All of us should. Below, John Mauldin wrote:
We absolutely must move credit default swaps to a regulated exchange, no matter how much investment banks and hedge funds scream. Must be done. Do it now. Real rules about writing mortgages, although now that losses are in the hundreds of billions, underwriting rules are already becoming quite restrictive.”
I cannot possibly tell you how important this is. Jim Chanos said something similar earlier in the week on CNBC. If I had to recommend ONE thing in what Congress and our national leadership does in the package they put together this week, it would be this. Remember: the few somewhat intelligent commentators this week on the crisis noted that the bond market is WAY bigger than the stock market, and was much more at the center of the real storm (see, e.g. Henry Paulson below).
Well, the CDS market is WAY, WAY bigger than the bond market. And it played a huge role””huge””in the exponential expansion of debt. And as we speak, someone like JP Morgan””right now””is expanding their off book CDS exposure by at least 150 billion/quarter.
We do not just need a regulated CDS market. We need a carefully thought through cessation of the huge off book CDS paired nonsense that is currently being undertaken and will continue to be undertaken by our financial institutions.
At lease one NY times reporter was somewhat onto the story. Please take the time to read Gretchen Morgenson’s articles here and there.
I find it simply incredible that this market is not being addressed under the current “plan.”
By the way, one of my very knowledgeable friends who has lots of industry ties thinks the current CDS market is now in the range of 90 trillion dollars (I think that is high, and it is more like 60-70 trillion, but no one really knows exactly). That’s up from $900 billion in 2000. Everett Dirksen would know that is a lot of money–KSH.
Kendall, I think you are right. I note the silence, however, from my fellow blog commentators.
It does show that the relationship between the government and the market is … complex. Or more complicated than “government bad, markets good.” It does seem that wall street needs the government.
I find it simply incredible at this late stage that we have this HUGE shadow economy which is not only unregulated, but also not transparent.
This has to change.
There will be ample time, later, for the after-action report and assignment of both credit and blame. For the present, please pray that those handling this Charlie-Foxtrot have both the wisdom and the humility to help it unravel slowly enough that unintended damage is limited.
Most people have no idea how close we came to global financial disaster last week — for example, sudden collapse of Deutsche Bank and Barclays, which would have demolished two of the top five economies in the world. I detest interventions and bail outs. This one was essential.
While praying for a gradual [i]denouement[/i] we should also prepare for potentially devastating impact on ordinary people and businesses if this does not work.
Most mortgages, for example, can be called in full on 30 to 90 days’ notice, even if all payments have been timely. Ordinary lines of credit for sound businesses can be closed. Suppliers can demand cash ahead of orders. Imagine the consequences for others in your congregation … and think about how you might minister to them.
I’m grateful that Everett Dirksen isn’t around to see this.
What bothers me MOST is the likelihood that the problem will never be solved. We will see yet another layer of band-aids covering yet another botched attempt of government to correct what it did wrong several operations ago and refuses to admit culpability and fix the real problem.
Government seems not to be about fixing problems but it is about creating dependence upon government.
Don
DonGander, it does show how deeply dependent upon the government the elites are. And yet, people vote them in, constantly.
Plainly, the biggest proponents of capitalism, are those that need the government.
I have heard that it is over 500 trillion. When you consider that the entire GDP of the WORLD is something like 50 trillion, the mind reels.
Okay, settle down.
Realistically in the States this could tot up to 3 Trillion bucks. If we’re fortunate, half that amount. The US annual federal budget is, in round numbers, 3 Trillion per year. That’s against a GDP of about 14 Trillion. If structured to unwind slowly, this is not an insurmountable problem.
Something similar happened at a smaller scale in the early ’80s, but because it was spread out over about six years … nobody remembers it anymore. Banks and the market were able to grow their way beyond it. With care and wisdom it may be possible again.
One huge problem – very few people understand CDS’s. While less complex than options mathematically, they’re less well-known outside hardcore finance. Most MBAs are better-versed in financial instruments than folks in Congress, and most MBAs know only what CDS’s are and how they are used. Obama and McCain can’t touch this stuff because they can’t go more than one question deep on it (or anything to do with derivatives for that matter). Harry Reid (not a great leader IMHO) said it best and most honestly when he said nobody on the Hill knows what to do. Pelosi, Frank, and Reid may be clamoring for oversight, but they weren’t clamoring to move first.
Since CDS’s do act like insurance, one idea is to restrict their trading to parties with an insurable interest in the underlying asset (like in life insurance, I can’t go out and buy life insurance on a complete stranger). That would take out the use of CDS’s as speculative instruments and get rid of the problem whereby a $1 billion company could theoretically have many billions of dollars in CDS’s written on it. I don’t know what it would do to the overall market though.
Doing a Google search of a name in one of the articles Kendall linked brought up more now-prescient reporting:
[url=http://www.harpers.org/archive/2008/03/hbc-90002727]Who, Us? Derivatives traders shocked that fingers point at them[/url]
Kendall,
The Austrian school is the only group that has called it right from the beginning. Please go to mises.org to begin your education.
In summary, lack of regulation is not the problem. If you expand credit beyond the pool of real savings, then all that funny money has to go somewhere. In the 1990’s it went to dot-coms. Where was the government to “inject liquidity” then? Why has not the technology sector been destroyed due to government inaction? Should we “regulate” the business of entrepeneurs’ soliciting capital? Oh wait, we already do.
What we are seeing is simply the unwinding of yet another bubble facilitated by artificially cheap credit. Post hoc regulation and massive bailouts for multi-billion dollar business entities do no good and much harm.
RE: “Plainly, the biggest proponents of capitalism, are those that need the government.”
As a huge proponent of capitalism, the very last thing I need is the government screwing things up further, after they have had their mitts all over this latest foul-up.
#8 “Realistically in the States this could tot up to 3 trillion”
Unfortunately, there are a few more shoes to drop.
One of the larger, undropped shoes will be the recapitalization or bancruptcy of JP Morgan. Remember JP Morgan? It is the largest CDO player in the world with 8.1 trillion in CDOs.
JP Morgan is one of the “favored” banks that are not required to show assets and liabilities. It has received some striking “favors” recently.
For example, it got all the “good assets” of Bear Stearns at a 98% discount, while the US taxpayer got the toxic waste.
http://www.hussmanfunds.com/wmc/wmc080324.htm
More recently it appears to be the major bank involved in silver/gold price suppression, selling “paper” silverand gold at the end of trading day in order to force down the price. Currently, while it appears to have reduced its short position in gold, it has concentrated its short position in silver, now owning some 36% of COMEX.
http://www.dailypaul.com/node/61035
http://news.silverseek.com/TedButler/1219417468.php
http://news.silverseek.com/TedButler/1220376924.php
Then last week,
http://www.financialsense.com/Market/wrapup.htm
JP Morgan was permitted to “transfer†138 billion dollars to Lehman, after Lehman had already filed for Chapter 11 bankruptcy early last Monday morning. The advance was reportedly “to allow†Lehman to settle securities trades with clients. J.P. Morgan was then immediately reimbursed by the Federal Reserve for the same 138 billion.”
Does anybody else think this looks like a “Hail Mary” pass?
And THAT 8.1 trillion in the wings is just one bank: JP Morgan. We have not even gotten to the toxic waste in the BOND market yet. That is far Larger than the stock market.
At some point every debtor needs to take a deep breath and ask themselves whether they would not be better off declaring bancruptcy sooner rather than later. And yes, it will mean instant second Depression, and of a far greater magnitude than the one in 1929.
Let us pray. (I mean that).
#12 – um, how was the government “responsible” for Wall Street’s greed? I thought they were to regulate themselves. Isn’t that the theory? Nobody needs regulation.
The government did nothing.
It might bail out those who believe in the “free-market” however. It won’t bail out anyone else.
Hypocrites.