Goldman Sachs.
What's up here with them anyway? Any of you financial gurus have any good feedback? GS just reported huge profits, on taxpayer money or what ever. Also see the youtube video on the second link.
Two of their large competitors were allowed to go bankrupt - Lehman Brothers and Bear Stearns, while AIG was bailed out, and AIG promptly paid Goldman Sachs money owed, billions worth. Just so happens that Hank Paulsen, under the Bush admin, was a former top guy with Goldman Sachs, as were others along the way in similar govt jobs, as the articles point out. Rather messy. Plus other rumblings I've seen or heard on the news elsewhere.
Our illustrious Congress should be doing a lot of investigating, er, if many of them weren't so entrenched in the issues, power plays, connections and campaign cash that they'd be investigating on, perhaps? Yeah, I know I'm being overly conspiratorial, but really, the events lately have really given me a lot of questions.
In the first link, skip the Sarah Palin part and go to the bottom of the link about GS.
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http://www.huffingtonpost.com/david-paul/the-greening-of-goldman-s_b_235181.html
The US economic turnaround may not be complete. The AIG turnaround may not be complete. The GM turnaround may not be complete. But Goldman Sachs is back.
"A Swift Return to Lofty Profits" proclaimed in the New York Times, as Goldman Sachs reported that it earned $3.44 billion in the second quarter, and is preparing its largest bonus payout in history. And without doubt, those lofty bonuses are well earned.
Consider how effectively Goldman has navigated the roiling waters of the global financial crisis. First, Goldman received a $10 billion injection of TARP funds to help it weather the market turmoil. Next, it swiftly converted itself into a commercial bank and member of the Federal Reserve system, gaining access to low or zero cost capital at the Fed Discount window and access to federally guaranteed borrowing through the FDIC Temporary Liquidity Guaranty Program. Finally, it garnered a $13 billion payout at one hundred cents on the dollar for its outstanding credit default swap contracts with AIG.
Now, we are told, Goldman's profitability stems from its trading prowess in global markets. Really? A $3.44 billion profit in the second quarter could be accounted for simply by a 25% run-up in the value of the CDS portfolio from its value when AIG stood as a bankrupt counterparty.
No, Goldman may have trading prowess, but that pales against its political prowess.
Thirty years ago, most of the major Wall Street investment banks were partnerships, and those with the greatest prestige and market power--Salomon Brothers, Goldman Sachs, Lehman Brothers and Morgan Stanley--eschewed retail brokerage in favor of institutional relationships and proprietary trading. Only Merrill Lynch prided itself on retail brokerage and being a member of the New York Stock Exchange.
Then, the world changed, as investment banking firms looked far and wide for new ways to strengthen their balance sheets and access new pools of capital. One by one, the old-line partnerships fell by the wayside, casting aside their culture and independence for the lure of other people's money. Salomon merged first with Phibro, and then was subsumed into the emerging Citibank colossus. Lehman was acquired by American Express. Morgan Stanley suffered the ignominy of merging into the Sears Roebuck/Dean Witter/Discover financial services company.
Only Goldman Sachs retained its culture and identity, even though it too tossed aside its partnership heritage in exchange for the lucre and capital offered through a public stock offering.
As one watches the evolution of Goldman, it is hard not to become a conspiracy theorist. After all, Goldman's rise from merely the top of the heap into the stratosphere has come after years of growing influence in Washington as one Goldman partner after another were appointed to senior positions in the Cabinet or White House--John Whitehead, Robert Rubin, Josh Bolten, Hank Paulson, to name a few--and tens of millions of dollars of political contributions found their way from Goldman Sachs into the campaign war chests of members of Congress, of Senators and Presidents, Democrats and Republicans alike.
Perhaps the public interest and the private interest just happened to coincide with the passage of the Financial Services Modernization Act in 1999 and the Commodity Futures Modernization Act of 2000. Perhaps the conversion of Goldman Sachs--a non-depositary institution--into a commercial bank, with access to Fed Funds and the Discount window, and eligible for FDIC guarantees on its debt offerings was in the public interest. And perhaps the public interest was somehow served when Goldman and others jumped to the front of the line of AIG creditors and were made whole on their credit default swap contracts with a bankrupt counterparty.
Perhaps. But we must conclude--because we believe in truth, justice and the American way--that Robert Rubin, Josh Bolten and Hank Paulson influenced and guided public policy in ways that was truly in the public interest, and that there was no nefarious connection between all of those campaign dollars and the direction of our national policy in any manner that unduly benefited Goldman Sachs over the years.
Perhaps. But this year, appearances matter. And this is the year that has seen $10 billion of TARP money and $13 billion of AIG money and who knows what amount of additional Federal Reserve funds or federal guarantee benefits flow into the coffers of Goldman Sachs.
So perhaps, this year, Goldman Sachs employees should be content with the tripling in value of their stock--surely a direct result of all of the financial largesse that has flowed Goldman's way--and perhaps this is a year when $3.44 billion of Goldman Sachs profits should not turn into bonuses, without due consideration for how all of that was possible, and where that money came from.
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http://www.huffingtonpost.com/peter-daou/palin-mania-how-goldman-s_b_233241.html
I'm starting to wonder about the mental health of our nation when I read stuff like, "Analysts estimate that [Goldman Sachs] will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions." (Update from Reuters: "That puts the average Goldman employee on pace to earn more than $900,000 this year. Chief Executive Lloyd Blankfein, senior officers and star traders will likely receive tens of millions of dollars.") Are we out of our minds? How can we sit by and let this happen?
In sum, after paying off TARP, Goldman Sachs is still in hock to us for $52.6 billion. No wonder they can pay $18 billion in compensation. Correct that: We're actually paying the $18 billion. Which brings us back to the problem of holding on to reality. When we bail out an entire sector to the tune of trillions of dollars, eliminate many of the competitors, make money available at near-zero percent interest rates, change accounting rules to make toxic assets appear less toxic for profit and loss purposes, and guarantee everyone's remaining assets -- after we've done all that, what does it mean to book a profit? What did Goldman Sachs actually do that was useful for society, after having helped to drive our economy off a cliff? And why aren't our elected leaders doing something about it?
And this, from Robert Reich:
Goldman's resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs. Why? Because Goldman's high-risk business model hasn't changed one bit from what it was before the implosion of Wall Street. Goldman is still wagering its capital and fueling giant bets with lots of borrowed money. While its rivals have pared back risks, Goldman has increased them. And its renewed success at this old game will only encourage other big banks to go back into it.
Goldman's greed is being rewarded at our expense while the media, punditocracy, and online commentariat rail against a soon to be ex-Governor of Alaska. Next time Palin writes an op-ed or makes an announcement, hopefully we put her in perspective, keep the reaction appropriately muted and stay focused on more significant things.
I agree that it takes a lot of effort to not be a conspiracy theorist when it comes to Goldman Sachs. It also saddens me that it seems like we're on track for never learning anything from the previous debacle. It seems like the culture of obscene profiteering is back.
It seems to me that these guys have got the perfect gambling system. If they lose then the taxpayer bails them out, if they win then they profit :huh:
I didn't read the article (not interested in a hufffington post financial article), but the firm has had the reputation of being the best, hiring the best, and paying the best for a while.
GS had 4 major investment banking competitors in this country: Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley. Three of the four failed, and the government rescued two of them, which preserved some competition for GS. As for the bailout, apparently GS never wanted to take the $10 billion but was told it had to along with other companies—and GS paid it back at the first opportunity. As for the AIG counterparty payments, GS claims it was fully hedged on those claims and would not have lost money had AIG defaulted.
GS had the strongest capital position of the investment banks going into the crisis, and was able to privately raise capital when most of its competitors could not. As they either went out of business (Lehman Brothers), had to downsize during a firesale (Bear Stearns and Merrill Lynch), or had to deal with major losses and a crappy capital reserve (Morgan Stanley), GS is in a very strong competitive position right now.
Yeah Alfred, that at least puts things in some perspective. But I still wonder if there are too many connected people, those that helped get us into this mess (Bernanke, Geithner, Paulsen, and more), now running things to try and get us out. But maybe there aren't many others with the knowledge to do it, though the business-government relationships seem too incestuous.
I rarely care for the Huffington Post site either, but I was looking for info on GS and these posts came up. While I'd figure that a lefty site might be too anti-"evil corps", I also figured that might be balanced some by the fact that some of this goes on during Obama's watch, having started in previous admins as well.
Quote from: Richard Hakluyt on July 16, 2009, 02:42:24 PM
It seems to me that these guys have got the perfect gambling system. If they lose then the taxpayer bails them out, if they win then they profit :huh:
C'mon Tricky, not you too.
Who is "these guys?" Goldman, who bet right on CDS and made money? Lehman, which is gone? Bear Stearns, Merril, Washington Mutual, or IndyMac, whose shareholders got wiped out?
Goldman has smart guys and they had the resources to buy some assets on the cheap when everyone else was panicking.
Goldman was basically forced to take the TARP money, and they were the first to pay off. They did benefit from the AIG bailout, but the government didn't bail out AIG to help Goldman, they bailed out AIG to avoid a major diplomatic incident.
They paid back the TARP money eh?
Good on them. Hurrah for profits!
Quote from: Admiral Yi on July 16, 2009, 03:17:05 PM
Quote from: Richard Hakluyt on July 16, 2009, 02:42:24 PM
It seems to me that these guys have got the perfect gambling system. If they lose then the taxpayer bails them out, if they win then they profit :huh:
C'mon Tricky, not you too.
Who is "these guys?" Goldman, who bet right on CDS and made money? Lehman, which is gone? Bear Stearns, Merril, Washington Mutual, or IndyMac, whose shareholders got wiped out?
I was confusing Lehman with GS, I'll shut up now :D
It could be good, or it could be more accounting tricks.
Quote from: The Minsky Moment on July 16, 2009, 03:17:41 PM
they bailed out AIG to avoid a major diplomatic incident.
What does that refer to? All the European financial institutions that would have gone done without the AIG money?
I wonder why the shareholders of Goldman Sachs don't demand higher dividends and a bit lower bonuses. It's not like everybody would immediately jump ship if they only got an average $200,000 and not $300,000 bonus. Sounds like the other banks are currently incapable of paying such high bonuses.
Quote from: DGuller on July 16, 2009, 02:18:04 PM
It seems like the culture of obscene profiteering is back.
Obscene profiteering is in the eye of the beholder. Objectively it's just called profit.
Quote from: DGuller on July 16, 2009, 02:18:04 PM
I agree that it takes a lot of effort to not be a conspiracy theorist when it comes to Goldman Sachs. It also saddens me that it seems like we're on track for never learning anything from the previous debacle. It seems like the culture of obscene profiteering is back.
(https://languish.org/forums/proxy.php?request=http%3A%2F%2Ftrollcats.com%2Fwp-content%2Fuploads%2F2009%2F07%2Ftheres_a_reason_youre_poor_poverty_trollcat.jpg&hash=89a80dce74893c7140444f6ae8e0d415ddd1b778)
Well, most of the competition is gone. That could explain it, in part at least.
Quote from: citizen k on July 16, 2009, 05:22:20 PM
Quote from: DGuller on July 16, 2009, 02:18:04 PM
It seems like the culture of obscene profiteering is back.
Obscene profiteering is in the eye of the beholder. Objectively it's just called profit.
I was actually reacting to expected record bonuses. That just further encourages plundering when the going is good, and turning tail and leaving the government with the mess when the going goes bad.
Quote from: Ed Anger on July 16, 2009, 05:31:26 PM
Quote from: DGuller on July 16, 2009, 02:18:04 PM
I agree that it takes a lot of effort to not be a conspiracy theorist when it comes to Goldman Sachs. It also saddens me that it seems like we're on track for never learning anything from the previous debacle. It seems like the culture of obscene profiteering is back.
(https://languish.org/forums/proxy.php?request=http%3A%2F%2Ftrollcats.com%2Fwp-content%2Fuploads%2F2009%2F07%2Ftheres_a_reason_youre_poor_poverty_trollcat.jpg&hash=89a80dce74893c7140444f6ae8e0d415ddd1b778)
:unsure: I don't consider myself poor.
Quote from: DGuller on July 16, 2009, 05:35:02 PM
:unsure: I don't consider myself poor.
Yet you bargain with muggers to get a better deal. :unsure:
You know, if the company has actually turned a profit, and all of this isn't smoke and mirrors, then the guys deserve their monster bonuses.
Quote from: Neil on July 16, 2009, 05:46:16 PM
You know, if the company has actually turned a profit, and all of this isn't smoke and mirrors, then the guys deserve their monster bonuses.
Not necessarily. In that business you can turn a big profit by sheer dumb luck.
Quote from: Zanza on July 16, 2009, 04:17:54 PM
Quote from: The Minsky Moment on July 16, 2009, 03:17:41 PM
they bailed out AIG to avoid a major diplomatic incident.
What does that refer to? All the European financial institutions that would have gone done without the AIG money?
Exactly - there were huge counterparty exposures among Euro banks and pressure was put on treasury and the Fed to fix the problem
Quote from: Zanza on July 16, 2009, 04:20:17 PM
I wonder why the shareholders of Goldman Sachs don't demand higher dividends and a bit lower bonuses. It's not like everybody would immediately jump ship if they only got an average $200,000 and not $300,000 bonus. Sounds like the other banks are currently incapable of paying such high bonuses.
the senior guys get compensated in the tens of millions, and the company attempted to seriously ratchet back, they are at the level where they could probably start there own firms or get huge offers from competitors.
Quote from: DGuller on July 16, 2009, 05:35:02 PM
:unsure: I don't consider myself poor.
It is a joke son. kids these days.
Quote from: Ed Anger on July 16, 2009, 06:51:14 PM
Quote from: DGuller on July 16, 2009, 05:35:02 PM
:unsure: I don't consider myself poor.
It is a joke son. kids these days.
:unsure: I don't consider myself a kid.
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Even the janitors who work for GS in Hong Kong are paid like 20 months of salary per year.
I thought this was that Jew baby disease. :blush:
Quote from: Jaron on July 17, 2009, 12:31:20 AM
I thought this was that Jew baby disease. :blush:
You mean chronic inflammation of greed? :)
Whether they posted the profit by luck or design, the fact remains that they did make the money. They repaid their TARP injection, and it's not like FDIC coverage is a brand-new concept among banks.
This seems like a case of "we just want them to feel our pain," since I haven't heard any complaints about "big government" interfering when FDIC directly takes control of a failed bank, without the pesky middleman of a clearing house. I didn't hear complaints from those with bank accounts between $100,000 and $250,000 when FDIC raised the amount it would insure, even though somebody's paying for that, too.
Even if 95% of their profit was in CDS transactions, when they did it, it was not against the rules. For those of you who want to see it become more difficult for a bank to turn a profit, you'll be happy to hear that the Fed is demanding a system where the SEC and CFTC take on oversight of all derivates, and just to make sure we've got them coming and going, they're finally talking about how to do away with overdraft fees, so get ready to see higher monthly banking fees.
Quote from: Monoriu on July 16, 2009, 07:03:56 PM
Even the janitors who work for GS in Hong Kong are paid like 20 months of salary per year.
Have you applied?
Quote from: Monoriu on July 16, 2009, 07:03:56 PM
Even the janitors who work for GS in Hong Kong are paid like 20 months of salary per year.
Yeah. My understanding is that GS have very low salaries for such a big and successful company but that everyone from the janitor up gets very good bonuses.
Sort of like the John Lewis Partnership (minus the socialism) where the pay is decent for the shop floor staff and considerably higher for the senior management but the real reason to work there is the annual bonus/dividend, which was, I think 13% of annual gross salary this year. I think that's the lowest it's been in over a decade.
Quote from: alfred russel on July 16, 2009, 02:44:16 PM
As for the AIG counterparty payments, GS claims it was fully hedged on those claims and would not have lost money had AIG defaulted.
They were fully hedged on paper - but there is a real question about how the counterparties to those hedges would have held up had AIG defaulted. So they did have something to gain by AIG being rescued.
that said, I am in fundamental agreement with you on this issue
Quote from: The Minsky Moment on July 17, 2009, 10:58:59 AM
Quote from: alfred russel on July 16, 2009, 02:44:16 PM
As for the AIG counterparty payments, GS claims it was fully hedged on those claims and would not have lost money had AIG defaulted.
They were fully hedged on paper - but there is a real question about how the counterparties to those hedges would have held up had AIG defaulted. So they did have something to gain by AIG being rescued.
that said, I am in fundamental agreement with you on this issue
In theory, if you are hedged with a counterparty that can't pay, you aren't fully hedged--even on paper. On the one hand, GS is claiming they were fully hedged, but on the other the amounts were so large I can't imagine any private institution paying out without a government bail (especially during the end of last year). AIG collapsed so fast that GS may never have had to get the sign off of their auditors on their hedging claim, and even if they did they may have been able to argue about an implicit government backstop.
I'd be interested to know the details, but that may never come out. If I had to guess, I agree that the government's checkbook was probably the ultimate source of any payment they were going to get. (which would have made it a bit ballsy for GS to refuse to negotiate a lower payment from AIG).
Quote from: Valmy on July 17, 2009, 09:02:41 AM
Quote from: Monoriu on July 16, 2009, 07:03:56 PM
Even the janitors who work for GS in Hong Kong are paid like 20 months of salary per year.
Have you applied?
11 years ago, I made the decision to chicken out :Embarrass:
They have been engaging in a lot of speculations on currencies in Eastern Europe in February/March this year. The word on the market was that they were bringing down the local currencies to cash some fx options (to the degree there were talks about undertaking some governmental punitive actions against them). Could be the result of that.
Quote from: Martinus on July 17, 2009, 03:34:51 PM
They have been engaging in a lot of speculations on currencies in Eastern Europe in February/March this year. The word on the market was that they were bringing down the local currencies to cash some fx options (to the degree there were talks about undertaking some governmental punitive actions against them). Could be the result of that.
I read earlier that investment banks have been making money on large bid/offer spreads on bonds and on IPO business (especially related to bank recapitalization). The article said these sources of profit will not be sustained.
QuoteWith friends like Goldman Sachs who needs enemies
July 16, 10:57 PM · Tim McCown - Philadelphia Progressive Examiner
I don't know whatever happened to investigative journalism. Wall Street is robbing us blind and literally destroying the economic foundation of this nation. Wherever he is if Osama Bin Laden is watching surely he must be thinking no matter what I do to America I could never hurt them as much as the confluence of our own government and Wall Street. As Robert Reich notes, Goldman's is still wagering its capitol and funding giant bets with our money and after all the damage to us financially our complicit government has done nothing to change that.
You would never know any of this because instead of the truth the press gives us the insanity of stories. Stories like John Ensign and Mark Sanford whose behavior as atrocious as you might think it is, has nothing to do with lost jobs or beginning to create a foundation for economic recovery. Or we breathlessly pretend that every detail of the pathetic and stupid questioning by the Senate of Sonia Sotomayer for the Supreme Court actually matters. This woman is not on the edge she is probably one of the best qualified of any nominee recently and once again does this recreate economic prosperity? Is this what we get instead of the whole truth?
What the press ignores on purpose is that Goldman's is still successfully playing politics. Former Treasury Secretary Hank Paulson is a former CEO of Goldman's. Tim Geithner, when he was at the Fed in New York was little more than a compliant dupe. Our government is chock full of Goldman's alumni who move effortlessly back and forth between Government and Goldman's looting this nation.
An example of this complicity between Government and the Wall Street looters is in the meeting where it was decided to bail out AIG. Geithner, Paulsen and the current CEO of Goldman's Lloyd Blankfein were all part of the decision making. The decision to bail out AIG meant a 13 billion giveaway to Goldman's because it had credit default insurance with them. Somehow Goldman's execs and Alumni guiding the Wall Street bail out policy wasn't considered conflict of interest by our press, who now breathlessly exclaim their awe at Goldman's recent record profits or should we call it what it really is record thefts.Paul Abrams in Huffington Post on July 15th called AIG a ponzi scheme so big that Bernie Madoff could not even match it. AIG had no cash reserves backing the financial products it agreed to insure. In the bail out it served as a conduit for 13 billion. Without the bail out that Goldman's helped engineer both would have been belly up. Instead Middle Class America is being bankrupted for profit because we are not too big to fail; they are.
Andy Kessler in The Wall Street Journal on July 16, 2009, noted that just about every move we have made has failed. We saved Bear Stearns. We let Lehman's go. We forced Merril Lynch, Wachovia, and Washington Mutual into other banks. We took control of Fannie, Freddie, and AIG and took over two car companies. We have a zero interest rate and have guaranteed bank debt. We set up TARP. When the banks refused to sell toxic assets for what they were actually worth we just went ahead and gave them the money. We are still in the economic toilet for all that money no matter how our leaders try to tell us it isn't so You can put perfume on B.S. but you know what, it is still B.S.
Goldman's traders have profited from taking advantage of openings left by our government aiding in reducing Goldman's competition. Goldman's is still depending on 28 billion in outstanding debt that is backed by the FDIC which means that in reality you and I are doing the funding of Goldman's high risk operations including speculating in oil futures for profit which takes even more money out of our pockets.
It also might benefit you to know that whatever rise the Stock market has made has been made with one trillion dollars of our money that Ben Bernanke flooded the market with. Bernanke has been the market and it will be interesting to see when Wall Street traders have to use their own money and not your and my tax dollars whether they will be buying stock then. This is the so called green shoots they have been touting as proof their economic policy is working.
Of course you haven't heard much about this because the press is too busy trying to anesthetize us with stupid irrelevant stories. The press has ignored on purpose, the fact that people are getting really wealthy by bankrupting Middle Class America and our elected officials are aiding and abetting this.
None of our plight has been an accident it has all been done on purpose. The Wall Street economy has nothing to do with anything that directly affects the economy of Middle Class America. We receive no benefit from Wall Street. They don't even create jobs here any more. Our government doesn't work pure and simple. If we were told the truth we would and should be angry as hell. I guess I'm asking why aren't we ?
That's some damn fine progressive reporting.
This is an interesting question though, to what extent we should recognise someone as a beneficiary of a bailout (and thus impose the restrictions that are attached to bailouts).
Say, a company A invests in dodgy securities. Then company B invests in derivatives issued by company A. Company A is too big to fall, so gets bailed out. This means that, indirectly, the bail out benefits company B as well.
I understand that this is similar to the situation with AIG and GS (with AIG being "A" and GS being "B"). Should then shareholders and managers of GS benefit from the profits that were possible only because AIG was bailed out (otherwise, the domino effect would have hit GS too).
Quote from: Admiral Yi on July 17, 2009, 03:38:44 PM
Quote from: Martinus on July 17, 2009, 03:34:51 PM
They have been engaging in a lot of speculations on currencies in Eastern Europe in February/March this year. The word on the market was that they were bringing down the local currencies to cash some fx options (to the degree there were talks about undertaking some governmental punitive actions against them). Could be the result of that.
I read earlier that investment banks have been making money on large bid/offer spreads on bonds and on IPO business (especially related to bank recapitalization). The article said these sources of profit will not be sustained.
Yeah, which is their right. What I question is to what extent they should be allowed to actually influence FX rates by speculative selling/buying of large quantities of foreign currency on the eve of their bond/option pay out date, to jack up their profits.
The question is: which would be more damaging to America: Ballooning the national debt, or having virtually the entire financial industry blow up, taking their 401ks with them?
Quote from: Martinus on July 18, 2009, 03:27:04 AM
This is an interesting question though, to what extent we should recognise someone as a beneficiary of a bailout (and thus impose the restrictions that are attached to bailouts).
Say, a company A invests in dodgy securities. Then company B invests in derivatives issued by company A. Company A is too big to fall, so gets bailed out. This means that, indirectly, the bail out benefits company B as well.
I understand that this is similar to the situation with AIG and GS (with AIG being "A" and GS being "B"). Should then shareholders and managers of GS benefit from the profits that were possible only because AIG was bailed out (otherwise, the domino effect would have hit GS too).
Why not? They allowed foreign governments to benefit, and they don't matter at all.
It wasn't Goldman-Sachs that got AIG bailed out, it was Europe.
Quote from: Martinus on July 18, 2009, 03:30:08 AM
Yeah, which is their right. What I question is to what extent they should be allowed to actually influence FX rates by speculative selling/buying of large quantities of foreign currency on the eve of their bond/option pay out date, to jack up their profits.
With a floating exchange rate their "right" to influence FX rates is unlimited.
I'm not positive but I think what you described (making money by buying options then buying/selling in the spot market to move those options into the money) is impossible.
Quote from: Admiral Yi on July 18, 2009, 01:07:30 PM
Quote from: Martinus on July 18, 2009, 03:30:08 AM
Yeah, which is their right. What I question is to what extent they should be allowed to actually influence FX rates by speculative selling/buying of large quantities of foreign currency on the eve of their bond/option pay out date, to jack up their profits.
With a floating exchange rate their "right" to influence FX rates is unlimited.
I'm not positive but I think what you described (making money by buying options then buying/selling in the spot market to move those options into the money) is impossible.
That's not how it worked.
Before financial crisis, banks offered a lot of hedging instruments against fx risk associated with, say, Polish zloty continuing to raise against US$. Now when these instruments became due, they flushed a lot of zlotys into the market, thus artificially reducing it value - which gave the banks big returns on the hedging instruments.
Quote from: Admiral Yi on July 18, 2009, 01:07:30 PM
Quote from: Martinus on July 18, 2009, 03:30:08 AM
Yeah, which is their right. What I question is to what extent they should be allowed to actually influence FX rates by speculative selling/buying of large quantities of foreign currency on the eve of their bond/option pay out date, to jack up their profits.
With a floating exchange rate their "right" to influence FX rates is unlimited.
Subject to whatever rules against market manipulation may be in place.
Quote from: Martinus on July 18, 2009, 01:22:47 PM
Quote from: Admiral Yi on July 18, 2009, 01:07:30 PM
Quote from: Martinus on July 18, 2009, 03:30:08 AM
Yeah, which is their right. What I question is to what extent they should be allowed to actually influence FX rates by speculative selling/buying of large quantities of foreign currency on the eve of their bond/option pay out date, to jack up their profits.
With a floating exchange rate their "right" to influence FX rates is unlimited.
I'm not positive but I think what you described (making money by buying options then buying/selling in the spot market to move those options into the money) is impossible.
That's not how it worked.
Before financial crisis, banks offered a lot of hedging instruments against fx risk associated with, say, Polish zloty continuing to raise against US$. Now when these instruments became due, they flushed a lot of zlotys into the market, thus artificially reducing it value - which gave the banks big returns on the hedging instruments.
While consipiracy theories are on occassion right, doesn't it seem more probably that eastern european currencies have lost value because:
a) in a crisis, the dollar and the euro are seen as safe haven currrencies, and
b) Eastern Europe is seen by more than a few as the most exposed region in the crisis
Quote from: Martinus on July 18, 2009, 01:22:47 PM
That's not how it worked.
Before financial crisis, banks offered a lot of hedging instruments against fx risk associated with, say, Polish zloty continuing to raise against US$. Now when these instruments became due, they flushed a lot of zlotys into the market, thus artificially reducing it value - which gave the banks big returns on the hedging instruments.
That sounds like the banks were involved in legitimate business activity, providing hedging services to clients.
I am also a little confused about the mechanism here. If the banks are hedging against a zloty rise and they turn out to be on the correct side of the trade (the zloty falls or remains steady), and if the hedge is in the form of an option (as per your post), then presumably the customer will just let the option lapse, and the bank keeps whatever premiums it earned. How does that flush zlotys into the market?
Quote from: alfred russel on July 20, 2009, 10:16:24 AM
Quote from: Martinus on July 18, 2009, 01:22:47 PM
Quote from: Admiral Yi on July 18, 2009, 01:07:30 PM
Quote from: Martinus on July 18, 2009, 03:30:08 AM
Yeah, which is their right. What I question is to what extent they should be allowed to actually influence FX rates by speculative selling/buying of large quantities of foreign currency on the eve of their bond/option pay out date, to jack up their profits.
With a floating exchange rate their "right" to influence FX rates is unlimited.
I'm not positive but I think what you described (making money by buying options then buying/selling in the spot market to move those options into the money) is impossible.
That's not how it worked.
Before financial crisis, banks offered a lot of hedging instruments against fx risk associated with, say, Polish zloty continuing to raise against US$. Now when these instruments became due, they flushed a lot of zlotys into the market, thus artificially reducing it value - which gave the banks big returns on the hedging instruments.
While consipiracy theories are on occassion right, doesn't it seem more probably that eastern european currencies have lost value because:
a) in a crisis, the dollar and the euro are seen as safe haven currrencies, and
b) Eastern Europe is seen by more than a few as the most exposed region in the crisis
In February, Polish zloty fell by almost 20% over 2 days, which was coincidentally right before a number of hedging options expired.
It since when has regained enormously and is now back to its November levels.
Quote from: The Minsky Moment on July 20, 2009, 10:25:33 AM
Quote from: Martinus on July 18, 2009, 01:22:47 PM
That's not how it worked.
Before financial crisis, banks offered a lot of hedging instruments against fx risk associated with, say, Polish zloty continuing to raise against US$. Now when these instruments became due, they flushed a lot of zlotys into the market, thus artificially reducing it value - which gave the banks big returns on the hedging instruments.
That sounds like the banks were involved in legitimate business activity, providing hedging services to clients.
I am also a little confused about the mechanism here. If the banks are hedging against a zloty rise and they turn out to be on the correct side of the trade (the zloty falls or remains steady), and if the hedge is in the form of an option (as per your post), then presumably the customer will just let the option lapse, and the bank keeps whatever premiums it earned. How does that flush zlotys into the market?
No, THAT doesn't flush zlotys into the market. The banks would flush zlotys into the market (by selling lots of their zloty reserves), thus bringing down its price, thus earning big premiums on their options.
Quote from: Martinus on July 20, 2009, 10:29:15 AM
[No, THAT doesn't flush zlotys into the market. The banks would flush zlotys into the market (by selling lots of their zloty reserves), thus bringing down its price, thus earning big premiums on their options.
The premium is whatever it is when they entered into the contract. So only way for this to work is if the options had been in the money but then the banks took them out of the money by flushing some reserves into the spot market. That strategy could only work if a relatively small amount of trades on the spot market could move prices and make them stick - i.e. if there is significant illiquidity in zloty-$ or some kind of barrier to trading.
this scenario also only makes sense if all the banks had entered into contracts with similar sunset dates.
Quote from: The Minsky Moment on July 20, 2009, 10:25:33 AM
Quote from: Martinus on July 18, 2009, 01:22:47 PM
That's not how it worked.
Before financial crisis, banks offered a lot of hedging instruments against fx risk associated with, say, Polish zloty continuing to raise against US$. Now when these instruments became due, they flushed a lot of zlotys into the market, thus artificially reducing it value - which gave the banks big returns on the hedging instruments.
That sounds like the banks were involved in legitimate business activity, providing hedging services to clients.
I am also a little confused about the mechanism here. If the banks are hedging against a zloty rise and they turn out to be on the correct side of the trade (the zloty falls or remains steady), and if the hedge is in the form of an option (as per your post), then presumably the customer will just let the option lapse, and the bank keeps whatever premiums it earned. How does that flush zlotys into the market?
I don't know for certain, but I would guess that currency hedges through forwards, futures, and swaps would be more common than options. All of the former could involve mechanisms with an incentive like the one Marty is discussing.
Quote from: Martinus on July 20, 2009, 10:27:55 AM
Quote from: alfred russel on July 20, 2009, 10:16:24 AM
Quote from: Martinus on July 18, 2009, 01:22:47 PM
Quote from: Admiral Yi on July 18, 2009, 01:07:30 PM
Quote from: Martinus on July 18, 2009, 03:30:08 AM
Yeah, which is their right. What I question is to what extent they should be allowed to actually influence FX rates by speculative selling/buying of large quantities of foreign currency on the eve of their bond/option pay out date, to jack up their profits.
With a floating exchange rate their "right" to influence FX rates is unlimited.
I'm not positive but I think what you described (making money by buying options then buying/selling in the spot market to move those options into the money) is impossible.
That's not how it worked.
Before financial crisis, banks offered a lot of hedging instruments against fx risk associated with, say, Polish zloty continuing to raise against US$. Now when these instruments became due, they flushed a lot of zlotys into the market, thus artificially reducing it value - which gave the banks big returns on the hedging instruments.
While consipiracy theories are on occassion right, doesn't it seem more probably that eastern european currencies have lost value because:
a) in a crisis, the dollar and the euro are seen as safe haven currrencies, and
b) Eastern Europe is seen by more than a few as the most exposed region in the crisis
In February, Polish zloty fell by almost 20% over 2 days, which was coincidentally right before a number of hedging options expired.
It since when has regained enormously and is now back to its November levels.
Falling 20% in 2 days sounds fishy, but then February was a crazy month. Just taking the US stock market as an example, we fell dramatically during that time period too (but not 20% in 2 days) and are now back to November levels as well.
Quote from: alfred russel on July 20, 2009, 10:36:35 AM
I don't know for certain, but I would guess that currency hedges through forwards, futures, and swaps would be more common than options. All of the former could involve mechanisms with an incentive like the one Marty is discussing.
One way or another you would have be talking about some kind of obligation to deliver zlotys. I don't see how any currency dump could work here unless the market is \weak and subject to easy manipulation.
Quote from: The Minsky Moment on July 20, 2009, 11:39:51 AM
Quote from: alfred russel on July 20, 2009, 10:36:35 AM
I don't know for certain, but I would guess that currency hedges through forwards, futures, and swaps would be more common than options. All of the former could involve mechanisms with an incentive like the one Marty is discussing.
One way or another you would have be talking about some kind of obligation to deliver zlotys. I don't see how any currency dump could work here unless the market is \weak and subject to easy manipulation.
I would guess that many if not most currency forwards/futures/swaps have net cash settlement features, so zlotys wouldn't need to be exchanged. Suppose I am a bank writing forwards to hedge companies who have used american debt to finance operations in poland. If we have a forward agreement with a net cash settlement feature and you pay theoretical US$1 while my bank pays theoretical 3 zlotys on settlement, I have an incentive for a devalued zloty on settlement. For example, if the exchange rate on settlement date is 4-1 (versus the implied 3-1), you will owe me $0.25 (assuming US dollar settlement). There wouldn't be a need for anyone to touch zlotys as a part of the contract.
Quote from: alfred russel on July 20, 2009, 10:36:35 AM
I don't know for certain, but I would guess that currency hedges through forwards, futures, and swaps would be more common than options. All of the former could involve mechanisms with an incentive like the one Marty is discussing.
Do forwards, futures and swaps involve payment of an up front premium?
How does an FX swap work? Never heard of it before.
Quote from: Admiral Yi on July 20, 2009, 01:59:59 PM
Quote from: alfred russel on July 20, 2009, 10:36:35 AM
I don't know for certain, but I would guess that currency hedges through forwards, futures, and swaps would be more common than options. All of the former could involve mechanisms with an incentive like the one Marty is discussing.
Do forwards, futures and swaps involve payment of an up front premium?
How does an FX swap work? Never heard of it before.
They can, but they typically don't involve an upfront premium.
An fx swap works conceptually like a forward but involves a stream of payments on a series of dates rather than a single payment on a single date.
Quote from: alfred russel on July 20, 2009, 12:33:32 PM
I would guess that many if not most currency forwards/futures/swaps have net cash settlement features, so zlotys wouldn't need to be exchanged. Suppose I am a bank writing forwards to hedge companies who have used american debt to finance operations in poland. If we have a forward agreement with a net cash settlement feature and you pay theoretical US$1 while my bank pays theoretical 3 zlotys on settlement, I have an incentive for a devalued zloty on settlement.
I don't dispute this, but I don't think it changes my analysis.
Quote from: The Minsky Moment on July 20, 2009, 03:56:07 PM
I don't dispute this, but I don't think it changes my analysis.
Having a net cash settlement feature disconnects the contracts from an actual transaction in the currency, which means you are settling multi-million dollar contracts based on numbers in the wall street journal or financial times. Intervening to manipulate those numbers seems a bit less far fetched, but in the end I agree with you that it still seems far fetched for the reasons you posted.