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April 06, 2009

Comments

steve sturm

per your point on Goldman's hedging of their AIG exposure, how solid were those hedges, were those trading partners able to back up their exposure, or were they as weak as AIG? And even if Goldman believed they were covered, it probably made them happier to get the money from the government (via AIG) than try to collect it from their hedges.

Charlie (Colorado)

It would seem that if these securities had been traded on an open-outcry market, and the leverage and exposure of the various parties had been visible, the various investors would have been able to make risk-appropriate decisions about the values.

Having some kind of international agreement on accounting standards and how big bankruptcies are processed might help too.

Add to that some kind of insurance program to formalize the way the government has tried to deal with systemic risks, so that the costs aren't entirely borne by the Federal budget?

Danube of Thought

I gotta confess. After a career as a business litigator, handling many cases involving securities transactions, accounting disputes, and a few bankruptcy trials, I simply don't have a clue as to what is going on with this stuff now.

Rick Ballard

"I simply don't have a clue as to what is going on with this stuff now."

A rather desperate attempt to restore confidence in a failed regulatory system through the manufacture of a new regulatory epicycle is my bet. Newton and Kepler still haven't shown up.

clarice

Well, DoT, it's only YOU. Everyone else grasps it completely and thoroughly. (LOL)

Jane

Dot,

I'm so lost I can't even finish reading it. Of course that rarely stops me from talking about it on the radio. I just repeat some really smart comment Rick or Charlie or Rich makes and figure I'm on safe ground.

If we start taking calls, I'm toast.

clarice

Try the old Obama Uhhmm ehh in that event, Jane.

Jane

Ahhhh, that would work - either that or I'll start talking Austrian which I am fluent in.

DrJ

I'll start talking Austrian which I am fluent in.

I'd personally suggest Swedish -- as in the Swedish Chef. That'll confuse 'em.

Ignatz Ratzkywatzky

The idea that regulation is the key to solving anything other than an event which has already transpired and will not be repeated is IMO a little crazy.

People are generally too cautious or too intelligent to jump into the same idiotic scheme as they have just gotten out of.
But they are seldom too cautious or too intelligent to jump into the new and improved scheme which the regulators are inevitably utterly blind to, since they are furiously fortifying a wall to prevent the assault of the last bubble which has already popped and will not return.
Regulators fight the last war more assiduously than generals do and markets are always ahead of them.
We had a housing debacle in the late 80s/early 90s and erected barriers to it ever happening again. Instead the market found ways around the barriers and the resultant bubble was worse than the first.
Sarbox and FASB were supposed to cure accounting scams. Instead they either didn't help transparency at all or actually made things worse, possibly a lot worse.

IMO, regulations promulgated to stave off the last crisis are often worse than doing nothing.

Neo

Financial crisis, not armed terrorists, greatest threat to U.S. security

The current international financial disaster brought on by Wall Street has created 25 million unemployed around the globe. People everywhere are mad as hell at both their leaders and America.

Charlie (Colorado)

IMO, regulations promulgated to stave off the last crisis are often worse than doing nothing.

Except when they aren't.

Ignatz Ratzkywatzky

Except when they aren't.

Yes, that would be indicated by the plainly visible qualifier 'often'.
I try not to make unsustainable, absolutist statements or give hectoring lectures, especially outside my area of expertise.
Others might find that course profitable as well.

Thomas Collins

Don't worry, DOT and Jane. Noone has a clue. Noone has even begun to absorb what deals, public or otherwise, were cut at G20. There is only one thing on which we can be certain. That one thing is that Paul Volcker is the only American who can deal with the Euro and Asian cutthroat financiers (in the finance ministries, central banks and multi-national corporations) and still have the US leave with its pants on. And Volcker apparently has been marginalized.

PMII

I feel much better after reading some of today's comments. I've raed and read and read. Everytime I think I understand, I see something else...

In the end it will be under-regulation to some and over-regulation to others...


And oversight is only a word not an action....

jimmyk

I don't for a moment believe that GS was 100% hedged, and I was asking here a couple of weeks ago why they and other AIG creditors were being made whole by the taxpayers. The haircut suggestion makes more sense than trying to cap compensation after the fact. If the idea is to avoid the spillover costs of systemic failure, cover only enough losses to avoid those costs. It seems pretty clear now that AIG just had a bunch of blank checks with the taxpayers signatures, and happily paid off its counterparties 100%. I now breathlessly wait for Charlie to assert that this was all absolutely necessary.

cathyf
In the end it will be under-regulation to some and over-regulation to others...
That's just asinine. What matters is what the regulations say. When the regulations say that minorities with crummy credit scores are not deadbeats while whites with the same credit scores are, is that over- or under- regulation?
Jim Rhoads a/k/a vjnjagvet

It is disgusting that those politicians arguing that the financial crises was caused by "underregulation" of the financial markets have (at least) two goals:

1. Blaming Bush -- By foisting on the 95% of the population that, like them, doesn't understand financial regulation the meme that the Bush Administration's laissez faire policies bear all of the blame.

2. Deflecting the real blame -- By covering up their direct responsibility for the breakdown of the US housing market and its financial underpinnings. All of those funky debt instruments were devised to spread the known risks of sub-prime lending legislatively encouraged by the left side of the political spectrum.

It is even more disgusting to me that this crowd is being pretty successful in achieving those goals.

RichatUF

Jim-

I would include a number 3 on your list: the oil shock of 2008. It dug into consumer spending, wrecked the auto sector, and exported about $450 billion of capital out of the US.

Thomas Esmond Knox

What kind of a creditor was/is Goldman Sachs? Had they loaned money to AIG, or did they hold a valid claim on an insurance contract with AIG? I suspect the latter.

The most valuable asset that AIG has is its licences to operate as an insurance company in the US and many other countries.

If AIG reneged on its obligation to pay a valid claim then it would be in breach of its licence to operate.

If I was AIG, I would pay those creditors first. If it does that, it has a good chance of survival. Otherwise none.

rhodeymark

Hmmm - notice a name missing on that list? A rather LARGE player that mysteriously avoided AIG counterparty risk (did I call it risk? Silly me.) Or at least has so far avoided exposure. Check out this table, and see who is worth more dead than alive. GM avoiding bankruptcy has a lot more than the UAW at stake.
LUN

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