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Subject: Naive, empty threat, lying or accurate? rss

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Scott Russell
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From Obama's Wall Street speech:

Quote:
Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.


Chime in. Do you think the US government would stand by and watch banks crash?

(Recent) history says no. Any reason to expect change? Our financial oversight Congressional committees have already pitched in the towel on significantly changing the structure of the oversight commissions because it's "too hard." They have called for the various organizations to "work more closely' with each other. That's my prediction for the extent of reform.

I predict Wall Street will continue on course, have another correction and receive even more taxpayer money, because they will remain "too big to fail."

Help me sleep and explain why I am wrong?

If you agree that the statement to avoid intervention is false, how would you classify Obama's statement? Meaningless hot air to fill the time, acting like the mother in the supermarket "If you do that again...," plea for help, teleprompter malfunction or just posturing for cameras? Or some other classification?
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Chief Slovenly
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Meaningless motherly scolding unless it's backed up by some partial restoration of Glass-Steagall, or at least some more tailored equivalent for today's Wall Street -- although I think G-S did fine for the 70 years or so it was actually on the books.
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What would happen if the government did let them fail?
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Chief Slovenly
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quozl wrote:
What would happen if the government did let them fail?


It would mean the death of commercial paper -- there's an argument that that's already happened to a certain extent, and one that I'm not unsympathetic to, but when the largest commercial paper issuers and insurers go under, that means NO, and I do mean full stop, NO commercial outlays/contracts/activity.

Consumer debt is one thing, but commercial debt is another kettle of fish.
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qzhdad wrote:
If you agree that the statement to avoid intervention is false, how would you classify Obama's statement? Meaningless hot air to fill the time, acting like the mother in the supermarket "If you do that again...," plea for help, teleprompter malfunction or just posturing for cameras? Or some other classification?


You're ignoring the connector. "Wall Streeters cannot do bad things AND expect another bailout." This means that this can be kept true by one of two ways: either Wall Street will not get another bailout, or Wall Street will stop doing bad things - either out of the goodness of their hearts, which is of course unlikely, or because they are coerced to do so by new regulatory policy.

Given that such regulatory policy is probably the next big thing for Obama to do once the healthcare mess is dealt with or collapses, the speech was laying the groundwork for it (in advance of insane Republicans screaming about how regulation of nigh-criminal organizations is socialism). Unlike healthcare, this is one area where public support is overwhelmingly strong, so Obama can bypass Congressional committees, introduce a bill from the executive far more simply than happened with healthcare, and bully-pulpit it.
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Chad Ellis
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I think we're going to see a significant round of regulatory restructuring, assuming that Obama retains some political capital when the healthcare battle is over (and possibly even if he doesn't). Bringing back G-S in some form seems like a likely starting point.
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Nate Sandall
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I had an economics professor in college that I took American Economic History from who hammered home the idea that banks are necessary but financial institutions must be heavily regulated because they will always come up with a way to fail and then will take a significant portion of the economy down with them as peoples' life savings disappear.

This has been proven over and over again:
Bank failures in the 1930's
Continental Illinois 1984
The S&L debacle 1989
Long Term Capital Management 1999

(these are the best examples I can think of off the top of my head)

Peoples' life savings must be saved when a bank fails and usually the best solution is to force a merger of the failing bank. This is what happened to Washington Mutual and Wachovia. Without the FDIC, the failure of either of those huge banks and subsequent loss of deposits would have resulted, by itself, in the tanking of the US economy and an even worse great depression.

The failure of AIG would have resulted in a cascade of failures of nearly every major bank in Europe which would have tanked the entire world economy. Therefore, government intervention was absolutely crucial to the stability of every nation on the planet. The problem is the government just tells us it would have been bad, but they don't say how bad or give any specifics about the international implications. This just creates resentment.


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Scott Russell
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Cavedog_pdx wrote:

The failure of AIG would have resulted in a cascade of failures of nearly every major bank in Europe which would have tanked the entire world economy. Therefore, government intervention was absolutely crucial to the stability of every nation on the planet. The problem is the government just tells us it would have been bad, but they don't say how bad or give any specifics about the international implications. This just creates resentment.




So are you agreeing that threatening to not pump more governement funds in if it looks like a large financial institution is going to fail is an empty threat?
 
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Bojan Ramadanovic
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Yes - it was an empty threat.

If the financial institutions were in fact too big to fail (and this is arguable in the light of deposit insurance) then this sort of bailout *must* be followed by a round of regulation limiting the size of the financial institutions to something that is sufficiently small to be allowed to fail.

Yes, regulating a size of a business is an infringement on free markets but it is *much* less pernicious one then having massive businesses that know they can operate without any risk of failure. It will mean that growth at good times will be much less then it possibly could be (large banks do provide all sorts of positive synergies) but would prevent a worse repetition of the current mess in the future.
Unfortunately, although this policy would get massive public support I think it is very unlikely to be pursued.
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Ken
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qzhdad wrote:
Chime in. Do you think the US government would stand by and watch banks crash?


It depends on how successfully regulation on systemic risk is. If we can come up with a reasonably good model to identify and limit systemic risk so that we avoid the "cascading failure" issues of the latest crisis, then I think we can.

It's all a question of regulation requiring the institutions to manage their risk more successfully and provide insight into exposures at one institution that create larger exposures throughout the system, then the failure of one institution needn't threaten the banking system as a whole.

Will we end up providing government funds to address with a crisis at some point? Hell, yes. We can't predict everything accurately (although we can predict more than we did), so presuming it won't happen is bound to be wrong. I'm more interested in reducing the amount of funds required and the impact of bank activities on other areas of the economy.

So we will have to help banks out at some point in the future, simply because no matter how smart we get, we will be caught off-guard. But we probably can limit those funds and the depth of the problem.
 
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George Kinney
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Cavedog_pdx wrote:
The problem is the government just tells us it would have been bad, but they don't say how bad or give any specifics about the international implications. This just creates resentment.


Too bad this whole issue is, even described in broad generalizations, massively more complex than the average joe can comprehend.

Of course either Bush or Obama could've made a little more effort, spread their arms wide at the podium and said 'Its a problem thats THIS big!'. That might have sunk through a few more skulls.
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qzhdad wrote:

If you agree that the statement to avoid intervention is false, how would you classify Obama's statement?

Wishfull thinking.
The democratic leader that will have the gut and will to "fix" the financial system has yet to be elected.
 
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Ken
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bjlillo wrote:
The threat of failure is a far more effective regulation than what the government is currently doing.


Which is why they did such a stellar job of managing their exposure in the first place, right?

Had the government not stepped in, there's significant questions as to whether or not we'd even have a financial industry today. Let's not pretend the market did a good job of managing risk.
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Chad Ellis
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bjlillo wrote:
The threat of failure is a far more effective regulation than what the government is currently doing.


Pretty to think so, but the facts don't bear it out. Financial crisis were the rule rather than the exception before G-S came into effect and the period from its enactment to its repeal* was a period of much higher systemic stability and growth for the banking sector.



* One of my old professors said this was analogous to a society with regular outbreaks of epidemic that prevents them through a rigorous program that is eventually discarded because there's been such a long period without epidemics that the population decides they must not be a threat.
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Scott Russell
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Wait, who signed the bill repealing G-S?

Who did all they could to prevent more oversight of Fannie and Freddie?

Why exactly do you guys trust the same guys to put in real reform? (Barnie Frank has already said that significantly changing the structure of oversight is a no-go, but he is going to ask them to play nicely together.)
 
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Ken
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bjlillo wrote:
Please. The source of all of this trouble is Fannie, Freddie, and the Fed.


No, Lehman didn't fail only because of them. It failed because of an incredible amount of risk it assumed in the derivatives market. You're again trying to turn a very complex issue in the "McNuggets" version of what happened.
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Scott Russell
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perfalbion wrote:
bjlillo wrote:
Please. The source of all of this trouble is Fannie, Freddie, and the Fed.


No, Lehman didn't fail only because of them. It failed because of an incredible amount of risk it assumed in the derivatives market. You're again trying to turn a very complex issue in the "McNuggets" version of what happened.


Not only, but would you agree partially or, even substantially?

I agree that treating derivatives like serious investments was part of the story, but don't those still fall between SEC and F(whatever controls commodities)? Has anything been proposed for oversight of them?
 
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Ken
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qzhdad wrote:
Not only, but would you agree partially or, even substantially?


Fannie & Freddie had oversight problems in their regulation. Loose credit definitely contributed to the problem building, but I don't know that we'll know exactly how much for a while. Contributory for sure, causal I don't think so.

Quote:
I agree that treating derivatives like serious investments was part of the story, but don't those still fall between SEC and F(whatever controls commodities)? Has anything been proposed for oversight of them?


Yes. I don't know the specifics off-hand, but the derivative market has regulatory rules working through the process. The systemic risk regulations are also in process.

I can't say I've tracked the specifics too closely (only so much bandwidth), but I know they're working their way through and/or are already in place.
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I think he's putting out a warning shot. The way he has doggedly pursued health care reform should tell us this should be heeded, but how his administration would react is open to speculation.
 
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Ken
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DarthXaos wrote:
It would be a lot better for the economy if the banks and AIG were allowed to fail. FDIC would take care of people's savings, we would have a really bad situation for a short time while the economy corrected itself, but then we would be back on track if we allowed Darwin and Adam Smith to work their healing magic.


You're positively insane if you think allowing the entire financial system to fail would have been "better for the economy."
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Ken
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bjlillo wrote:
The reason their derivatives failed is because Fannie and Freddie, at the behest of Federal regulators like the esteemed Barney Frank, pushed loans on people who couldn't afford them and didn't deserve them.


Ummm. No? Not every sub-prime note went to Fannie or Freddie. Indeed, many of them didn't. You're also completely ignoring the derivative market which allowed a bank to take a loan with $100,000 of exposure, securitize it, and sell that to many, many people so that the $100,000 was magnified multiple times if/when a loan went into default. Then you're forgetting the CDS market, which was presumed to be a safe way to hedge risk, but turned out to be nothing close to that due to the counter-party exposures that ended up existing between the various institutions.

It's nice to try to make things "fortune cookie" in their appearance. Particularly when they support your political views. But it doesn't mean it's true. In fact, those analysis are almost never true. From either side.

Take the blinders off.
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bjlillo wrote:
I'm not ignoring either of those things. Without the instability caused by Fannie, Freddie, the Fed, and Federal regulators with their efforts to increase the availability of credit to those who didn't deserve it, those things would not have been a problem.


Wait, you started with "This was all Fannie and Freddie," now we've added two more bodies - federal regulators and the Fed itself. Which is it?

Lehman Brothers failed due to an inability to meet capital requirements, which was tied to the risk it had assumed in the CDS and Derivatives markets, which it had deemed to be safe enough to place huge bets in. When their value evaporated, they could no longer maintain sufficient capital to meet either their regulatory or counter-party requirements and had huge payments trigger.

Now, you can blame that on the government all you like. But the government isn't the one that had them so heavily exposed to SDOs and CDSs - that was their risk modelers and investment managers guided by their executives. Yes, it's possible that Lehman survives without "mark to market" rules, but since that should have factored in to a risk assessment, they failed in their job.

I can't say I'm surprised at your position - when government does something bad, the market would have done it better. When the market does something bad, it's the government's fault. How convenient for you.
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bjlillo wrote:
The reason their derivatives failed is because Fannie and Freddie, at the behest of Federal regulators like the esteemed Barney Frank, pushed loans on people who couldn't afford them and didn't deserve them.


No, the reason their derivatives failed was because they were based on subprime mortgages, which Fannie and Freddie didn't finance.

By 2006, Fannie and Freddie's share of the new mortgage market had dropped to just over forty percent - amazing, given their size, and entirely because of the enormous glut of subprime mortgages which were in essence built to foreclose. Subprimes - you know, as in "subprime mortgage crisis" - are pretty much by definition mortgages which Fannie and Freddie would refuse to back.

If you look at mortgage default rates in 2008, Fannie's overall default rate was 1.15 percent and Freddie's .085 percent. Compare that to the overall market default rate of 1.47 for prime mortgages, 8.35 for alt-A mortgages and 20.47 for subprime mortgages, and it becomes evident that Fannie and Freddie's mortgages was in fact unusually reliable and solid, and not the cause of the mortgage crisis as you suggest.

There can be differences of opinion between us, but this is verifiable fact: Fannie and Freddie were victims of the mortgage crisis, not instigators of it.
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bjlillo wrote:
perfalbion wrote:
bjlillo wrote:
The threat of failure is a far more effective regulation than what the government is currently doing.


Which is why they did such a stellar job of managing their exposure in the first place, right?

Had the government not stepped in, there's significant questions as to whether or not we'd even have a financial industry today. Let's not pretend the market did a good job of managing risk.


Please. The source of all of this trouble is Fannie, Freddie, and the Fed. Without their hyper-acceleration of credit to allow for "fairness and affordability in housing" and to avoid the correction we needed after the dot com bubble burst, we wouldn't have ever had a housing bubble.

The first domino to fall wasn't fannie and freddie, it was Bear Stearns which then started a chain reaction with Lehman Brothers, Merril Lynch, and AIG. All of these companies invested heavily in high risk mortgages not because they were forced to but because it was highly profitable in the short term. These are all private companies, so I think its ridiculous to blame the current economic crises on Government. The true blame lies with greed, and arrogance, which were abundant in those companies.
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Chief Slovenly
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jeff brown wrote:
bjlillo wrote:
perfalbion wrote:
bjlillo wrote:
The threat of failure is a far more effective regulation than what the government is currently doing.


Which is why they did such a stellar job of managing their exposure in the first place, right?

Had the government not stepped in, there's significant questions as to whether or not we'd even have a financial industry today. Let's not pretend the market did a good job of managing risk.


Please. The source of all of this trouble is Fannie, Freddie, and the Fed. Without their hyper-acceleration of credit to allow for "fairness and affordability in housing" and to avoid the correction we needed after the dot com bubble burst, we wouldn't have ever had a housing bubble.

The first domino to fall wasn't fannie and freddie, it was Bear Stearns which then started a chain reaction with Lehman Brothers, Merril Lynch, and AIG. All of these companies invested heavily in high risk mortgages not because they were forced to but because it was highly profitable in the short term. These are all private companies, so I think its ridiculous to blame the current economic crises on Government. The true blame lies with greed, and arrogance, which were abundant in those companies.


More to the point, it helps to remember what a SIV actually is (and also that it was created by Citi) and how it was used in the shadow banking system (crucial point: "not subject to the same safety and soundness regulations").

It's a rather radical distortion of agency in the first place to pin the whole thing on the bad nasty government, especially when these markets were unregulated by design.

And even accepting the dubious Fannie theory as true -- that government fair housing regs led to an overreliance on lending to high-risk borrowers, and that drove Fannie and Freddie under -- so what? Where were the rating agencies in all this? Were they forced to rate this packaged debt so highly? Were the investment banks forced to package the debt and leverage themselvesso much by the government? Is the government conspiracy so pervasive that its pernicious influence can be felt in unregulated investment products, up and down the chain?

Sure, go ahead, blame Carter.
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