Languish.org

http://finance.yahoo.com/news/Jobless-rate-hits-94-percent-apf-15452726.html?sec=topStories&pos=1&asset=&ccode=

I just thought this was interesting, given the enormous piles of money we shovelled at the conomy to avoid this, and given that the stress tests for the banks envisioned this as the worst case scenario.

However, the pace of job loss is slowing and was much lower than expected. Which I think is a lot more interesting.

Quote from: Berkut on June 05, 2009, 02:27:58 PM
However, the pace of job loss is slowing and was much lower than expected. Which I think is a lot more interesting.

Why so?

Quote from: Faeelin on June 05, 2009, 02:30:37 PM

Quote from: Berkut on June 05, 2009, 02:27:58 PM
However, the pace of job loss is slowing and was much lower than expected. Which I think is a lot more interesting.

Why so?

Beacuse it means we are bottoming out. Hopefully.

Indeed.  I wonder if things will just kinda drift and stabilize at current levels.  Was the past 12 years a bubble? Were the last 30 years? I know there were some severe recessions in there, but has all that deficit spending at personal and national levels led us to a rather bleak, if stable, economic life?

Quote from: Darth Wagtaros on June 05, 2009, 02:32:03 PM
Indeed.  I wonder if things will just kinda drift and stabilize at current levels.  Was the past 12 years a bubble? Were the last 30 years? I know there were some severe recessions in there, but has all that deficit spending at personal and national levels led us to a rather bleak, if stable, economic life?

I've been thinking about that as well.  I definitely think that since Reagan's financial deregulation (and all subsequent movement in that direction), a lot of our gains have really been on the backs of one bubble after another after another.  What we thought was increasing efficiency and flexibility turned out to be just a way to ignore the risks we've taken. 

However, in other ways, we did leap far ahead in the last 30 years.  For one, we didn't even have a useable personal computer 30 years ago, and now we can't imagine our society without it.

When Obama was arguing in favor of the stimulus he claimed that without the stimulus the unemployment rate would rise to 8.9 percent by this summer and with it it would top out at 7.9%.

Would be nice if we actually had a news media in this country pointing out the utter failure of the plan.  Alas, we merely have a cheerleading section.

Why are you babbling about Obama?

DG just proved that the entire economy's fall is because of Reagan.

Quote from: Hansmeister on June 05, 2009, 03:53:33 PM
When Obama was arguing in favor of the stimulus he claimed that without the stimulus the unemployment rate would rise to 8.9 percent by this summer and with it it would top out at 7.9%.

Would be nice if we actually had a news media in this country pointing out the utter failure of the plan.  Alas, we merely have a cheerleading section.

This was sort of one of my points, but I'm not sure what you're saying.

"Obama was wrong! Recession was worse than people thought it would be at the time!"

Quote from: Berkut on June 05, 2009, 03:57:47 PM
Why are you babbling about Obama?

DG just proved that the entire economy's fall is because of Reagan.

oh yeah, I forgot.  Fannie mae and Freddy Mac are the type of institutions supported by Reagan. And so are laws like the Community Reinvestment Act that force lending to unqualified people.  :lol:

There have certainly been a lot of long-term gains in the past 30 years. Cars are more reliable, travel is more affordable, food is better, there is the whole computer and internet thing. It seems to me that the definite gains are due to technological improvements and innovation; even something as apparently basic as better food depends on improved transportation and storage techs.

Quote from: Faeelin on June 05, 2009, 04:02:34 PM

Quote from: Hansmeister on June 05, 2009, 03:53:33 PM
When Obama was arguing in favor of the stimulus he claimed that without the stimulus the unemployment rate would rise to 8.9 percent by this summer and with it it would top out at 7.9%.

Would be nice if we actually had a news media in this country pointing out the utter failure of the plan.  Alas, we merely have a cheerleading section.

This was sort of one of my points, but I'm not sure what you're saying.

"Obama was wrong! Recession was worse than people thought it would be at the time!"

that Obama's stimulus bill was a fraud.  It did nothing to stimulate the economy, indeed, that was never the purpose of the bill.  It was a vehicle to expand the reach of the state.

Quote from: Hansmeister on June 05, 2009, 04:05:30 PM
that Obama's stimulus bill was a fraud.  It did nothing to stimulate the economy, indeed, that was never the purpose of the bill.  It was a vehicle to expand the reach of the state.

:hug:

Quote from: Berkut on June 05, 2009, 02:31:18 PM
Beacuse it means we are bottoming out. Hopefully.

What about summer employment distortion? I'm sure it is not as noticeable over there, but in Spain tourism drives up employment during the summer significantly.

Quote from: Hansmeister on June 05, 2009, 04:03:52 PM
oh yeah, I forgot.  Fannie mae and Freddy Mac are the type of institutions supported by Reagan. And so are laws like the Community Reinvestment Act that force lending to unqualified people.  :lol:

As usual, good job on pounding on the factors that are least responsible for the current meltdown.  Fannie and Freddy were an abomination, but they were much more of a victim of the meltdown rather than the root cause.  CRA was also ill-conceived in theory, but in practice greedy lenders issued far more garbage loans than CRA required.

Also, CRA does have a good function.  The moment someone mentions CRA as the reason for the meltdown, you can safely assume that they're blowhards with no critical thinking or interesting insights on the matter.

Quote from: Iormlund on June 05, 2009, 04:23:00 PM

Quote from: Berkut on June 05, 2009, 02:31:18 PM
Beacuse it means we are bottoming out. Hopefully.

What about summer employment distortion? I'm sure it is not as noticeable over there, but in Spain tourism reduces drives up employment during the summer significantly.

All employment figures are normally seasonally adjusted.

Quote from: DGuller on June 05, 2009, 04:30:15 PM

Quote from: Hansmeister on June 05, 2009, 04:03:52 PM
oh yeah, I forgot.  Fannie mae and Freddy Mac are the type of institutions supported by Reagan. And so are laws like the Community Reinvestment Act that force lending to unqualified people.  :lol:

As usual, good job on pounding on the factors that are least responsible for the current meltdown.  Fannie and Freddy were an abomination, but they were much more of a victim of the meltdown rather than the root cause.  CRA was also ill-conceived in theory, but in practice greedy lenders issued far more garbage loans than CRA required.

Also, CRA does have a good function.  The moment someone mentions CRA as the reason for the meltdown, you can safely assume that they're blowhards with no critical thinking or interesting insights on the matter.

:rolleyes:

Quote from: DGuller on June 05, 2009, 04:30:48 PM

Quote from: Iormlund on June 05, 2009, 04:23:00 PM

Quote from: Berkut on June 05, 2009, 02:31:18 PM
Beacuse it means we are bottoming out. Hopefully.

What about summer employment distortion? I'm sure it is not as noticeable over there, but in Spain tourism reduces drives up employment during the summer significantly.

All employment figures are normally seasonally adjusted.

We also don't have a large seasonal summer tourism industry, compared to many southern european countries.  Unemployment is more likely to rise during the summer as new graduates enter the workforce.   Acual unemployment plus underemployment in the US is currently actually at around 16%.

Quote from: Hansmeister on June 05, 2009, 04:05:30 PM

Quote from: Faeelin on June 05, 2009, 04:02:34 PM

Quote from: Hansmeister on June 05, 2009, 03:53:33 PM
When Obama was arguing in favor of the stimulus he claimed that without the stimulus the unemployment rate would rise to 8.9 percent by this summer and with it it would top out at 7.9%.

Would be nice if we actually had a news media in this country pointing out the utter failure of the plan.  Alas, we merely have a cheerleading section.

This was sort of one of my points, but I'm not sure what you're saying.

"Obama was wrong! Recession was worse than people thought it would be at the time!"

that Obama's stimulus bill was a fraud.  It did nothing to stimulate the economy, indeed, that was never the purpose of the bill.  It was a vehicle to expand the reach of the state.

It didn't do a good enough job of that.

Quote from: Berkut on June 05, 2009, 02:31:18 PM
Beacuse it means we are bottoming out. Hopefully.

Things are getting worse more slowly which is a good thing.  People aren't afraid any more which is why consumer confidence numbers are doing well  and some businesses are beginning to expand again.

But, I'm aware that a number of the big retailers in this country think things will still get worse and retail tends to be an early indicator.

Quote from: DGuller on June 05, 2009, 04:30:15 PM


Also, Reagan does have a good function.  The moment someone mentions Reagan as the reason for the meltdown, you can safely assume that they're blowhards with no critical thinking or interesting insights on the matter.

Indeed.

Not our precious Reagan!!!!1

So it's Obama's fault for scaring America with with the specter of high unemployment and it's also his fault that there was high unemployment. :huh:

Quote from: Sheilbh on June 05, 2009, 07:22:31 PM
...and retail tends to be an early indicator.

Really? I thought it was more of a lag indicator. :huh:

Quote from: citizen k on June 05, 2009, 09:21:12 PM

Quote from: Sheilbh on June 05, 2009, 07:22:31 PM
...and retail tends to be an early indicator.

Really? I thought it was more of a lag indicator. :huh:

Yeah.  If you exclude certain sections (effectively car sales) then I think retailers tend to suffer and recover early in recessions.

Quote from: Sheilbh on June 05, 2009, 09:57:37 PM

Quote from: citizen k on June 05, 2009, 09:21:12 PM

Quote from: Sheilbh on June 05, 2009, 07:22:31 PM
...and retail tends to be an early indicator.

Really? I thought it was more of a lag indicator. :huh:

Yeah.  If you exclude certain sections (effectively car sales) then I think retailers tend to suffer and recover early in recessions.

Makes sense. They are most vulnerable to consumer confidence fluctuations, but also have some of the lowest fixed costs, percentage-wise, of all industries.

Is America done for?

Quote from: Razgovory on June 05, 2009, 08:12:07 PM
So it's Obama's fault for scaring America with with the specter of high unemployment and it's also his fault that there was high unemployment. :huh:

He should have made the unemployment numbers a state secret. Then American consumers wouldn't be frightened and could resume spending us out of this mess.

Quote from: Berkut on June 05, 2009, 02:31:18 PM

Quote from: Faeelin on June 05, 2009, 02:30:37 PM

Quote from: Berkut on June 05, 2009, 02:27:58 PM
However, the pace of job loss is slowing and was much lower than expected. Which I think is a lot more interesting.

Why so?

Beacuse it means we are bottoming out. Hopefully.

It's always darkest before things go pitch black.

Quote from: DGuller on June 05, 2009, 04:30:15 PM
As usual, good job on pounding on the factors that are least responsible for the current meltdown.  Fannie and Freddy were an abomination, but they were much more of a victim of the meltdown rather than the root cause.

How so?

Quote from: The Brain on June 06, 2009, 03:33:37 AM
Is America done for?

Yes.

Quote from: Ed Anger on June 06, 2009, 05:21:22 PM

Quote from: The Brain on June 06, 2009, 03:33:37 AM
Is America done for?

Yes.

I'd give us a li'l while yet, eating us underdone could result in intestinal parasites.

Quote from: Admiral Yi on June 06, 2009, 04:08:53 PM

Quote from: DGuller on June 05, 2009, 04:30:15 PM
As usual, good job on pounding on the factors that are least responsible for the current meltdown.  Fannie and Freddy were an abomination, but they were much more of a victim of the meltdown rather than the root cause.

How so?

They did not buy most of the riskiest mortgages, and the trouble didn't start with the mortgages they were holding.  They were done in by the knock-on effects of the subprime meltdown.

Quote from: DGuller on June 07, 2009, 01:07:58 AM
They did not buy most of the riskiest mortgages, and the trouble didn't start with the mortgages they were holding.  They were done in by the knock-on effects of the subprime meltdown.

What do you mean by knock-on effect?

Quote from: Admiral Yi on June 07, 2009, 01:45:36 AM

Quote from: DGuller on June 07, 2009, 01:07:58 AM
They did not buy most of the riskiest mortgages, and the trouble didn't start with the mortgages they were holding.  They were done in by the knock-on effects of the subprime meltdown.

What do you mean by knock-on effect?

:rolleyes: Google it.

"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

Quote from: saskganesh on June 07, 2009, 01:28:16 PM
"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

A "knock-on effect" is a "secondary effect."  It's not jargon, just British.

Yi, I did a little search.  Here's the only page I found that I could understand :)
http://www.economist.com/blogs/freeexchange/2008/09/crisis_roundtable_were_fannie.cfm

I recommend Martin Wolf's stuff though.  What he emphasises is that this is a global crisis and its roots are global.  In his view the 'cause' was the legacy of the Asian financial crisis and that the developed world didn't intervene, in the way the US had with Mexico, which lead to very conservative policies in the developing world as they basically tried to build a central bank dike that would protect them from something like the Asian crisis happening again.

Edit:  Here's a precis of the argument from Wolf who doesn't have to use matchsticks to do his economic working outs:
'It is neither desirable nor feasible for the US to be the world's dominant borrower forever. Indeed it is absurd for the world economy's stability to depend on the willingness of the world's richest consumers to borrow ever more.' The globalisation of finance should have brought substantial benefits. In practice it brought a series of devastating currency and banking crises in the 1980s and 1990s, particularly in the developing world. The failure of advanced countries and of the IMF to rescue the damaged economies of Asia, Russia or Brazil taught those countries, and the emerging Chinese giant, an overwhelming lesson: never again. Emerging economies ceased importing capital, but by keeping their exchange rates down, running huge current account surpluses, recycling capital inflows and accumulating enormous foreign currency reserves, they began to export it on a vast scale. Since several advanced countries also ran large current account surpluses, to which the oil exporters added their own massive contributions in the mid-2000s, the US emerged as the spender and borrower of last resort. The US is the world's most creditworthy borrower. But as its external deficit exploded, so did the domestic borrowing of US households, stimulated by rising house prices. The result was the subprime mortgage crisis of 2007.

Quote from: saskganesh on June 07, 2009, 01:28:16 PM
"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

Dorsey isn't really known for his ability to carry an argument.

Shelf:

Is there anything in your article about the role played by Freddie and Fannie?

Quote from: Admiral Yi on June 07, 2009, 06:44:35 PM
Shelf:

Is there anything in your article about the role played by Freddie and Fannie?

Which article?

Quote from: Sheilbh on June 07, 2009, 06:46:27 PM
Which article?

http://www.economist.com/blogs/freeexchange/2008/09/crisis_roundtable_were_fannie.cfm

Or does your blog/freeexchange mention it.

The Economist's blog mentions it. 

The bit I italicised is from Martin Wolf's book in which he suggests that the flood of capital from developing economies into the developed world funded and enabled the housing boom and indeed the credit boom for people in countries like the US and the UK. 

If you have an hour I'd really recommend listening to Martin Wolf here:
http://fora.tv/2008/10/15/A_Conversation_with_Martin_Wolf

Edit: I recommend section three of that conversation with Martin Wolf on the housing stuff in particular, which is about 10 minutes long.  His basic argument is that the US housing bubble isn't special, that there's a similar bubble in many other economies now and in the past and in proportion many of those are larger.  The only possible difference is that 'it seems' that the quality of lending in the US seems a bit lower.

So the housing bubble is, in his view, not the problem but a symptom of the problem which is the international climate which made such bubbles not just possible, but likely.  Interest rates that were kept too low for too long, a flood of capital from the developing world into the developed world and external debt in the US and the UK helped create a lot of household debt that then hit financial institutions that were over-leveraged.

Edit:  Basically this is a global crisis that started globally, not one that started with the US sub-prime mortgate market, that emerged from nowhere, and that then spread around the world.  The housing bubble, which is the real problem, had global causes and sub-prime loaning was a further complication that hastened the collapse of the bubble.

OK, read the blog.  The not Frennie's fault argument is that they didn't guarantee (did they buy?) subprimes.  The yes Frennie's fault argument is that they bought a buttload of MBS's.

Martin Wolf (at least in the summary) skips over the part that I'm interested in.  Yes there was a housing bubble driven by cheap credit.  Yes cheap credit was driven in part by foreign macro policies and perceptions of relative risk.  But that doesn't explain why knowledgable financial institutions made immense one way bets on markets that (a) *everyone* knew were overvalued and (b) whose future perfomance depended on cleaning ladies putting 60% of their paychecks into a mortgage payment.

This was different than the dotcom bubble.  In the dotcom bubble the people who got burned were retail investors, not the pros. 

60 Minutes did an interview with the new CEO of AIG a couple weeks back.  He came out of retirement to work for a dollar a year because he thinks it's the right thing to do.  He oozed sincerity.  He was asked about the subprime meltdown and his answer was that people tend to discount "remote catastrophic outcomes."  Now that makes no sense to me.  Based on everything I know there was nothing remote about the subprime meltdown, it was odds-on.

Quote from: saskganesh on June 07, 2009, 01:28:16 PM
"look it up" "gogle it" " I am not going to tell you" "I don't know either but I am going to repeat what I read elsewhere because I think it makes me look clever"

great conversational gambit.

I don't think being asked to be a dictionary is a reasonable demand on a debater.  I know you just need to throw yet another jab at me, because for some reason you really like doing it rather than contributing anything of value to the debate, but you're really barking up the wrong tree.  I'll pit my record of original analysis on this topic against anyone else on Languish.

Quote from: Admiral Yi on June 07, 2009, 07:26:33 PM
But that doesn't explain why knowledgable financial institutions made immense one way bets on markets that (a) *everyone* knew were overvalued and (b) whose future perfomance depended on cleaning ladies putting 60% of their paychecks into a mortgage payment.

1) Financial types are more stupid than they let on.
2) Financial institutions were run by people with hugely misaligned incentives.

Quote from: DGuller on June 08, 2009, 11:06:44 AM

Quote from: Admiral Yi on June 07, 2009, 07:26:33 PM
But that doesn't explain why knowledgable financial institutions made immense one way bets on markets that (a) *everyone* knew were overvalued and (b) whose future perfomance depended on cleaning ladies putting 60% of their paychecks into a mortgage payment.

1) Financial types are more stupid than they let on.
2) Financial institutions were run by people with hugely misaligned incentives.

Wait, I thought you said it was because of Reagan?

Quote from: DGuller on June 08, 2009, 11:06:44 AM
1) Financial types are more stupid than they let on.
2) Financial institutions were run by people with hugely misaligned incentives.

And yet financial institutions have been known to operate for months, even years, without failing.  Presumably there was something that differentiated the subprime crisis from normal operations.

Quote from: Admiral Yi on June 08, 2009, 04:19:12 PM

Quote from: DGuller on June 08, 2009, 11:06:44 AM
1) Financial types are more stupid than they let on.
2) Financial institutions were run by people with hugely misaligned incentives.

And yet financial institutions have been known to operate for months, even years, without failing.  Presumably there was something that differentiated the subprime crisis from normal operations.

Same can be said of any other bubble.  Those who became victims of the bubble must've operated normally before they became victims of the bubble.

Quote from: DGuller on June 08, 2009, 04:24:08 PM
Same can be said of any other bubble.  Those who became victims of the bubble must've operated normally before they became victims of the bubble.

OK, let's say the same of the dotcom bubble and the commercial real estate bubble that brought down the S&L's.  Wall Street didn't get burned when those bubbles burst.  Has Wall Street gotten stupider since then, or have the incentives gotten more perverse?

Quote from: Admiral Yi on June 08, 2009, 04:19:12 PM
And yet financial institutions have been known to operate for months, even years, without failing.  Presumably there was something that differentiated the subprime crisis from normal operations.

Actually the past 30 years has had a number of banking crises and financial system collapses.  Russia had one, Japan, most of Asia, Brazil also had a large one.  I believe the majority of the IMF's work over the past 30 years has been dealing with precisely this sort of crisis.  All that's different is that this one's affecting the US not the developing world.

This chart compares Japan and the US:
(https://languish.org/forums/proxy.php?request=http%3A%2F%2Fmedia.ft.com%2Fcms%2Fd4df193c-fd28-11dd-a103-000077b07658.gif&hash=a50dfd228905741566cc791820f337d26cdaff0f)

I can't find a chart but there was a very interesting one in the FT a while ago that showed that basically the number of banking and financial system crises globally has been at about the level of the pre-war years for the past 30 years.  Between 1945 and the 70s there were very few, indeed almost none.  This sort of thing has been happening for a while.  What's difficult about it is that it's hit the US which means that IMF-like solutions can't be imposed and which also means the whole world is hit due to American economic strength and globalisation.

I still can't find the charts but there's a few which may do.  Unfortunately I couldn't find them online so I've had to save these and attach them to posts.  Hopefully this'll work.

First a map of bank crises since the late seventies:

Second a frequency of crisis chart.  The 56 are emerging, transitional and developing countries:

And finally a crisis severity average chart:

I don't buy the "misaligned incentives" argument: I'd argue that current compensation aligns incentives more than any previous system we had. Stock as a percent of compensation has grown, often through incentive plans.

Are incentives misaligned from shareholders? Absolutely. There has never been, and never will be a system that perfectly aligns the interests of shareholders and management.

But the concept that no one seems willing to consider is if this crisis was in part due to the alignment of incentives between management and shareholders. Stock is considered a very risky asset class--high risk, high reward. A diversified investor is likely to want the company to maximize its expected returns regardless of the risks of the company (for example, I'd invest 100 in a coin toss if I lost everything in a tails, but won 250 if heads). The employees, bondholders, communities and customers probably don't share this willingness (I would not, for example, be willing to wager my salary on the same bet).

Quote from: Admiral Yi on June 08, 2009, 04:30:20 PM

Quote from: DGuller on June 08, 2009, 04:24:08 PM
Same can be said of any other bubble.  Those who became victims of the bubble must've operated normally before they became victims of the bubble.

OK, let's say the same of the dotcom bubble and the commercial real estate bubble that brought down the S&L's.  Wall Street didn't get burned when those bubbles burst.  Has Wall Street gotten stupider since then, or have the incentives gotten more perverse?

One difference is that Wall Street had no inherent role to play in those bubbles.  The subprime bubble was all about Wall Street, it wouldn't be possible without Wall Street buying up the mortgages and leveraging the hell out of them.

Quote from: Sheilbh on June 08, 2009, 04:41:42 PM
I can't find a chart but there was a very interesting one in the FT a while ago that showed that basically the number of banking and financial system crises globally has been at about the level of the pre-war years for the past 30 years.  Between 1945 and the 70s there were very few, indeed almost none.  This sort of thing has been happening for a while.  What's difficult about it is that it's hit the US which means that IMF-like solutions can't be imposed and which also means the whole world is hit due to American economic strength and globalisation.

Interestingly enough, between 1945 and 1980 is also the period between Great Depression and Great Deregulation.  Coincidence?

Quote from: DGuller on June 08, 2009, 06:41:20 PM
One difference is that Wall Street had no inherent role to play in those bubbles.  The subprime bubble was all about Wall Street, it wouldn't be possible without Wall Street buying up the mortgages and leveraging the hell out of them.

:huh:Eh, that's sort of the question, isn't it?

Quote from: alfred russel on June 08, 2009, 04:57:47 PM
I don't buy the "misaligned incentives" argument: I'd argue that current compensation aligns incentives more than any previous system we had. Stock as a percent of compensation has grown, often through incentive plans.

Are incentives misaligned from shareholders? Absolutely. There has never been, and never will be a system that perfectly aligns the interests of shareholders and management.

But the concept that no one seems willing to consider is if this crisis was in part due to the alignment of incentives between management and shareholders. Stock is considered a very risky asset class--high risk, high reward. A diversified investor is likely to want the company to maximize its expected returns regardless of the risks of the company (for example, I'd invest 100 in a coin toss if I lost everything in a tails, but won 250 if heads). The employees, bondholders, communities and customers probably don't share this willingness (I would not, for example, be willing to wager my salary on the same bet).

The biggest part of misaligned incentives is precisely the conversion of investment banks into public companies.  This played a big part in investment banks becoming less prudent.  The bonus structure rewarded short-term rewards at expense of long-term viability.  Getting a big bonus out of a bunch of shareholders is a lot easier than getting a big bonus out of Mr. Goldman and Mr. Sachs.

Quote from: Admiral Yi on June 08, 2009, 06:48:43 PM

Quote from: DGuller on June 08, 2009, 06:41:20 PM
One difference is that Wall Street had no inherent role to play in those bubbles.  The subprime bubble was all about Wall Street, it wouldn't be possible without Wall Street buying up the mortgages and leveraging the hell out of them.

:huh:Eh, that's sort of the question, isn't it?

What I meant to say is that Wall Street wasn't in the business that gave rise to previous bubbles.  That's why I put "inherent" in it.  They are not in the Internet business, they're not in the S&L business.  They were, however, squarely in the business of creating highly leveraged financial instruments, which is what the subprime bubble was really about.

I was reading an article in Forbes a few weeks ago about a smallish Texas bank that refused to go along with the subprime mess and maintained conservative lending pracices.  For that they were constantly harrassed by Gov't regulators for failing to expand lending to risky low-income groups.

The bank is sitting quite pretty now (which is why they wrote an article about them), but it makes clear how central pressure by gov't regulators to expand lending was to creating this crisis.

Quote from: Hansmeister on June 08, 2009, 07:02:04 PM
I was reading an article in Forbes a few weeks ago about a smallish Texas bank that refused to go along with the subprime mess and maintained conservative lending pracices.  For that they were constantly harrassed by Gov't regulators for failing to expand lending to risky low-income groups.

The bank is sitting quite pretty now (which is why they wrote an article about them), but it makes clear how central pressure by gov't regulators to expand lending was to creating this crisis.

Again, this is a deliberate attempt to misdirect perpetrated by the same people who started or enabled the crisis.  Even if you buy into the fairy tale that the explosion in popularity of subprime mortgages was solely the creation of the government and no one else, they still were not the cause of the meltdown.  What set off the meltdown was the reckless leveraging upon leveraging upon leveraging by Wall Street.  The losses from the financial products absolutely dwarf the losses from the actual subprime mortgages. 

Yeah. In Europe we widely accept it is the banks fault, though we still like to blame our politicians for letting them screw up as they did.

Quote from: Sheilbh on June 08, 2009, 04:55:06 PM
I still can't find the charts but there's a few which may do.  Unfortunately I couldn't find them online so I've had to save these and attach them to posts.  Hopefully this'll work.

First a map of bank crises since the late seventies:

So it seems that the only places that have avoided banking crises are desperately backwards or are so tiny as to not really be independent.

Quote from: Palisadoes on June 08, 2009, 07:24:32 PM
Yeah. In Europe we widely accept it is the banks fault, though we still like to blame our politicians for letting them screw up as they did.

In way, it's extremely unfortunate that this bubble came to be known as "subprime mortgage crisis".  It makes people think that it was the subprime mortgages that did the economy in, even without the WSJ-created misdirections like the CRA.  This bubble should really be called the "financial instruments bubble".

Quote from: DGuller on June 08, 2009, 06:52:26 PM

The biggest part of misaligned incentives is precisely the conversion of investment banks into public companies.  This played a big part in investment banks becoming less prudent.  The bonus structure rewarded short-term rewards at expense of long-term viability.  Getting a big bonus out of a bunch of shareholders is a lot easier than getting a big bonus out of Mr. Goldman and Mr. Sachs.

Investment banking bonuses went way up, but so did investment banking profits--much like private investment bankers and hedge funds. My understanding has always been that comparably sized private companies offer management compensation that is similar and in some cases exceeds that of public companies (they can quietly bid as much as they want for an executive team without the sparking public outrage). I just don't think that argument (investment bank goes public --> bonuses go up because no one cares about shareholders --> stupid decisions and bankruptcy) works.

Quote from: Neil on June 08, 2009, 07:51:58 PM

Quote from: Sheilbh on June 08, 2009, 04:55:06 PM
I still can't find the charts but there's a few which may do.  Unfortunately I couldn't find them online so I've had to save these and attach them to posts.  Hopefully this'll work.

First a map of bank crises since the late seventies:

So it seems that the only places that have avoided banking crises are desperately backwards or are so tiny as to not really be independent.

Which is Canada?

Quote from: alfred russel on June 08, 2009, 09:15:55 PM
Investment banking bonuses went way up, but so did investment banking profits--much like private investment bankers and hedge funds. My understanding has always been that comparably sized private companies offer management compensation that is similar and in some cases exceeds that of public companies (they can quietly bid as much as they want for an executive team without the sparking public outrage). I just don't think that argument (investment bank goes public --> bonuses go up because no one cares about shareholders --> stupid decisions and bankruptcy) works.

When it comes to investing, it is short-sighted to talk of just profits.  There has to be some sort of risk-adjustment done to those profits, due to the inherently stochastic nature of the markets.  Any idiot can earn good profits with 50:1 leverage ratio and a little good luck.  It's not going bust in the long run that's going to be problematic.  Unfortunately, executive compensations neglected that kind of risk-adjustment, and all financial types were paid as if they were making something from nothing.  Heads they won, tails someone else lost.

Quote from: DGuller on June 08, 2009, 09:39:18 PM

When it comes to investing, it is short-sighted to talk of just profits.  There has to be some sort of risk-adjustment done to those profits, due to the inherently stochastic nature of the markets.  Any idiot can earn good profits with 50:1 leverage ratio and a little good luck.  It's not going bust in the long run that's going to be problematic.  Unfortunately, executive compensations neglected that kind of risk-adjustment, and all financial types were paid as if they were making something from nothing.  Heads they won, tails someone else lost.

If I'm able to lever up at 50:1 with low interest rates and freedom to develop my own business plan, guess what I'm doing? I'm going to create a massively leveraged high risk structure that kicks off obscene profits in the good times, and implodes when things start to turn south.

That is a rationale decision making process for managing equity. That is not a good decision making process for the overall economy. I wouldn't put all the blame on the equity ownership structure: it seems to me more should reside with the debt markets.

Quote from: alfred russel on June 08, 2009, 09:45:25 PM
If I'm able to lever up at 50:1 with low interest rates and freedom to develop my own business plan, guess what I'm doing? I'm going to create a massively leveraged high risk structure that kicks off obscene profits in the good times, and implodes when things start to turn south.

That is a rationale decision making process for managing equity. That is not a good decision making process for the overall economy. I wouldn't put all the blame on the equity ownership structure: it seems to me more should reside with the debt markets.

Well, I guess the answer is that people like you got the opportunity to do exactly that.  Investment bankers found themselves in a very lucrative position where they got to gamble with other people's capital and take enormous juice off their proceeds.  I think that's immoral, but certainly not irrational, they don't seem to be doing too badly even now.  I guess once we figure out how that situation came to pass, we'll have an answer for Yi's riddle.

Quote from: DGuller on June 08, 2009, 09:52:00 PM

Quote from: alfred russel on June 08, 2009, 09:45:25 PM
If I'm able to lever up at 50:1 with low interest rates and freedom to develop my own business plan, guess what I'm doing? I'm going to create a massively leveraged high risk structure that kicks off obscene profits in the good times, and implodes when things start to turn south.

That is a rationale decision making process for managing equity. That is not a good decision making process for the overall economy. I wouldn't put all the blame on the equity ownership structure: it seems to me more should reside with the debt markets.

Well, I guess the answer is that people like you got the opportunity to do exactly that.  Investment bankers found themselves in a very lucrative position where they got to gamble with other people's capital and take enormous juice off their proceeds.  I think that's immoral, but certainly not irrational, they don't seem to be doing too badly even now.  I guess once we figure out how that situation came to pass, we'll have an answer for Yi's riddle.

Since going public, the investment banks have done fairly well for their shareholders. Even if you factor in that 3 of the 5 effectively went under, if you put in equal amounts to each of the 5's IPO's you would be doing quite well--Morgan Stanley has exploded with solid performance from Goldman Sachs which makes up for the loss of the other three.

From a public policy perspective, 3 of the 5 major investment banks going down the decade after going public was very bad. But from an investor perspective, it looks like the way the companies operated is paying off.

Ok, I concede that the shareholders weren't the ones fleeced.  However, it seems like the fact remains, Wall Street going public created incentives that were perverse to the economy at large.  It created incentives for wealth destruction rather than wealth creation, on the whole.

Quote from: DGuller on June 08, 2009, 10:26:09 PM
Ok, I concede that the shareholders weren't the ones fleeced.  However, it seems like the fact remains, Wall Street going public created incentives that were perverse to the economy at large.  It created incentives for wealth destruction rather than wealth creation, on the whole.

In terms of the individual contributing capital, having employee/partners contribute the capital will generally produce less risk and lower returns, as they will be more conservative. But at the same time the firms will have a higher cost of capital, be less profitable, employ fewer people, and be less active in the economy.

At the end of the day, Morgan Stanley and Goldman Sachs have combined market caps of about $100 billion. You aren't going to get partners to contribute that much capital. The cat is out of the bag and these are public companies that are going to stay that way. I tend to think that reasonable regulation could prevent some of the problems we are having without privatizing the companies.

Quote from: Barrister on June 08, 2009, 09:28:50 PM

Quote from: Neil on June 08, 2009, 07:51:58 PM

Quote from: Sheilbh on June 08, 2009, 04:55:06 PM
I still can't find the charts but there's a few which may do.  Unfortunately I couldn't find them online so I've had to save these and attach them to posts.  Hopefully this'll work.

First a map of bank crises since the late seventies:

So it seems that the only places that have avoided banking crises are desperately backwards or are so tiny as to not really be independent.

Which is Canada?

According to Sheilbh's map, it has suffered banking issues in the last 30 years.  There were a couple of regional bank failures in the mid-80s, which is probably what they're referring to.

Quote from: alfred russel on June 08, 2009, 11:05:53 PM
In terms of the individual contributing capital, having employee/partners contribute the capital will generally produce less risk and lower returns, as they will be more conservative. But at the same time the firms will have a higher cost of capital, be less profitable, employ fewer people, and be less active in the economy.

At the end of the day, Morgan Stanley and Goldman Sachs have combined market caps of about $100 billion. You aren't going to get partners to contribute that much capital. The cat is out of the bag and these are public companies that are going to stay that way. I tend to think that reasonable regulation could prevent some of the problems we are having without privatizing the companies.

True, but when the firms were created, they didn't start with that much capital anyway.

What about a system where capital is allocated into a liquidity pool, a leveraging pool, and an operational pool, with allocations determined by the risk presented by officers within the firm?

Quote from: DontSayBanana on June 09, 2009, 09:19:16 AM


True, but when the firms were created, they didn't start with that much capital anyway.

But they have that much now. To run them as private companies, you will either need that much capital, drastically reduce their size, or lever them up even more.

Quote from: DontSayBanana on June 09, 2009, 09:19:16 AM

What about a system where capital is allocated into a liquidity pool, a leveraging pool, and an operational pool, with allocations determined by the risk presented by officers within the firm?

I have no idea what you are talking about.

I have nothing really to add to this thread, but in the spirit of reaching 1000 posts asap I have to report my personal unemployment level is 0%.

Quote from: PDH on June 09, 2009, 09:51:02 AM
I have nothing really to add to this thread, but in the spirit of reaching 1000 posts asap I have to report my personal unemployment level is 0%.

This "can do" spirit deserves recognition but a poster attempting to raise their post cound to escape the level of Timmay Taint.

Quote from: Hansmeister on June 05, 2009, 04:03:52 PM
And so are laws like the Community Reinvestment Act that force lending to unqualified people.  :lol:

I'd juste like to point out that these loans reprensent a "big" total of 15% of all the subprime market.  And not all of them defaulted on their loans.

Quote from: viper37 on June 09, 2009, 12:56:31 PM

Quote from: Hansmeister on June 05, 2009, 04:03:52 PM
And so are laws like the Community Reinvestment Act that force lending to unqualified people.  :lol:

I'd juste like to point out that these loans reprensent a "big" total of 15% of all the subprime market.  And not all of them defaulted on their loans.

Not all of them need to in order to make a huge impact. Are you arguing that if the degfault rate is not 100%, then that somehow matters? Would 99% matter? 90% 50%?

The basic idea is the basic problem - that the government has a role in incenting financial institutions to make loans outside what is financially prudent. They exerted considerable pressure in a variety of forms on banking institutions to change their lending habits to allow people to get loans who would not qualify otherwise.

Quote from: viper37 on June 09, 2009, 12:56:31 PM

Quote from: Hansmeister on June 05, 2009, 04:03:52 PM
And so are laws like the Community Reinvestment Act that force lending to unqualified people.  :lol:

I'd juste like to point out that these loans reprensent a "big" total of 15% of all the subprime market.  And not all of them defaulted on their loans.

Good luck.  "CRA caused the bubble" is a very convenient truth for people whose religion tells them that the market can do no wrong and the government can do no right.

Quote from: DGuller on June 09, 2009, 01:16:48 PM

Quote from: viper37 on June 09, 2009, 12:56:31 PM

Quote from: Hansmeister on June 05, 2009, 04:03:52 PM
And so are laws like the Community Reinvestment Act that force lending to unqualified people.  :lol:

I'd juste like to point out that these loans reprensent a "big" total of 15% of all the subprime market.  And not all of them defaulted on their loans.

Good luck.  "CRA caused the bubble" is a very convenient truth for people whose religion tells them that the market can do no wrong and the government can do no right.

Indeed, the fact that the CRA and laws like it might have contributed to the mortgage and sub-prime crisis is such a less rigorous argument than "Reagandidit!"

It simply cannot compete with that kind of intellectual analysis!

Someone please respond to this post so DG can pretend not to read it and respond indirectly.

Quote from: Berkut on June 09, 2009, 01:12:12 PM
The basic idea is the basic problem - that the government has a role in incenting financial institutions to make loans outside what is financially prudent. They exerted considerable pressure in a variety of forms on banking institutions to change their lending habits to allow people to get loans who would not qualify otherwise.

I thought the basic problem was trillions invested in bonds based on the subprime mortgages, not that the subprimes themselves were the problem.

Because surely there are not so many subprime mortgages that they could even come close to doing the sort of damage that has been done.

That is not to say that subprimes were a good idea and shouldn't be stopped of course.

Heck if me and my uneven credit and middling job can get a good mortgage (though I granted I did have lots of cash for a downpayment) I would hate to see what sorts of people get subprimes.

Quote from: Valmy on June 09, 2009, 01:20:50 PM
I thought the basic problem was trillions invested in bonds based on the subprime mortgages, not that the subprimes themselves were the problem.

Because surely there are not so many subprime mortgages that they could even come close to doing the sort of damage that has been done.

You're challenging another convenient truth, though this one was accidental, whereas the CRA bit was an engineered deflection.  The house of cards built by Wall Street was the true disaster in the bubble, as I mentioned earlier.

Quote from: Valmy on June 09, 2009, 01:20:50 PM

Quote from: Berkut on June 09, 2009, 01:12:12 PM
The basic idea is the basic problem - that the government has a role in incenting financial institutions to make loans outside what is financially prudent. They exerted considerable pressure in a variety of forms on banking institutions to change their lending habits to allow people to get loans who would not qualify otherwise.

I thought the basic problem was trillions invested in bonds based on the subprime mortgages, not that the subprimes themselves were the problem.

Because surely there are not so many subprime mortgages that they could even come close to doing the sort of damage that has been done.

I guess that depends on how you define "basic". Certainly the leveraging is a necessary condition to the disaster, but then, so are the shitty loans to begin with. Of course, you also need a ready source of investment capital looking for somewhere to go, and lax enough oversight laws. Lots of necessary conditions.

Laws like the CRA are hardly the sole driver of sub-prime mortgages, but to pretend like they had nothing to do with it is a bit silly. Actually, it is a bit political, but I guess that is the same thing.

Quote from: DGuller on June 09, 2009, 01:23:45 PM

Quote from: Valmy on June 09, 2009, 01:20:50 PM
I thought the basic problem was trillions invested in bonds based on the subprime mortgages, not that the subprimes themselves were the problem.

Because surely there are not so many subprime mortgages that they could even come close to doing the sort of damage that has been done.

You're challenging another convenient truth, though this one was accidental, whereas the CRA bit was an engineered deflection.  The house of cards built by Wall Street was the true disaster in the bubble, as I mentioned earlier.

Actually, what you mentioned earlier was how it was all Reagan's fault for deregulating everything. Because you are so objective and non-political.

Quote from: Berkut on June 09, 2009, 01:26:21 PM
Actually, what you mentioned earlier was how it was all Reagan's fault for deregulating everything. Because you are so objective and non-political.

Does DG really blame Reagan?  I thought the big financial deregulation happened under Clinton's watch.

Quote from: Barrister on June 09, 2009, 02:17:27 PM

Quote from: Berkut on June 09, 2009, 01:26:21 PM
Actually, what you mentioned earlier was how it was all Reagan's fault for deregulating everything. Because you are so objective and non-political.

Does DG really blame Reagan?  I thought the big financial deregulation happened under Clinton's watch.

I don't know if he really does, or whether he was just making one of his little political tantrum he is so fond of... But he did say:

Quote from: DGI definitely think that since Reagan's financial deregulation (and all subsequent movement in that direction), a lot of our gains have really been on the backs of one bubble after another after another.  What we thought was increasing efficiency and flexibility turned out to be just a way to ignore the risks we've taken.

Not only is the current crisis Reagans fault, but every single financial "bubble" since he was President.

I guess that means the dotcom bubble was his fault as well. Damn him!

In related news:

QuoteWASHINGTON (MarketWatch) - A group of 10 large financial institutions were given the go-ahead by the Treasury Department on Tuesday to repay $68 billion in funds they received as part of the government's almost $200 billion bank bailout program.

"These repayments are an encouraging sign of financial repair, but we still have work to do," said Treasury Secretary Timothy Geithner in a statement.

J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and eight other institutions were approved to repay billions of dollars in government money they received, in part because they have issued long-term debt.

The banks that have been allowed to pay back the funds are J.P. Morgan Chase & Co., (JPM, Trade ), Goldman Sachs Group Inc., (GS, Trade ) , Morgan Stanley (MS, Trade ), American Express (AXP, Trade ), Bank of New York Mellon (BK, Trade ), State Street (STT, Trade ), US Bancorp (USB, Trade ), BB&T Corp. (BBT, Trade ), Capital One Financial Corp. (COF, Trade ) and Northern Trust (NTRS, Trade ).

However, the repayments represent the creation of a two-tier banking system. Ten other financial institutions, including Bank of America Corp. (BAC, Trade ), Citigroup Inc., (C, Trade ) and Wells Fargo (WFC, Trade ) have a longer road to recovery.

After undergoing federal stress tests released in early May, the Treasury Department called on this group to show how they would raise $74.6 billion in private capital in order to withstand a further economic downturn. The banks submitted plans for raising capital to the Federal Reserve on Monday, and the Fed said it will begin working with the institutions to make sure their plans are implemented quickly. See complete story.

As part of the bank bailout program, known as the Capital Purchase Program, the 10 institutions eligible to repay TARP have the right to repurchase warrants the Treasury holds at fair market value.

The 10 financial institutions already paid $1.8 billion in dividend payments to the Treasury over the last seven months, bringing the total of all dividend payments to $4.5 billion.

Proceeds from the repayments go to the Treasury's general account, which is used to reduce Treasury's borrowing and reduce the national debt. The funds could also be used to provide further capital to troubled financial institutions as part of the TARP program.

Other smaller banks have also returned bank bailout funds, bringing the total in returns to $70 billion.

As part of the program, J.P. Morgan is eligible to return $25 billion in TARP funds, Goldman Sachs, $10 billion, and Morgan Stanley, $10 billion.

BB& T plans to repay $3.1 billion in TARP funds it received, according to a statement from the institution Tuesday. U.S. Bancorp announced plans to buy out $6.6 billion in TARP capital, the bank reported Tuesday.

Other eligible institutions include American Express, $3.4 billion, Bank of New York Mellon, $3 billion, and State Street Bank, $2 billion.

Quote from: alfred russel on June 09, 2009, 09:39:37 AM

Quote from: DontSayBanana on June 09, 2009, 09:19:16 AM
What about a system where capital is allocated into a liquidity pool, a leveraging pool, and an operational pool, with allocations determined by the risk presented by officers within the firm?

I have no idea what you are talking about.

Essentially, I'm talking about requiring that the companies show they can cover their asses with a rainy-day fund or something similar before going public; I was talking about a dedicated fund to cover temporary market downtrends (the liquidity thing; I just couldn't think of how to phrase it) and another to cover potential creditor claims- I'm convinced the publicly traded companies should be akin to institutions, and not constantly wobbling on the edge of bankruptcy.

Quote from: DontSayBanana on June 09, 2009, 03:36:22 PM

Quote from: alfred russel on June 09, 2009, 09:39:37 AM

Quote from: DontSayBanana on June 09, 2009, 09:19:16 AM
What about a system where capital is allocated into a liquidity pool, a leveraging pool, and an operational pool, with allocations determined by the risk presented by officers within the firm?

I have no idea what you are talking about.

Essentially, I'm talking about requiring that the companies show they can cover their asses with a rainy-day fund or something similar before going public; I was talking about a dedicated fund to cover temporary market downtrends (the liquidity thing; I just couldn't think of how to phrase it) and another to cover potential creditor claims- I'm convinced the publicly traded companies should be akin to institutions, and not constantly wobbling on the edge of bankruptcy.

That is utterly unworkable.

Quote from: alfred russel on June 09, 2009, 03:41:24 PM

Quote from: DontSayBanana on June 09, 2009, 03:36:22 PM

Quote from: alfred russel on June 09, 2009, 09:39:37 AM

Quote from: DontSayBanana on June 09, 2009, 09:19:16 AM
What about a system where capital is allocated into a liquidity pool, a leveraging pool, and an operational pool, with allocations determined by the risk presented by officers within the firm?

I have no idea what you are talking about.

Essentially, I'm talking about requiring that the companies show they can cover their asses with a rainy-day fund or something similar before going public; I was talking about a dedicated fund to cover temporary market downtrends (the liquidity thing; I just couldn't think of how to phrase it) and another to cover potential creditor claims- I'm convinced the publicly traded companies should be akin to institutions, and not constantly wobbling on the edge of bankruptcy.

That is utterly unworkable.

Since when has that stopped anyone from passing more laws?

Quote from: alfred russel on June 09, 2009, 03:41:24 PM
That is utterly unworkable.

How? Cents used on the dollar for operational expenses is how we already classify non-profit organizations- why can't that be extended to publicly traded companies? Grandfather in ones that are already on the books, and while it'll take companies longer to get an IPO together, they'll be so sound when they do that you could bounce rocks off them.

And Berkut, shut up. The grownups are talking.

Quote from: DontSayBanana on June 09, 2009, 04:22:35 PM
How? Cents used on the dollar for operational expenses is how we already classify non-profit organizations- why can't that be extended to publicly traded companies? Grandfather in ones that are already on the books, and while it'll take companies longer to get an IPO together, they'll be so sound when they do that you could bounce rocks off them.

And Berkut, shut up. The grownups are talking.

Cents on the dollar for non-profits refers to admin costs, completely different than what you're talking about.

As to your proposal, why not simply allow investors to not purchase shares in companies that they think don't have sufficient cash reserves?

Quote from: Admiral Yi on June 09, 2009, 04:29:06 PM
Cents on the dollar for non-profits refers to admin costs, completely different than what you're talking about.

As to your proposal, why not simply allow investors to not purchase shares in companies that they think don't have sufficient cash reserves?

Actually, it's not. I'm just saying that rather than be forced to show the money being spent before being classified a not-for-profit, I'm saying that they should have to show the money is being saved before the IPO is issued and possibly at intervals afterward.

Investors already have that right, but that goes back to what I was saying in another thread about not being able to assume that company officers are acting ethically; that assumption cost investors in one of my previous employers about $80 million when he fibbed to them and burned through the cash in a quarter. The jobs fluctuation, the court costs, and the overall headache could have been avoided if there were more of a focus on fiscal responsibility and transparency in the regulations.

Anyone has a right to do business, but with those particular businesses being seen as synonymous with the US economy, there should be greater control as well as self-control.

Quote from: DontSayBanana on June 09, 2009, 04:22:35 PM

How? Cents used on the dollar for operational expenses is how we already classify non-profit organizations- why can't that be extended to publicly traded companies?

It is true that non profit accounting is different than for profit, but the differences aren't that significant in terms of the balance sheet. What you are referring to is the financial metrics to measure the organizations: some derivation of earnings is usually used for for-profit enterprises, while overhead cost metrics are usually used for non-profits. I don't see why or how that should change.

The income statement for the two is very different, for obvious reasons.

Quote from: DontSayBanana on June 09, 2009, 04:22:35 PM

Grandfather in ones that are already on the books, and while it'll take companies longer to get an IPO together, they'll be so sound when they do that you could bounce rocks off them.

That doesn't make sense. It sounds like you want to effectively end the ability of a company to carry liabilities if it goes public. Think about it this way: lets say Ford has $30 billion in assets under management. These assets must be financed. If you add the total claims of creditors (debt capital and trade liabilities, primarily) and the total equity capital contributed, you will by definition come up with $30 billion. It is theoretically possible for any company's assets to fall to $0. That being the case, it seems that you want any company that goes public with $30 billion in assets to also have $30 billion in equity capital, leaving no place for debt in the economy.

In any event, why do we want to end the ability of companies to go bankrupt? As has been said before, capitalism without bankruptcy is like religion without sin. You need bankruptcy to weed out the less efficient, and also need the risktaking that makes bankruptcy possible if we are to have any kind of growth.

Quote from: alfred russel on June 09, 2009, 04:53:48 PM
That doesn't make sense. It sounds like you want to effectively end the ability of a company to carry liabilities if it goes public. Think about it this way: lets say Ford has $30 billion in assets under management. These assets must be financed. If you add the total claims of creditors (debt capital and trade liabilities, primarily) and the total equity capital contributed, you will by definition come up with $30 billion. It is theoretically possible for any company's assets to fall to $0. That being the case, it seems that you want any company that goes public with $30 billion in assets to also have $30 billion in equity capital, leaving no place for debt in the economy.

In any event, why do we want to end the ability of companies to go bankrupt? As has been said before, capitalism without bankruptcy is like religion without sin. You need bankruptcy to weed out the less efficient, and also need the risktaking that makes bankruptcy possible if we are to have any kind of growth.

Beyond that, the purpose of going public is to raise funds for operations and expansion.  DontSayBanana's plan would essentially mean that any company that would be allowed to go public wouldn't really need to raise those funds in the first place.

Quote from: DontSayBanana on June 09, 2009, 04:48:53 PM
Anyone has a right to do business, but with those particular businesses being seen as synonymous with the US economy, there should be greater control as well as self-control.

I don't know what you mean by that.

Causes of the Economic Crisis - in order

1) Long-term underlying economic trends i.e. low inflationary, low nominal interest rate, low asset price volatility environment in the context of large imbalances in international trade and financial flows. 

2) Government subsidization of the mortgage market via Fannie/Freddie and the interest deduction combined with light regulation of the secondary and derivative markets.  Privitization of gains and socialization of losses.

3) Fed unwillingness to prick bubbles.

Everything else -- CRA, eliminating Glass-Steagal, etc is minor or non-factor.

Quote from: The Minsky Moment on June 11, 2009, 04:54:11 PM
2) Government subsidization of the mortgage market via Fannie/Freddie and the interest deduction combined with light regulation of the secondary and derivative markets.  Privitization of gains and socialization of losses.

I'm curious why this was such a major factor; the government has subsidized the mortgage market since the National Housing Act in 1934 and interest deductions on loans has existed since the beginning of the income tax.  Why did those factors cause a bubble now?

Quote from: alfred russel on June 09, 2009, 04:53:48 PM
[snip]

Fair points, though I think part of our problem is that the growth needs to happen in inches, not miles. There's also a difference between "risktaking" and "gambling," and with tech in the 90s and housing in the 00s, we were doing more gambling than responsible risktaking.

I realize I snapped to the far end of the spectrum, but considering we've been looking at potential deflation and negative GDPs, I do seriously believe it's time to reset the sliders to aim for smaller, safer gains.

I would not be TOO quick to look for large systemic changes.

After all, the basic free market capitalist system we have been using for quite some time has resulted in rather astonishing economic growth and quality of life increases for the vast majority of people over the long run.

I am worried about the viability of that model as it relates to sustained resources than I am about the ups and downs that are experienced at any particular point. I suspect the current recession will, in the long run, be just another dip in the cycle, rather than the cataclysmic disaster everyone thinks it is right now while demanding large scale changes.

Quote from: DontSayBanana on June 12, 2009, 08:50:08 AM

Quote from: alfred russel on June 09, 2009, 04:53:48 PM
[snip]

Fair points, though I think part of our problem is that the growth needs to happen in inches, not miles. There's also a difference between "risktaking" and "gambling," and with tech in the 90s and housing in the 00s, we were doing more gambling than responsible risktaking.

I realize I snapped to the far end of the spectrum, but considering we've been looking at potential deflation and negative GDPs, I do seriously believe it's time to reset the sliders to aim for smaller, safer gains.

I don't think that is as attrative as it might seem. If people want to invest their money in traditional equity investments, it is going to be hard to stop. Sure you can regulate public markets in the US, but people can just move their money to international public companies and to private companies in the US. From the perspective of a company wanting to raise funds, why not then go public overseas, rely on private money in the US, or sell yourself to a large public company here (that in your example would be exempt from regulation).

In fact, after the Enron/Worldcom debacles, we ramped up our regulation of publicly traded companies to a level arguably higher than the rest of the developed world, and all these trends have played out since then. In a globalized economy where it doesn't really matter whether a company is nominally American or foreign--we all share the same systematic risk--what could end up happening is the next wave of growth occurs overseas, without the oversight of the American government, and whose American investors don't have the benefit of SEC oversight (and are exposed to foreign currency risk).

I hope what you're talking about is not completely true.  We don't need a world-wide regulatory race to the bottom.  I do think that the boom and bust cycles we've been stuck in for the last 30 years are destructive, and they're not a necessary evil that we just have to live with.

It seems to me, and I'm no economist, that the way to lower unemployment is to either:

a) create more jobs
b) gives employers incentive to hire people
c) kill the unemployed

Quote from: DGuller on June 12, 2009, 10:51:58 AM
I hope what you're talking about is not completely true.  We don't need a world-wide regulatory race to the bottom.  I do think that the boom and bust cycles we've been stuck in for the last 30 years are destructive, and they're not a necessary evil that we just have to live with.

It is hard to race to the bottom when discussing what CC is talking about, because everyone is sitting on the bottom.

Quote from: alfred russel on June 12, 2009, 10:55:56 AM
It is hard to race to the bottom when discussing what CC is talking about, because everyone is sitting on the bottom.

To be honest, I'm having a difficulty grasping what CC is talking about.  I'm talking more generally about the regulation aimed at reducing the systemic risk.  If, as you say, companies can escape it just by shopping for a more lenient regulator, then it's not a good thing.

Quote from: DGuller on June 12, 2009, 10:51:58 AM
I hope what you're talking about is not completely true.  We don't need a world-wide regulatory race to the bottom.  I do think that the boom and bust cycles we've been stuck in for the last 30 years are destructive, and they're not a necessary evil that we just have to live with.

I think you are very much exaggerating the "bust" in that cycle.

Right now, in one of the worst down cycles we've seen in a long time, it still isn't that terribly bad.

Perhaps the business cycle can be eliminated, and we could replace "boom and bust" with just a constant level of poor growth - but would that in the long run result in a better outcome? I suspect not, nor do I think it is really possible to eliminate the cycle anyway - certainly history has shown that it seems somewhat ubiquitous.

Quote from: DGuller on June 12, 2009, 10:57:44 AM

Quote from: alfred russel on June 12, 2009, 10:55:56 AM
It is hard to race to the bottom when discussing what CC is talking about, because everyone is sitting on the bottom.

To be honest, I'm having a difficulty grasping what CC is talking about.  I'm talking more generally about the regulation aimed at reducing the systemic risk.  If, as you say, companies can escape it just by shopping for a more lenient regulator, then it's not a good thing.

I'm not sure what he is talking about either, but in general having separate rules based on companies being public doesn't seem wise, as we have some very large private institutions, and in many cases those are loaded with more debt than public ones. It doesn't seem especially just to me to make the opportunity to invest in high growth companies limited to high net worth individuals who have access to private markets.

Quote from: alfred russel on June 12, 2009, 10:48:38 AM
I don't think that is as attrative as it might seem. If people want to invest their money in traditional equity investments, it is going to be hard to stop. Sure you can regulate public markets in the US, but people can just move their money to international public companies and to private companies in the US. From the perspective of a company wanting to raise funds, why not then go public overseas, rely on private money in the US, or sell yourself to a large public company here (that in your example would be exempt from regulation).

In fact, after the Enron/Worldcom debacles, we ramped up our regulation of publicly traded companies to a level arguably higher than the rest of the developed world, and all these trends have played out since then. In a globalized economy where it doesn't really matter whether a company is nominally American or foreign--we all share the same systematic risk--what could end up happening is the next wave of growth occurs overseas, without the oversight of the American government, and whose American investors don't have the benefit of SEC oversight (and are exposed to foreign currency risk).

I'm not so sure. Simply pointing out that the problems occurred post-regulation doesn't tell me anything. In fact, a lot of the problems were attempts to circumvent regulation- CDS being treated as insurance, companies posting overly-rosy projections to spike value; even when we bandy about the term "value," there's very little objective definition of what we're talking about.

As for these companies being seen as representatives of the US economy, everytime someone starts talking about that mythical beast, the first indicator of progress mentioned is usually the NYSE. Since AIG, Madoff, and several other significant rogue elements have surfaced, I've been having a harder and harder time believing that it truly is the be-all and end-all accurate representation of performance in the markets.

Quote from: DontSayBanana on June 12, 2009, 11:17:33 AM

I'm not so sure. Simply pointing out that the problems occurred post-regulation doesn't tell me anything. In fact, a lot of the problems were attempts to circumvent regulation-

This is an excellent point.

Quote from: DontSayBanana on June 12, 2009, 11:17:33 AM
I'm not so sure. Simply pointing out that the problems occurred post-regulation doesn't tell me anything. In fact, a lot of the problems were attempts to circumvent regulation- CDS being treated as insurance, companies posting overly-rosy projections to spike value; even when we bandy about the term "value," there's very little objective definition of what we're talking about.

As for these companies being seen as representatives of the US economy, everytime someone starts talking about that mythical beast, the first indicator of progress mentioned is usually the NYSE. Since AIG, Madoff, and several other significant rogue elements have surfaced, I've been having a harder and harder time believing that it truly is the be-all and end-all accurate representation of performance in the markets.

CDS weren't and have never been treated as insurance. No one was circumventing regulation--it just wasn't there. This wasn't a secret--everyone including regulators was aware of it for years.

I don't know if AIG was a rogue company--it just went bust. Madoff ran a hedge fund, which has been exempted from most regulations since FDR and was certainly not on the NYSE (he almost certainly couldn't have run his gig if he was).

Quote from: DontSayBanana on June 12, 2009, 11:17:33 AM
In fact, a lot of the problems were attempts to circumvent regulation- CDS being treated as insurance,

Was that really the case?  I know that CDS is often confused with insurance, either out of ignorance or due to deliberate misdirection, but I wasn't aware it was actually treated as insurance.  It was treated as a financial product by AIG, for example. 

In any way, I don't know why you would ever want to treat anything as insurance to escape regulation; insurance is by far the most regulated part of the financial industry.  It's also, not coincidentally, the part that took on the least damage in the meltdown.

Quote from: alfred russel on June 12, 2009, 11:31:00 AM

Quote from: DontSayBanana on June 12, 2009, 11:17:33 AM
I'm not so sure. Simply pointing out that the problems occurred post-regulation doesn't tell me anything. In fact, a lot of the problems were attempts to circumvent regulation- CDS being treated as insurance, companies posting overly-rosy projections to spike value; even when we bandy about the term "value," there's very little objective definition of what we're talking about.

As for these companies being seen as representatives of the US economy, everytime someone starts talking about that mythical beast, the first indicator of progress mentioned is usually the NYSE. Since AIG, Madoff, and several other significant rogue elements have surfaced, I've been having a harder and harder time believing that it truly is the be-all and end-all accurate representation of performance in the markets.

CDS weren't and have never been treated as insurance. No one was circumventing regulation--it just wasn't there.

I think that is the point - one of its attractions was that it was not regulated, and hence could take on a huge amount of risk.

We can (and should) close that hole, but will the financial whizzes just find another one?

Quote from: Berkut on June 12, 2009, 11:46:59 AM


I think that is the point - one of its attractions was that it was not regulated, and hence could take on a huge amount of risk.

We can (and should) close that hole, but will the financial whizzes just find another one?

Of course. Any time you have something you want to sell (in this case risk) and I'm willing to buy, it is going to be almost impossible to prevent the transaction. Especially for global institutions that have extensive operations in virtually no regulation jurisdictions.

I do agree there should be regulations of CDS and other products, I just don't delude myself of how effective they will be.

Quote from: Savonarola on June 12, 2009, 08:35:43 AM

Quote from: The Minsky Moment on June 11, 2009, 04:54:11 PM
2) Government subsidization of the mortgage market via Fannie/Freddie and the interest deduction combined with light regulation of the secondary and derivative markets.  Privitization of gains and socialization of losses.

I'm curious why this was such a major factor; the government has subsidized the mortgage market since the National Housing Act in 1934 and interest deductions on loans has existed since the beginning of the income tax.  Why did those factors cause a bubble now?

The extraordinary growth in securitization markets.

Quote from: The Minsky Moment on June 12, 2009, 12:39:02 PM
The extraordinary growth in securitization markets.

Which was brought about by deregulation.  By itself such growth wasn't a bad thing, but it brought about issues that should've been addressed (mainly underwriting incentives and excessive leverage).

Quote from: The Minsky Moment on June 12, 2009, 12:39:02 PM


The extraordinary growth in securitization markets.

I still don't understand.  Wouldn't the growth in the securitization market be the underlying cause rather than federal subsidization of the mortgage market?

Quote from: Berkut on June 12, 2009, 11:46:59 AM

Quote from: alfred russel on June 12, 2009, 11:31:00 AM

Quote from: DontSayBanana on June 12, 2009, 11:17:33 AM
I'm not so sure. Simply pointing out that the problems occurred post-regulation doesn't tell me anything. In fact, a lot of the problems were attempts to circumvent regulation- CDS being treated as insurance, companies posting overly-rosy projections to spike value; even when we bandy about the term "value," there's very little objective definition of what we're talking about.

As for these companies being seen as representatives of the US economy, everytime someone starts talking about that mythical beast, the first indicator of progress mentioned is usually the NYSE. Since AIG, Madoff, and several other significant rogue elements have surfaced, I've been having a harder and harder time believing that it truly is the be-all and end-all accurate representation of performance in the markets.

CDS weren't and have never been treated as insurance. No one was circumventing regulation--it just wasn't there.

I think that is the point - one of its attractions was that it was not regulated, and hence could take on a huge amount of risk.

We can (and should) close that hole, but will the financial whizzes just find another one?

This is the fallacy of the regulators:  to believe if we just empower the right people they can create regulations that can account for the near limitless permuntations of economic possibility.  It is a fool's errant and will always end up in failure.  No person, or collections of persons, are smart enough to regulate the activities of billions of human beings.  Regulations don't prevent economic crisis from reoccuring, the crisis in itself does that.  regulators like to like to claim credit for their new regulations preventing people from making the same mistake twice, when in reality it is the learning process from that mistake which accounts for the change of behaviour.  Regulations serve simply as dead-weight.

In a free market there is constant experimentation, which leads to huge successes and to large failures.  Things get tried out until they don't work and this constant creative destruction creates growth.  Regulators attempt to control the economy are more likely to do harm than good.

Quote from: Savonarola on June 12, 2009, 12:55:53 PM
I still don't understand.  Wouldn't the growth in the securitization market be the underlying cause rather than federal subsidization of the mortgage market?

The two are intertwined. 

Freddie and Fannie created the mortgage backed securities market, and they and the private market grew together hand-and-hand.  Recall, that although Fannie was founded in the 30s, it did not begin issuing mortgage-backed securities until 1968.   During the 60s 70s, and much of the 80s, the level of MBS issuance was fairly modest, in part because the institutional demand for such securities was limited (for example during this period you could buy very high yielding treasury bills and bonds) and in part because the interest in securitization by banks was limited - banking in this period was heavily regulated and a typical bank could do very well making money from the spread between the interest rate obtained from borrowers and the interest rate paid to savers.

When the banking business was deregulated starting in the late 1970s to allow competition for savers from money market funds and the like, making money off the spread became more difficult - the cost of funding increased.  At the same time, the removal of restrictions to interstate banking and lines of business opened up the market for corporate control and encouraged consolidation - this put pressure on bank mangagement to maximize their own profitability and in particular their return on equity capital.  Finally, the Fed finally beat back inflation in the 80s and by the early-to-mid 90s interest rates fell to a low and stable level.  This had the following implications:

+ Tightening of the "spread" --> lower profitability from traditional lending and servicing
+ Drive to maximize return on equity --> emphasis on minimizing use of equity capital in the business
+ Low and stable interest rates --> bond investors look to chase yield to squeeze out extra returns.

Factors 1 and 2 generated significant pressure of the banks to abandon traditional loan servicing and favor of an originate and distribute securitization model.  Securitization conserves captial because the loan gets off the balance sheet, while earning the bank a steady new earnings stream in origination fees to supplement the dwindling profits to be earned from the interest spread.  But this would be irrelevant unless there was a strong market to purchase the securitized loans.  The key factor here was Fannie and Freddie's willingness to assume the credit risk without limit on conforming loans.  That meant that bond buyers could get a government-backed AAA credit with a nice interest premium over Treasuries, thus playing right into Factor 3.

Once institutional bond purchasers became habituated to looking for AAA bonds with spread premiums, that opened the door to Alt-A and subprime securitizations using "credit enhancements" and a CDO tranche structure.  This started out as a private securitization market, but one essentially parasitic on the vast MBS market that Freddie and Fannie had created and enabled to grow.  And once this new market took off, Fannie and Freddie stepped in to compete in that segment as well, thus implicitly throwing the weight of the US Treasury behind the entire housing securitization market and all the related derivative instruments.  what we had was a malign symbiotic relationship between private financial institutions riding a bubble and vast government-backed parastatal finance corporation gleefully working the bellows.

I completely agree with this analysis.

There is one  thing that I don't get.  Assuming there is something about securitization (tax advantages?  balance sheet advantages?  it's just what they do?) that led the investment banks to participate in the subprime bubble and stay out of previous bubbles, that still doesn't explain why they decided to double down with CDS's.  Default insurance is not a brand new financial product.  Why did they bet the house on subprimes, and not on, say emerging market debt?

Quote from: Admiral Yi on June 12, 2009, 06:20:58 PM
There is one  thing that I don't get.  Assuming there is something about securitization (tax advantages?  balance sheet advantages?  it's just what they do?) that led the investment banks to participate in the subprime bubble and stay out of previous bubbles, that still doesn't explain why they decided to double down with CDS's.  Default insurance is not a brand new financial product.  Why did they bet the house on subprimes, and not on, say emerging market debt?

Did anyone double down on CDS besides AIG? Before they went bust, AIG did disclose what they were doing, and that was taking advantage of the "arbitrage" opportunity of MBS paying higher interest rates than less risky assets. Essentially they decided that MBS were virtually risk free, and they were going to put all their eggs in that basket (the CFO communicated to an analyst in a conference call that they saw very little chance to lose money). One way they did this was purchasing CDS, which would provide significantly higher returns than purchasing the assets. Another was through securities lending. CDS is getting a lot of publicity, probably because derivatives are the boogeyman of our times, but AIG lost more through securities lending (they would lend, or "temporarily sell", their securities to other companies and use the cash to invest in MBS, rather than treasuries or other relatively riskless assets as is typical).

I don't know to what extent the banks doubled down, or whether they were just holding some product in the course of business which went bad and general business conditions helped to conspire against them.

I don't know.  Lehman went bust on commercial real estate.  What about Merril and Bear Sterns?

Quote from: Admiral Yi on June 12, 2009, 07:02:29 PM
I don't know.  Lehman went bust on commercial real estate.  What about Merril and Bear Sterns?

I can't tell you.

Quote from: Admiral Yi on June 12, 2009, 06:20:58 PM
There is one  thing that I don't get.  Assuming there is something about securitization (tax advantages?  balance sheet advantages?  it's just what they do?) that led the investment banks to participate in the subprime bubble and stay out of previous bubbles, that still doesn't explain why they decided to double down with CDS's.  Default insurance is not a brand new financial product.  Why did they bet the house on subprimes, and not on, say emerging market debt?

Because there was an implicit guarantee by the gov't (thru freddie mac and fannie mae) that they could always sell it at no risk.  Basically, the high-risk subprime morgages became the surefire way to make a profit.  People make the argument that since the two entities didn't own that much of the subprime market it is wrong to blame them for the failure, which is nonsense.  As long as there was the believe that they would always buy them up, they didn't actually have to own it to affect the entire market.

Why did they take such a radical step? because in the late '90s the gov't decided that the only way to get financial institutes to lend to minorities to increase their homeownerships was to remove the risk to the lender. 

You'd be happy to know that the very person who designed the financial instruments to expand subprime mortgages while working for FM has been appointed the head of the Federal Housing Authority by Obama.  Since then the FHA has picked up the slack for the two failed institutes, building up the next housing crisis.

That *might* explain some of the appetite for MBS's, but it doesn't explain the appetite for CDS's.

Quote from: Admiral Yi on June 12, 2009, 07:30:29 PM
That *might* explain some of the appetite for MBS's, but it doesn't explain the appetite for CDS's.

The main reason there was an appetite for CDS's is because that provided an effective way to speculate on a company's solvency. If you think GM is going to run into financial distress, you can short the stock and make a 50% profit, or you can buy a CDS and make a 1000% profit.

In terms of being "insurance", there was some of that going on. AIG disclosed it was helping companies achieve "regulatory arbitrage." Basically European regulators were uncomfortable with the banks holding MBS, but were okay so long as they were protected by CDS written by AIG. But "insurance" uses such as that was not the primary use: the notional value of CDS's written exceeded the value of the debt they were written on. They were primarily ways to speculate.

Quote from: Hansmeister on June 12, 2009, 07:26:29 PM

Because there was an implicit guarantee by the gov't (thru freddie mac and fannie mae) that they could always sell it at no risk.  Basically, the high-risk subprime morgages became the surefire way to make a profit.  People make the argument that since the two entities didn't own that much of the subprime market it is wrong to blame them for the failure, which is nonsense.  As long as there was the believe that they would always buy them up, they didn't actually have to own it to affect the entire market.

Why did they take such a radical step? because in the late '90s the gov't decided that the only way to get financial institutes to lend to minorities to increase their homeownerships was to remove the risk to the lender. 

You'd be happy to know that the very person who designed the financial instruments to expand subprime mortgages while working for FM has been appointed the head of the Federal Housing Authority by Obama.  Since then the FHA has picked up the slack for the two failed institutes, building up the next housing crisis.

There was an implicit guarantee that the US government was going to stand behind Fannie and Freddie's debt, but there was never a guarantee that Fannie and Freddie were going to stand behind nonconforming debt, even if they did buy a portion of it. The ratings agencies and the buyers of the debt screwed up, and to the extent the mortgage companies and investment banks should have been doing do diligence, they screwed up too. 

Quote from: alfred russel on June 13, 2009, 01:49:24 AM
The main reason there was an appetite for CDS's is because that provided an effective way to speculate on a company's solvency. If you think GM is going to run into financial distress, you can short the stock and make a 50% profit, or you can buy a CDS and make a 1000% profit.

In terms of being "insurance", there was some of that going on. AIG disclosed it was helping companies achieve "regulatory arbitrage." Basically European regulators were uncomfortable with the banks holding MBS, but were okay so long as they were protected by CDS written by AIG. But "insurance" uses such as that was not the primary use: the notional value of CDS's written exceeded the value of the debt they were written on. They were primarily ways to speculate.

I meant an appetite to sell CDS.  Sorry I wasn't clear.

Quote from: Admiral Yi on June 13, 2009, 03:24:47 PM

Quote from: alfred russel on June 13, 2009, 01:49:24 AM
The main reason there was an appetite for CDS's is because that provided an effective way to speculate on a company's solvency. If you think GM is going to run into financial distress, you can short the stock and make a 50% profit, or you can buy a CDS and make a 1000% profit.

In terms of being "insurance", there was some of that going on. AIG disclosed it was helping companies achieve "regulatory arbitrage." Basically European regulators were uncomfortable with the banks holding MBS, but were okay so long as they were protected by CDS written by AIG. But "insurance" uses such as that was not the primary use: the notional value of CDS's written exceeded the value of the debt they were written on. They were primarily ways to speculate.

I meant an appetite to sell CDS.  Sorry I wasn't clear.

If you are in the business of providing financial services, why wouldn't you write them, provided they were at the right price and didn't put your institution at risk?

AIG determined that MBS were essentially risk free, so why wouldn't they write as CDS contracts as they could, considering they didn't have to set up a reserve, their AAA rating was a significant part of their collateral, and the risk was substantially off balance sheet and the rating agencies were apparently not concerned. I don't think anyone was as far out on a limb as AIG was, but the same principles apply.

Well yeah, IF their assumptions were all correct CDS's were a fabulous line of business.  My whole point is their assumptions were boneheaded.

Quote from: Admiral Yi on June 13, 2009, 05:58:23 PM
Well yeah, IF their assumptions were all correct CDS's were a fabulous line of business.  My whole point is their assumptions were boneheaded.

Sometimes stupidity is not only the simplest explanation, but also the one most correct.  Sometimes you get so caught up collecting the nickels that you lose track of the steamroller creeping up on you.  Pricing tail events is extremely difficult, and it's all to easy to get false comfort in models that are more precise than accurate.

Quote from: DGuller on June 13, 2009, 06:44:43 PM
Pricing tail events is extremely difficult, and it's all to easy to get false comfort in models that are more precise than accurate.

How was the subprime meltdown a tail event?  That's the line the AIG CEO was pushing and I just don't see it.

Quote from: Admiral Yi on June 13, 2009, 06:51:47 PM

Quote from: DGuller on June 13, 2009, 06:44:43 PM
Pricing tail events is extremely difficult, and it's all to easy to get false comfort in models that are more precise than accurate.

How was the subprime meltdown a tail event?  That's the line the AIG CEO was pushing and I just don't see it.

I guess I was speaking more from the point of view of the AIG financial products quant.  They thought they were selling "insurance" that would almost never be cashed in.  That makes it pricing a tail event.  Even if they were right, they were being too careless doing that.

FYI just read a book review in the NYT and Bear Sterns, Lehman, and Merril were all big into CDS.