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Note: Obey (below) says I have this utterly wrong, and that I’m leading you astray. Also note that he’s a real doctor, and I am not. You can read Ben Bernanke’s speech in April, 2011 about the reasons to declare clearinghouses dealing in massive amounts of derivatives as ‘systemically important’ at the link.
The Wall Street Journal (behind a paywall) reported on May 23 that in a secret meeting the day before that as per one part of Dodd-Frank’s Title VII, those ‘transparent clearing houses’ that could be deemed ‘systemically important’, or are, in parlance: Too Big To Fail.
(courtesy of matthewnstoller via flickr.com)
The language had been created initially by Chris Dodd in 2010, was inserted into the worse-than-useless (it now turns out) Dodd-Frank Pretend Regulation Bill, and was apparently left open to final tweaks as recently as this week.
Here’s how Mary Shapiro, head of the SEC claimed it would work, twelve cool rule proposals that would be designed to keep the OTC derivative trading clean, safe and transparent. But oh dear, when the SEC/CFTC were just finalizing the regs, the Big Banks swooped in, and..well, fiddlesticks; ya might think they own the place.
Cool. Obama had made great theater this month claiming that boy, howdy, would his team make sure that nothing like Jamie Dimon’s $X-billion debacle ever happen again, nossirree. We got yer backs, taxpayers! Vote fer us! We’re for the 99%!
From the WSJ via gota.org (most complete reprint I could find):
“J.P. Morgan’s recent trading loss and the resulting Washington blather about tighter regulation have grabbed headlines.
Little noticed is that on Tuesday Team Obama took its first formal steps toward putting taxpayers behind Wall Street derivatives trading — not behind banks that might make mistakes in derivatives markets, but behind the trading itself. Yes, the same crew that rails against the dangers of derivatives is quietly positioning these financial instruments directly above the taxpayer safety net. [snip]
Specifically, the law authorizes the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies. Traditionally the ability to borrow from the Fed’s discount window was reserved for banks, but the new law made clear that a clearinghouse receiving assistance was not required to “be or become a bank or bank holding company.” To get help, they only needed to be deemed “systemically important” by the new Financial Stability Oversight Council chaired by the Treasury Secretary.
Last year regulators finalized rules for how they would use this new power. On Tuesday, they began using it. The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club. After further review, regulators will make final designations, probably later this year, and will announce publicly the names of institutions deemed systemically important.”
We’re told that the clearinghouses of Chicago’s CME Group (read the amount of derivatives trading they do and weep) and Atlanta-based Intercontinental Exchange (same here) were voted systemic this week, and rumor has it that the council may even designate London-based LCH.Clearnet as critical to the U.S. financial system. “
Oh, yes. And London/Paris-based Clearnet:
“…clears approximately 50% of the $348 trillion global interest rate swap market, and is the second largest clearer of bonds and repos in the world, providing services across 13 government markets.”
(Do read the more of the WSJ reprint for the cool history on CFTC Chairman Gary Gensler, who’s in the thick of all this derivatives ‘regulation’. Sad, sick, funny; your call.
Bloomberg News was far more sanguine about it all, at least on Monday before the meeting (suckers!).
Yeah; when Bloomberg News took receipt of the documents they’d demanded under FOIA, and discovered the Fed had secretly (bailed out) made emergency loans to foreign banks and multinationals to the tune of $1.2 trillion (cool graphics), no or low interest, no strings loans, you ranted. Now it’s the clearinghouse-moral hazard.
I thought: Oh, Barack Babee; you’re… killing me softly with your song…mmm…oooh…my goodness…aaah….aahhooooommmmm….
82 Comments
More insanity.
What next? – I almost don’t want to know.
This stuff is important and worth keeping an eye on. Rec’d!
But. Dunno if you are focusing on the right bit. Designating clearing houses as systemically important is actually … a good thing. At least in theory. It means they get subjected to more stringent oversight. Right now, these outfits are already systemically important, and if anything, I’d lobby the regulators to designate more banks, hedge funds, and clearing houses as systemically important. Because they’d face more oversight and stricter capital rules.
On the other hand, the problem is that oversight of systemically important banks, funds, exchanges and the rest, is basically … shit. Just look at the ‘oversight’ of JPMorgan, which now has a decent chance of going under with the bets they have on, with the regulators greenlighting the distribution of dividends instead of using the money to beef up their capital buffer against losses. THAT is the outrageous part of the story, imho.
I understand that you think the bigger story is allowing JippyMO to pay dividends rather than increase their capitalization, but if the WSJ is right, and the ‘systemically important’ clearinghouses have been ‘authorized by the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies’, and two or three have been named, how is that not a huge deal, given that those borrowing privileges (up to $11 trillion in 2008, with $1.3 trillion outstanding (if the Fed was truthful) by the time that Bloomberg got the FOIA docs.
Every time we get suckered into believing that there IS regulatory oversight, or that a Schneiderman means business, or that the rules were changed at the last minute for the notional values of banks, and increased by 7,999% (see my diary link; the OMB said it left out something like 78% of the banks from the capitalization rules…) and now this?
I cannot for the life of me think how it’s not a big deal, Obi-wan (knowing that you know far, far more than I about this stuff.)
That’s why the 1% gets all the money: they take all the risks.
Crap. I wasn’t very clear. My point was that these clearinghouses are already systemically important – i.e. even without the designation, the Fed would provide those privileges to clearinghouses in an emergency. Just as they did with investment banks in 2008, investment banks who didn’t face stringent oversight.
Now the idea, the good idea, is to identify – AHEAD OF TIME – those companies that are systemically important, i.e. those that will have to be supported, in order to make sure they meet certain stricter standards in their risk-management.
That’s why the problem is with the standards, that are too lax, rather than with the designation. It doesn’t help to refuse to designate those companies that are important as such.
And the problem is also with the nature of the priveleges accorded, as you say, too. They SHOULD make the priveleges contingent upon prefered shareholders and subordinated bonds being wiped out first, and senior bondholders forced to take a haircut, before any Fed lending is extended. That way there is also some market discipline in addition to the govt oversight.
The worst of all worlds is having these companies accorded those borrowing priveleges without serious oversight, and without the people funding them facing some risk of losing their money. That is just a recipe for disaster as it will feed a culture of excessive risk-taking.
ANd, bingo, that is what the Obama administration is encouraging here…
LOL! I just hit the wall, Obi-Wan; have been answering comments on three of my posts here and a couple on my Posterous. I need a quick nap (though the gale-force winds might preclude sleep), then some coffee, and…I’ll be back.
Hope your trip went well, darlin’ dear,
wd
When I read this “the ‘systemically important’ clearinghouses have been ‘authorized by the Federal Reserve to provide “discount and borrowing privileges” to clearinghouses in emergencies’, and two or three have been named,” I know you’ve been trying to do too much.
What this does is also take away the game Goldman, etc. played in becoming ‘banks’ back in 2008 in order to be bailed out. BUT is also extends such bailout ability to derivative clearing houses.
The REAL problem is that the so called value of ‘derivatives’ is $1.14 Quadrillion!
(Be sure to read the “More on this topic” at the bottom of the article; here’s just one paragraph: “In the financial world we see the extraordinary growth of derivatives in notional value, to almost unbelievable proportions. This mass of derivatives facilitates the withdrawal of money from the real economy in the form of wealth transferal, such as bonuses and commissions for example. But they do not become actual money themselves until some trigger event. To perhaps stretch our analogy to the physical world, it could be described as the withdrawal of the ocean, as money is siphoned from the real economy by the financial world, in advance of the arrival of a tsunami as derivatives start hitting the balance sheets and are transformed into ‘real money.’)
As towards “the Fed had secretly (bailed out) made emergency loans to foreign banks and multinationals to the tune of $1.2 trillion ” ; well, it’s really $29 Trillion; see here and download the PDF to read the whole story.
I was going to do a diary about this and AIG but then figured what’s the point. Everyone should know by now that reads FDL that we’re being lied to and screwed and most, from what I can tell, don’t really want to take the time to really dig into how it’s all happening. So I didn’t.
http://www.youtube.com/watch?v=x-o3CJytIPE
Just want to point out, wendy, that in the last part of your second paragraph, “or” should I think read “are”. (I’ve read the sentence several times, and that seems to make it work.)
Otherwise the statement from the WSJ that
“The Financial Stability Oversight Council secretly voted to proceed toward inducting several derivatives clearinghouses into the too-big-to-fail club”
does seem to support your heading and alarm. ( I’m alarmed.) We don’t need that club! It’s like the tumor you are saying you can’t excise without killing the patient; well, okay, but your patient’s doomed.
Could we not try a different therapy?
Thanks for this. Recommended.
Oh,BTW, good catch and rec’d.
Gambling counterparties hope to make something for nothing from each other. (Capitalism without a product dressed up as capitalism risk-lite.)
A clearinghouse confirms that a broker is bankrupt and that dealing with that broker puts the risk of non-payment on his contracted parties. “Mutualizing” his failure means socializing his losses. Baroque O’Bummer allows that socialization to extend to non-contracted parties.
There Is No Alternative.
There is no there, there.
I’m beginning to wonder if there ever was.
And it’s only gotten worse.
I’d used the number $700 trillion in my post linked above (derivatives sales having actually increased since 2008), and said here in the comments that Bloomberg had said that in 2008, the Fed had loaned and guaranteed $11 billion, $1.3 of which (they claimed) was still outstanding. I hadn’t seen the $29 trillion.
The point to me is that this administration is claiming they will make sure that taxpayers aren’t on the hook for more bailouts, then immediately include the clearinghouses, which don’t even claim to be banks or holding companies, including, according to Gensler: “to overseas markets when subsidiaries of U.S. firms are involved.”
Now if, as Obey says, that meant they really would have to play by the new capitalization rules, and the agencies were funded, not corrupt, political, etc., it could look like Mary Shapiro said at that link.
But quoting from that piece I wrote:
“The regulators at the CFTC have been weighing all these questions about ‘what is a financial entity’, ‘who is a swap dealer’, ‘which end parties should be exempted’ etc. But this bit concerned how big does a bank doing swaps have to be to be regulated in terms of capitalization and be required to sell through the clearinghouses?
Well, they’d been talking about the figure of $100 million of notional value, or the total value of a leveraged position’s assets. But jeez; the Big Banks said it wasn’t fair, and the lobbyists made their case to Gensler and the SEC. You guessed it. Within a few weeks, they announced the new bar:
$8 Billion in swaps a year. And that’s an increase of 7,900 %. Karen Weise writing at Bloomberg said that the argument was that the smaller players shouldn’t be burdened with extra requirements that would ultimately drive up costs for consumers. And that:
“By one estimate, that means 60 percent of swap dealers will now be exempt. Those companies, ranging from banks to energy and agricultural firms, can breathe easier now that they’re exempt. As for what the new rules mean for risk in the market, regulators say they’ll reevaluate in five years, when the threshold defaults down to $3 billion.”
So…if the bar for banks to be held to their capitalization requirements is $8 billion or they’ll be required to go onto the clearinghouses, AND now they will backstop the clearinghouses, doesn’t it indicate that they don’t want shareholders to take the losses, but taxpayers?
I can’t see it, ubetcha, with all deference. I know you and Obey know economics far better than I.
But you are right for sure about one thing: I am doing too much, and have been crazed making things ready for our son and his new family who arrive tonight. But I saw this story at 3 this morning, and reckoned it needed telling. I would ask you why the WSJ was disgusted by it? Just to diss Obama doesn’t seem a credible reason to me; he gives Wall Street more than they could reasonably expect, and I’d guess Mort won’t mind a bit if he’s re-elected.
Thanks, Juliania, fixed it. I’d typed it the way I spoke it my head, which is always dangerous. ;o)
That WSJ piece is transparently a perverse hatchet job, Wendy. I can’t say that emphatically enough.
The give-away is the mendatious way in which they present Gensler’s decision to extend regulatory oversight to overseas units of American TBTF banks. Losses at those units are ALREADY backstopped by the US taxpayer. Again – these units are already backstopped! Extending oversight is a very necessary move. It’s either that, or ban US TBTF banks from having overseas units, or firewalling the US holding company from losses at those units. Is that clear? The fucker who wrote that article is pretending – because he damn well knows he is lying – that Gensler is EXTENDING government guarantees. That is total and utter bullshit. He is extending oversight on the grounds that the US holding company – in teh case of JPMorgan – is taking on losses from the CIO unit based in London.
This is fucking crucial, guys. You are getting hoodwinked here. It is VITAL to criticize Gensler for the stuff he gets wrong. But it’s also important not to criticize him for the – rare – stuff he is getting right.
Please get this right!
And, why, you ask, is the Wall Street Journal writing mendacious hatchet pieces on good moves on the part of regulators, strengthening tax payer protections?
Golly, why would the wonderful Wall Street Journal cast good extensions of financial regulations in a bad light…? Hm…
Jeezus people, clear your eyes, drink some coffee, splash some water on your face. Do something. Cuz you’re not thinking clearly here.
“But I saw this story at 3 this morning”; good grief; get some sleep besides naps.
I don’t know that the WSJ was ‘disgusted’ by it as I haven’t read that article. But I do have ‘feelers’ out to others about it.
In the links I referenced, ‘notational’ versus ‘real’ dollar derivatives is explained. As well as the numbers associated with listed credit derivatives contrasted to notational/OTC derivatives (which are the even more dangerous ones).
Swaps are just one kind of derivative not to offer justification for what the CFTC did because it was just another example of the regulatory capture that bedevils us pawns.
WD,i invented the name Mittens,gaw was it 6 or 7 years ago ,i cant remember
I love it when the smoke comes outta your ears, Pug.
Okay; I got bamboozled, and the Bloomberg piece was right, even though their hopes are long. Watching Gensler cave so completelt on the the $100 billion bar caused my initial cynicism. If the move is seriously for additional oversight/examination/capitalization funds in case banks need unwound, and taxpayer protection, great.
Thank you for throwing the metaphorical cold coffee in my face, dear. I bow to your (and ubetcha’s) superior knowledge.
Papau said somewhat the same thing about notional value on my other post, though I didn’t quite grasp his language.
Obey explained the Journal’s disgust, lol! I admit it caught me up short, and I never read there except I saw this at another site, hunted the longer reprint versions.
Sleep. Well, I get four hours and a nap; just the way it is, dear. Pain hasn’t much to recommend it, and a nap makes a day into…two days. Better, imo. ;o)
LOL! I’ve never said it before, really. It just fit in the circumstances. ;~)
Edited to add: I almost never think of Mitt Romney, but I confess, I’ve read a bit too many books on the cult known as LDS. ;o)
We don’t have the cash to insure even a 1% loss in this market where would America find $3 trillion plus dollars? The Stock market goes up and down 1% all the time I assume in a bad market the global interest rate swap market will one day have a greater than 1% loss.
http://en.wikipedia.org/wiki/Interest_rate_swap
The Global Interest Rate market seems to be different than the Credit Default Swap market is the GIR market part of the CDS market?
A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults.
In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan.[1] However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called “naked” CDSs).
http://en.wikipedia.org/wiki/Credit_default_swap
http://dealbook.nytimes.com/2011/04/29/european-regulators-investigating-banks-over-cds/
http://my.firedoglake.com/thingscomeundone/2011/07/26/another-lecture-on-imaginary-markets/
They both seem to be part of a $600 trillion derivatives market? Can this bill’s language be expanded to cover other derivatives?
My dear TCU, you do the numbers and that is not negotiable. This is why I totally support you: you think good. If my lottery ticket ever wins and I have the $$$$$$, you will be on my team.
If that is OK with you, of course. And I keep buying those tickets (just a few, lightening and all that)
http://en.wikipedia.org/wiki/Derivatives_market
My bold I thought I would include this information so readers don’t confuse the Future’s market with the Over the Counter market. It is interesting to note that the futures market that trades in futures in real goods is $81 trillion and the Over the Counter market at $615 trillion dollars is more than 6 times its size and trades in imaginary stuff.
World GDP is smaller than $615 trillion.
In search of growth
May 25th 2011, 16:37 by The Economist online
Where will the next $10 trillion of GDP come from?
http://www.economist.com/blogs/dailychart/2011/05/world_gdp
We now have a bubble market in the developed world that is larger than the entire developed and undeveloped world’s economy?
The banks claim their function is to allocate capital to businesses and consumers efficiently.
Right now it seems they are betting capital they don’t have ( leverage, Nakid Shorts) on products of imaginary value regardless off actual earnings.
( the value of Facebook seems to be based on Imagination not actual earnings. )
Not that anyone can really claim to know the value of anything since the problems of Enron.
(Enron’s value was based on accounting tricks like hiding debt in off special purpose entities and old fashion lying about profits.)
Seem since the JPMorgan scandal to be in practice not fixed. Laws don’t matter if they are not enforced and Obama has yet to bring any bankers to trial.
Thanks HotFlash :) doing the numbers is easy when the difference between the me markets size is larger than the GDP of the entire planet:)
If I get some tall cash I’ll keep you in mind. I think the Lake could be a profitable think tank one day.
The fdl book chat on the “Difference ” pointed out that a group of non experts if diverse enough of experience and large enough could solve problems better than a group of experts.
FDL just needs to put its ideas into action get track record of success and then either develop and manage our own ideas or just do what most think tanks do take cash from groups like government and corporations who don’t understand and will change our plans to further their own agendas.
I prefer the first option but of course we would need some ability to manage a real world business or investment.
Meanwhile, The Poetry Man, is selling us out on more Persian Fantasies… *gah*
“Pain hasn’t much to recommend it”; I surmise you have a physical condition that I’m not aware of ? Did I miss something deductively when the herbal diary was published?
What TCU writes about a ‘bubble market’ is detailed in one of my links provided; it has an analysis of the derivatives markets from a speech given at Berkshire-Hathaway.
The thing everyone needs to keep in mind is that the only value a fiat currency has is ‘the full FAITH and CREDIT of (xxxx ‘entity’). When that faith and credit breakdown there’s usually a lot of sorrow.
I read, Tuttle, and read Pepe’s new piece. No time to comment, my family just arrived, and I need to shut down, I think. Well, I know, lol! Thanx for the Phoebe; god, I love her. Long hiatus without her, eh?
love, may comment before they waken,
wd
Just like when any religion falls from lack of faith there is sorrow hmmm our currency policy the whole Fed is a religion in trouble.
Interesting.
Capitalism is a bad religion. The whole point of dealing in fictional capital is to rig the real economy.
Yep, have lots of structural damage, and it’s partially why I’m so in favor of using culinary spices for healing, and use many unguents and potions to help the stuff that can still be helped. But really, it was spices, not herbs, which subject is far more complex as you know. I was trying to keep it simple and non-controversial, if there is such a thing.
Faith and credit: not so much, and Ben’s speech in April, 2011 on derivatives clearing houses was meant to restore some of it.
His conclusion:
“Clearinghouses around the world generally performed well in the highly stressed financial environment of the recent crisis. However, we should not take for granted that we will be as lucky in the future. Past crises, including the financial panic of 1907 and the 1987 stock market crash, led to significant reforms and improvements in clearing and settlement that paid off in subsequent periods of financial stress. Given the growing interdependencies among clearinghouses, along with the new mandates for central clearing, now is a good time to reflect on the lessons of the recent crisis and consider whether further improvements are possible.
For more than a century, financial stability has depended on the resilience under stress of clearinghouses and other parts of the financial infrastructure. As we rely even more heavily on these institutions in the United States and around the world, we must do all that we can to ensure their resilience, even as our financial system continues to evolve rapidly and in ways that we cannot fully predict. In short, I think Pudd’nhead Wilson would agree that that is one important basket.”
Yeah, well; hope Gensler and Shapiro get it right.
Word.
Thank you, wendy.
Important information and the further spot-on perspectives on the thread, provided by Obey and ubetchaiam are critically important.
Superb, all around … especially as a springboard to further and deeper discussion.
Recommended to the concentrated attention of everyone at FDL.
DW
Recommened, cuz everybody needs to be more familiar with these concepts. wendygirl, even the creator is said to have rested on the seventh day. ((WD))
Well, if there’s anyone I’d prefer to give me a major ass-kickin’, it’s my friend Obey. I have tried to yield to his superior knowledge and experience, but I’m still not 100% convinced that these moves are in aid of consumer protection.
I poked around a bit at 4:00, saw the story more places, but found a piece from 2011 saying that LCH Clearnet knew a year ago that they had been designated as ‘systemically important’. Seems like a well-duh conclusion to me, but…if they knew ahead of time that they’d be scrutinized so very carefully, wouldn’t it/shouldn’t it mean that they really wouldn’t need ‘emergency’ Fed back-stopping?
‘For whose protection’ is the question a cynic would ask by now, in the end.
And, FYI, this week we at FDL manged to raise an additional $620 for TarheelDem’s WePay account, with one or two possible new additions soon; not sure about them. Cool. ;o)
Hey Darlin! I don’t get the question.
Nobody is getting, right now, that emergency funding. The SIFI status attribution basically involves trying to identify those institutions that ARE SYSTEMICALLY IMPORTANT, and thus, in the event that they face an emergency, are gonna get emergency funding to save the system, whatever anybody says. It doesn’t help to deny them SIFI status now, and hence not regulate them, if they then go on to blow themselves up and the Fed has to step in with funding anyway. It’s better to identify those that are systemically important NOW, and then ask, how the hell are we going to regulate them.
Ideally they should then be nationalized – all these clearinghouses should be run directly by the government, imho. But that is a question that we can only ask AFTER the various systemically important institutions have been identified.
Does that make sense?
Another giveaway: note that hedge funds are desperately trying TO AVOID getting designated as SIFIs. It’s not a fucking privilege. It involves having regulators giving you the financial equivalent of a rectal exam every other day. It’s a pain in the ass, figuratively speaking…
;0)
In case WD comes back to this; here is a law firms analysis of the subject:
http://www.pepperlaw.com/publications_update.aspx?ArticleKey=2330
Note the steps associated AND :
“$50 billion in total consolidated assets, and” ; see the ‘and’ as it’s important in determining if a hedge fund is a SIFI
“Importantly, the final rule provides the FSOC with the flexibility to designate any non-bank financial company, including those with less than $50 billion in assets, as a SIFI.
“In stage three, …..; Judicial review of the FSOC’s designation decision is available.” —-so they can take the FSOC to court to try to escape oversight and the attendant regulations.
BUT let’s all not forget it takes people to regulate effectively (referencing both the SEC and CFTC testimony to Congress about their funding) AND the known capture of regulatory agencies by those they are supposed to regulate.
Anyone for ‘dirt in the air’?
Not sure what is being referenced by ‘structural damage’ but these two places -Swansons Vitamins and Vitacost- I’ve found to have the highest quality products at the lowest cost.
Exactly what I said to Obey on his new post: No faith in regulators any more. Bottom line. I’d add a few extra concerns here, but family is way more important.
Yes on vitacost, and a few others for celadrin and other crucial unguents and potions; I have a legion of home care tools. “Structural” means broken parts; the related symptoms can be aided to a certain extent, that’s some help, lol! No more surgeries for me; long ugly story, of interest to no one but me. I’ll die in this house I helped build, and I really am fine with that, though when I can’t Occupy Mancos on the hard days…I do regret that. ;o) I’m fine, IOW, just have limitations.
As in: What good is it designate a clearinghouse as SI if regulators breeze on by the dangers as they soooo often have, and those mammoth losses they *will* inevitably incur…get backstopped by the Fed: read: American taxpayers. I.don’t.get.it.
Why only regulate the Clearing house/casino and not the Hedgefunds/banks/customers gambling with money they don’t have? Why only bailout the Clearing house/casino because this way voter anger is directed at a new target not the Hedgefunds/banks/customers.
I am quite sure that if the Clearing house/casinos are bailed out then they won’t be forced to call in the Hedgefunds/banks/customers debts.
Yes I agree that as long as we got the system a bailout is necessary or their will not if be another banking collapse but as long as all the gamblers are unregulated there will ALWAYS be another collapse coming.
This leaves us with another problem sure Obama can protect them from a Greek default but if Spain, Italy default too probably not.
Either break up the casinos and stop gambling which I think is what Wendydavis wants, or regulate the casinos and the gamblers which is I think your point.
Both of you should look for common ground more than just defending your own points honest I don’t see much reason for conflict here.
TCU, read the pepperlaw link I provided at 40 and that will answer you’re question “Why only regulate the Clearing house/casino and not the Hedgefunds/banks/customers gambling with money they don’t have? ”
This brings up what I think is the next question can Hedgefunds/Banks etc keep making the profits they are used too without gambling I think not.
If the Hedgefunds/banks etc were all regulated, their assets accounted for at fair market value Hedgefunds/Banks etc still are exposed to tons of home loan debt for example and I bet they have not marked that down to fair market value ( they are waiting still years later for housing prices to go up) then could they claim to be as profitable as they claim they are now?
Again I think not.
So what do we do let Obama steal more of our SS and Medicare to let the Hedgefunds and Banks etc keep gambling?
That is until the gamblers finally run up a bill so big we can’t bail them out of? Bailing out the Clearing Houses just delay’s the inevitable gamblers will if they keep gambling lose.
But if they lose they destroy our economy we get a Lefty Revolution or Right Wing Coup (the Right does not have the numbers for a popular revolution).
Do we regulate the Hedgefunds, Banks etc and force an audit of their assets at real world, real time fair market value?
That I think would also force the Hedgefunds and Banks to go under.
Or do we slowly force an audit of their assets at real world, real time fair market value and give the banks time?
We could and should also regulate slowly the clearing houses. I do not agree we should bailout the Clearing houses and by extension the Hedgefunds, banks etc again with SS and Medicare cash.
But if Obama wants to take that money from the military budget and end both wars I am ok with that.
I don’t think its fair to say Obama is ending the wars until all our troops and Mercs are out of those countries.
Ok going there now.
I don’t think there is much disagreement on the goal – getting the big banks to stop gambling. I’m just trying, and pretty much failing it seems, to convey that extending the regulatory oversight that the big banks already have to also cover clearinghouses, that extension, is good. Now somehow we just have to get regulators to do their job.
http://www.pepperlaw.com/publications_update.aspx?ArticleKey=2330
It sounds like the Federal Reserve is worried they might fail soon and wants to be ready to bail them out.
Rather than have the Fed print up more cash and make the dollar weaker or Obama give them our SS and Medicare it should be said the cash should come from the military budget.
I expect the banks and hedgefunds etc to fight this. I can see why Mitt is so upset Bain’s cash flow will be effected by stage three below.
http://www.pepperlaw.com/publications_update.aspx?ArticleKey=2330
“Non-banks that are classified as SIFIs will be expected to operate with higher capital requirements, more stringent risk-management and leverage standards, and supervision by the Federal Reserve Board.”
This right there seems to be the reason Mitt is so pissed at Obama:)
I swear I did not read your links before I wrote my other comments.
I still think it could go further and I still think any bailout must come from the military budget and not SS and Medicare.
I agree with you about regulating the clearing houses. I also think their customers should be regulated.
But any bailout of either must not come from SS, Medicare etc it must come from the military budget.
On the one hand we face the destruction of the world’s economy and we should if anything move faster to regulate and enforce regulations like by bringing bankers to trial.
On the other we might have to bail them out again because the system is likely to collapse before more regulations can take effect.
I like that the Fed will be forcing audits on these guys. I wonder if slowly getting rid of these clearinghouses might be the best thing because they have to much money and can later get the rules we are trying to put in voted out.
Mitt seems to be running on this very idea and without these rules being put in place and enforced then a bailout will just lead to more gambling and another bailout.
I and Wendy both seem to be under the impression that we can’t even trust Obama to enforce these rules.
No bailout the world’s economy collapses no rules that are enforced the world’s economy collapses.
We need your idea provided the bailout comes from the military budget but we also need trust the rules will be enforced and Obama does not inspire that trust.
Interesting stuff. One thing worth keeping in mind is that it is rarely the bailout itself that is costly. What costs money is (1) the tight monetary policy the Fed runs subsequent to a bailout, and (2) the high unemployment rate that tight monetary policy brings with it (i.e. it causes high deficits – and hence a threat to entitlements – and also of course, unnecessary hardship).
The tight monetary policy means that they are keeping inflation down below 2%, which is suffocating the economy. And they are doing that because the Banks would all be insolvent if they let inflation rise to 3% or above, since their treasury and mortgage assets would fall in value. They *should* be forcing the banks to beef up their capital buffers so they could handle the rise in inflation, but they’re too captured to do that.
So what’s the more general solution? Tax financial transactions, especially derivatives. Tax systemically dangerous institutions. That should reduce the risk of bailouts by reducing the size of these TBTF institutions, and provide enough funds to cover them if they occur.
Anyway, off the top of my head, that’s what I can think of…
Very good points I never thought of do you have any numbers on how much the Fed’s policies have made unemployment worse and the deficit.
I am wondering if we ever got any numbers on all the bad home loans the Fed took off the banks balance sheets and what their value is now?
Also does the Fed even really have title to these loans the banks problem’s with titles I assume was passed to the Fed.
Next question how many homes has the Fed had the banks foreclose on? I don’t expect you to have all the answers but I do think these are questions the econ wonks here should be asking themselves.
A tax would effect the banks and hedgefunds profits a tax would I admit be a good idea assuming that the banks were not leveraged to the hilt and desperate for cash.
I assume they are desperate because the Government now wants to bailout the clearing houses because I assume they expect the Clearing house’s customers to default if Greece defaults.
The great thing about a tax is it forces the banks to show real money audits can be faked.
Requirements for cash well the banks can just claim a rouge trader borrowed the money and let him take the fall if he loses money.
The banks know he will do minimum time if any and only a big loss like what JPMorgan faces will only cause some political concern.
Only a loss big enough to cause a bailout is a worry for banks as long as the Government won’t bail them out a problem Wendy points out is over for them.
In fact the news that the clearing houses will be bailed out will likely spark even more bad gambling from the banks and clearing houses since they know the clearing houses if they get bailed out won’t come after them for any bad trades they lose money on.
But forcing the banks to pay a tax means the banks have to come up with money in the real world.
Next idea the banks bailout fund has to be funded by a bank transaction tax if the banks lose money and need a bailout the tax automatically increases to pay for the bailout in ten years.
Add that to the this idea any bank that gets a bailout the CEO the top ten percent of executives, the board of directors, their wives etc get held personally liable for up to 50% of the money they made from the bank and trading in any stocks, CDS etc at any bank bank, hedgefund etc not just the one they worked at for the last ten years.
That should stop the banks problem with executives using inside information to trade against well for example Facebook’s IPO.
Wendy I know its stressful to have conflict on a thread but I think the conflict is mostly resolved or at least we are exploring the various choices and discussing them.
But we are discussing them without name calling the Israel, Middle East threads used to have a problem with this.
It is much more interesting to have a thread with heated discussion and an actual exchange of ideas than a thread where everyone agrees with you though that is nice, a thread where the other side refuses to accept your facts ( the Ron Paul is a racist, homophobe threads),.
You got a thread where there is argument and new ideas have arisen from the comments after some disagreement.
Socrates would be pleased:) and I say that as a Philosophy Major:)
My Brother Pablo after listening to me describe the discussion here points out that regulating the banks like FDR did and Nationalizing the banks so we not them and accounting firms they pay go over their books would be the simplest most effective quickest way to handle this.
As long as Private pension money invested in the market, and up to $10,000 for small investors was insured like FDIC bank deposits then the banks, large investors and the 1% are left on the hook only.
Its not our fault they invested in a gambling. Its not our fault they put huge cash on the table. Its not our responsibility to bail them out with our money.
“do you have any numbers on how much the Fed’s policies have made unemployment worse and the deficit.”
- Not precise numbers. Maybe one yardstick would look at what these numebrs would look like if the economy were back to trend growth. If the economy were growing at trend – i.e. if the Fed did its job and worried about the economy rather than banker bonuses – then the deficit would be 2-300 billion. A fraction of what it is now. Likewise unemployment would be down to 6% or below, that is to say 7-8 million more jobs than now.
“I am wondering if we ever got any numbers on all the bad home loans the Fed took off the banks balance sheets and what their value is now?”
- Dunno. But I think they have recovered their value and the Fed stands to lose little if anything on their holdings. But, remember, that’s not a good thing. Those recovered values are people deeply underwater on their mortgage desparately paying outrageous fees and interest in order to hold on to their houses, and other people getting turfed out of their homes when foreclosed upon. Instead, the Fed should be taking losses and using the money to provide decent mortgage modifications and keeping an eye on abusive fees. But one shouldn’t focus on the Fed’s holdings. It’s barely 1-2% of what Fannie and Freddie, who got the biggest bailout of all, hold and service. And their practices are just as outrageous.
“does the Fed even really have title to these loans the banks problem’s with titles I assume was passed to the Fed.”
- No they probably don’t have title on a good chunk of these. But that doesn’t seem to matter now that the robosigning agreement has been signed and robosigning goes on unabated and unregulated and unprosecuted.
“In fact the news that the clearing houses will be bailed out will likely spark even more bad gambling from the banks and clearing houses since they know the clearing houses if they get bailed out won’t come after them for any bad trades they lose money on.”
I don’t think it’s actually news to anyone in the industry that clearinghouses would be bailed out if they failed. But, sure, it is a consideration that the now *explicit* government backstop might encourage banks and hedge funds to take on more risk in their trades. For one thing, they no longer need to worry about counterparty risk, i.e. they no longer need to worry whether the guy they are betting against is actually good for the money.
Your brother’s a wise man.
Thanks for the reply lots to think about
This idea could be expanded with links and a diary hint:)
How pray tell when the fed has housing debt and the housing market has yet to recover?
Ok this I have a problem with laws are laws. Ignoring laws just to avoid the banks going under just encourages more bad behavior.
Thats one of my problems with Obama agreeing to back the clearing houses if they have problems.
I’m as big a news junkie and econ wonk as anyone here I assumed yes another bailout was a given but for Obama to announce it publicly before the election before Greece defaults says that stablizing the markets is more important than him winning reelection.
Wendy’s diary is not big news now but if Greece, Spain, Italy etc default then where will the money come from for a bailout?
SS, Medicare then Obama risks his reelection and the Left thanks to Wendy and others will be able to say again we the Left were Right.
We avoid a revolution if Obama takes the cash from the bailout from the military budget but if we take the cash from the military budget we risk a Right Wing Coup.
Regardless Obama just risked his reelection chances if this blows up before the election.
Keeping the markets stable is apparently more important than O’s reelection and he dismisses a the Left … big mistake. I don’t think O will cut the military budget.
Thanks Pablo has no college degree he needs to hear that from someone other than me:)
“Regardless Obama just risked his reelection chances if this blows up before the election.”
- Yes. Even if it doesn’t blow up before then, he’s basically fucked. He’s manufactured a Banks-first, banks-only recovery, and it’s probably already petering out. And if the unemployment rate doesn’t improve, he can’t win … unless they find pictures of Romney in bed doing unspeakable things to a dead donkey. … which, on second thought, I wouldn’t exclude totally.
Obama can win because Mitt is that bad a candidate but lets let Wisconsin’s recall election be our guide in the short term if Walker loses Wisconsin then Obama’s chances go up.
if Walker wins even if there is Right wing Voter fraud well Obama from his past record will do nothing about it. But who cares the fact will be Obama can’t win a purple state where Walker the candidate is running on the Tea Party ideas.
Heck if Walker wins he might eclipse Sarah Palin as Tea Party poster boy and will make Mitt’s VP list.
But even if Walker loses if the clearing houses need a bailout the news Obama promised them one and that bailout is paid for with our SS and Medicare well Mondale and Jimmy Carter vs Reagan will look like closer elections.
Hoo, boy, things; I’m soooo behind here, I’ll never catch up. My son’s family is on a rare visit for two days, and we’re jamming in far too much, including Dr. Mom’s bodywork and 5-cent psychiatry-stand talks, packing their truck with a plethora of Stuff to take home, and to our daughter on their way back to the Springs.
Too much spread too thin, as has been (ahem) pointed out on the thread. I apologize for not being here, as I still have some major concerns about how this may be actually *designed* to play out; dunno how much of my belief is just abject cynicism by now…and only time will tell, and we may never know, given Fed secrecy.
Anyhoo, I am not a bit sorry that the discussion is advancing; I am simply out of my league by now, and haven’t time to read the many links you and others have brought; I hope I will be able to tomorrow. The troops are heading to Mesa Verde, so I should have some time and space.
Thanks for helping to make the discussion lively. Right now about all I really know/believe is that non-violent revolution is the only thing that will stop the Fed and Wall Street-driven policies and tax code from heisting the remaining money regular Americans still have, and stealing the remaining social safety net. And that is a seriously fucked up place we’re at now.
best, and love,
wd
It’s okay, wendy – you got the thread off to a really good start and then others contributed such weighty morsels it will probably take me at least a month to digest them, as DWBartoo says we must. Aiee! I thought I was getting a handle on the mortgage slicing and dicing and tranches and such and how we wrecked the world economy and while I can’t pretend to participate in more WSJ terms – got as far as Matt Taibbi’s naked shorts (oh dear, didn’t really mean to say that) the other day, and I will have to go eat some wheaties or sump’n to get some brainspace for clearinghouses as I am not exactly sure what those entities might be.
However, I think your point that regulation is being proven toothless is a valid one. That and prosecution seem to have become wraiths like the ghosts of Christmasses past. They much resemble Obama’s feel good rhetoric or Plato’s cave reflections maybe. So I think ‘legitimizing’ some derivative stuff is a bit like legitimizing MERS for housing transactions. Or saying you are a little bit pregnant. Or something…
Do enjoy your family, and be well.
Wendy I am attempting to bring compromise and ask new questions from the ideas you sparked. Take some time do not rush address these ideas both here and a new diary. If you are out of your depth ask questions leave it to the readers ok. Many people thinking about a similar problem will be more effective.
Valid reader concern what are clearing houses define them here and next diary on the subject.
Dear Juliania and Things,
Thank you both; just now focusing on family is crucial, as well as enjoyable. Things become unwieldy at a moment’s notice, and luckily that’s a familiar theme, as in: I never imagined I would be dealing with things in my family, my stars. ‘The Real’ will always take ascendancy over the theoretical or political (acknowledging how the personal story is emblematic of the wider political/societal themes.
But to be honest, I have several other diaries in the works that may sincerely interest me far more than this…policy stuff that is fraught with distractions since the whole house of cards will come tumbling down…if we’re reading it right: This financial system is built on lies, fakery, pretense, faux ‘investor’ exuberance, unprosecuted criminal fraud and tra la la…and in the end, people are suffering mightily, college in affordable for elites only, food banks are empty…and the MSM is keeping it all a big secret.
Soldiers are coming home with untreated PTSD and wreaking havoc on families and friends, Native and poor rural lands are being stolen and made uninhabitable in Colonization 3.0, 50-60 million citizens have no jobs and haven given up all hope, and more. All of which to say is: this issue is almost small potatoes in a larger sense.
Heh. Believe it or not, this hard story may anchor my next diary, and believe me, I will understand if you don’t understand how I see the larger story behind it. My mind works in non-ordinary ways since an injury a decade ago. ;o)
http://www.youtube.com/watch?v=7n0T2twtmpI
If you’ve read The Bone People (best aboriginal story ever written, imo), you may understand where I’m heading. And no, I am not a happy camper tonight, and I will not submit willingly to what the PTB are doing to us and our comrades around the planet.
love you you both,
wd
My mind has been like that since birth:)
It’s a feature, not a bug lol.
Mebbe mine did too, and I’ve just…forgotten. ;o)
Happy birthday, (((realitychecker))).
Or…was yer birthday last year?
* * http://www.youtube.com/watch?v=1YqMSIOQ4YE * *
(grin)
My mind has been like that since I met Wendy.
… think its contagious…
;0)
Thank you muchly, dearest wendydavis. ;-)
Karmic payback, methinks, Pug. Mustta been after you penned this poem in my honor:
“Here is little wendy’s head
Whose brains are made of gingerbread
just imagine it I say
God amid a monstrous din
watch your step and follow me
stooping by Effie’s little, in
(want a match or can you see?)
which the six subjective crumbs
twitch like mutilated thumbs;
picture His peering biggest whey
coloured face on which a frown
puzzles, but I know the way-
(nervously Whose eyes approve
the blessed while His ears are crammed
with the strenuous music of
the innumerable capering damned)
-staring wildly up and down
the here we are now judgment day
cross the threshold have no dread
lift the sheet back in this way
here is little wendy’s head
whose brains are made of gingerbread”
THE DOCTOR IS OUT.
;o)
Welcome, dear. I had a vanity photo of myself made a couple days ago to go as a gift with the song, but I forgot to ** link ** it. ;o)
I want it!
My gingerbreads been kickin’ some of this around and here are a few of my crumbs…
In the interviews with some of JP Morgan women on the Frontline Money, Power and Wall Street series, and IIRC, it was the one who explained that her job (and others’) was financial arbitrage, and additionally to create derivatives that were so complicated that regulators wouldn’t be able to tell WTF was in them, meaning: a winning product, since the buyers hadn’t a clue, either, as to how much risk they were buying.
Then I was remembering some of this episode at the bottom of the page, Episode 4, chapter 3…with the scene of the big meeting (about the 4 minute mark) at the FDIC Advisory committee, purpose of which was to ‘discuss banks that were TBTF’ with some ‘heavyweights, yada, yada (wish I could have heard more of what Simon Johnson had said). But in the end Paul Volcker said again that only reinstating Glass-Steagal would be the cure. A voice on the FDIC said, “We aren’t gonna be telling the companies what to do, they’re going to be telling US how they’re going to deal with that issue….”
Dude says it right, so does Satyajit Dis “no energy for that!”
You got it; don’t I have a winning smile and great fashion sense? I keep tellin’ y’all…
Happy B-Day Realitychecker :)