Michael Lewis "The Big Short"

[mike777]

In my completely uninformed opinion the problem is more about lack of ethics and social responsibility than it's a about lack of mathematics.

 

Those managers that arrange for themselves to be awarded with options rather than futures on their company are perfectly aware that this creates a situation in which managers are risk-seeking while shareholders (and most other interest groups) are risk-averse. It may take some math to assess the nett present value of the black swans correctly but it doesn't take any math to see that the black swans are more attractive to managers than to shareholders (or to employees or savers or to society in general for that matter).

Yes an old economic issue called principle-agent problem.

 

What we do know is that incentives work. People do react to incentives.

 

Getting the incentives correct is tough.

 

In the book one guy lost 9 billion$ in one trade and walked away with millions in his pocket.

--------------

 

As for the math and stat software etc these firms have PHD's math guys and gals in house. In addition it is very common for Univ. Profs to have outside second jobs as consultants to these firms. All of these firms have in house risk management teams.

 

Yet somehow none of it seemed to matter in this case.

[y66]

For the collaboration to work effectively, the mathematician has to ask the RWP what it is that he really wants to do, the RWP has to explain it,  and the M  has to take the time and make the effort to understand the explanation.

 

...

 

The people that work in the mathematics of finance are very smart people and they know all of this stuff  that I just said. Still, it seems possible that at least some of the current difficulty springs from a very sophisticated version of the same basic issue.

I just re-read an excerpt from Gillian Tett's book on this topic. It sounds like the "very smart people" were indeed onto the problem and trying to explain it and that the RWP's were not listening.

 

JP Morgan statisticians knew that company debt defaults are connected. If a car company goes into default, its suppliers may go bust, too. Conversely, if a big retailer collapses, other retail groups may benefit. Correlations could go both ways, and working out how they might develop among any basket of companies is fiendishly complex. So what the statisticians did, essentially, was to study past correlations in corporate default and equity prices and program their models to assume the same pattern in the present. This assumption wasn’t deemed particularly risky, as corporate defaults were rare, at least in the pool of companies that JP Morgan was dealing with. When Moody’s had done its own modelling of the basket of companies in the first Bistro deal, for example, it had predicted that just 0.82 per cent of the companies would default each year. If those defaults were uncorrelated, or just slightly correlated, then the chance of defaults occurring on 10 per cent of the pool – the amount that might eat up the $700m of capital raised to cover losses – was tiny. That was why JP Morgan could declare super-senior risk so safe, and why Moody’s had rated so many of these securities triple-A.

 

The fact was, however, that the assumption about correlation was just that: guesswork. And Demchak and his colleagues knew perfectly well that if the correlation rate ever turned out to be appreciably higher than the statisticians had assumed, serious losses might result. What if a situation transpired in which, when a few companies defaulted, numerous others followed? The number of defaults required to set off such a chain reaction was a vexing unknown. Demchak had never seen it happen, and the odds seemed extremely long, but even if there was just a minute chance of such a scenario, he didn’t want to find himself sitting on $100bn of assets that could conceivably go bust. So he decided to play it safe, and told his team to look for ways to cut their super-senior liabilities again, irrespective of what the regulators were saying.

 

That stance cost JP Morgan a fair amount of money, because it had to pay AIG and others to insure the super-senior risk, and those fees rose steadily as the decade wore on. In the first such deals with AIG, the fee had been just 0.02 cents for every dollar of risk insured each year. By 1999, the price was nearer 0.11 cents per dollar. But Demchak was determined that the team must be prudent.

 

Around the same time, the JP Morgan team stumbled on a second, potentially bigger problem. As the innovation cycle turned and earnings declined from the early Bistro deals based on pools of corporate loans, Demchak asked his team to explore new uses for Bistro-style deals, either by modifying the structure or by putting new kinds of loans or other assets into the mix. They decided to experiment with mortgages. Terri Duhon was at the heart of the endeavour. Only 10 years earlier, Duhon had been a high-school student in Louisiana. When she told her relatives she was going to work in a bank, they had assumed she was going to be a teller. Now she was managing tens of billions of dollars. She was trained as a mathematician, and she thrived on adrenaline, riding motorbikes in her spare time. Even so, she found the thought of being in charge of all those zeros awe-inspiring. “It was just an extraordinary, intense experience,” she later recalled.

 

A year after Duhon took on the post, she got word that Bayerische Landesbank, a large German bank, wanted to use the credit derivatives structure to remove the risk from $14bn of US mortgage loans it had extended. She debated with her team whether to accept the assignment; working with mortgage debt wasn’t a natural move for JP Morgan. But Duhon knew that some of the bank’s rivals were starting to conduct credit derivatives deals with mortgage risk, so the team decided to take it on.

 

As soon as Duhon talked to the quantitative analysts, she encountered a problem. When JP Morgan had offered the first Bistro deals in late 1997, it had access to extensive data about all the loans it had pooled together. So did the investors who bought the resulting credit derivatives, since the bank had deliberately named all of the 307 companies whose loans were included. In addition, many of these companies had been in business for decades, so extensive data were available on how they had performed over many business cycles. That gave JP Morgan’s statisticians, and investors, great confidence in predicting the likelihood of defaults. But the mortgage world was very different. For one thing, when banks sold bundles of mortgage loans to outside investors, they almost never revealed the names and credit histories of the individual borrowers. Worse, when Duhon went looking for data to track mortgage defaults over several business cycles, she discovered it was in short supply.

 

While America’s corporate world had suffered several booms and recessions in the later 20th century, the housing market had followed a steady path of growth. Some specific regions had suffered downturns: prices in Texas, for example, fell during the Savings and Loans debacle of the late 1980s. But since the second world war, there had never been a nationwide house-price slump. The last time house prices had fallen significantly en masse, in fact, was way back in the 1930s, during the Great Depression. The lack of data made Duhon nervous. When bankers assembled models to predict defaults, they wanted data on what normally happened in both booms and busts. Without that, it was impossible to know whether defaults tended to be correlated or not, in what circumstances they were isolated to particular urban centres or regions, and when they might go national.

 

Duhon could see no way to obtain such information for mortgages. That meant she would either have to rely on data from just one region and extrapolate it across the US, or make even more assumptions than normal about how defaults were correlated. She discussed what to do with Krishna Varikooty and the other quantitative experts. Varikooty was renowned on the team for taking a sober approach to risk. He was a stickler for detail and that scrupulousness sometimes infuriated colleagues who were itching to make deals. But Demchak always defended Varikooty. His judgment on the mortgage debt was clear: he could not see a way to track the potential correlation of defaults with any confidence. Without that, he declared, no precise estimate could be made of the risks of default in a pool of mortgages. If defaults on mortgages were uncorrelated, then the Bistro structure should be safe for mortgage risk, but if they were highly correlated, it might be catastrophically dangerous. Nobody could know.

 

Duhon and her colleagues were reluctant simply to turn down Bayerische Landesbank’s request. The German bank was keen to go ahead, even after the uncertainty in the modelling was explained, and so Duhon came up with the best estimates she could to structure the deal. To cope with the uncertainties the team stipulated that a bigger-than-normal funding cushion be raised, which made the deal less lucrative for JP Morgan. The bank also hedged its risk. That was the only prudent thing to do, and Duhon couldn’t see herself doing many more such deals. Mortgage risk was just too uncharted. “We just could not get comfortable,” Masters later said.

 

In subsequent months, Duhon heard through the grapevine that other banks were starting to do credit derivatives deals with mortgage debt, and she wondered how they had coped with the lack of data that so worried her and Varikooty. Had they found a better way to track the correlation issue? Did they have more experience of dealing with mortgages? She had no way of finding out. Because the credit derivatives market was unregulated, details of the deals weren’t available.

The team at JP Morgan did only one more Bistro deal with mortgage debt, a few months later, worth $10bn. Then, as other banks ramped up their mortgage-backed business, JP Morgan largely dropped out. Eight years later, the unquantified mortgage risk that had frightened off Duhon, Varikooty and the JP Morgan team had reached vast proportions. And it was spread throughout the western world’s financial system.

My wife and I have a saying: "just because I'm not listening doesn't mean I don't care". Fortunately, she is not a quant and I am not an investment banker, or vice versa.

[y66]

Haircuts are coming back into fashion ...

[y66]

Out of curiosity, I read some of Michael Burry's posts on that value investing thread he started in 1996. Chris Nicholson has excerpts and a link here.

 

Yeah, maybe I'm resulting, but the guy definitely thinks and writes clearly and he's not afraid to take a position (obviously). Reminds me of some of the bright young players on this forum (the ones who post on bridge).

[y66]

From Michael Burry’s Op-Ed piece in today’s NYT

... I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, “The Big Short,” which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins.

 

Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.

 

As a nation, we cannot afford to live with Mr. Greenspan’s way of thinking. The truth is, he should have seen what was coming and offered a sober, apolitical warning. Everyone would have listened; when he talked about the economy, the world hung on every single word.

 

Unfortunately, he did not give good advice. In February 2004, a few months before the Fed formally ended a remarkable streak of interest-rate cuts, Mr. Greenspan told Americans that they would be missing out if they failed to take advantage of cost-saving adjustable-rate mortgages. And he suggested to the banks that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”

 

Within a year lenders made interest-only adjustable-rate mortgages readily available to subprime borrowers. And within 18 months lenders offered subprime borrowers so-called pay-option adjustable-rate mortgages, which allowed borrowers to make partial monthly payments and have the remainder added to the loan balance (much like payments on a credit card).

 

Observing these trends in April 2005, Mr. Greenspan trumpeted the expansion of the subprime mortgage market. “Where once more-marginal applicants would simply have been denied credit,” he said, “lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.”

Yet the tide was about to turn. By December 2005, subprime mortgages that had been issued just six months earlier were already showing atypically high delinquency rates. (It’s worth noting that even though most of these mortgages had a low two-year teaser rate, the borrowers still had early difficulty making payments.)

 

The market for subprime mortgages and the derivatives thereof would not begin its spectacular collapse until roughly two years after Mr. Greenspan’s speech. But the signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.

 

Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool — the epic and unfair taxpayer-financed bailouts. Now, in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children’s children will suffer terrible financial consequences.

 

It did not have to be this way. And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis. Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat. If the mistakes were properly outlined, that might both inform Congress’s efforts to improve financial regulation and help keep future Fed chairmen from making the same errors again.

A "supremely lucky flipper of coins"? How galling.

 

This flip's for you Al:

 

http://www.ooze.com/finger/assets/images/rockefeller.jpg

[Winstonm]

Mr. Greenspan told Americans that they would be missing out if they failed to take advantage of cost-saving adjustable-rate mortgages. And he suggested to the banks that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.”

 

Within a year lenders made interest-only adjustable-rate mortgages readily available to subprime borrowers. And within 18 months lenders offered subprime borrowers so-called pay-option adjustable-rate mortgages, which allowed borrowers to make partial monthly payments and have the remainder added to the loan balance (much like payments on a credit card).

 

Observing these trends in April 2005, Mr. Greenspan trumpeted the expansion of the subprime mortgage market. “Where once more-marginal applicants would simply have been denied credit,” he said, “lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.”

 

Greenspan, with his refusal to oversee the non-bank lenders who took the mortgage-to-securitize model into the stratosphere of bad loans and the handymen who helped them along the way (the ratings agencies) who whitewashed the bad paper as AAA, is the most responsible party of the bunch.

 

Who is John Galt? Should be: Why do we still listen to Alan Greenspan?

[pdmunro]

"ultimately leaving themselves with only one policy tool — the epic and unfair taxpayer-financed bailouts."

 

interesting article but saddening at the same time. I think this (above) says it all – those in charge (Fed, Congress etc) knew they could step in at any time and support in times of stress. But failed dismally (despite miles of risk analysis) to estimate the extent of the eventual stress that would unfold.

 

Guys like Burry (if employed by banks or investment houses) would have lost their job because they failed to milk the gravy train during the days of lending excess.

 

************************************************************

The above is an email from my brother in response to the Burry Op-Ed piece.

[mike777]

AGain what govt policy tools do you want to solve what issue?

 

If we cannot agree on what the problem is.....

 

 

Many hate the speculators/risk takers but they were the ones who saw the crises.

------------

 

Many say....banks should... not take on risk.....

 

Yet these are the same people who say.....banks....loan more......lots more

 

----------

 

Many say.....hate..hate too big to fail...yet the USA central govt takes on more and more risk..........too big to fail????

[kenberg]

People such as Burry and Greenspan are in the business and think in large terms. I think in small terms and try to extrapolate.

 

I know someone who bought a townhouse a while back. A bit under 200K I think. Housing prices were still shooting up and so they took out a second mortgage (I guess that's what it's called, anyway they borrowed money on their house) for another 40K. This was not something needed for sudden unexpected expense such as a medical meltdown, it was to pay off their credit cards. They have since re-run up the balance on their credit cards.

I don't want to bail them out. Not them, not the bank(s) that lent them the money, not the credit card companies if they default, none of them. I don't want to do it personally, I don't want to do it as part of a broad government effort.

 

I think that when push comes to shove, the view expressed above is widely shared by my peer group, by which I mean people who are not particularly stupid but who don't know much, and don't wish to know much, about banking and finance.

 

Now to Burry and Greenspan. An essential difference between them is that Burry did not work for me, Greenspan did. My question for Greenspan is not why Burry was able to figure it out (we have all seen bizarre declarer play that stumbles home, if AG says that's what happened I lack the knowledge to argue with him) but rather why Greenspan didn't figure it out. He was getting paid to understand such things. And, of course, who should we trust now?

 

We will never be able to stop some people from acting foolishly. But I prefer that those who do so have to pay for their own mistakes. Even if the mistake was not foolish. If you choose a well thought out line of play and you come up short on tricks, you are still short of tricks. Fundamentally, we have to accept that people will make errors, but devise the system so that their errors are their problem. It will motivate them to look a little more carefully. Some of them anyway. And for the rest, it's their problem.

 

 

And incidentally, I still think that the wildly irresponsible use of credit cards is going to someday bite us all, even we who don't run a balance, in our collective ass. You just can't have a large share of the population in large debt and expect things to go well. And yes, we have to address the national debt.

 

Many years ago, before we all learned to speak carefully, a student asked an instructor how he could improve his grade. The instructor suggested that the first ting was for the student to get his head out of his ass. A fine recommendation. Huge unsecured, or badly secured, debt is a really bad idea. Duh.

[Al_U_Card]

Credit card debt may well be the next "bubble", now that carbon credits are side-lined (for the time being). They will just have to devise a different sort of CDO/CDS to make the riskier part more palatable.

[y66]

Making Financial Reform Fool-Resistant

By Paul Krugman NYT April 5, 2010

 

The White House is confident that a financial regulatory reform bill will soon pass the Senate. I’m not so sure, given the opposition of Republican leaders to any real reform. But in any case, how good is the legislation on the table, the bill put together by Senator Chris Dodd of Connecticut?

 

Not good enough. It’s a good-faith effort to do what needs to be done, but it would create a system highly dependent on the wisdom and good intentions of government officials. And as the history of the last decade demonstrates, trusting in the quality of officials can be dangerous to the economy’s health.

 

Now, it’s impossible to devise a truly foolproof regulatory regime — anyone who believes otherwise is underestimating the power of foolishness. But you can try to create a system that’s relatively fool-resistant. Unfortunately, the Dodd bill doesn’t do that.

 

As I argued in my last column, while the problem of “too big to fail” has gotten most of the attention — and while big banks deserve all the opprobrium they’re getting — the core problem with our financial system isn’t the size of the largest financial institutions. It is, instead, the fact that the current system doesn’t limit risky behavior by “shadow banks,” institutions — like Lehman Brothers — that carry out banking functions, that are perfectly capable of creating a banking crisis, but, because they issue debt rather than taking deposits, face minimal oversight.

 

The Dodd bill tries to fill this gaping hole in the system by letting federal regulators impose “strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.” It also gives regulators the power to seize troubled financial firms — and it requires that large, complex firms submit “funeral plans” that make it relatively easy to shut them down.

 

That’s all good. In effect, it gives shadow banking something like the regulatory regime we already have for conventional banking.

 

But what will actually be in those “strict rules” for capital, liquidity, and so on? The bill doesn’t say. Instead, everything is left at the discretion of the Financial Stability Oversight Council, a sort of interagency task force including the chairman of the Federal Reserve, the Treasury secretary, the comptroller of the currency and the heads of five other federal agencies.

 

Mike Konczal of the Roosevelt Institute, whose blog has become essential reading for anyone interested in financial reform, has pointed out what’s wrong with this: just consider who would have been on that council in 2005, which was probably the peak year for irresponsible lending.

more ...

 

Mike Konczal's blog.

[Winstonm]

Let's start with renewal of Glass-Steagal.

[Al_U_Card]

Well, at least we know where the money went and who stood to benefit....

 

http://money.cnn.com/2010/04/14/news/compa...?cnn=yes&hpt=T2

 

Wouldn't want them to lose jobs or suffer pay cuts now, would we?

[kenberg]

I hope I am within the spirit of the topic here. I just had a five day house guest of Libertarian persuasion, and this week-end we will be visiting friends where the guy is a Ron Paul fan. I am in need of a little peace. Forum discussion is much calmer.

 

In a recent Post op-ed, http://www.riskcenter.com/story.php?id=19846, Tim Geithner spoke of success. I am in favor of success. I also like to think I am not a total sucker. So I ask: Is the following correct?

 

In fact, we are repairing our financial system at much lower cost than anyone anticipated and expect to return hundreds of billions of dollars in available but unused TARP resources to the American people. That is a rare achievement in Washington.

 

Our latest estimate conservatively puts the cost of TARP at $117 billion, and if Congress adopts the Financial Crisis Responsibility Fee that the president proposed in January, the cost to American taxpayers will be zero. More broadly, we estimate the overall cost of this crisis will be a fraction of what was originally feared and much less than what was required to resolve the savings-and-loan crisis of the 1980s.

[Al_U_Card]

From what I understand, the TARP 700 billion is a small portion of the 22 trillion or so that will eventually be "lost".

[helene_t]

Dunno but it could be right.

 

The Danish central bank stroke rich from "saving" the Danish krone from depreciating as a result of the 1992 referendum (bought up DKK cheap during the immediate crisis and sold them at a higher price when the panic had settled).

 

Governments all over the developed World have acquired stock during the credit crisis and may sell them with a profit.

[y66]

Agree with Al you have to look at the bigger picture. According to Paul Krugman, the CBO estimates the "output gap" resulting from the crisis will be around $2 trillion.

 

Yes, the Federal Reserve and the Obama administration have pulled us “back from the brink” — the title of a new paper by Christina Romer, who leads the Council of Economic Advisers. She argues convincingly that expansionary policy saved us from a possible replay of the Great Depression.

 

But while not having another depression is a good thing, all indications are that unless the government does much more than is currently planned to help the economy recover, the job market — a market in which there are currently six times as many people seeking work as there are jobs on offer — will remain terrible for years to come.

 

Indeed, the administration’s own economic projection — a projection that takes into account the extra jobs the administration says its policies will create — is that the unemployment rate, which was below 5 percent just two years ago, will average 9.8 percent in 2010, 8.6 percent in 2011, and 7.7 percent in 2012.

 

This should not be considered an acceptable outlook. For one thing, it implies an enormous amount of suffering over the next few years. Moreover, unemployment that remains that high, that long, will cast long shadows over America’s future.

 

Anyone who thinks that we’re doing enough to create jobs should read a new report from John Irons of the Economic Policy Institute, which describes the “scarring” that’s likely to result from sustained high unemployment. Among other things, Mr. Irons points out that sustained unemployment on the scale now being predicted would lead to a huge rise in child poverty — and that there’s overwhelming evidence that children who grow up in poverty are alarmingly likely to lead blighted lives.

 

These human costs should be our main concern, but the dollars and cents implications are also dire. Projections by the Congressional Budget Office, for example, imply that over the period from 2010 to 2013 — that is, not counting the losses we’ve already suffered — the “output gap,” the difference between the amount the economy could have produced and the amount it actually produces, will be more than $2 trillion. That’s trillions of dollars of productive potential going to waste.

[Al_U_Card]

There may be a parallel to draw between the big monopolies of the last century and the monopolizing financial methods that are presently assaulting our pocketbooks.

 

JP Morgan and Goldman Sachs took down Bear-Stearns and Lehmann Bros. as well as parking all of the risk with AIG. When the ***** hit the fan...they walked away indemnified and AIG took the hit. (And then so did we through our future taxes.)

 

As long as these "instruments" of fiscal torture are not controlled and restrained, we will be in a similar state in the future.

[kenberg]

Wait! Yes, we should all look at the big picture. Al suggests a 22 trillion dollar loss. Y only suggests 2 trillion. Still, a trillion here, a trillion there.... The Krugman article speaks of the misery caused by unemployment. Who would disagree.

 

 

Still, a year or two back the potential for total collapse was felt. Few, certainly not I, suggest the problem is past. My question is far more restricted. We elected Obama and a slew of Dems. He brought in Geithner. He reappointed Bernanke. They made some dramatic moves.

 

In his article (this links directly to the Post, the earlier link is more problematic) Geithner claims some aspects of their efforts are actually working well. If in fact this is so, I think it is important. I ask: Is it so?

 

I just saw that some of my questions are addressed in

http://www.washingtonpost.com/wp-dyn/conte...0041304332.html

[Al_U_Card]

Fundamentally, a problem occurred. Can the cause be identified and can action be taken to mitigate the result, correct the cause and prevent future recurrence?

 

If Geithner et al successfully resolve the above, then they are to be congratulated. If not, then why not?

[kenberg]

By analogy: A while back I had a large kidney stone. The doc sent in a camera and a laser gun and zapped the sucker. He didn't fix the fact that I am overweight, not so young anymore, or a host of other issues. However, an earlier doc, when I complained of some pain in my kidney area, announced that I was in the grip of something called "Devil's Claw". This guy is no longer my doctor.

 

In a few months we get to vote on whether we think Obama and his party should continue to have a majority in the Senate and the House. We will need to assess how they are doing. Looking at the economic fears of a year or a year and a half ago, perhaps the answer is "Not so bad".

 

But regarding the big banks, I agree we need to stop the mothers from robbing us blind.

[PassedOut]

But regarding the big banks, I agree we need to stop the mothers from robbing us blind.

Seems there's a big fight going on now about putting a stop to that. Needless to say, the crooks don't want it to happen: Krugman: The Fire Next Time

 

So it’s crucial to avoid disorderly bank collapses, just as it’s crucial to avoid out-of-control urban fires.

 

Since the 1930s, we’ve had a standard procedure for dealing with failing banks: the Federal Deposit Insurance Corporation has the right to seize a bank that’s on the brink, protecting its depositors while cleaning out the stockholders. In the crisis of 2008, however, it became clear that this procedure wasn’t up to dealing with complex modern financial institutions like Lehman or Citigroup.

 

So proposed reform legislation gives regulators “resolution authority,” which basically means giving them the ability to deal with the likes of Lehman in much the same way that the F.D.I.C. deals with conventional banks. Who could object to that?

 

Well, Mr. McConnell is trying. His talking points come straight out of a memo Frank Luntz, the Republican political consultant, circulated in January on how to oppose financial reform. “Frankly,” wrote Mr. Luntz, “the single best way to kill any legislation is to link it to the Big Bank Bailout.” And Mr. McConnell is following those stage directions.

 

It’s a truly shameless performance: Mr. McConnell is pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite. In recent weeks, he and other Republican leaders have held meetings with Wall Street executives and lobbyists, in which the G.O.P. and the financial industry have sought to coordinate their political strategy.

 

And let me assure you, Wall Street isn’t lobbying to prevent future bank bailouts. If anything, it’s trying to ensure that there will be more bailouts. By depriving regulators of the tools they need to seize failing financial firms, financial lobbyists increase the chances that when the next crisis strikes, taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse.

 

Even more important, however, the financial industry wants to avoid serious regulation; it wants to be left free to engage in the same behavior that created this crisis. It’s worth remembering that between the 1930s and the 1980s, there weren’t any really big financial bailouts, because strong regulation kept most banks out of trouble.

A huge amount of money (ill-gotten gains, in large part) is behind the effort to allow big bankers to evade regulation. It is sobering to see that quite a few voters actually fall for the anti-regulation propaganda that those con artists spew.

[hrothgar]

Seems appropriate to post the following

 

http://www.dailykos.com/story/2010/4/16/85...uding-Investors

 

Couple interesting quotes

 

first, from the SEC indictment

 

"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

 

Second from the WSJ financial blog

 

The crux of the charges against Goldman Sachs relate to a financial instrument the firm developed through discussions with hedge fund Paulson & Co. (Paulson & Co. was not named as a defendant in the SEC charges.)

 

According to the complaint, Paulson paid Goldman Sachs approximately $15 million for structuring and marketing this security — called ABACUS 2007-AC1 — in early 2007. The security let Paulson & Co. make bets against the residential real estate market, which the hedge fund believed was going to tank....

 

In other words, Paulson had an incentive to pick securities that would have tanked, since he was then going to bet that the value of these securities would fall. While that may sound strange to people, in and of itself it isn’t a problem. The problem, according to the SEC, comes in the form of Goldman not telling the guys that invested in ABACUS 2007-AC1 the role that Paulson had played in its construction.

[mike777]

The real problem is the guys insured a bunch of bad loans..and they knew the loans and had all the info. They did not just invest, they insured, they bet.

 

 

They did not have to insure the loans, they wanted to, no one forced them to insure these exact loans.

 

They wanted this risk, they choose it. How do you regulate insanity.

[hrothgar]

The real problem is the guys insured a bunch of bad loans..and they knew the loans and had all the info. They did not just invest, they insured, they bet.

 

 

They did not have to insure the loans, they wanted to, no one forced them to insure these exact loans.

The specific charges in this case relate to disclosure of information.

 

Goldman Sachs did not disclose the information necessary to allow investors to understand the nature of the financial instruments that they were purchasing.