Let's talk politics and Wall Street...

[IlyaKEightSix]

Okay, I'm hearing all of these politicians clamor about how Wall Street needs to be more regulated, more regulation, yadda yadda yadda...

To me, I say it's all bullsh!t. Why? Simple.

Government regulatory agencies wouldn't know toxic waste if those assets slapped them in the face. To regulators, the tangled web of complex financial instruments can look like anything that firms wish to make them look like.

The professor of Stochastic Calculus told me that I'd have far too much difficulty absorbing Shreve's, and I have a quantitative major. Now if you asked some form of regulator to just look at all of these complex systems, how the hell do they know what they're even regulating?

What the heck will the regulators do if they're completely blind? Slow down the process? And? It'll happen anyway! It'll just take longer to build up, but the mess will be all the same!

Nobody self-respecting with the capability of understanding the complexities of derivatives and the insane and arcane strategies they give rise to should ever want to work for a small, random amount of money, when they can work as risk managers within firms (errr, firms being firm...GS will be the only one left standing) or hold front office positions.

Is this just all hot air that's going to do nothing in the end anyway?

 

[bigbadwolf]

The political pressure is for real. There will be regulation. It's not just (would-be) regulators who can't understand complex financial instruments and the bewilderingly complex manner in which they interact: it's also quants. It is impossible to calculate risks with such complexity. And it has become clear even to laymen that the taking on of such risks by over-leveraged firms with inadequate financial reserves is destabilising and expensive (for the taxpayer). Upto now the opaque complexity of financial instruments and (by implication) the financial system they constitute have been explained away by haughty Ph.D. quants whose condescending attitude towards laymen has been that these matters can't possibly be explained to those who can't even solve a simple PDE. This won't wash anymore. People are dimly coming to understand that math and computing have been used to camouflage reckless risks, shady practices, and incalculable complexity. But now, the party's over.

One more thing to keep in mind is that the decision to go for unfettered financial markets was a political one: this has been a political project from day one (for more on this, read Kevin Phillips's "Bad Money"). Both the US and the UK have used financialisation, with its concomitant emphasis on financial instruments and debt explosion, to cover inherent weaknesses and contradictions in their neoliberal economies (most important of which has been insufficient purchasing power by consumers as well-paid jobs have vanished or been shipped overseas). The decision to abandon such unfettered markets will also be political. The political dimension of the financial framework is something myopic quants tend not to focus on (they focus on math and computing, while not understanding that it takes place within a framework ordained by the powers-that-be).

My two cents, as usual.

Postscript: I see a well-thought-out article by Philip Stephens in today's FT:

When enough banks have been nationalised or gone bust, when the last reputations have been properly shredded, and when prices of Fifth Avenue apartments and Mayfair town houses have fallen finally to earth, politicians are going to have to think hard about the lessons of the financial crash of 2008.

The fiendishly complex products that seemed for a time to define a new financial capitalism will be seen for what they properly are: instruments of deception as much as of innovative genius.

It is horrifying to think that the huge liabilities of failing institutions have now been loaded on to the backs of taxpayers: a case, as far as speculators are concerned, of heads, we win; tails you lose. Given where we are, governments scarcely have much choice.


Even so, and for all the richly deserved humiliation suffered by those hollow titans Jimmy Cayne, Dick Fuld and Stan O’Neal, ordinary folk will suffer most. Unsurprisingly, they will blame governments. Political leaders took the credit for the economic boom; they cannot escape blame for the bust.

 

[charlesdwright]

There's nothing new under the sun.

 

[IlyaKEightSix]

Could you summarize that please, Chuck?

 

[doug reich]

The authors of the paper very sweetly wrote a kind of summary:

In this paper we first trace the changing nature of banking, currency and debt crises from
the last century to the present. Each type of crisis has transmogrified in the presence of official
intervention and the creation of a safety net. A similar pattern is observed for international rescue
loans. We then present evidence suggesting that the incidence has increased and the severity of
financial crises has changed little in emerging markets from the pre-1914 era to the present.
Finally we assess the impact of IMP loans on the macro performance of the recipients. A simple
with-without comparison of countries receiving IMF assistance during crises in the period
1973-98 with countries in the s ame region not receiving assistance suggests that the real
performance of the former group was possibly worse than the latter. Similar results obtain
adjusting for self-selection bias and counterfactual policies.

 

[Adam]

Is any future regulatory regime going to have any real teeth? Perhaps. It stands to be remembered, after all, that this current mess has been caused by, among other things, massive over-leveraging of the independent IBs, which has only been legal since Phil Gramm snuck in a 262-page amendment (the Commodities Futures Modernization Act) to an essential government reauthorization bill back in December 2000, introduced several hours before Congress broke for Christmas in order to ensure it would get passed without debate. If Congress can pass a deregulation bill that allowed the financial industry to "get drunk", as GWB so piquantly put it, it stands to reason that Congress can, in theory, instate some common sense regulations to help banks sober back up.

That said, it ain't likely. Assuming McCain takes the WH, expect nothing but empty words, pointless commissions, and the continuance of business as usual. Assuming Obama takes the WH, expect Congress to thwart any and all positive steps the administration might propose. IMHO, I'd rather vote for the ticket that will try to do something productive (and, unfortunately, likely fail) than the ticket that looks to malevolent actors like Gramm for financial advice, but maybe that's just me.

 

[charlesdwright]

Could you summarize that please, Chuck?

Sorry, that's above my pay grade.

Actually, I think summaries are Doug's speciality, and I see he's on the job.

I just got to the part about how much money the IMF has dispensed to Russia, Asia Mexico, and Brazil, up to 2000. Amazing.

Bordo has also written about the cycle nature of regulatory efforts at preventing financial crisis.

For those who might not be familiar, Anna Schwartz is the esteemed widow of the esteemed Milton Friedman.

 

[Andy Nguyen]

Now if you asked some form of regulator to just look at all of these complex systems, how the hell do they know what they're even regulating?

I disagree that most of them has no clue. Maybe some political appointees have no relevant knowledge but much of these regulators are long time industry veterans so while they may not know how to setup a boot trap code, they know the "put a lipstick on a pig" game too well.
You ignore the fact that this whole thing is not about CDS or some technical jumbo mumbo, it's all about election year politics and who is pulling the strings behind closed doors. The whole "bailout of X but let Y die" has fingerprints of many politicians in it.
You have a guy who is "fundamentally a deregulator" for 26 years and now suddenly talking about holding Wall Street CEO responsible, and you worry about regulators don't understand derivatives?

 

[myqee]

Is any future regulatory regime going to have any real teeth? Perhaps. It stands to be remembered, after all, that this current mess has been caused by, among other things, massive over-leveraging of the independent IBs, which has only been legal since Phil Gramm snuck in a 262-page amendment (the Commodities Futures Modernization Act) to an essential government reauthorization bill back in December 2000, introduced several hours before Congress broke for Christmas in order to ensure it would get passed without debate. If Congress can pass a deregulation bill that allowed the financial industry to "get drunk", as GWB so piquantly put it, it stands to reason that Congress can, in theory, instate some common sense regulations to help banks sober back up.

That together with Gramm's repeal of the Glass-Steagall act, and the repeal of the uptick rule are serious contributing factors to the recent instabilities. Also don't forget that Gramm's wife was the head of the Commodity Futures Trading Commission under Reagan and was a director on Enron's board at the time the Modernization act was passed -- i.e., Gramm voted to have NO OVERSIGHT on oil futures trading when his wife was on the board of Enron; is that a coincidence? It seems all the measures that were put in place after the Great Depression has been systematically removed by politicians one by one. Doesn't it occur to anybody that there were good reasons that these rules were initially put in place? Is it a logical stretch to assume that removal of these rules might bring back the problems that originally motivated these rules? What worries me now is that MS and GS are now becoming bank holding companies. Wasn't that one of the things that they decided was the cause of the run on the banks after the Great Depression?

 

[alain]

interesting opinion published in Bloomberg

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0

 

[IlyaKEightSix]

Wow. Everyone makes mistakes, but that's a royal screwup if there ever was one.

Frankly, I can't stand politicians on a whole. They're talking heads that can't create anything.

Too bad Hank Paulson isn't running for president.

It'd be nice to have someone that knows how to govern a large collection of people to produce amazing results running our country.

And sadly, I can't run for president either. I was born in Kiev.

 

[Stefan Zota]

Paulson has a proven record, same as Bloomberg or Mack.
These are the people that should lead the country. These guys can understand global economy from theory and practice. These guys know how to talk to Chinese government, to a corporation, to a fund etc. They have an extraordinary work power, quick reaction, not lost in details. They know how to choose capable employees and delegate appropriate work ...

Most of politicians are either lawyers or even failures in their first proffession !

 

[Andy Nguyen]

What do you guys think about foreign banks included in the bailout plan? Paulson mentioned that thousands of financial institutions will be included in the plan.
Where does this end? Tax payer money is given out like candy.

 

[Adam]

Paulson has asked for $700b with absolutely no governmental oversight over how he spends this cash. And we're supposed to just trust him? Why? Executive power without oversight is the definition of despotism. If he had any idea how to fix this mess, don't you think he would have done something to stop it in the first place? King Henry's just looking for a government handout for his buddies at Goldman.

Case in point: He's against having the government purchase equity for its cash (not to mention capping CEO salaries and mandating the elimination of golden parachutes) because he's afraid that punishing the failing companies would lead to limited participation in the program. Isn't limiting participation in the handout -- sorry, bailout -- program a good thing? Any company that is strong enough to survive without participating SHOULD NOT BE PARTICIPATING. It amazes me how quickly all these free-market conservatives, at the first sign of trouble, turn into socialists crying out for the government dole.

And why the rush? We need $700b NOW!!! Next week will be too late! No time to debate, or perhaps look for another, better option. And nobody better ask how Henry came up with the $700b price tag. Why not $500b? Why not $900b? Has anyone here read anything about the Paulson Welfare Plan that might convince me of what a great idea it is? Or should I be impressed with him because he wears a nice suit?

 

[IlyaKEightSix]

No, Adam, you're supposed to be impressed with Paulson because he ran Goldman Sachs and ran it well for 8 years and he knows what the hell he's doing, unlike the imbeciles on Capitol Hill that make up the electoral college--each and every single one of them.

As for bailing out foreign banks, Paulson has a point. If they lend Americans money and hire American employees, they're part of the system. While it certainly makes me uneasy, the question is this:

Who is anyone else to question the CEO of Goldman Sachs on matters of money?

Are they honestly *that arrogant* to think they can do better?

A bunch of noisy idiots do not make for better decisions. Yes, Paulson may be wielding unprecedented power, but we're facing an unprecedented crisis. Also, this "bailout" for his buddies at Goldman Sachs?

Goldman Sachs got subprime RIGHT. They SHORTED MBSs and CDOs. It's just that no financial company, all of which run on fractional reserving and massive leverage is safe from a widespread panic.

What we are facing is a terrible aberration, and the politicians need to shut their mouths and let Paulson do his work.

 

[Stefan Zota]

Paulson has asked for $700b with absolutely no governmental oversight over how he spends this cash. And we're supposed to just trust him? Why? Executive power without oversight is the definition of despotism. If he had any idea how to fix this mess, don't you think he would have done something to stop it in the first place? King Henry's just looking for a government handout for his buddies at Goldman.

Case in point: He's against having the government purchase equity for its cash (not to mention capping CEO salaries and mandating the elimination of golden parachutes) because he's afraid that punishing the failing companies would lead to limited participation in the program. Isn't limiting participation in the handout -- sorry, bailout -- program a good thing? Any company that is strong enough to survive without participating SHOULD NOT BE PARTICIPATING. It amazes me how quickly all these free-market conservatives, at the first sign of trouble, turn into socialists crying out for the government dole.

And why the rush? We need $700b NOW!!! Next week will be too late! No time to debate, or perhaps look for another, better option. And nobody better ask how Henry came up with the $700b price tag. Why not $500b? Why not $900b? Has anyone here read anything about the Paulson Welfare Plan that might convince me of what a great idea it is? Or should I be impressed with him because he wears a nice suit?

I can understand the "angry tax-payer" approach.

The cost is large as mentioned by everyone. However let's throw this plan aside. Does anyone in Washington have an answer to following questions:
1. What is the alternative?
2. Do you understand the reaction of the markets?
3. Do you have any method to re-start the credit markets?


Here is my answers as far as I understand the environment. Looking forward to your opinion.
1. Don't see an alternative at the moment. Looking at the turmoil from last week, entire financial market had same answer.
2. A domino of bankrupcies may trigger a complete stall in the sector. If GS, MS, Wachovia go backrupt there will be many, many other that will default as a result. If confidence is completely lost in financials, I don't really see how markets can function.
Are you aware of the volume executed/cleared through the major brokers?
3. Don't see an alternative again. Markets have vanished for a lot of derivative instruments and even simple products. Bank prosecutions were the only way to create some transactions. Do you think that is the solution?

 

[IlyaKEightSix]

Newsflash:

Warren Buffet just bought 5 billion in GS preferred stock.

That should mean GS is in the clear.

 

[Keni]

Goldman gets $5 Billion from Buffett's Berkshire

Check out the article here.

Buffett must perceive Goldman as undervalued from the significant investment he is making in the company...but he is getting a dividend of 10% on his shares.

 

[Andy Nguyen]

Yeah, and the FBI is investigating Lehman, AIG. ABC News: FBI Probes Possible Fraud at Collapsed Firms
Wait, didn't they investigate just a couple of months ago?
Carry on.

 

[IlyaKEightSix]

Well, so long as Buffett is in on it, it seems that it may be back to business in short order for GS--investment bank or holding bank.