"F. George McDuffee" wrote in message
...
On Tue, 18 Mar 2008 01:04:29 -0400, "Ed Huntress"
wrote:
"Jon Elson" wrote in message
om...
Ed Huntress wrote:
"F. George McDuffee" wrote in
message
...
As usual Krugman asks the right question and then quits.
"So here's the question we really should be asking: When the feds
do bail out the financial system, what will they do to ensure
that they aren't also bailing out the people who got us into this
mess?"
I don't think he knows the answer to that.
But *** I *** know the answer (and I'll be the rest of you reading do,
too)! Basically, nothing will be done. The whole crappy situation is
institutionally entrenched. They've built this house of cards over
decades, and NOBODY quite knows how to take it apart without the whole
thing falling down. It will take YEARS of Congressional hearings and
the
passing of new laws to stop these practices. A bunch of companies will
likely go down the tubes like Enron, when it is found there is DAMN
little
actual value in all the paper they are holding. Hopefully, we won't
have
a run on banks like what started at Bear Stearns, but a run on
investment
and commercial banks could make what happened in 1929 look like a party!
I mean, if GM suddenly can't issue paychecks, it could get "serious".
And, it could happen pretty suddenly, the way everything is online now.
Jon
I don't think they'll do "nothing," Jon. My feeling is that they'll
restore
some required disclosures to the unregulated "hedge funds" (which haven't
really been hedge funds since the '80s). And, if they find a way to make
this applicable across the board, they'll establish some kind of
documentation to derivatives trading. That means they'll have to be
registered, like stocks and most bonds are today. And deposits and some
other instruments will be subject to reserve requirements, with no way to
get around it.
In other words, all kinds of instruments will be subject to normal
good-practice banking procedures and they'll probably have to be
registered.
There's some discussion going on about all this in the financial press,
but
it's been overwhelmed by news of the panics. I think we'll see it surface
pretty soon.
====================
If you don't like my suggestions, feel free to post some of your
own for the groups evaluation/critique. Note that none of the
attack the "capitalist system" or "free market." These simply
implement the equivalent of speed and load limits for vehicle
operation on the public roads.
I favor all of the things I listed above, with the SEC oversight required to
enforce them. That's been my position since Reagan first started to loosen
up financial regulations.
Regulating the financial industry is not like regulating a manufacturer's
safety or accounting practices. The whole idea behind deregulation of
finance was that those very creative financial people would come up with new
ideas, new insruments and new kinds of trades, that benefitted the economy
as a whole. And they did.
Although derivatives were really created as a gambling vehicle for
high-rollers and day-traders, corporate treasurers quickly adopted them as a
way to protect their treasuries from predictable risk, thus increasing their
stability and reducing their bond interest rates. That freed up capital,
added to all stockholders' net worth, and gave investment a shot in the arm.
But -- and this was clear from the beginning -- allowing these new
instruments to be created and traded in the dark, with virtually no
regulation, was an invitation to the fast-buck artists to create an endless
array of shell games.
The financial industry is loaded with all kinds of shady characters, as well
as some pillars of probity and good sense. When the money is running hot,
the shady ones get the upper hand. That's basically what's happened here.
== Remember -- If we don't get what you want, we will get what
you deserve.==
There is no more chance of implementing any of these suggestions
than the baseball home run kings uniting to ban HGH, steroids,
and crank. It will required a concentrated effort to pound any
reform up the financial establishment's "nose" [I said *NOSE*]
with a 16 lb maul, which will be possible only after another
catastrophic melt-down, and their temporary loss of political
influence.
The downside of the US press reporting [such as it is] on the
"panics" is their total failure to examine the causes and make
any suggestions on how this could be avoided in the future.
That's editorializing, not reporting, and the financial editorial pages are
loaded with prognostications.
Having too much time on my hands, I have spent some time on the
web probing this problem and have the following specific
suggestions:
(1) Put an absolute limit on the amount of "leverage" that a LBO,
hedge fund, private equity fund, etc. can employ. Although
several of the "hedge funds" (more accurately "speculation
pools") were invested almost 100% in AAA rated bonds issued by
GSE entities such as Freddie Mac and Sally Mae, they had a
"leverage" of 32X [probably more] and a total lack of any cash
reserves. The slightest downturn led to margin calls, forcing
sales into a down market, further depressing prices, and their
collapse. In just one example [Carlyle Credit Corporation] 16
billion dollars of the "investors" money went up in smoke in
three days. There are many others. I suggest that the absolute
limit of leverage be set at what corresponds to the bank's loan
reserve requirements, i.e. 10X if the bank loan (cash) reserve is
set at 10%, 5X if the loan reserve is set at 20%, etc..
Some margin limits will have to be set, but I don't know how you can set
numbers on it now.
(2) Given the common practice of the banks to evade loan reserve
requirements, increase the loan reserve from 10% to 15 or 20%,
with a corresponding reduction in the max leverage allowed in the
private capital pools, hedge funds, etc.
Goodby, liquidity. Goodby, expansion of home ownership. Goodby, car sales.
Goodby, US economy...
(3) Eliminate the use of "off-shore" corporations
created/domiciled in the Cayman Islands, Liechtenstein, etc. as
SIVs [special investment vehicles], SPE [special purpose
entities], conduits, CDO [collateralized debt obligation]
trustees, etc. as this both places the records and assets beyond
the reach of the US courts, and eliminates many of the
traditional financial safeguards under US law. These are also
widely used to evade the bank loan reserve requirements.
===========
"Other underwriter responsibilities include working with a law
firm and creating the special purpose legal vehicle (typically a
trust incorporated in the Cayman Islands) that will purchase the
assets and issue the CDO's tranches. In addition, the underwriter
will work with the asset manager to determine the post-closing
trading restrictions that will be included in the CDO's
transaction documents."
http://en.wikipedia.org/wiki/Collate...ebt_obligation
(4) There does not appear to be any shortage of "liquidity" in
the financial markets, rather a mis-use/mis-allocation of the
adequate and available funds.
There isn't now. But there probably will be after the economy is thoroughly
wrung out.
As for your other suggestions, putting numbers on those ideas is something
I'm not able to do.
--
Ed Huntress