC said:
ou banker types just keep enhancing your public image don't you.
Can you give me a reason why I should change my behaviour to appease a pissant like you?Edited by Shay HTFC on Thursday 8th December 16:21
It is clear that the driver was a combination of greed, weak regulators, weak government ot supporting the weak regulators, hubris, greed, denial, greed, rating agencies with no regulation, short term incentivised pay structures and greed.
This was primarily done in the US, thoug later spread here.
I don't think all bankers can be on the hook for this.
NorthernBoy said:
Shay HTFC said:
ou banker types just keep enhancing your public image don't you.
Can you give me a reason why I should change my behaviour to appease a pissant like you?Edited by Shay HTFC on Thursday 8th December 16:21
Get over yourself, you work in an industry with a bad name (rightfully so it seems). Deal with it rather than getting all pissy.
Edited by Shay HTFC on Thursday 8th December 23:10
What Warren thought of Lehmans
Class 1 Assets (can be realised at short notice)
$72 billion
Class 1 Liabilities ( can be called on at short notice)
$109 billion
That is just basic, bad business - no hindsight required for that one...
http://www.riskoverreward.com/2009/12/mr-buffett-a...
Class 1 Assets (can be realised at short notice)
$72 billion
Class 1 Liabilities ( can be called on at short notice)
$109 billion
That is just basic, bad business - no hindsight required for that one...
http://www.riskoverreward.com/2009/12/mr-buffett-a...
johnfm said:
Buffett says ...
Alternatively, derivatives allow you to fix your mortgage, cap your mortgage. They have their good points and bad points - it's easy to come up with all this doom and gloom stuff but any new technology or innovation creates problems as well as solutions.
Shay HTFC said:
Get over yourself, you work in an industry with a bad name (rightfully so it seems). Deal with it rather than getting all pissy.
That's solely your opinion. Hundreds of thousands of people are happy to work in this industry (or as happy as in any other industry), are well paid and enjoy their work.Edited by fido on Thursday 8th December 23:10
fido said:
Shay HTFC said:
Get over yourself, you work in an industry with a bad name (rightfully so it seems). Deal with it rather than getting all pissy.
That's solely your opinion. Hundreds of thousands of people are happy to work in this industry (or as happy as in any other industry), are well paid and enjoy their work.Edited by fido on Thursday 8th December 23:10
However, to get all stroppy everytime someone mentions that the banking system is fundamentally flawed (which it arguably is at this moment in time) is pretty pathetic. To then arrogantly dismiss everyone who sees flaws in it as a fool (which is effetively what NorthernBoy does time and time again) is just weak.
Edited by Shay HTFC on Thursday 8th December 23:16
fido said:
johnfm said:
Buffett says ...
Alternatively, derivatives allow you to fix your mortgage, cap your mortgage. They have their good points and bad points - it's easy to come up with all this doom and gloom stuff but any new technology or innovation creates problems as well as solutions.
Shay HTFC said:
Get over yourself, you work in an industry with a bad name (rightfully so it seems). Deal with it rather than getting all pissy.
That's solely your opinion. Hundreds of thousands of people are happy to work in this industry (or as happy as in any other industry), are well paid and enjoy their work.Edited by fido on Thursday 8th December 23:10
I am not sure if 'any new technology or innovation' has the facility to bring down the global economy.
Agreed, derivatives have their uses - but Buffet is rightly outlining the risks of using derivatives and the accounting practices that were being used.
fido said:
johnfm said:
Buffett says ...
Alternatively, derivatives allow you to fix your mortgage, cap your mortgage. They have their good points and bad points - it's easy to come up with all this doom and gloom stuff but any new technology or innovation creates problems as well as solutions.
Derivatives (especially CDS), and securitisation, can be incredibly useful tools but just like a chainsaw, can be dangerous in the wrong hands. Everything in moderation.. but securitisation did get out of hand. Which is supposed to be the whole point of regulators, to spot macroprudential risks arising from the system as a whole. Capitalism needs to have controls, otherwise we'd still have children up chimneys and down coalmines. Unfortunately the regulators were asleep on the job, the controls didn't work and Winky even removed a lot of the controls.
Digga said:
At what point does banks knowingly hoovering up bad risk, labelling it as AAA and then betting against it because they were sure the risk was bad not constitute fraud?
I can't see how that could ever be anything other than fraud; if the law doesn't classify it as such it is badly drafted. This was fraud; the perpetrators are criminals.The people borrowing money they couldn't afford to buy houses they didn't deserve were stupid, not criminal. 'The masters of the universe' claim not to be stupid so I must conclude they did it deliberately and are therefore criminals.
munky said:
fido said:
johnfm said:
Buffett says ...
Alternatively, derivatives allow you to fix your mortgage, cap your mortgage. They have their good points and bad points - it's easy to come up with all this doom and gloom stuff but any new technology or innovation creates problems as well as solutions.
Derivatives (especially CDS), and securitisation, can be incredibly useful tools but just like a chainsaw, can be dangerous in the wrong hands. Everything in moderation.. but securitisation did get out of hand. Which is supposed to be the whole point of regulators, to spot macroprudential risks arising from the system as a whole. Capitalism needs to have controls, otherwise we'd still have children up chimneys and down coalmines. Unfortunately the regulators were asleep on the job, the controls didn't work and Winky even removed a lot of the controls.
Maybe nuclear explosives or deadly virus research would be closer.
Car deaths per user mile are not significant. In the UK and US it is in the thousands per year - combined population of a few hundred million.
There is not a likelihood that millions will be killed AND that these deaths with then trigger millions of deaths in other areas.
The regulators weren't asleep at he job - they were outgunned by wall street power and money.
hidetheelephants said:
Digga said:
At what point does banks knowingly hoovering up bad risk, labelling it as AAA and then betting against it because they were sure the risk was bad not constitute fraud?
I can't see how that could ever be anything other than fraud; if the law doesn't classify it as such it is badly drafted. This was fraud; the perpetrators are criminals.The people borrowing money they couldn't afford to buy houses they didn't deserve were stupid, not criminal. 'The masters of the universe' claim not to be stupid so I must conclude they did it deliberately and are therefore criminals.
Simple answer is, it didn't happen that way. As already mentioned on this thread, the storyteller of the programme in question neglected to say that the 'bank' (more correctly, broker-dealer, it wasn't actually a bank) in question, Goldmans, did NOT bet against it because they were sure the risk was bad. They bet against it, rather sensibly one might add because they avoided a bailout, in order to hedge the risk on their books while they were packaging the deals. The firms that didn't do this lost a boatload of cash and needed a bailout. It seems some people would think that is preferable; I do not.
Second, the banks didn't label it as AAA, the ratings agencies did. And yes they got paid for those ratings but the reason those ratings were given is because the instruments sold to investors included insurance purchased from Monoline insurers (again, not mentioned by the storyteller) to protect against default of the underlying debt. And when I say insurance, I mean real insurance, not CDS, for the avoidance of doubt. For those wondering what Monolines are, they are insurance companies like MBIA and Ambac that specialise in bond insurance, otherwise known as financial guaranty companies. The problem with this of course is that no-one stopped to consider whether these insurers actually had enough cash to pay out in the event of widespread defaults, and as it turned out, they did not. Is it REALLY criminal that the people structuring the deals didn't investigate thoroughly whether the insurers could cope with an event which they believed wouldn't happen? Do YOU go and audit your car insurance company to make sure they can afford to pay out? No? My god, you CRIMINAL!!
The second problem - easy to identify with hindsight but no-one, even internet warriors, identified at the time, was that the mathematical models used to price and calculate the risk on these products were based on historical observations of default rates. Historically, Americans would rather do anything than default on their mortgage. If in financial difficulty, Americans would always, always default on credit card debt first (unsecured), followed by car finance payments (ok so the car gets repossessed, not the end of the world) and only if all else failed, the mortgage. This time round, that didn't happen. Americans for the first time defaulted on their mortgage first, handing the keys to the lender and walking away from their debt. Nobody was expecting that, even though American mortgages are non-recourse (if your house is worth less than you borrowed, you can just walk away and not owe the remainder). SO, they believed large scale defaults would not happen, and therefore didn't worry too much about the monoline insurers, and neither did the ratings agencies.
The other point that the programme failed to point out is that the buyers of these instruments were professional investors, not grannies. They knew what they were buying, had an insatiable appetite for it and queued up for more. Goldmans just sold them what they wanted. Is that criminal? If however they misrepresented what they were selling then yes, that's fraud and they shoud go to jail, but as far as I know there has been no proof of this so far. Yes, there were some stupid internal emails at Goldies describing what they were selling as "crappy", but that's no different from Ratner describing his jewellery as crappy. Now, I think there might be an investigation still ongoing (or maybe it isn't, I don't know) into one of the deals Goldies sold, where Paulson (no, the other one - the one that's a client of Goldies) was involved in selecting the names to go into a CDO and then he (Paulson that is, not a bank, and not Goldies) then bet against that deal. Now, Goldies should have disclosed to client Y (the buyer) that another client X was involved in selecting the credit names, but a failure of disclosure is not fraud and there may be a civil case to answer but not criminal, probably.. a question for the lawyers.
So there you go. Stuff that the TV programme did not tell you, because it was biased and had an agenda and gullible viewers accept it as fact, because they want to believe it.
johnfm said:
Car deaths per user mile are not significant.
Tell that to the relatives of the dead, you heartless sod! johnfm said:
In the UK and US it is in the thousands per year - combined population of a few hundred million.
There is not a likelihood that millions will be killed AND that these deaths with then trigger millions of deaths in other areas.
The regulators weren't asleep at he job - they were outgunned by wall street power and money.
outwitted, maybe. Did you know that AIGFP were not regulated and why?There is not a likelihood that millions will be killed AND that these deaths with then trigger millions of deaths in other areas.
The regulators weren't asleep at he job - they were outgunned by wall street power and money.
Fact remains, derivatives used properly in a controlled manner by the right people, are perfectly safe tools to manage and reduce risk. AIG - an insurance company - were trading derivatives from their AIGFP subsidiary without having a clue what they were doing. They were the wrong people.
Pommygranite said:
There's a lot of 'knowledgeable' comments going on here on the back of watching a film 
Everyone, I mean everyone, got greedy and had the unobtainable become obtainable and took the easy option.
The consumer may not have created the rules but they certainly learnt to play to them.
The effect comes after the cause though. The conditions had to be created. Everyone, I mean everyone, got greedy and had the unobtainable become obtainable and took the easy option.
The consumer may not have created the rules but they certainly learnt to play to them.
munky said:
johnfm said:
Car deaths per user mile are not significant.
Tell that to the relatives of the dead, you heartless sod! johnfm said:
In the UK and US it is in the thousands per year - combined population of a few hundred million.
There is not a likelihood that millions will be killed AND that these deaths with then trigger millions of deaths in other areas.
The regulators weren't asleep at he job - they were outgunned by wall street power and money.
outwitted, maybe. Did you know that AIGFP were not regulated and why?There is not a likelihood that millions will be killed AND that these deaths with then trigger millions of deaths in other areas.
The regulators weren't asleep at he job - they were outgunned by wall street power and money.
Fact remains, derivatives used properly in a controlled manner by the right people, are perfectly safe tools to manage and reduce risk. AIG - an insurance company - were trading derivatives from their AIGFP subsidiary without having a clue what they were doing. They were the wrong people.
Seems the heads of banks, insurers, rating agencies etc got too caught up in maths and lost sight of some fundamental 'sense checks'
munky said:
Goldmans just sold them what they wanted. Is that criminal? If however they misrepresented what they were selling then yes, that's fraud and they shoud go to jail, but as far as I know there has been no proof of this so far.
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