Sunday, March 29, 2009

The quiet coup

From the Atlantic for your reading:  "The Quiet Coup"

Essentially - the U.S. government is an oligarchy with financial interests not unlike Russia or any third world country.

Wednesday, March 25, 2009

The mythical "Systemic Risk"

Does anyone have a definitive idea on what "systemic risk" is?   If so, should we even try to regulate it as it is now obvious that existing regulatory regimes and human nature have shown otherwise.

The solution is to acknowledge that many believe that there is the existence of systemic risk, but that it cannot be controlled.  Prudence, in the sense of being prepared for things that we cannot predict or forecast, should be the guiding principle.

There should be two frameworks - regulatory and non.   Two rules for non-regulated:  Cannot be a publicly traded company and will not get bailed out.  In other words, these non-regulated firms would normally be partnerships where the owners have all their capital at risk and then some.   They are generally free of oversight except that they will not be bailed out.  

The regulated companies have their deposits and custodial accounts guaranteed for a fee.  In return, they are limited in the amount of leverage they may use,  cannot use off balance sheet financing, and cannot engage in trading from their own account except as a market maker (i.e. no proprietary trading).   The only derivatives that these firms may trade are those that go through a clearinghouse with adequate margin rules.

This keeps the "traditional" banking and investment banking side in their roles, but limits their leverage and scope of business in return for being insured by the government.   The other players not covered are the wild West, whereby the players are on the hook for their losses and are not publicly traded (think the big 4 CPA firms or Goldman Sachs before it went public as a structural model).  

Think this is fair enough for everyone to understand ..

Saturday, March 21, 2009

AIG - the key question

I guess the best way to describe this is that when you rush things, stuff gets screwed up.

During that meeting, between the Geitner, Paulson et. al. in late 2008 when it was decided that the Treasury was going to end up owning AIG, why weren't the 10 largest CDS counterparties brought in and given this simple option:

"The United States Treasury will not step and and save AIG unless all CDS counterparties agree to take a 20% haircut".  This is done where AIG could not match off counterparties with offsetting swaps.

AIG at the time had $4.7 trillion in outstanding credit default swaps.  I think that most  of the counterparties would rather take a guaranteed 80 cents on the dollar than try their luck in bankruptcy court.

Of course, that would assume that Treasury would try to be the best stewards of taxpayers' money.

Thursday, March 05, 2009

Hank Grenbeerg sues AIG

This is incredible - if Greenberg is correct in saying that Tim Geitner barred AIG's former chairman and largest shareholder from discussing the company's rescue while Goldman Sachs, AIG's largest CDS counterparty is allowed. This is disgraceful and a clear conflict of interest. Geitner should resign and GS should not be bailed out .