Chuck Norris doesn't need credit default swaps,since no one is going to default with Chuck Norris around. But Floyd Norris of the NY Times is half glib and half savant in his column on the topic. Let's go glib:
Naked Truth on Default Swaps
...Because swaps were unregulated, calling insurance a swap meant those who traded in them could make whatever decisions they wished.
That decision, perhaps more than anything else, enabled the American International Group to go broke — or, more precisely, to fail into the hands of the American government. Had it been forced to set aside reserves, A.I.G. would have stopped selling swaps a lot sooner than it did.
Ahhh! By the end of 2005 AIG Financial Products had more or less stopped writing the housing-based swaps that failed so spectacularly in 2008. Had they been forced to set aside reserves, there would have been a monumental intellectual debate in 2006 as to the appropriate level of reserves for AAA securities. Obviously, by 2008 the more bearish viewpoints would have been vindicated, but in 2006 the level of collateral AIG would have posted on these swaps would have been negligible.
Finally, as Norris ought to know, AIG lost nearly as much on its boring, regulated securities lending tied to housing bonds as it did on its glamorous, sexy, unregulated credit default swaps.
On to the semi-savant:
There is another, little noticed, possible impact of credit-default swaps. They can undermine bankruptcy laws.
Normally, a creditor wants to keep a company out of bankruptcy if there is a decent chance it can survive. If it does go broke, the creditor wants to maximize the value of the company anyway, so that more will be available to pay creditors.
But what happens if a major creditor, who might even control one class of bonds, has a much larger position in credit-default swaps?
Will he not have interests directly at odds with those of other creditors, since he will do better if the company ends up with less to pay its creditors? Might that creditor seek to, and perhaps be able to, sabotage the company’s best hopes for revival?
At a minimum, such things should be disclosed, but that gets tricky when one part of a megabank (the one with the bonds) claims it is run independently from the other (the one with the swaps).
These conflicting incentives are hardly hypothetical - since Mr. Norris had already mentioned AIG, this would have been a lovely moment to ruminate about Goldman Sachs and their role in the AIG crack-up.
Goldman claimed to have fully hedged their AIG exposure with offsetting credit default swaps. Assuming that to be true, it would have made no economic sense for Goldman to volunteer any sort of debt relief to AIG at all; Goldman's logical economic position would be that either AIG formally defaults, in which case Goldman's offsetting default swaps are triggered, or AIG pays up, in which case the default swaps are unnecessary.
I have belabored that previously. The key point is that the government negotiated the terms of the AIG bail-out with some firms that, although formally creditors, had little actual stake in an AIG default. Awkward.
They can undermine bankruptcy laws.
And heaven knows we don't want that to happen, right?
Posted by: Danube of Thought | May 21, 2010 at 10:22 AM
Here's Obama's view, courtesy of Jonathan Alter:
"Obama later told a friend that the angriest he got as president in his first year was when he heard [CEO Lloyd] Blankfein" justify his compensation by saying "that Goldman [Sachs] was never in danger of collapse. That was flatly untrue," Obama said.
"'Let me get this straight,' the president said.… 'They're now saying that they deserve big bonuses because they're making money again. But they're making money because they've got government guarantees….
"'These guys want to be paid like rock stars when all they're doing is lip-syncing capitalism.' "
Posted by: anduril | May 21, 2010 at 10:33 AM
Now wait a minute. Obama said 'Lip synching capitalism'? That's pretty cool.
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Posted by: He's pretty milli vanilli himself. | May 21, 2010 at 10:38 AM
I have to admit, I thought it was cool, too. As I said yesterday, Why couldn't Rush have said that?
Posted by: anduril | May 21, 2010 at 10:40 AM
With rumors flying that Goldman Sachs will settle today regarding the fraud which they will not have to admit committing and speculation that the settlement won't top $1 billion, it's good to be reminded that they really didn't have much of a stake in the AIG bailout.
Posted by: Rick Ballard | May 21, 2010 at 10:43 AM
Here's Ezra Klein, taking out after Jon Chait and explaining why he (Klein) writes about Israel. I was tempted to paste in the whole piece, since it's not long, but I've opted for just the last two paragraphs:
It was the reaction to Walt and Mearsheimer's book that drew me into the topic. The accusations of anti-semitism or, when the target was Jewish, self-hatred. Jeffrey Goldberg's New Republic cover story that connected the book to Osama bin Laden, Mahmoud Ahmedinejad, Father Coughlin, Charles Lindbergh, Patrick Buchanan, Louis Farrakhan and David Duke. The American Jewish Committee's paper (pdf) calling progressive Jewish thought "the new anti-semitism." The implausible rejection of the idea that America's behavior toward Israel might be heavily influenced by groups interested in Israel, just as its behavior toward corn subsidies is heavily influenced by the corn lobby, and that this might have worrying consequences. I found myself shocked to see liberals engaging in all of this out of what struck me as a fearful tribalism.
Not just shocked, but worried. Accusations of anti-semitism are accusations made partially in my name. I'm Jewish, after all, and have the inbox to prove it. (Today's selection: "I know you don't care about our Constitution, like most Jews, you are only in this country because it is the best place to satify [sic] your greed.") Accusations of ethnic hatred are heavy weaponry: Rolling that grenade against critics of the Israeli government's actions might shut down debate, but it's a dangerous strategy, as it cheapens the meaning of the term and tells a lot of people that they are not simply being critical of Israel's actions, but that their beliefs actually set them against Jews. Friends are important, even if you disagree on some things. And that's not how you keep them.
Posted by: anduril | May 21, 2010 at 10:46 AM
That's true, but it's a remarkable piece of chutzpah, Menendez Brothers level, coming from
Obama. He won one of the first cases that forced the banks to unredline loans, how did we get to this point. Did he really think he got all that money from Goldman, Citi, AIG,et al; because he was a pretty face
Posted by: narciso | May 21, 2010 at 10:49 AM
As I said yesterday, Why couldn't Rush have said that?
Yeah, but here it was on-topic, there it was trolling. But you got your anti-Semitic diatribe in above, so I guess you're still in form. I guess the gratuitous insult to Clarice will have to wait for another thread, eh?
Posted by: Cecil Turner | May 21, 2010 at 10:51 AM
Ezra Klein, yes that's a source I would trust implicitly, he's been clueless since he wormed
his way from Pandagon to American Prospect now to the Washington Post. Well that's not
exactly true, he keeps getting promoted upwards, probably he'll be at the Times by 2012
Posted by: narciso | May 21, 2010 at 10:59 AM
He has to out stupid Friedman and Rich, n, and that's pretty tough to do.
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Posted by: Do it for the Moose Man. | May 21, 2010 at 11:02 AM
Yeah, but here it was on-topic, there it was trolling. But you got your anti-Semitic diatribe in above, so I guess you're still in form. I guess the gratuitous insult to Clarice will have to wait for another thread, eh?
LOL.
1. Where were you when you were needed yesterday to take out after OT posting on the Meet Joe Blank thread? Oh, wait--you were there, but it didn't happen to be anduril who started the OT posting. I think I get it, Cecil.
2. You forget--I don't insult. I call spades spades. For a recent example, check the latest posts at the Rand Paul thread, where I expose more of Clarice's dishonesty.
Posted by: anduril | May 21, 2010 at 11:02 AM
I think Charles Blow has shown the way there, Kim,
Posted by: narciso | May 21, 2010 at 11:07 AM
nate, kim--you used to be so predictable. I could have counted on you to call Klein a "self hating Jew." What's happened?
Posted by: anduril | May 21, 2010 at 11:09 AM
TM: you're right, the key isn't whether AIG should have set aside 'reserves' as opposed to having 'collateral' available, the key is that AIG dramatically underestimated their risk exposure for the 'insurance' product they were selling.
AIG made the mistake of thinking and thus pricing residential mortgage-based CDS as being similar to other lines of business... and they suffered when proven wrong.
This illustrates why the financial reform legislation is mostly unneeded. No business will again think of residential mortgages as being close to bulletproof... and while people will make mistakes in the future, there's no way the financial review boards will ever pick up on the mistakes fast enough to keep them from happening... for the simple reason that they aren't mistakes until they go bad (My betting the Suns will beat the Lakers isn't stupid until the Lakers win).
Posted by: steve sturm | May 21, 2010 at 11:11 AM
I've fallen into the wrong box in your mind, anduril. I don't think I've ever called anyone a 'self-hating jew'. I don't even know what a 'self-hating jew' is.
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Posted by: Don't fence me in. Or yourself out. | May 21, 2010 at 11:12 AM
This is What a Carry Trade Unwind Looks Like
Posted by: anduril | May 21, 2010 at 11:12 AM
Kim,
I hope you caught the giggler inn TM's WaPo link:
How in the world did we ever live without CDOs, CDS and "robust" models?
Posted by: Rick Ballard | May 21, 2010 at 11:15 AM
Someone on Tom Fuller's board was complaining about the proliferation of the word 'robust' and I told him that my method of dealing with it was to think of Scooby Doo: "Ruh roh busted". It makes it all better.
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Posted by: Scooby Doo for President. | May 21, 2010 at 11:20 AM
I think the designer of the Doomsday bomb that went off in "Beneath the Planet of the Apes" had a similar notion
Posted by: narciso | May 21, 2010 at 11:21 AM
If Ezra Klein is not self hating it's only because he is either not very introspective or he's a bad judge of charcter.
Posted by: Ignatz | May 21, 2010 at 11:38 AM
The problem is the damage had already been done, once the impact of Greenspan's 18 consecutive rate hikes and the oil spike set it, the cake was baked, And one couldn't tell what was salvageable and what wasn't, on purpose I think
Posted by: narciso | May 21, 2010 at 11:45 AM
"My betting the Suns will beat the Lakers isn't stupid until the Lakers win"
Hmmm. Probably just semantics, but I disagree. Would you have said the same about, say, a bet on Cumberland to beat Georgia Tech?
Posted by: Danube of Thought | May 21, 2010 at 11:49 AM
There were those who took Butler. Some of my friends.
Posted by: MarkO | May 21, 2010 at 11:53 AM
Is it stupid to continue to place bets with a bookie who had to rob a bank because he laid off his line with someone who couldn't pay up?
Posted by: Rick Ballard | May 21, 2010 at 12:20 PM
You forget--I don't insult.
Ah, some comic relief. First time in recent memory you've actually added something.
Hey, I'm curious. Are you actually Mark Wauck, or is that just more misdirection?
Posted by: Cecil Turner | May 21, 2010 at 12:47 PM
You forget--I don't insult.
You insult implicitly and love it...
Posted by: glasater | May 21, 2010 at 12:59 PM
kim, i learned something today--typepad seems not to take one word posts. after our exchange i typed a one word "sorry" post, but it didn't turn up. it turns out i must have mistaken you and nate for Ignatz and nate.
Posted by: anduril | May 21, 2010 at 01:03 PM
You insult implicitly and love it...
Let me get this straight--you're accusing me of having fun? Maybe even more than a human being should be allowed to have?
Posted by: anduril | May 21, 2010 at 01:07 PM
No, he accused you of being a liar.
Posted by: Cecil Turner | May 21, 2010 at 01:08 PM
So again, is it Mark Wauck, or not?
Posted by: Cecil Turner | May 21, 2010 at 01:11 PM
Cecil, you seem to have time on your hands--that's for you to figure out.
Posted by: anduril | May 21, 2010 at 01:14 PM
Oh, so cagey. Embarassed to have your real name attached to your trollery, or pretending to be someone you aren't?
Posted by: Cecil Turner | May 21, 2010 at 01:18 PM
--it turns out i must have mistaken you and nate for Ignatz and nate.--
Well then you're 0 for 2 champ, because I've never called anyone a self hating Jew in my life either.
I believe Klein should hate himself because he's a bit of a dolt, regardless of his religion, ethnicity or heritage, which to my knowledge I don't believe I ever even contemplated until today.
But then I'm not predisposed to see nefarious Jews under every rock.
Posted by: Ignatz | May 21, 2010 at 01:33 PM
We have a winner, Howard Dean is no longer the craziest person in the room, in the LUN
Posted by: narciso | May 21, 2010 at 02:00 PM
Ignatz, your comment was a bit ambiguous--or so it seemed to me--but I'm glad to learn that I misunderstood you. I'm also glad you don't see "nefarious Jews" under the rocks that you lift. I don't either, but then I'm not prone to lifting rocks these days. As for Jews, I find some that I agree with and some that I disagree with, and with some I split the difference. As for Klein, I'd guess that I'd disagree with him about 99% of the time, but I thought his comments this morning were sharp and accurate. They mirror some of the comments that ex-AIPACer Peter Beinart made earlier this week, re attempts to stifle legitimate debate--an area in which I would have expected you to find some common ground with both of them.
nate, I think you should regard that room as the scene of what used to be known as a Chinese fire drill--an ongoing one. The person left standing at any given moment will be the craziest in the room, but only for that moment.
Posted by: anduril | May 21, 2010 at 02:31 PM
You were wrong to endorse the bailouts, JOM. It showed your poor grasp of economic incentives that you did at the time. Your continued posts on the subject still show a lack of economic understanding and a lack of willingness to admit you were wrong at the time.
Posted by: TCO | May 24, 2010 at 02:06 PM
There was some back and forth on TARP here as I recall but no support for bailouts (or the uses the second half or TARP were put to by O). Further it seems the portion of TARP that returned also went to bailouts.
So you are either a liar or ignorant or reading comprehension challenged.
Even the original TARP was spent in ways other than advertised. Anybody who supported the original purpose for TARP has not been proven wrong, because that never happened the way it was sold.
On this site I supported the Repubs who bailed on TARP 1 when Nancy tried to make it a political hit job. Don't recall you being here doing that TCO so you can GFY as far as I'm concerned.
Posted by: boris | May 24, 2010 at 02:25 PM
The host and most of the posters here defended the Bush bailouts.
Posted by: TCO | May 24, 2010 at 02:58 PM
Boris:
The bailouts were a bad idea REGARDLESS of some Nancy politics on the fringe. they were a transfer of wealth from saving taxpayers to speculators.
Also, the followon bailouts, the politicization, etc. WERE EXPECTABLE results of opening the bailout door.
Man up and admit you were wrong.
Posted by: TCO | May 24, 2010 at 03:00 PM
Bailout, TCO. Singular. The first one. And we've pointed out to you before that you have no idea of what the consequences of not stopping a bank run would have been, so you have little call to criticize.
You can continue to leave the bulk of us in the wrong box in your head, but it would be your loss.
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Posted by: Go beat up Maurice Strong and Lord Stern. | May 24, 2010 at 03:33 PM
TCO:
It is very easy, now that the bailout has happened, and we avoided (hopefully) Great Depression II, to natter natter about how we never should have bailed them big nasty banks out. But I don't think I would have cared to know the unknowable that not doing the bailout would have brought upon us. About the only thing we would have been spared is the current discussion of Greece and Spain, because those countries likely would have crashed already.
Posted by: Appalled | May 24, 2010 at 03:59 PM
"REGARDLESS of some Nancy politics ..."
That was the last realistic point it could have been stopped and I supported them here while you did not. I'd tell you to "man up" and admit you were AWOL but it's pretty obvious you don't have what that would require.
Seems to me you are not concerned with the politics, therefore the reasonable inference is that what you wanted was "the guilty parties in the private sector" to go down, no matter who else goes down with them. Asshole.
The only guilty parties I'm confident enough to blame are the dimorat politicians who
forcedmanipulated the Wall Street Walkers into FUBARing the market. Since they would only be helped by your epic crash that does no good in my book.Your transparent carp about an epic crash H E L P I N G McCain ??? total BS.
Posted by: boris | May 24, 2010 at 04:12 PM