Wall Street's criminal intelligence
Sunday October 5, 2008
Categories: Decline and fall, Economics
I will never, ever understand people who mistake education and intelligence for virtue. I thought about that tonight watching Steve Kroft's "60 Minutes" report on the derivatives and credit-swap market that has gotten the national and indeed the global economy...
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About Crunchy Con
Rod Dreher is an editorial columnist for the Dallas Morning News, and author of "Crunchy Cons" (Crown Forum), a nonfiction book about conservatives, most of them religious, whose faith and political convictions sometimes put them at odds with mainstream conservatives. The views expressed in this blog are his own.
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Here's a helpful post on Credit Default Swaps:
http://www.reason.com/blog/show/129272.html#commentform
"Credit Default Swaps: Yes, You Have to Think About Them
Brian Doherty | October 3, 2008, 7:16pm"
"If my theory is correct, then the credit default swap protection is somewhat of a delusion....It is too late to undo the delusion. In the aggregate, markets under-estimated the risk of the bonds they were buying. The risk premium needs to adjust upward. That upward adjustment is not a credit squeeze--it's a return to reality." Arnold Kling
From Kling's own piece:
http://econlog.econlib.org/archives/2008/10/credit_default.html
"A credit default swap is like insurance against default. If you want to buy a municipal bond or a corporate bond but not take default risk, you try to buy a credit default swap. You pay a fee, and in exchange for that fee the seller of the swap will make you whole if the city or corporation defaults.
The seller of swaps collects nice fees, and most of the time the borrowers don't default. But if borrowers do default, then the seller is like an insurance company in a town that was hit by a hurricane."
Have fun.
The Credit "swaps", as the 60 Minutes reports, were a scheme to provide insurance but evading regulation by calling them swaps. There would have been capital requirements laid down had they been truly represented as insurance. I hope the SEC and Treasury lawyers in the next adminstration indict, convict and put these scumbags in jail.
Can your impeach a President after he leaves office? Too bad.
I saw the piece and was floored when I realized that Credit Default Swaps flew under the radar of regulators who either didn't realize or ignored the fact that they are INSURANCE! Here Wall Street was, selling an insurance product that was not backed by the reserves that are required for insurance companies!
Of course, everybody who purchased those CDS's is going to be suing - they'll say they weren't informed that there were no reserves to back them; and, of course, they'll be looking to that $700 billion bailout to make them whole. That's not where I want my (figuratively) $700 billion to go - not there, and not to the legal fees required to defend me from having to cover them.
I read the Bill that passed the other day, and didn't see anything in it addressing the CDS's; but then, I wasn't really looking for it. I'll have to reread and see what I see.
In my opinion, some of these investment products have gotten so complex that even the regulators don't understand them. I believe they're going to have to start taking the time to understand everything offered to "the public". Yeah, those who bought those things are not Joe Q. Sixpack, but if there's a snowball's chance Joe Q.'s going to end up holding the bag for them, then they should not be offered or sold - not even to accredited investors as defined in the securities regs.
The stuff in here is absolutely infuriating. When the next Congress comes into session, there should be hearings.
Keep in mind, this is another variation on the 80's S&L game, the 90's stock market game, and the big old Enron collapse. There are lots of ways to play the finance game to make something out of nothing.
The unfortunate problem here is that the R party, while ostensibly being the party of liberty and old-fashioned virtue, is really the party of ginourmous banks. And those ginourmous banks really could care less about the US, which is unfortunate, because we need a party of liberty and old-fashioned virtue.
(You could fold 911 in here. Bin Laden poked Wall Street in the eye with a sharp stick; blinded and enraged, Wall Street and friends invented a theory that said that world dominance was the only way to allow Wall Street to get on with the business of fleecing people, so they did, regardless of right, wrong or even sensible. I guess even bin Laden is smarter than these guys.)
max
['Pathetic, innit?']
I heard about two thirds of "Another Scary Show About the Economy" on public radio's This American Life yesterday. The segment on credit default swaps sounded like a circular firing squad. All the major investment houses and banks were at risk such that if one fell, they all fell.
I'm curious about whether the Crunchy Cons still feel that "we are all to blame" after learning about these financial will-o'-the-wisps that almost (and may still) crashed the economy.
There's a lot of blame to spread around. Not just parts of Wall Street, but also parts of Washington, too.
As for the next Congress holding hearings, will the folks likely to be in control of Congress and chairing these Congressional committees (specifically Schumer, Dodd, Frank, et. al.) be willing to shine the light on their own culpability? Hardly.
Senator Chris Dodd has been the largest recipient of campaign cash from Fannie Mae executives. Senator B.O. is the second highest recipient. Will a B.O. presidency married to a Senate with filibuster-proof majorities have the appetite to investigate the culpability of those in charge?
Earlier this year I read a book called F.I.A.S.C.O by Frank Partnoy who happened to be on the show tonight. Anyways, he goes into great detail about his time working on wall street in the 90's and how derivatives are created and sold. I'd encourage anyone who wants to understand this stuff to pick up the book 'cause it's looks like not a lot has changed.
Airballs. They were selling airballs.
They should be jailed along with our Congress.
Obviously Reaganite has forgotten the Keating Five or the quote about "hitting the jackpot" that the Republican for whom he has named himself uttered upon deregulating financiers.
Another good resource regarding the background of this mess is the program aired by This American Life called "The Global Pool of Money" - this show was about how the demand created by huge pools of capital in IRA's and from developing countries like China and oil rich nations fueled the demand for more and more investment vehicles, particularly given the very low interest rates being set by Alan Greenspan. I think this program said that the pool of money looking for something to invest in more than tripled in a single decade. They bought up these crazy mortgage vehicles because they were supposed to be extremely safe with higher returns.
" The day may come when they count themselves happy to be in jail, because that way they'll be safe from the mob with torches and pitchforks. Bastards."
Are you people mental? Two people enter into a contract that violates no existing financial regulation willingly (call it purchasing gas from a gas station, ordering a pizza, buying a CDS, whatever) and you want to throw them in jail?
I know there's an old-school 19th century religious argument that considered life insurance an affront against the Lord. That's all a CDS is - insurance. These equations for derivative modeling are less complicated than the actuary modeling that life insurance companies use (certainly the "model human behavior with math" part). Are we pitchforking them too?
To Reaganite and DocAmazing (and Rod):
There will be no congressional hearings regarding CDS or other shadow games because there are key Congresmen and Senators who are too close to the issue.
Why are not the heads of Fannie Mae and Freddie Mac in the star chamber now like Ken Lay of Enron was when that debacle broke? This episode is far larger than the Enron mess.
The reason is obvious. These CEO's have at least as much on their Congressional Compadres than they have on them.
And another thing; as bad as all this is I do not think it is obvious any laws were broken by Fannie Mae and Freddie Mac with this CDS crap.
The stuff in here is absolutely infuriating. When the next Congress comes into session, there should be hearings.
There won't be. "Goodguyex" is right--Rod, I remember how in the run up to the current 110th Congress, you repeatedly expressed the hope that figures involved in Iraq, Katrina, the Attorney General's office would be, in your favorite image, "roasted alive on national television". Well, we've had two years of an inquisitional Congress, and it's all been extremely boring, both in terms of illumination and entertainment value.
Why, because, as always, Congressional jacklegs aren't interested in asking the really probing questions--leastways when those questions hit a little too close to home. Hearings on the wisdom of repealing the Glass-Steagall Act? Oh dear, that would impugn St. William de Hope. Turning a microscope on the Fannie/Freddie leadership and nomenklatura? Oh, but that would damage the Lightworker's handlers and funders.
1. I hear lots of talk about prosecutions, on this thread & others. Query: what laws were violated in the creation & distribution of CDOs, CDS, etc.?
2. "Never attribute to malice what can be adequately explained by incompetence." I suppose there are cases of actual fraud & deception out there, but my suspicion is that the root cause of the financial crisis boils down to gross incompetence by a large number of parties - starting with home borrowers (oops, I meant "homeowners"), and on through mortgage brokers & originators, securitizers, and investors. (Not to mention various governments.) With the prime failing by all parties being espousal of the delusion that housing prices would appreciate indefinitely at abnormally-high rates.
"I will never, ever understand people who mistake education and intelligence for virtue."
What does virtue have to do with buying/selling/pricing a CDS? This whole article (the 60 minutes thing) is just an exercise to make people angry and fearful at what they don't understand.
And the random jab at people "using math to understand what people do" or whatever dumb formulation it had, that is just designed to appeal to people who feel bad about never having understood any math...
People in the 60 minutes are really giving it to Wall St., and rightly so because the greed and incompetence of the supposed expert firms is a big part of why the market became so huge. Yet I didn't hear people blaming the federal government for effectively forcing banks to lend to credit risks who were "minorities" or "people of color." When I was in college, one of the big social justice buzz words was "redlining", the process where banks identified neighborhoods or areas where they wouldn't lend money. I heard how it was such an outrage. Well, the Clinton administration -- and later the Bush administration -- took it upon themselves to get banks to stop the redlining and lend to these people. It was purely an ideological decision, not a practical or financial one. Anti-"redlining" folks used the specter of Jim Crow to bludgeon critics into submission. Banks eventually submitted.
After 9/11, when the Fed held interest rates at ridiculously low levels, the banks and investment firms stopped minding the terrible credit of the "minorities" and "people of color" they were forced to lend to because there was so much money to be made. That's where a lot of the problem started. Wall St.'s meltdown would have been impossible if not ordered (initially) by the federal government and then encouraged by a reckless Fed. Blame the Wall St. firms, because they were reckless and stupid. But don't forget to blame the ideologues and social justice fanatics who helped prod them along on their way. And, of course, don't forget to blame the general public, whose spending habits and lifestyles played such a large part in making all this government overspending and debt possible:
http://www.theonlyorthodoxy.com/2008/10/01/money-for-nothing/
Asked why, he says, "Because you can't model human behavior with math."
This is stupid. Of course you can. That's what a 'credit rating' is. It actually works pretty well, despite all the claims of people with bad credit.
However, what you also can do is fudge reality with math.
Goodguyex
Why are not the heads of Fannie Mae and Freddie Mac in the star chamber now like Ken Lay of Enron was when that debacle broke? This episode is far larger than the Enron mess.
Um, because Fannie Mae and Freddie Mac have nothing to do with credit default swaps? Because they, in fact, didn't make them?
Somehow I knew that Rod getting more specific about this crisis would result in people talking about the GSEs in places they were totally inapplicable, because the people complaining about them are just repeating Republican talking points and have no actual understanding of the issue. Seriously, the ability of the right to ignore reality and pin this on Freddie and Fannie is getting a little absurd at this point.
Freddie Mac and Fannie Mae were the legitimate, regulated portion of this market. They actually did have assets to back their promises, they put good loans in their securities (Which the banks copied the method of but put in all loans.), and they didn't invent a form of 'insurance' and call it something else to keep out of regulation. They weren't mismanaged, they didn't break rules, and, most importantly, the mortgages they own are pretty good and not in a high rate of foreclosure.
Of course, the value of their assets, aka, houses, took a sharp nosedive and they required help there as they no longer had assets to cover their promises, but there's a large difference between that and the stupid fiscal insanity that mortgage companies and banks were living. It's the difference between the guy who invests in gold and the guy who starts a pyramid scheme. Both of them might lose their money, but only one of them is behaving in any sort of legitimate investment manner.
It is curious to juxtapose this whole premise that the mathematicians done them wrong with the opposite from the Crime Drama, "NUM3ERS". In that show mathematicians usually save the people in distess, the FBI's reputation, the nation, and basically - the day. Obviously, the truth lies somewhere between. But I cannot help but wonder if it was the application of the mathematicians' work that was wrong, not the work itself. Wouldn't it be ironic - even sad - if someone in the investment field misunderstood and applied the right formula upside down or backwards? One of the central points of "NUM3ERS" is that the math is helpful only if the information is complete. Could it be that some information was withheld, in the interests of personal gain? The formula of the day would then be GIGO - Garbage In / Garbage Out. We seem to be in the "Out" phase.
I am also reminded of Aismov's character, Hari Seldon, from the Foundation Trilogy - who believed you could use math to aniticpate big trends in human life. Could it be that Cheney (Bush is not clever enough for this) is similar to Asimov's "Mule"? It is simply a point to ponder.
Regarding possible criminal charges - Sometimes prosecutors try to use securities fraud in order to get at conduct without a more specific set of elements. As I understand it, securities fraud just requires a material misrepresentation about some matter in a transaction.
The real challenge, if this report is correct about the complexities involved, is that the prosecutor has to show some level of awareness regarding the fact that the defendant was making a material misrepresentation -- they have to "intend" or at least "know" they are making a material misrepresentation. Usually reckless or negligent misrepresentation is not sufficient to maintain a criminal charge. The problem is that if you really needed a PhD in mathematics or physics to understand these transactions, then it may be very difficult to establish that anyone "knew" that they were lying about them.
I say all this from a general criminal law perspective, so there may be other more specific criminal charges that could be brought, but you'd have to ask someone with more specific training in that area of law.
I just watched the 60 Minutes segment, and it is, indeed, infuriating. If it turns out that laws were broken, of course those responsible ought to be prosecuted.
However, it seems more like laws of morality, ethics and common sense were broken, especially by those (presumably in Congress) who allowed such huge, unregulated markets as the Credit Default Swaps Market to exist.
At this moment, it doesn't look like the $700 billion dollar bailout is having the desired effect. No more bailouts are politically possible, nor should they be considered. It seems we may be in for a very deep recession, or depression, and it will be global. This is not good.
New car dealers are the same as these Wall Street types. But you will never see new car dealers before Congress because every Congressman has new car dealers in his/her district. Also, local media will never investigate new car dealers because media are dependent on the ad dollars spent by new car dealers.
Rod, how on earth can the FBI investigate when there aren't nearly enough investigators to address mortgage fraud itself, let alone Wall Street?! And that doesn't even scratch the surface of the fact that although the FBI may get the evidence, who's going to prosecute?
IIRC, the FBI does not take things to court -- the Dept of Justice is supposed to do that. And we know what a hack outfit GWBush turned that into; basically, a bunch of people with law degrees who thought it was the 'right thing' to hire ONLY ideologically pure, abortion-rights-obsessed people into DOJ? Where in all that madness was one single iota of concern about financial integrity for the largest economy the world has ever seen...? N-o-w-h-e-r-e.
Nowhere in sight.
The fact that this 'bailout bill' does not appear to have diddly squat for the FBI to add agents, nor for a rehaul and complete retooling of what's left of DOJ, speaks volumes.
I don't know much about finance, but I've observed a thing or two about human nature.
How could Congress pass a 'bailout bills' that doesn't even fund more FBI agents? Good grief (excuse me while I go bang my head against the nearest wall for an hour or more....)!!
And yes, there were a few people trying to call attention to the dearth of FBI investigators, as late as summer 2007 when it was already evident this mess would get out of hand: http://seattlepi.nwsource.com/opinion/322612_frauded.html
No wonder the wingnuts hate George Soros. He predicted much of this in his 2005/6 book, "The Age of Fallibility". Like vampires afraid of their own shadows, the free-market nutjobs screech at the very notion of George Soros, but IMHO it's because he's been right so many, many times -- plus, he appears to believe that ethical conduct is the only good foundation for a healthy business. Call me a lefty liberal all you want, but I happen to agree with him.
As for the Seattle PI hollering into the wind in July 2007, I'd sure hope a lot more US newspapers start asking all those Congress and Senate candidates what they're going to do in 2009 and beyond to fund more FBI investigators. It's sure cheaper than a bailout.
Rod and commenters, here's a book recommendation for this topic and this thread: "Demons of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation".
I stumbled on it here, which also has a very good review and some easy to read background info:
http://bigpicture.typepad.com/comments/2007/09/a-demon-of-our-.html
The next person "60 Minutes" may want to interview is Bookstaber, the author of this excellent book. It has a lot of concepts, but makes for riveting reading.
in my opinion after watching 60 minutes, and the fallout of these 'financial terrorist criminals' the only way to find out the scope and identities of the perpetrators is to have homeland security
arrest those known persons and transfer the terrorists to Guantanimo.
Using their own 'waterboarding' techniques to get all individuals that benefitted from this financially, and seize their assets to correct the problem. It should be done before the new president elect takes office, if possible. I feel that deregulation was the key
factor that allowed them access to this fraud scheme.
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