Kana
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quote:
ORIGINAL: Edwynn
quote:
ORIGINAL: Kana
How in the world did this degenerate into a dissertation on the righteousness or not of Econ?
But the best line of all came from an economist who worked at the Fed-he told me once, give any two economists the same exact stats, and they can each see what they want to see, and derive the info they want to. Which of course, leads to that classic line about lies, damned lies, and statistics. :-)
Which is why I went into finance...
So, do all the finance guys see the exact same numbers when it comes to the pricing of risk?
I'm also a bit curious as to the actual risk assessment scheme of the collateralized debt obligations and the credit default swaps that were tied to them.
Any insight is appreciated.
Most of the profs thought it was insane. It's a general opinion among the ones I discussed this with in detail that the majority of the time you see derivatives they are created to flank existing laws-especially when you get into derivatives of derivatives. In a lot of companies, what ended up happening was that one sub group of the company was playing with things that were so complicated that the powers that be that ran the companies didn't have a clue what was actually going on-think AIG where one small office of about twenty made bets that took down an industry giant.
Straight finance guys tend to be all about real capital and hard cash, not accounting money. And buying these things on negligible margins opened the corporations up to risk that was waaaaaaay beyond the profits they pulled in. Which is exactly what happened when the margin calls grew as company credit slipped-it was an awful cycle with no way out. The sub-derivatives would be found to be risky (And lots of people saw this coming-folks had warned about, say Bear Stearns vulnerability at least two years prior), margins would rise, companies would need hard cash to meet the margins, but their vulnerability made their credit risk rise, thus making it substantially more expensive, if possible at all, to borrow money to meet the margin calls, which would then create more risk, so the margins call would go up again, causing the whole cycle to repeat itself until no more cash was available and the company would fall.
But really, the profs main beef with the bailouts had less to do with that and more to do with ideals about the market.
First, bailing out the banks interfered with the Darwinistic effects of capitalism-it rewarded poor decision making and prevented companies from suffering the ramifications of their errors.
Secondly, they saw the bailouts as a futile attempt to stymie way overdue market corrections-the markets had been riding a boom that went way beyond what most analysts thought was reasonable or continuable and that the crash, like all bubble crashes was an inevitable market correction. They thought, and I agree, that the bailouts would just be a speed bump slowing down the correction that was bound to come (and did and is continuing)-in layman's terms, it was throwing good money after bad. Markets tend to be self correcting. This market had risen to high on the dotcom boom, then, due in many ways to political reasons, had shifted to a housing boom, one that was artificially created and sustained, one that ran far higher than it should have for far too long. The market needed to go down-things were just like the twenties with all this paper money flying around based on nothing. The bailouts were designed to prevent, or at least minimize, that correction, which ain't a good thing. The market needed to come back to earth, reconnect with the fiscal realities, and the bailouts were intended to prevent that from happening
Third, and most important in many of their eyes, the markets are kinda the savage garden in macrocosm-they need to be thinned of the weak, the stupid, the inefficient. When the crash is done and the dust clears, the ones who remain are meaner, leaner, more effective and more efficient, better managed smarter companies, which is all good stuff and in the long term best interests of the nation and the economy. Crashes thin the herd...but this one didn't because the bailout. Instead of suffering for their foolish gambling, the big boys were rewarded, and acted accordingly, giving themselves massive bonuses with the bailout money.
Finally, the one question that runs finance is, "Where is the money coming from." They tend to be hard cold facts sorta people, not idealists, and the one thing they knew was that the US didn't have the currency put aside to do the bailout, which meant that they were gonna just print it, pull it out of thin air so to speak, and they were seriously worried about the ramifications on the national economy, things like cost of money, inflation, diminishing power of the dollar worldwide, all of which came true.
And the answer to your first question, an answer you already know, is of course not. No two people will ever see the same stats and draw exactly the same conclusions.
And in response to question number two, the answer for many of the big boys is that they got caught unaware. This happened for lots of reasons, but the single biggest driver is that they deliberately turned a blind eye to what was happening, that they cared far more about continuing the stream of profits, about continuing to make shareholders happy by providing big returns (This is why I argue that there really isn't a difference between main Street and Wall Street-that's a bullshit phrase spun by ratings happy TV people. Main street's greed drives Wall Street and vice versa), about those big fat bonuses, that they trotted merrily down a path strewn with warning signs. Now some of this was flagrantly fraudulent(Think about the banks that rolled lots and lots of shitty mortgages that could never be repaid in with good ones and then sold them as bundles), lots of this was due to lack of oversight (The rating companies knew these things were crap yet continued to keep company and national credit ratings far higher than they had any right to be) and some of it was simply because the deals had become so convoluted and complicated that even the guys who DID the deals had lost touch with what was really going on-no one knew nothing, except to not kill the golden goose. And part of it is the market structure itself. The whole free market economy is a house of cards with everyone lending each other money to stay afloat and meet daily needs/calls, and God help the day that someone can't make the calls or that the other lenders won't loan the cash (This is what happened to Shearson Lehman)...and it ain't just the bad companies, it's, with very very few exceptions, all of them. These companies and banks, they don't have the reserves to meet their daily needs, and haven't for a long time, so, for example, GS borrows money to meet their calls, make the buys they need to, etc..., then lends it to Blackstone, who lends it to BoA, who lends it to Citi, who lend it to Morgan Stanley, who lends it to GS.
Which all works well, as long as everyone is buddy buddy and willing to keep the capital flowing, but if the rumor mills starts swirling and the sharks start circling, money can tighten up real fast and then people get caught exposed.
Which is kinda ironic, because of there ever came a day when they all got called simultaneously, almost none of em would be able to meet the calls and they ALL would collapse.
So yeah, they knew about some of the risks, but this is business as usual in high finance, it's all a gamble, and as long as nobody calls the bluff the cash keeps rolling.
If you want a good read about the whole Fiasco that's not written in total finance geek speak, read House of Cards by William Cohan.
And don't fool yourself-this is still going on today. It's business as usual.
And don't look to any politician to help. Both parties are so far in the pockets of the big banks it's pathetic. I mean crap, Obama was absolutely wide open on his mishandling of the crisis(Not a single big banker has gone to jail, the penalties are ludicrously low, hell, not a single person at the SEC has been disciplined, much less fired for their lack of action in the crash)-Romney could have smashed Obama in the debates and almost certainly picked up those points he lost by and won had he gone after this.
And Obama is just as bad. The man was elected the first time with a mandate to do something about the crisis. Instead, he tried to appoint Corzine for Gods sake to run the Treasury, the same cat who disappeared 1.6 billion in clients assets and despite a freaking congressional investigation isn't going to get disciplined, much less charged for his malfeasance. He hasn't gone after any of the big boys, his top finance guys are ex GS to a man,his AG has long term ties to the big banks and his fines, well lets just say that while the banks have essentially committed treason (Dealing with Iran, funneling money for them, selling crappy deals to state, local and municipal govts that will keep these folks bankrupt for decades, lying blatantly about mortgage packages, the list goes on and on and on), nobody on his side has done shit. And don't talk to me about the fines. He's gotten a few billion here, a few billion there. Meanwhile, the banks made trillions in profits(What, if they were mobsters(Which is really what they are) would be labeled Ill Gotten Gains, IGG's, and be subjected to RICO acts across the board and dropped in jail for twenty to life) then, on top of that we gave them, hold your breath $15 trillion more to bail em out, $5 trillion of which they immediately turned around and gave themselves as bonuses for doing such a bang up job. It was the single largest transfer of money/capital in the history of the world (The prior record holder had been the transfer of cash from Western economies to the Middle East after the 1970's OPEC induced gas crisis). The only thing either party cares about is lining their pockets at taxpayer expense.
But I digress.
I hope I answered you sufficiently...
< Message edited by Kana -- 12/8/2012 9:53:33 AM >
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"One of God's own prototypes. A high-powered mutant of some kind never even considered for mass production. Too weird to live, and too rare to die. "
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