Frontline Special On Brooksley Born’s Attempt To Tame Derivatives
by ilene - June 14th, 2010 11:47 pm
Frontline Special On Brooksley Born’s Attempt To Tame Derivatives
Courtesy of Tyler Durden
Think Blanche Lincoln’s attempts to tame derivative trading are new? Think again. During the 1990′s, its was the CFTC’s Brooksley Born who was the original crusader, attempting to warn about the dangers posed by an unregulated and out of control explosion in synthetic exposure. And just like Lincoln’s current role reprisal will likely end up being neutered by the Dodd-Frank tag team, so Born’s warnings continuously fell on deaf and conflicted ears. To see how 12 years ago one person was predicting precisely what may happen if JPM got its way to drown the world in $1.2 quadrillion of derivatives, watch this Frontline video "The Warning" from late last year: a fascinating hour-long adventure into the shadowy Over The Counter world which everyone has an opinion on, yet so few understand.
h/t TwentypercentTV
Facebook
Twitter
LinkedIn 
del.icio.us
DiggHow To Stop The Contagion HERE
by Phil - June 5th, 2010 4:42 am
Posted by from
This is an unpopular set of prescriptions. Nonetheless, it is the only thing that will work, and either our President grows a set of clankers between his legs and forces this through one way or another or we will suffer a self-fulfilling collapse when our turn comes – and it will.
-
ALL derivatives must be placed on an exchange and backed nightly with CASH margin. Give everyone 30 or 60 days to do it, including de-constructing the "custom" derivatives to one or more "standard" and thus tradeable contracts. All positions must be marked nightly to the market and cash margin posted by the underwater side – period.
-
30 or 60 days hence all derivatives not so exchange-traded with cash margin proved behind each one are deemed canceled. End of discussion. Argue over "sanctity of contracts" if you wish, the inability in aggregate to perform is sufficient to void them. Yes, I know, this will produce howls. I don’t care. That which must be done must be done. If the GM bondholders can take this one up the chute so can the banks on these derivatives.
-
All banks and other backstopped institutions are required to sell 5% of their retained virtual portfolios to non-bank entities and mark their virtual portfolios to the market – no exceptions – including all off-balance sheet entities. The "mark to fantasy", "extend and pretend" and similar games must stop right now. We gave the banks the right to lie for a year and demanded they recapitalize and get rid of their crap. They laughed at the government and bonused out over $100 billion instead. These institutions and individuals abused the "pass" we gave them – this has to end as the crisis was and is REAL! The mark-to-market requirement must be immediate, continuing and permanent.
-
All banks and other backstopped entities are required to adhere to "one dollar of capital" behind each dollar of unsecured lending at all times, plus six percent regulatory cushion, all in either cash or short-term (26-week or shorter) T-bills. No ifs, ands, buts or exceptions. Give the banks three months to sell off whatever they must (or to raise additional capital on whatever terms they must) to meet these requirements.
-
The government must
…
Municipal Market A “Terrible Problem” Says Warren Buffet
by ilene - June 3rd, 2010 4:54 pm
Municipal Market A “Terrible Problem” Says Warren Buffet
Courtesy of Bondsquawk
The $2.8 trillion municipal market concerns Warren Buffet, the Chairman for Berkshire Hathaway as states may face defaults in the months ahead according to a Bloomberg article.
Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the bonds in coming years.
“There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”
Berkshire’s investment portfolio included municipal bonds valued at less than $3.9 billion as of March 31, down from more than $4.7 billion at the end of 2008. The company had a maximum of $16 billion at risk in derivatives tied to such debt, according to the company’s annual report for 2009.
Read the Full Article
What You Can Do To Bring Wall Street Under Control
by ilene - May 30th, 2010 1:13 pm
What You Can Do To Bring Wall Street Under Control
Courtesy of Robert Reich
The most important remaining battle to rein in Wall Street is over Senator Blanche Lincoln’s measure to stop the big banks from being subsidized by taxpayers for their risky derivative trades. Miraculously, it’s still in the bill but it’s on life support. The bill has now gone to the conference committee where differences between the House and Senate bills are to be ironed out.
But official Washington (read: dependent on Wall Street for money) is dead set against it. Even Barney Frank — who Massachusetts voters used to consider a reliable progressive until he became chair of the House Financial Services Committee — has vowed to kill Lincoln’s provision. And the White House says the measure is “not core,” which in Washington-lingo means “you’re free to dump it.”
Big, big money is at stake. Wall Street’s five largest banks have a corner on the trade, raking in about in about $30 billion in over-the-counter derivatives last year. It’s the single largest reason they’re too big to fail. So they’re spending like mad on Washington lobbyists and campaign donations in order to keep the subsidy in place. (Lincoln’s provision doesn’t force them to give up derivative trading, by the way; it only forces them to do it in a separate entity that doesn’t get subsidized by deposit insurance or the Fed’s discount window).
All the guns are aimed at this measure. But it’s still possible that the people can prevail, if we’re organized and active. Here’s a list of all the Dems on the Senate Banking and House Finance Committee, as well as Republican conferees. All conferees are indicated by ->.
Organize and mobilize your friends and acquaintances, especially those who live in these states or districts, to call their members and make their voices heard. Tell them you want Lincoln’s measure (Section 716 of the Senate bill) to remain in the final bill. Say you’ll hold them responsible if it goes.
Alabama -> Senator Richard C. Shelby (202) 224-5744
Arkansas -> Senator Blanche Lincoln (202) 224-4843
California -> Rep. Maxine Waters (202) 225-2201 (California-11)
Rep. Brad Sherman, CA (202) 225-5911
Rep. Jackie Speier, CA (202) 225-3531
Rep. Joe Baca, CA (202)225-6161
Colorado -> Senator Michael Bennet (D-CO) (202) 224-5852
Rep. Ed Perlmutter, CO 202.225.2645
Connecticut -> Chairman Christopher J. Dodd…
Credit Storm in Europe
by ilene - May 29th, 2010 1:20 pm
Credit Storm in Europe
By MIKE WHITNEY writing at CounterPunch
Credit market turmoil in the Eurozone has ignited frenzied trading on global markets. On Tuesday, shares tumbled nearly 300 points on the Dow Jones before launching an unconvincing 257-point late-day comeback. Wednesday the mayhem continued; all the major indexes seesawed wildly as positive news on durable goods was nixed by reports on wobbly EU banks. Erratic selling pushed the S&P down to 1,067 while the Dow slipped below 10,000 for the first time since February 7. The rise in Libor (the London Interbank Offered Rate) is increasing volatility, a red flag indicating trouble in interbank lending. Banks are wary of each other’s collateral as Greece and other underwater Club Med members appear to be headed for debt-restructuring. Libor is not yet at pre-Lehman levels, but the rate that banks charge each other for short-term loans has rocketed to a 10-month high. Improving economic data have not eased fears of another meltdown or removed the rot at the heart of the system. The banks are still loaded with loans and assets that are losing value. The credit system is breaking down.
When banks post collateral overnight for short-term loans, the collateral is effectively downgraded, limiting the banks’ access to capital. This is what triggered the financial crisis two years ago, a run on repo. Regulated "depository" institutions now rely on a funding system that operates beyond government oversight, a shadow banking system. The banks exchange collateral, in the form of bundled securities and bonds with institutional investors (aka—"shadow banks"; investment banks, hedge funds, insurers) via repurchase agreements (repo) for short-term loans. The repo market now rivals the traditional banking system in terms of size but lacks the guard rails and stop signs that make the regulated system safe. The system is inherently unstable and crisis-prone as a recently released paper by the Federal Reserve Bank of New York (FRBNY) admits. Moody’s rating agency summarized the paper’s findings like this: the tri-party repo market “will remain a major source of systemic risk, especially given the current market volatility and the fact that the Federal Reserve’s primary dealer emergency lending facilities are no longer in place…… the market remains structurally vulnerable to a repo run…… If cash investors pulled away in a stressed environment, the clearing banks would be faced with a choice (as they were several times in 2008)…
Wall Street’s War
by ilene - May 27th, 2010 3:53 pm
Wall Street’s War
Congress looked serious about finance reform – until America’s biggest banks unleashed an army of 2,000 paid lobbyists
By Matt Taibbi, The Rolling Stone
This article originally appeared in RS 1106 from June 10, 2010.
It’s early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act – the massive, year-in-the-making effort to clean up the Wall Street crime swamp – word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once-indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.
The real shocker is a thing known among Senate insiders as "716." This section of an amendment would force America’s banking giants to either forgo their access to the public teat they receive through the Federal Reserve’s discount window, or give up the insanely risky, casino-style bets they’ve been making on derivatives. That means no more pawning off predatory interest-rate swaps on suckers in Greece, no more gathering balls of subprime shit into incomprehensible debt deals, no more getting idiot bookies like AIG to wrap the crappy mortgages in phony insurance. In short, 716 would take a chain saw to one of Wall Street’s most lucrative profit centers: Five of America’s biggest banks (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup) raked in some $30 billion in over-the-counter derivatives last year. By some estimates, more than half of JP Morgan’s trading revenue between 2006 and 2008 came from such derivatives. If 716 goes through, it would be a veritable Hiroshima to the era of greed.
"When I first heard about 716, I thought, ‘This is never gonna fly,’" says Adam White, a derivatives expert who has been among the most vocal advocates for reform. When I speak to him early in May, he sounds slightly befuddled, like he can’t believe his good fortune. "It’s funny," he says. "We keep waiting for the watering-down to take place – but we keep getting to the next…
So We Now Have “Financial Reform”?
by ilene - May 21st, 2010 10:52 pm
So We Now Have "Financial Reform"?
Courtesy of Karl Denninger at The Market Ticker
Who are these guys trying to kid?
The most-important part of the bill, stopping derivative abuse, was watered down to the point of irrelevance. The exceptions and exemptions that remain for OTC trading are big enough to drive 200 West Street through – sideways – and Goldman will do exactly that.
Nor did we re-impose a hard leverage cap. You know, the one that existed before 2004?
Nor did we reinstate a hard deposit cap limitation.
Nor did we fix The Fed illegally usurping the appropriation power of Congress or impose an actual audit on them.
Nor did we fix the off-balance sheet or "mark to fantasy" BS – in short, the outright lies printed in so-called "financial reports" every quarter.
President Obama came to the podium yesterday afternoon to "applaud" the passage of the rookery bill in the Senate, looking like he had a laser designator on his forehead – or a load that was about to intrude into his pants. In a delicious bit of irony the sellout he had just perpetrated on the American People was graphically illustrated by nature:
Many commentators have said that’s a rat – but it doesn’t look like one to me, unless someone chopped off it’s tail. But no matter what it might be on a species basis it’s definitely a rodent. The Rat in Chief got one-upped by Mother Nature. If you don’t appreciate the irony…..
On the other side of things we have Europe, which is really just the shape of things to come here in the US in the near future. Yeah, I know, everyone says it won’t happen here. Uh huh. They said Europe wouldn’t have it happen either a year ago. "They" were wrong then and they’re wrong now.
There is no solution to the mess we’re in found in borrowing and spending more money. Yet that’s been the "solution" to recession ever since… well…. forever. At least since 1929.
Why has it "worked" up until now? Well it didn’t work in 2003, as the chart I’ve repeatedly posted showed. All it did was "support" the economy perpetually and embed into the economic fabric structural deficits. Medicare Part "D" was one of the most-outrageous of these acts undertaken by the Bush Administration, but it was by no means the only one.
We have lied our way into idocracy. Bwarney Frank stepped…
The Financial Markets are Reformed!
by ilene - May 21st, 2010 4:48 pm
The Financial Markets are Reformed!
Courtesy of Tim Iacono at The Mess That Greenspan Made
As I understand it, there will be no restrictions on the trading of derivatives other than that the majority of the $615 trillion market will go through some sort of a “clearing house”.
Merkel to the Banks and Speculators: Sprechen Sie Deutsche? Then Droppen Sie Dead
by ilene - May 18th, 2010 7:50 pm
Droppen Sie Dead? I think that means drop dead.
Merkel to the Banks and Speculators: Sprechen Sie Deutsche? Then Droppen Sie Dead
Courtesy of JESSE’S CAFÉ AMÉRICAIN
There is much surprise that the German government has declared a ban on naked short selling, including CDS, as of midnight tonight, with no prior notice or the niceties demanded by the banks when government chooses to act. This action seems to have perturbed some and confused many.
The reason for this may be quite simple.
After tonight, when hedge funds and the NY and London Banks call upon German financial firms and European governments to make payments on Credit Default Swaps or other financial instruments that are subject to the ban, the Germans will have a great big hammer in hand to help them to negotiate the terms.
Since the CDS will be deemed to be no longer legal, the option to default on them with the backing of the government may be an option. This seems quite similar to the stance that the Chinese government took on behalf of some Chinese firms that were caught on the wrong side of energy derivatives.
I have heard that there was a general disappointment in Europe and in parts of Asia at the lack of progress being made in the US Congress towards creating meaningful reforms in their financial system. In fact, there is a widespread belief that Washington is being dictated to by the Banks, and that their lobbyists are directing the conversation, and in many cases writing the actual legislation. The final straw was when the Obama Administration itself sought to water down and block key provisions of the legislation to limit the power and size of the Banks.
"To some degree this is a battle between the politicians and the markets," she said in a speech in Berlin. "But I am firmly resolved — and I think all of my colleagues are too — to win this battle….The fact that hedge funds are not regulated is a scandal," she said, adding that Britain had blocked previous efforts to do this. "However, this will certainly have taken place in Europe in three weeks," she said, without giving more details." Reuters, 6 May 2010
"German Chancellor Angela Merkel accused the financial industry of playing dirty. ‘First the banks failed, forcing states to
…
Capitalism Without Capital
by ilene - May 13th, 2010 12:02 pm
This is an excellent article by Mike about the causes of the financial meltdown. – Ilene
Capitalism Without Capital
Courtesy of MIKE WHITNEY writing at CounterPunch
Volatility is back and stocks have started zigzagging wildly again. This time the catalyst is Greece, but tomorrow it could be something else. The problem is there’s too much leverage in the system, and that’s generating uncertainty about the true condition of the economy. For a long time, leverage wasn’t an issue, because there was enough liquidity to keep things bobbing along smoothly. But that changed when Lehman Bros. filed for bankruptcy and non-bank funding began to shut down. When the so-called "shadow banking" system crashed, liquidity dried up and the markets went into a nosedive. That’s why Fed Chair Ben Bernanke stepped in and provided short-term loans to under-capitalized financial institutions. Bernanke’s rescue operation revived the system, but it also transferred $1.7 trillion of illiquid assets and non-performing loans onto the Fed’s balance sheet. So the problem really hasn’t been fixed after all; the debts have just been moved from one balance sheet to another.
Last Thursday, troubles in Greece triggered a selloff on all the main indexes. At one point, shares on the Dow plunged 998 points before regaining 600 points by the end of the session. Some of losses were due to High-Frequency Trading (HFT), which is computer-driven program-trading that executes millions of buy and sell orders in the blink of an eye. HFT now accounts for more than 60 percent of all trading activity on the NYSE. Paul Kedrosky explains what happened in greater detail in his article, "The Run on the Shadow Liquidity System". Here’s an excerpt:
"As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don’t want any….Liquidity is a function of various things working fairly smoothly together, including other investors, market-makers, and, yes, technical algorithms scraping fractions of pennies as things change hands. Together, all these actors create that liquidity that everyone wants, and, for the most part, that everyone takes for granted…..
“Largely unnoticed, however, at least among non-professional investors, the provision of liquidity has changed immensely in recent years. It is more fickle, less predictable, and more prone to disappearing suddenly, like snow sublimating straight to vapor during a spring heat wave. Why? Because traditional providers of liquidity,
…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(