Another link:
Since we are on the topic of men, business, and regulations, Yves Smith points us to a relevent avenue for thought:
Relevant and even prescient commentary on news, politics and the economy.
Since we are on the topic of men, business, and regulations, Yves Smith points us to a relevent avenue for thought:
Hi dan:
I had taken the 10 minutes or so to read this article before you posted the link. It is a fine article encapsulating the existing and past culture on Wall Street detailing how the perpetrators of today’s economic crisis hold themselves at arm’s length from the events leading up to Wall Street’s demise and the subsequent implosion impacting Main Street.
“I am proud of everything I have done,” DeSantis wrote.
I was in no way involved in—or responsible for—the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage…. [W]e in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials.…
I take this action after 11 years of dedicated, honorable service to A.I.G. … The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. (A portion of Jake DeSantis’s resignation letter from AIG’s Financial Product’s subsidiary as Executive VP.)
This stance akin to one as detailed in a recent article detailing Paul Volcker’s speech by Barry Ritzholtz, “Not an Ordinary Recession” http://www.ritholtz.com/blog/2009/02/paul-volcker/ Upon reading Volcker’s disparaging remarks about financial engineering, Volcker’s daughter passed his note on to her son who responded to the staunch x-Fed Chairman:
“Grandpa, don’t blame it on us! We were just following the orders we were getting from our bosses.” In reply, Volcker responded to he grandson;
“I will not accept the Nuremberg excuse.”
Granted, the nephew was one of the “grunts” involved in the demise of Wall Street; but, to suggest there is no culpability to the cause in the collapse is incredulous. The same as LTCM, the math model did not reflect reality, was blind to it, and they continued to follow it. The system does appear to be broken as Volcker suggests and as evidenced by those once-in-a-life-time events Greenspan labels as happening. They are occurring with a […]
Everyone that thinks derivatives caused the recession is wrong and needs to try to think for themnselves rather than repeat the spin the read in the papers of hear on TV. Derivatives are a zero sum game (maybe a little less due to transaction costs). The cause of this recession is the popping of the real estate bubble with the aid of skyrocketing oil prices.
What we learned is that derivatives can’t keep the entire market from going down nor manage risk when everything is going down. Only a fool makes the jump that they caused the downturn rather than were the victim of it. No insurance market, including the government saftey net programs, hold when everything goes bad at once. The reason insurance works for life, homeowners, and health is that these markets exhibit statistical regularity. A certain percent of people die each year, get sick, or have their homes destroyed. Only the last item has any significant year-over-year variability in it, and it tends to be localized.
Another example of an insurance market getting overwhelmed is the destruction caused by Hurricane Katrina. That storm caused a widespread destruction and required some government help to fill in where insurance was coming up short. An analogous idiocy would be to blame the destruction on insurance rather than the storm.
Cantab:
You have a disconnect from here:
Only a fool makes the jump that they caused the downturn rather than were the victim of it.
to here:
No insurance market, including the government saftey net programs, hold when everything goes bad at once.
There is no relationship between those two statements. No one is discussing insurance which is completely different than CDS.
Of course there is a relationship. Here it is. If a plague or a massive nuclear attack hit our country all life insurance and health insurance would become insolvent. They would be the victim of these events, not the cause. No insurance market can survive a situation where the losses grossly outpace what the actuaries thought possible and priced their policies based on their expectations.
We should have let the CDS market fail on their insurance policies. Intervention to save the issuers of the CDS was a mistake. We should have let them fail and then made a decision if we wanted to bailout companies that had depended on CDS payouts from failed issuers of CDS’s
cantab:
As much as you try to rewrite the issue, CDS are not insurance. They are also exempt from regulation. Insurance is regulated in a strict manner.
I am posting here to lock your comments.
Run,
If a bond makes all its payments on time and follows all the bond covenants no payments are made. If they bond defaults then the CDS issuer makes payments to the holder of the bond and beneficiary of the CDS. This sure seems like insurance to me. What do you call a contract that is contingent on some bad event happening and is structured to make the holder hole again. If not insurance than what do you think it is?
http://www.forbes.com/2009/03/19/cds-future-trading-markets-robert-lenzner.html
a CDS contract is an insurance policy against a corporation defaulting on their debt. Say you own General Motors (nyse: GM – news – people ) bonds and are worried about GM’s future. You pay an insurance company to issue you a CDS, which will pay you if GM defaults.
http://www.angrybearblog.com/2010/03/another-link.html#comments
Credit default swaps are financial instruments that serve to protect against a default by a particular bond or security. They were invented by Wall Street in the late 1990s as a form of insurance. Between 2000 and 2008, the market for such swaps ballooned from $900 billion to more than $30 trillion. In sharp contrast to traditional insurance, swaps are totally unregulated. They played a pivotal role in the global financial meltdown in late 2008. More recently, swaps have emerged as one of the most powerful and mysterious forces in the crisis shaking Greece and other members of the euro zone.
Definition of insurance:
1. the act, system, or business of insuring property, life, one’s person, etc., against loss or harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in consideration of a payment proportionate to the risk involved.
2. coverage by contract in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract. 3. the contract itself, set forth in a written or printed agreement or policy. 4. the amount for which anything is insured. 5. an insurance premium. 6. any means of guaranteeing against loss or harm: Taking vitamin C is viewed as an insurance against catching colds. The function of a CDS is an exact match form #2
Definition of insurance:
1. the act, system, or business of insuring property, life, one’s person, etc., against loss or harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in consideration of a payment proportionate to the risk involved.
2. coverage by contract in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract.
3. the contract itself, set forth in a written or printed agreement or policy.
4. the amount for which anything is insured.
5. an insurance premium. 6. any means of guaranteeing against loss or harm: Taking vitamin C is viewed as an insurance against catching colds.
The function of a CDS is an exact match for #2
Run,
As much as you try to rewrite the issue, CDS are not insurance. They are also exempt from regulation. Insurance is regulated in a strict manner.
And sex is regulated strictly in Abu Dhabi and not so here, so is it not sex unless you’re in Abu Dhabi.