They play; we pay; more on CDSs
Here is Gretchen Morgenson on why credit default swaps need regulation, and why U.S. taxpayers are still on call to bail out banks who deal in them.
“USING these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the S.E.C. will be looking into that.”
“That’s what Ben S. Bernanke, chairman of the Federal Reserve, said last week when lawmakers asked him about credit default swaps during his Congressional testimony. Concerns are growing about such swaps — securities that offer insurance-like protection and helped tip over the American International Group in 2008 when it couldn’t pay mounting claims on the contracts.
“Now, there are fears that the use of these swaps may also help propel entire countries — think Greece — to the precipice….. … And now it appears that some traders are using swaps to bet that Greece won’t be able to meet its debt payments and will face a possible default.
“Mr. Bernanke is undoubtedly an intelligent man. But his view that it’s “counterproductive” to use credit default swaps to crash an institution or a nation exhibits a certain naïveté about how the titans of finance operate now.”
http://www.nytimes.com/2010/02/28/business/economy/28gret.html
Here’s Paul Krugman in Monday’s Times on the travails of financial reform legislation: http://www.nytimes.com/2010/03/01/opinion/01krugman.html?ref=opinion
And Robert Reich goes ballistic on the Dems betrayal of their base: http://tpmcafe.talkingpointsmemo.com/2010/03/01/the_enthusiasm_gap/#more
…”Much of the reason for the Democrats’ astonishing reluctance to place blame where it belongs rests with big business’s and Wall Street’s generous flows of campaign donations to Dems, coupled with their implicit promise of high-paying jobs once Democratic officials retire from government. This is the rot at the center of the system. And unless or until it’s remedied, it will be difficult for the President to achieve any “change you can believe in.”….
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on February 28th, 2010 at 3:48 pm
“Congressional “reform” plans for credit default swaps are full of loopholes, guaranteeing that another derivatives-fueled financial crisis awaits us. According to the Bank for International Settlements, credit default swaps with a face value of $36 trillion were outstanding in the second quarter of 2009, the most recent figures available.
Too bad Pres. Obama didn’t put derivatives first on his agenda. We have unemployment over ten per cent now? So what. Just wait till Great Depression II hits.
on February 28th, 2010 at 8:48 pm
Perhaps Bernanke was indulging in understatement, At least that was how I interpreted his words when i saw him utter them on the evening news. For better or for worse, understatement is out of fashion in some circles.
on February 28th, 2010 at 9:09 pm
Better understatement, I guess than naivete (which is what Morgenson read into his words). Or perhaps he can do nothing about them.
on March 1st, 2010 at 7:30 am
In capitalism, it’s sometimes about the quality. But it’s always about the money.
on March 1st, 2010 at 8:46 am
I believe this comment was misplaced below and belongs here.
glendaP
Submitted on 2010/03/01 at 12:22am
There are new credit card laws, thanks to the CARD Act, and while some are happy, the companies that fund those credit cards are weeping in their…whatever. (They probably drink the blood of baby seals.) Credit card companies can no longer change interest rates without advanced notice, cannot market to college students, and cannot be given to anyone under 21 years of age without a co-signer of proof of ability to repay. Essentially, it might cut down on people having to get payday loans just to pay credit card bills. The card companies are crying about it, of course, and are anticipating far stricter lending policies.
on March 1st, 2010 at 8:50 am
RE: credit card reform
News stories have been busy cataloging the ways in which the Credit Card Companies are getting around the new regulations. Whether or not they succeed is yet to be established. Would we be surprised if they do? As Unagidon says: “It’s always about the money.”
With a supine Congress when it comes to financial regulation and lackadaisical regulators, are we in for another resounding financial crisis down the line? See Paul Krugman in Monday’s Times.
on March 1st, 2010 at 8:58 am
It seems to me that the only thing wrong in this was that the CDS’s were used to conceal debt. If there is regulation, that’s where it should focus – disclosure.
For every person/company “betting” on a default, it another “betting” there won’t be one – that’s why there is a market. It isn’t like this is a ponzi scheme, the owners of CDS’s have real money at risk.
Greece’s fundamental problem has nothing to do with swaps. They have combined socialism and a form of crony capitalism for over 50 years and overspent, overtaxed, and over regulated businesses and individuals, driving most productive capital away. That’s why they are in a mess, Goldman Sachs – much as I can’t stand them (they are crony capitalists of the first order) – is a side show. Unfortunately, the left in Europe and the US must have their evil capitalist boogey man.
on March 1st, 2010 at 9:15 am
Sean: The same point made here, except that Christopher Hughes thinks Goldman should admit some kind of ethical transgression.
http://www.breakingviews.com/2010/02/26/goldman.aspx?sg=nytimes
Whatever the political make-up of Greek elites, it appears that its citizens have an unrealistic view of the country’s economic prospects. Reminds me of some others.
on March 1st, 2010 at 10:50 am
“Greece’s fundamental problem has nothing to do with swaps. They have combined socialism and a form of crony capitalism for over 50 years and overspent, overtaxed, and over regulated businesses and individuals, driving most productive capital away.”
Poor Greece, trying to be capitalist and socialist at the same time…
“Crony capitalism” is, more simply put, just capitalism. When I said above that capitalism is “about the money” I should have also said that for the capitalist, capitalism is “about MY money.” We are in the phase of monopoly capital. It’s not about a bunch of yeoman donut shop owners trying to make a buck in a competitive environment. When the notional value of all this unregulated over-the-counter stuff reaches $26 trillion, we aren’t talking about Adam Smith’s pin company any more. One can like it or one can not like it, but don’t pretend that we are talking about the 1780’s any more.
on March 1st, 2010 at 11:43 am
Paul Krugman in this morning’s column: Even Adam Smith would be horrified. He thought banks should be strictly regulated by the government. Invisible hand didn’t work with them then, and apparently not now either.
on March 1st, 2010 at 11:53 am
From Gretchen Morgenson’s article: “I asked Mr. Mayer for solutions to the problems that credit default swaps have created. He had several. First, he said, those trading in swaps must be forced to put up more capital to back them so that if a client asks for payment, the issuer actually has the funds on hand to do so. “This is an insurance instrument and it must be regulated on an insurance basis with minimum reserves, instead of making deals that don’t even have maintenance margin on them,” he said. ”
Not that I’m an expert, but to my mind, this is the single most important regulation that needs to be in place.
on March 1st, 2010 at 12:03 pm
All of Mayer’s proposals make sense to me. It’s pretty mind-blowing that Democrats aren’t able to get these done – if not them, then who?
One more thought: if you think the Tea Partiers have energy and momentum now, wait until you see what happens if there is another financial industry catastrophe that devastates middle class retirement portfolios. The last time it happened, Democrats swept into power. This time they are the ones in charge.
on March 1st, 2010 at 12:11 pm
My impression (perhaps mistaken) is that the insurance industry is largely regulated by the states. Is that true in this case?
What’s wrong with the Dems? The same thing that’s wrong with the Repub. They get too much campaign money from these bucaneers–among others.
on March 1st, 2010 at 1:15 pm
The decrease in Obama’s popularity is the awareness of the public that he also will not regulate the bankers as should be done. They spent loads of money on his campaign. It has to be acknowledged that Obama follows the money too. In that sense we are really a one party system. Other than the fact that they are major funders of political campaign there is no reason to not efficiently regulate the financial industry.
on March 1st, 2010 at 1:52 pm
JP: “One more thought: if you think the Tea Partiers have energy and momentum now, wait until you see what happens if there is another financial industry catastrophe that devastates middle class retirement portfolios. The last time it happened, Democrats swept into power. This time they are the ones in charge.”
What would happen? The Tea Partiers seem at the moment much too disparate to actually organize a major national change agenda. The official Repubs seem to be getting very nervous about the TPs and I suspect that before November they will seem less influential then the media now makes them out to be. For example, the TP has said it will raise $10,000,000 for the 2010 campaigns. Do they know that’s a drop in the bucket?
Nonetheless, there seem to be real political dangers if not of paralysis, than of chaos. The Democrats and Republicans both ought to think seriously about the consequences of their current stalemate.
on March 1st, 2010 at 4:40 pm
Hi, Margaret, I’m not sure that the Tea Party movement as it stands now will amount to much – although it might. But I see them as the first responders of a movement by center-right voters, particularly independents, who have reached the absolute breaking point of tolerance for running deficits and fiscal irresponsibility. I don’t think they’re wingnuts, I think they’re pretty average people who are fed up.
I don’t think the TP is a cohesive movement. Notions like raising money, and even announcing that you are raising money, presupposes a party structure and leadership that I don’t think the TP movement has, although there certainly are Republicans who are trying to now run out to the front of the mob.
on March 1st, 2010 at 8:58 pm
JP: “But I see them as the first responders of a movement by center-right voters, particularly independents, who have reached the absolute breaking point of tolerance for running deficits and fiscal irresponsibility. I don’t think they’re wingnuts, I think they’re pretty average people who are fed up.”
It will come as no surprise to you that so far there have been no TPers marching down (or up) Broadway; and I have yet to actually meet one. Run-of-the-mill conservatives, yes, we have these. Down the line there will be sociological profiles of who these folks are. From what I see in the papers, they mostly seem to be a lot of white guys, maybe retired, a little (or more) out of shape, and some of them carry guns (not allowed here).
In reading about them, my mind has flown to Richard Hofstader’s The Paranoid Style in American Politics, but I have reserved judgment largely because I don’t trust the “media’s” ability, either friendly or not, to report accurately on them. I continue to think that the big threat to U.S. politics is the current threat: BIG, BIG money buying votes so that corporations can go on their Merry capitalist way. This year it’s Greece, next year????
on March 2nd, 2010 at 3:21 pm
“My impression (perhaps mistaken) is that the insurance industry is largely regulated by the states. Is that true in this case?”
I’ll defer to our expert posters and commenters, but my understanding is that, for purposes of regulation, CDSs are not considered insurance, so the state regulatory agencies are not regulating them, either.
Conceptually, they’re not much different than getting your dad to cosign your first lease after college: if you can’t pay the rent, dad’s on the hook. Dad is your rental insurance policy. But that arrangement presupposes that dad is solvent and responsible. The rental agent might check out his credit score. Does any of that happen with CDS’s? Could I (who am not rich) call a broker and buy CDSs for Greek debt?