Derivative trading rears its ugly head...AGAIN

[GGT]

No, not just hope but act accordingly: provide value to customers, cut costs where we can without cutting quality etc

If your companies not good enough to survive it should fail. Problem is government doesn't (until now in Greece) face that pressure.

It is pressure to succeed not fail that makes capitalism work.

Companies based on 'frivolous' consumption may not survive a consumer-deleveraging recession, regardless of how "good" they are. But businesses with massive debt, who made "bad" decisions (especially investment firms) have survived the global recession/depression....because they made themselves systemically important to the financial side of all other business, and needed gov't and central bank intervention.

Governments don't operate like businesses, and countries aren't just enclaves of "capitalism".

[ar81]

Governments don't operate like businesses, and countries aren't just enclaves of "capitalism".

Exactly. Governments do not work like companies, and they do not work like families either. This misconception is still in the minds of many people.

[RandBlade]

Companies based on 'frivolous' consumption may not survive a consumer-deleveraging recession, regardless of how "good" they are.

So? Are you saying that's a bad thing, I don't see how it is.

Companies based on 'serious' consumption may not survive either.

But businesses with massive debt, who made "bad" decisions (especially investment firms) have survived the global recession/depression....because they made themselves systemically important to the financial side of all other business, and needed gov't and central bank intervention.

I'm not a fan of interventionism, I said all along bad companies should be allowed to fail. Name a single time you heard me call for a bailout of a business.

I believe the proportion of businesses to last a century is well under 1%.

Governments don't operate like businesses

Indeed, that's the problem and why they're not as efficient.

[GGT]

So? Are you saying that's a bad thing, I don't see how it is. Companies based on 'serious' consumption may not survive either.

Not saying that's a bad thing...but much of western employment is now tied to that "frivolous consumption". Really, how many fast food joints, coffee shops, retail banks, and pharmacies do we need? They're literally on every corner or intersection over here.

I'm not a fan of interventionism, I said all along bad companies should be allowed to fail. Name a single time you heard me call for a bailout of a business. I believe the proportion of businesses to last a century is well under 1%.

I honestly don't recall your position during the Northern Rock or IceSave debacles....let alone the domino effect from Lehman failing, and AIG's trillions in international banking....that led to the Great Global Recession. Sorry, I can't remember your opinion on central bank and treasury "intervention", or monetary policies, either.

I considered our auto "bail-out" a government loan that came with lots of strings attached, and was made because NO private capital was available --- not even from Bain Capital --- but it was needed to slow the hemorrhaging of jobs, and prevent an all-out Depression. But banks and SIFI aren't the average "business" that can fail without taking down entire economies with them. They also needed a "bail-out" but it didn't come with any strings attached. Big mistake, IMO.

Indeed, that's the problem and why they're not as efficient.

Well, it's one thing to want "government", or any bureaucracy, to adapt business-type efficiencies. But government itself isn't a business and shouldn't try to act like one. Their functions and goals are different, especially in complex and complicated values of fairness, equity, justice, and weighing the public good with individual freedoms.

It might sound like a great idea to elect officials that are skilled "business people", but not if their intent is to operate a state or country as if it's a corporation.

[RandBlade]

Not saying that's a bad thing...but much of western employment is now tied to that "frivolous consumption". Really, how many fast food joints, coffee shops, retail banks, and pharmacies do we need? They're literally on every corner or intersection over here.

I'd say you need one on every corner or intersection then. Starbucks etc aren't charities, they'll only be there if they can make a profit.

I honestly don't recall your position during the Northern Rock or IceSave debacles....let alone the domino effect from Lehman failing, and AIG's trillions in international banking....that led to the Great Global Recession. Sorry, I can't remember your opinion on central bank and treasury "intervention", or monetary policies, either.

I said let IceSave collapse, let Northern Rock collapse, let Lehman collapse, let AIG collapse and let GM collapse. Or have any of them find private suitors.

Barings Bank famously collapsed in 1995 and was bought by Dutch bank ING for £1, it wasn't bailed out by the Treasury and neither should Northern Wreck have been.

I considered our auto "bail-out" a government loan that came with lots of strings attached, and was made because NO private capital was available --- not even from Bain Capital --- but it was needed to slow the hemorrhaging of jobs, and prevent an all-out Depression. But banks and SIFI aren't the average "business" that can fail without taking down entire economies with them. They also needed a "bail-out" but it didn't come with any strings attached. Big mistake, IMO.

If a business is worth saving, it will get some form of private finance.

[GGT]

...
If a business is worth saving, it will get some form of private finance.

Maybe you missed the fact that ALL forms of financing was frozen up in '07-'08? Including commercial paper and overnight loans that serviced small businesses, and prevented them from cutting payroll checks to their workers. There was the hair-on-fire moment when ATM withdrawals were considered "bank runs", and the panic was real.

Again, I think you're underestimating the differences between business, banking, finance, and government. None of them operate on pure models of "freee markets" or "capitalism".

[RandBlade]

Maybe you missed the fact that ALL forms of financing was frozen up in '07-'08?

Yes I did miss that. Because it wasn't true.

[Wraith]

Maybe you missed the fact that ALL forms of financing was frozen up in '07-'08? Including commercial paper and overnight loans that serviced small businesses, and prevented them from cutting payroll checks to their workers. There was the hair-on-fire moment when ATM withdrawals were considered "bank runs", and the panic was real.

Again, I think you're underestimating the differences between business, banking, finance, and government. None of them operate on pure models of "freee markets" or "capitalism".

I was around then, and things weren't anywhere near as bad as you're claiming. There was a recession and a number of bankruptcies, but loans didn't become impossible to get and the banking sector weathered everything fairly well all things considered.

Also, how deep into the ground are you going to run that duplicate letters bit?

[RandBlade]

My company expanded rapidly then, with new bank financing. As I said at the time, recessions are great opportunities.

[ar81]

Indeed, that's the problem and why they're not as efficient.

It is curious how the concept of efficiency works...
* A company is efficient if it gives less (low spending) and get more (increased revenue).
* A government is efficient when it gives more (better services that may require to spend money) and get less (reduced taxes).

So in the end a government that collect higher taxes is less effeicient and a company that increases revenue is more efficient...

A good example of efficiency of a public service handled by a company is water in Atlanta.
---------------
NORTH AMERICA: FIXING THE AGING INFRASTRUCTURE IN ATLANTA, GEORGIA AND MONCTON, NB http://www.cbc.ca/fifth/deadinthewater/america.html
"Clair Muller: We were told that they could save us twenty million a year and they only saved us ten. Not only did they only save us ten, but the customer service really dropped dramatically."

Again, I think you're underestimating the differences between business, banking, finance, and government. None of them operate on pure models of "freee markets" or "capitalism".

Markets will never be free. What we call "lobby democracy" is just an oligopoly buying senators to create an intervention, a private intervention. Even if it looks like government intervention, it is oligopoly intervention. It is weird how is that if government come to regulate oligopolies to favor people, free market advocates complain on "government intervention", but when oligopolies lobby, they do not complain about the lack of free market involved in a private intervention masked as government intervention.

Democracy is when people rule, and it means people elect people who will do some intervention (else we may not need politicians or government to do anything). So if people's government is not allowed to do an intervention, but oligopolies do, what's the name of that?

It might sound like a great idea to elect officials that are skilled "business people", but not if their intent is to operate a state or country as if it's a corporation.

If government worked as a company, these should be the complaints we would have:

http://www.complaintsboard.com/

Scam
Accounts blocked
No delivery
Identity theft
Impossible to contact personnel
Wrong item delivered
Late delivery
Attempts to collect personal data
Arbitrary manipulation of accounts
Theft
Fake products
You pay and get nothing in return
Impossible to pay
You pay and they stop servicing you
Stolen property
They hang your call
Warranty problems
Poor service
Defective problems
Unauthorized charges
Receipt delivery problems
Racism
Hygiene problems
Product durability
etc...

[RandBlade]

It is curious how the concept of efficiency works...
* A company is efficient if it gives less (low spending) and get more (increased revenue).
* A government is efficient when it gives more (better services that may require to spend money) and get less (reduced taxes).

No you're looking at it backwards.

A company is efficient when it gives more (sales, service, quality etc) for less (costs).
A government is efficient when it gives more (services, quality etc) for less (costs).

Revenue isn't something that magically appears. A company that doesn't work on what they give is not a company that will survive.

[ar81]

No you're looking at it backwards.

A company is efficient when it gives more (sales, service, quality etc) for less (costs).
A government is efficient when it gives more (services, quality etc) for less (costs).

Revenue isn't something that magically appears. A company that doesn't work on what they give is not a company that will survive.

The problem is that unless process is changed, cost cutting leads to services/quality/etc cutting. Reduced costs is the result of a better process, but most of companies have processes that are just as efficient as the government, and in this crisis companies are not really so interested in providing services/quality/etc but they are focused on profit, which means they want to suck as much money as they can by giving as little as possible to customers. Welcome to the age of greed.

Many companies cut costs thinking that they will become more efficient. But indeed they just deliver less.

When Toyota developed Just In Time, many years ago, their process allowed to reduce inventory levels (Process change->Inventory reduction). So companies reduced inventory levels too, thinking that it would be more efficient (Inventory reduction->Process change) and what they achieved was late deliveries and supply problems.

There is still the myth that cost cutting without process redesign is "more efficient".

[GGT]

Yes I did miss that. Because it wasn't true.

I was around then, and things weren't anywhere near as bad as you're claiming. There was a recession and a number of bankruptcies, but loans didn't become impossible to get and the banking sector weathered everything fairly well all things considered.

Also, how deep into the ground are you going to run that duplicate letters bit?

Wow, can't believe you've both forgotten the events surrounding Lehman, Bear Stearns, AIG, etc...since we had exhaustive threads discussing it.

Refresher: That's when Paulson and Bernanke held crisis meetings with top congressional committee members, conferenced with all the CEOs of global top banks/financial firms....and were stunned to learn the magnitude of the crisis. Things were going down fast, money market funds "broke the buck", stocks were in crash mode, and everyone was de-leveraging and dumping. That's when QE and buying up toxic assets began in earnest, and all the senate grillings began. How could you forget all that?

TARP, HAMP, lowering rates to zero, Maiden Lane, FDIC closing/merging insolvent banks practically every Friday (after markets closed)....those things didn't just pop up because it was a regular recession. It was a mammoth financial crisis and yes, liquidity really was that bad, especially for overnight short term loans used by businesses for payroll. When heads of PIMCO were calling their wives with instructions to get as much cash as possible....it's bad.

The banking sector weathered the crisis period because of all the Fed/Treasury gov't interventions.

p.s. I'll use Freee Markets, sarcastically, as long as people <like Rand> seem to believe there is such a thing.

[RandBlade]

I haven't forgotten the events then which is why I know it wasn't true. You said

Maybe you missed the fact that ALL forms of financing was frozen up in '07-'08?

That wasn't true. The notion that ALL forms of financing was frozen is absurd and simply didn't happen. I can assure you that because back then I helped open new businesses financed through banks.

Banks became more cautious in issuing finance (and rightly so!), finance was not simply frozen. Certainly not ALL finance was frozen.

Forget media-driven hysteria and the collapse of a few failed businesses (which is the free market in action), I was actually involved with this sector somewhat then and financing was available. Your OTT claim is that ALL financing was frozen in '07-'08 so please back that up with some facts and figures. I challenge you to name a single month (heck even a single week) where banks issued ZERO loans to people and businesses in that two year window.

It was a mammoth financial crisis and yes, liquidity really was that bad, especially for overnight short term loans used by businesses for payroll.

What kind of company routinely plans on using overnight financing for payroll? Certainly for that to be the norm, that's absurd, if you can't typically self-finance payroll what are you doing in business? On a standard business model if you can't afford to pay your staff then that's a red flag that something's wrong and the banks should look twice at your business to see if you're a safe company to lend to.

[GGT]

....The notion that ALL forms of financing was frozen is absurd and simply didn't happen. I can assure you that because back then I helped open new businesses financed through banks.

I was pointing out that "if a business is worth saving, it will get some private finance" wasn't true at the height of the crisis. Post #64 example: the auto industry, when there was NO private financing available (not even for the small business supplier down-stream). I was referring to the dominoes in the crisis, including money market funds and commercial paper.

Banks became more cautious in issuing finance (and rightly so!), finance was not simply frozen. Certainly not ALL finance was frozen.

Forget media-driven hysteria and the collapse of a few failed businesses (which is the free market in action), I was actually involved with this sector somewhat then and financing was available. Your OTT claim is that ALL financing was frozen in '07-'08 so please back that up with some facts and figures. I challenge you to name a single month (heck even a single week) where banks issued ZERO loans to people and businesses in that two year window.

What kind of company routinely plans on using overnight financing for payroll? Certainly for that to be the norm, that's absurd, if you can't typically self-finance payroll what are you doing in business? On a standard business model if you can't afford to pay your staff then that's a red flag that something's wrong and the banks should look twice at your business to see if you're a safe company to lend to.

That wasn't media-driven "hysteria", but reporting the real reaction from our Fed and Treasury, and facts on the ground. It wasn't just small business getting loans from a local bank, people getting a home mortgage, or traditional "banking". (Although there were small pockets of bank "runs" when folks couldn't access their deposits while FDIC was closing/merging some failed banks. That's when they raised the insured limit to $250,000 per acct, to calm the panic). The broader field of "finance" includes using commercial paper instead of bank loans.

Sorry, I assumed you knew what I meant by overnight financing, since you're and Econ kinda guy. But since you've given me a challenge here's a couple of links, with a wikifist:

http://www.npr.org/templates/story/s...oryId=95099470

http://en.wikipedia.org/wiki/Commercial_paper



p.s. Parts of your text is really hard to read (black on blue)....

[GGT]

Bump, update on derivatives aka WMD:

(Reuters) - JPMorgan Chase & Co's disastrous bets on corporate debt may have caused unexpected collateral damage: erratic behavior in a barometer that measures the financial health of blue-chip U.S. companies.

Those bets used Wall Street derivatives called credit default swaps. They are supposed to act like homeowners insurance, allowing bondholders, banks and hedge funds to buy protection against declines in the value of corporate debt, and ultimately protection against a default.

In this case, though, they became more like the pawns in a battle between JPMorgan and hedge funds on the other side of its bet. This struggle so dominated a corner of the market that it sent false negative signals about the credit quality of some major companies whose underlying finances were largely unchanged, market experts said.

http://www.reuters.com/article/2012/...85D05L20120614


When a protective hedge can't be discerned from a speculative gamble....not even by the very people who created and trade these financial "instruments"....that's a huge red flag. The senate hearings were basically useless, so long as Dimon showed a modicum of contrition. It was probably too much to expect otherwise, since he's also on the Board of Directors of the NY Federal Reserve. How sweet is that gig---being a "regulator" of your own institution?

[Wraith]

Wow, can't believe you've both forgotten the events surrounding Lehman, Bear Stearns, AIG, etc...since we had exhaustive threads discussing it.

No, I remember the events fine. I remember you panicing about it, I just don't remember the sky falling down as a result. I got my mortgage then, at a very cheap rate, which immediately disproves that "ALL forms of financing [were] frozen up in '07-'08".

p.s. I'll use Freee Markets, sarcastically, as long as people <like Rand> seem to believe there is such a thing.

As long as you understand that it makes it harder to take you seriously, more power to you, I guess.

[GGT]

No, I remember the events fine. I remember you panicing about it, I just don't remember the sky falling down as a result. I got my mortgage then, at a very cheap rate, which immediately disproves that "ALL forms of financing [were] frozen up in '07-'08".

As long as you understand that it makes it harder to take you seriously, more power to you, I guess.

Your mortgage was cheap because of QE, and the Fed lowering rates to near zero. That's gov't intervention in markets that are erroneously called "free". There's no such thing as purely "free market capitalism" without checks and balances from gov't oversight/legislation/regulation. Greenspan's theory was proven wrong, and he admits that.

Look, early on I had the opinion this wasn't just a business cycle, or a "normal" recession, but a financial crisis. Partly because we'd monetized so much debt, and the financial industry added toxic derivatives and CDOs into the mix. The global punchbowl of chasing debts as profits, based on synthetic WMD with no there there, "hedging" with financial insurance tools that aren't regulated as insurance products. That's what brought AIG down, and led to JP Morgan's multibillion dollar losses.

Despite others' arguments, or portraying my concern as panic or Chicken Little Sky Falling Down hysteria....or nitpicking on what ALL means in finance :rolleyes....my opinion remains the same. Whether or not you agree if "bad" derivatives played a part, the role of banks/investment firms in private profits vs socialized losses, it's still playing out on the global stage as a financial and debt crisis.

[Loki]

Love your logic, GGT. Every single thing anyone here has ever achieved was accomplished because of government good will. Thank you Obama for not killing us all!

[GGT]

WTF are you going on about, Loki?

[Loki]

Read your post. The main reasons Wraith received a good rate are because he has good credit and high income.

[GGT]

Anyone who got a home mortgage below 5% did so after the housing bubble burst, and because the Fed lowered borrowing rates for banks as part of QE. Also, FHA ramped up buying those mortgages (see Fannie Mae's holdings) to help banks off-load their risk to the federal gov't, on the theory they'd recapitalize and make more loans. Rinse, repeat.

Sure, any new bank loan required having a good credit rating and a JOB. That's why it was much harder, if not impossible, to RE-finance a mortgage --- if the home had lost value, or the borrower had been laid off. Those things related to intervention by the Fed, Treasury, GSEs, and congressional legislation. It wasn't meant as a "Government Goodwill" measure, but to keep our economy from going over a cliff and into a Depression.

Do you disagree?

[Loki]

They also got the low rate because the government didn't put them in a gulag, throw them out of a plane, or confiscate all their money. Good job.

[GGT]

They also got the low rate because the government didn't put them in a gulag, throw them out of a plane, or confiscate all their money. Good job.

If you're trying to make a legitimate point, try again.

[Wraith]

Your mortgage was cheap because of QE, and the Fed lowering rates to near zero. That's gov't intervention in markets that are erroneously called "free". There's no such thing as purely "free market capitalism" without checks and balances from gov't oversight/legislation/regulation. Greenspan's theory was proven wrong, and he admits that.

You complain that the markets aren't laissez-faire, so they can't be called free, and that's why we need goverment intervention? That doesn't make any sense. Also, your nomenclature complaint is silly.

Look, early on I had the opinion this wasn't just a business cycle, or a "normal" recession, but a financial crisis. Partly because we'd monetized so much debt, and the financial industry added toxic derivatives and CDOs into the mix. The global punchbowl of chasing debts as profits, based on synthetic WMD with no there there, "hedging" with financial insurance tools that aren't regulated as insurance products. That's what brought AIG down, and led to JP Morgan's multibillion dollar losses.

Despite others' arguments, or portraying my concern as panic or Chicken Little Sky Falling Down hysteria....or nitpicking on what ALL means in finance :rolleyes....my opinion remains the same. Whether or not you agree if "bad" derivatives played a part, the role of banks/investment firms in private profits vs socialized losses, it's still playing out on the global stage as a financial and debt crisis.

I said in my first post in this thread that the economy wasn't ideal, my point has merely been that the sky isn't falling either. I do find it interesting now that you're completely ignoring the fact that irresponsible government spending and finances is responsible for the current Euro problems, and is a strong contributor to why there's still anything to talk about on this subject.

Sure, any new bank loan required having a good credit rating and a JOB. That's why it was much harder, if not impossible, to RE-finance a mortgage --- if the home had lost value, or the borrower had been laid off. Those things related to intervention by the Fed, Treasury, GSEs, and congressional legislation. It wasn't meant as a "Government Goodwill" measure, but to keep our economy from going over a cliff and into a Depression.

I refinanced in 2009, on the advice of a friend who'd been refinancing every six months like clockwork since 2007 - he always got the lenders to eat the fees, so it always made sense to do it. It was easy enough for me that lenders were fighting each other for the loan, and wound up swallowing all the fees themselves to gain competitive advantage. So, not anywhere near impossible.

[GGT]

You complain that the markets aren't laissez-faire, so they can't be called free, and that's why we need goverment intervention? That doesn't make any sense. Also, your nomenclature complaint is silly.

My 'complaint' is the way people throw around the term Free Markets, automatically condemn any regulatory attempts, while ignoring the fact that markets have always had some form of gov't intervention. Whether through laws, Treasury, or central bankers. Greenspan's flawed theory was based on the belief that market makers/players would self-regulate to protect their own best interests, and wouldn't take risks that could bring down the whole financial system. Oops?

I said in my first post in this thread that the economy wasn't ideal, my point has merely been that the sky isn't falling either. I do find it interesting now that you're completely ignoring the fact that irresponsible government spending and finances is responsible for the current Euro problems, and is a strong contributor to why there's still anything to talk about on this subject.

Since when did criticism of a particular financial tool and its toxic risk alerts become "the sky is falling"? The EU has structural debt problems related to irresponsible spending and policies, I've never denied that. But they also have financial political problems with the ECB, which doesn't operate like the US Federal Reserve, and makes any stimulus or QE difficult.

I refinanced in 2009, on the advice of a friend who'd been refinancing every six months like clockwork since 2007 - he always got the lenders to eat the fees, so it always made sense to do it. It was easy enough for me that lenders were fighting each other for the loan, and wound up swallowing all the fees themselves to gain competitive advantage. So, not anywhere near impossible.

Banks lowered rates consistently since '07 and were incentivized to hold mortgage values on their books (while passing the risk to Fannie Mae), because of things done by Treasury and Fed. Once the fed rate hit near zero things slowed down, because banks could borrow interest-free money from the fed, and get profits from buying risk-free treasury debts.

I'm only explaining that our mortgage rates are directly related to the Fed rates <"government intervention!">

[Veldan Rath]

Isn't this more of that evil distortions you don't like?

[GGT]

Isn't this more of that evil distortions you don't like?

Yes. Well, I've never called it evil, but it's still a distortion/manipulation, that many people won't admit. It's hypocritical of any politician to call China a "currency manipulator", when we do the same damn thing.

And no, I'm not saying we should "End the Fed" or return to a gold standard....but a thorough and open audit would be welcomed.

That might even help US consumers understand where their mortgage and credit card interest rates originate. Europeans (at least on this forum) seem to have a better grasp of what's "behind" their loans, whether it's LIBOR, TIBOR, etc. Most Americans don't have a clue and think "banks" set the rates.

[wiggin]

And no, I'm not saying we should "End the Fed" or return to a gold standard....but a thorough and open audit would be welcomed.

The Fed is regularly audited by an independent auditor, and by the GAO as well. Also, politicizing monetary policy is a recipe for disaster.

That might even help US consumers understand where their mortgage and credit card interest rates originate. Europeans (at least on this forum) seem to have a better grasp of what's "behind" their loans, whether it's LIBOR, TIBOR, etc. Most Americans don't have a clue and think "banks" set the rates.

Uh... banks do set LIBOR and TIBOR.

[GGT]

The Fed is regularly audited by an independent auditor, and by the GAO as well. Also, politicizing monetary policy is a recipe for disaster.

It's a sad commentary when tax payers having full disclosure and transparency for OUR OWN MONEY is considered "politicizing". Perhaps it's the other way around---that a "non-political" arm of the government can only do their job when it's done in secrecy?

Uh... banks do set LIBOR and TIBOR.

In concert with central bank rates. My point was that many Americans aren't very well informed about buying debt, using credit, or even know the difference between escrow or equity. Let alone why mortgage rates go up or down.