You can hear them yelling on Wall Street already, can’t you:
Marking its first major effort to overhaul financial regulation, the Obama administration will seek new authority to supervise the virtually unregulated complex financial instruments, known as derivatives, that were a major cause of the market crisis, Congressional aides and others who have been briefed on the decision said Wednesday.
The administration will ask Congress to approve legislation that would impose a new government oversight structure for the instruments, which Warren Buffett once called “weapons of mass destruction.”
In a two-page letter to Congressional leaders, Treasury Secretary Timothy F. Geithner asked for the swift approval of a measure that would require many kinds of derivative instruments, including credit default swaps, to be traded on exchanges and subject to tighter regulation. Derivatives can take many forms, but in total there are trillions of dollars’ worth exchanging hands every day around the globe.
The letter asked the lawmakers to give regulators the authority to impose new capital and business conduct requirements on the large Wall Street companies that issue the financial instruments. Capital requirements would, for example, require companies that issue derivatives to hold capital in reserve in case of a default, much the way banks must hold reserves when they make loans.
The mother of all freak-outs is about to happen, and once again, I am going to bet on the swarthy fellow. Obama’s only concern should be that the regulations make sense, because I would guess there is ample political willpower and public support to make this happen.
DougL (frmrly: Conservatively Liberal)
Wingnut explosion in 5, 4, 3 …
I’ll bet on the same swarthy guy to win this battle, he seems to be a pretty good bet so far. ;)
Edit:
Since I am the first post, I have a suggestion for the wingnuts: just cut your nuts off now and put them in a sack to hand to yourself.
Comrade Stuck
Yep. Countless Yacht’s , Bentleys’, and private islands hang in the balance. Obama, that heartless stinker.
Snark Based Reality
I believe this topic is too complex/technical for wingnuts.
They will do the usual getting pissed off and repeating what Rush said for a few days but the complexity means they will just get distracted by the next shiny.
The most we’ll see is the usual steady whining from columists, analysts, etc but we’re already having to put up with that already. There is only so much bandwidth they can burn on financial topics so who cares.
robertdsc
As long as the President sees it through, I’m fine with it. The cramdown massacre shows the banks still have muscle.
demkat620
Oh my, this is going to cause crying all over Wall Street.
Boo fucking hoo guys. How them derivatives looking now?
Woody
I’ll take the bet, if it’s not larger than my catastrophically reduced retirement accounts…
Not that something like it mightn’t pass, but that it would actually rein in the gamblers who, when the rules get too strict for ’em, always seem to be able to invent some new tool with which to extract cash from the proles…
Doctor Gonzo
They can cry me a river. Derivatives aren’t being banned, they aren’t being taxed to death, they are simply being regulated so firms like AIG (or me, for that matter) can’t sell trillions of dollars of credit default swaps without having the cash to back them up.
I bet anybody that if these regulations are sane and put into place in a good manner, in a few years Wall Street will positively love them because they will make business better by providing more transparency and hence less risk.
blogenfreude
Look for Phil Gramm on the TV telling us why this is a very bad idea.
Woody
US Grant, iirc, was the last president to leave Office no richer than when he began…barry won’t suffer…
BDeevDad
I’m guessing it would be impossible to make this retroactive as the amount of credit default swaps that are out is more than 1/2 our GDP.
ericvsthem
No mention in the NYT article of CDOs? These need much better transparency.
Comrade Stuck
@Woody:
That’s because while the foxes were dining in the WH Hallway, Ulysses was in the Oval Office jabbering to himself, drunk as a monkey.
Dennis-SGMM
@Woody:
Meaning what? Your comment implies that Obama, who like any other president has his investments in a blind trust, will somehow become wealthy from his presidency.
Look up how much James Carter was “enriched” by his term in office before you invoke U.S. Grant.
Think before you speak.
Joshua Norton
This so-called collateral thing is just a big impediment to capitalism. I’m going to live to be a 192 and am pretty sure I’ll make about $2m per year until then (starting next year, or the next, latest). So don’t worry, I’ll be able to cover any and all of my debts… all you need is my say so. No, you don’t need to look at the current market value of my assets… valuation is all just someone’s opinion anyway.
See? Easy peasy.
Tonal Crow
Requiring derivatives to be exchange-traded makes the market much more transparent. For example, you can determine how many of a standardized option contract are outstanding simply by getting a quote from an exchange or data provider (e.g., http://finance.yahoo.com/q?s=YPJMB.X shows you that there are 56 contracts outstanding for Moody’s Investor “Service” 1/2010 $10 puts). Also, some kind of reserve requirement is clearly necessary to prevent the reckless (e.g., AIG) from accumulating monstrous naked positions that they’ll be unable to cover if the market falls/rises beyond their estimates.
Along with these requirements (and probably implied by the exchange-traded requirement), we should standardize derivatives, much as has already been done with equity/index options and commodities futures. Standardization makes derivatives (much) easier to understand, and thus easier and safer to trade.
DougL (frmrly: Conservatively Liberal)
I’m suddenly hearing the theme from Mission Impossible.
Comrade Stuck
With my limited knowledge of the whole derivatives scam, and that’s what it seems to me, a scam, I still can’t get past the concept of wrapping up peoples deposits for things like IRA’s etc into CDS’s with loans subject to default. If I have it correct that that’s what happened
Seems like this is fundamentally wrong, and should only be regulated by banning the practice. Maybe that’s what he means, I don’t know.
JL
Sunday’s talk show line up
FOX Newt Gingrich because Sarah wasn’t available
MTP Phil Graham and Carla Fiorina (is she still collecting unemployment?)
This Week w/George George Will will just give a monologue for sixty minutes (commercial free)
Face The Nation Liz Cheney (need I say more)
Martin
So long as Buffet signs off on it, it’ll be done. Nobody is going to question the richest guy on earth and the most successful investor walking around.
If the administration is smart, they’ll put a transaction fee on stocks out there in this move.
Martin
Um, that’s how all jobs work. Even the guy working the drive-through at McDonalds ought to be leaving the job richer than when he began. You expect the President to get poorer while doing what we expect is the hardest job on the planet? Talk about social!sm…
Jim
you can’t be right because I am regularly assured that Obama is the cowardly tool of Big Wall Street and the Banksters.
(Actually, Grant was IIANM the first ex-president to cash in by writing his memoires. He was half-dead from throat cancer and didn’t want to leave Julia penniless.
And I have been meaning to read that book for years.)
Xenos
@Martin:
That will kill the day traders and the high-margin churners. Everyone who lives on volatility will get creamed. Wall Street will be decimated.
Really, an outstanding idea! Did we not have something like that once, about 30 basis points, back in the 60s?
Jim
and Truman… Truman and Bess left with his pension and a Chrysler.
gbear
Hasn’t he taken over Cheney’s undisclosed location (now that Cheney’s gone public)? Haven’t seen much of Gramm lately. Maybe too many people want to punch him.
Martin
Yes, all the people profiting off the backs of the 401ks and shoving the market through bipolar swings will get clobbered. So sad. I bet even Bernie Madoff would have lost money under that policy.
TenguPhule
Great, when can we start?
Tonal Crow
@Comrade Stuck: Derivatives are not, per se, a scam. They can be a very useful tool for moderating risk. Let’s say you’re the purchasing manager for Xyzzyest Airlines. Jet fuel is your company’s largest expense, and its price can swing wildly. To ensure an adequate supply at a predictable price (instead of an uncertain supply at a potentially extortionate price), you can buy futures contracts (a kind of derivative) to accept delivery of the amount you need for each month a few days before the 1st.
JL
OMG Liz Cheney is going to on This Week w/George
Comrade Stuck
@Tonal Crow:
I guess I could have been clearer. I was talking about the derivatives traded from the cds swaps mixing shaky loans in with peoples deposits, to the point where so many default, the AIG and other insurers can’t honor their insurance.
IOW’s gambling with other peoples money, without their permission. If I have this wrong, then I do.
Glidwrith
“That will kill the day traders and the high-margin churners. Everyone who lives on volatility will get creamed. Wall Street will be decimated.”
Yeehaw! Not to mention (though I could be mistaken), there are other countries which do assign a transaction fee – both to cut down on the volatility and to raise capital for the government. Good times!
Ron Beasley
There go those “Democrat Socialists”. About to close down the Las Vegas activities on Wall Street that got us into this mess. Hopefuly they will do enough to close down the Wall Street Ponzi Scheme and Wall Street can return to it’s original purpose of raising capital to fuel the economy.
Tonal Crow
@Comrade Stuck:
CDSs (“credit-default swaps”) are a kind of put option on default events (e.g., failure to pay interest when due) on some underlying loan. They weren’t mixed in with anyone’s deposits, but AIG (among others) sold huge quantities of them without having anywhere near enough reserves to cover them if there were more than a few default events. AIG made huge sums on this practice for years, selling CDSs to banks, which (among other things) used them to insure loans that they had made. But the housing bubble bust caused bigtime defaults, and suddenly AIG couldn’t pay its CDS obligations. We all know what happened then. Basically AIG gambled with our tax money; we had to bail it out, or the lousy banks that bought its CDSs would have had even larger losses, and we’d have had even worse credit conditions, which would have caused even more defaults; rinse and repeat.
Positive feedback can be a real b*tch. Probably we should have nationalized the worst-off banks right off the bat, but it does look like Obama (just barely) pulled us back from the credit-paralysis precipice.
Comrade Stuck
Who was that masked MUP?
gwangung
I am far from convinced that this is over.
DougL (frmrly: Conservatively Liberal)
Never fear, there are sure to be some new
ideasscams cooked up to circumvent any new rules that are imposed. That is how it always works; the scammers cook up a plan, they and their friends get rich from it, the scammed people howl for blood, a few low hanging apples are hung out to dry, new rules are imposed and of course, new scams are immediately cooked up. Wash, rinse and repeat ad infinitum.It’s just the way capitalism works.
DougL (frmrly: Conservatively Liberal)
Hep me! Teh BJ Mod Gawd et me post! :)
Mnemosyne
@Tonal Crow:
The more people explain CDSs and other “novel” financial instruments to me, the more it sounds like Bialystock and Bloom selling 25,000% of Springtime for Hitler.
Comrade Stuck
@Mnemosyne:
FTW!!
John Cole
@gwangung: We aren’t even close to out of this.
JohnR
‘The swarthy fellow’– that is major league funny! Kudos
jcricket
@John Cole: What he said. I’m not an uber-bear, but we’re acting as if the moderation in the rate of decline is in fact evidence of return to profitability and good times. Yes, it’s better than free fall (could we get any more vertical?), but it’s a far sight from recovery.
There are large, structural issues still to work through (credit card + student loan defaults, further drops in housing prices + increases in foreclosures, massive CRE defaults, corporate bond defaults) not to mention the “feedback loop” created by increased unemployment, financial de-leveraging still to play out, 50%+ of hedge funds and VCs to go out of business. And for years we’ll have residential and commercial real estate over-hangs (excess inventory still to be absorbed).
I think the “L” shaped recession (or rather, a hockey stick with a barely vertical rise in the handle) is the most likely scenario. And that’s if we keep doing stimulus like things. A complete L is likely if we think we’re out of the woods and stop doing anything stimulative.
BTW – This is the “optimistic” view I hold. The pessimist in me thinks my 401k will never be worth what I put into it, that future jobs will pay less than the one that laid me off last month, and that I’ll never be able to afford college for my kids.
asiangrrlMN
I am a fairly intelligent person, but my eyes start to glaze over when reading about or listening to people talk about hedge funds and credit swaps and all that. My dad has a Ph.D. in economics and is a big economic muckety-muck in Taiwan, and even he says he can’t stand to read a prospectus all the way through. If he can’t stand to read all that crap, what hope does an average person have?
I can’t wait to hear the sound of bankers’ heads exploding.
jrg
How is this different than the margin requirements that are (rightfully) imposed on ordinary investors?
Please add “collateral” to the list of things that the GOP power brokers pretend not to understand, in order to exploit their woefully ignorant base.
TenguPhule
On the bright side, you can join the lynch mobs stringing up bankers and stock brokers in the street.
TenguPhule
Look, dynamite isn’t cheap, you know.
You’ll have to settle for a wet splash.
asiangrrlMN
@TenguPhule: No. I want fireworks, damn it! I just made a fresh batch of popcorn.
J. Michael Neal
I’d appreciate it if you’d wait until after someone is willing to hire me. Right now, that’s the only way I’m making any money. Okay, I’m not really a day trader, but I do buy and sell a lot of options.
After I have a job, I’m all for this.
J. Michael Neal
The only people who read a prospectus all the way through are the lawyers who are making sure that it doesn’t say anything useful while still saying everything that’s required.
Left Coast Tom
How does this differ from traditional insurance? After all, I might have a “put option” on my house burning down. Of course, it’s criminal if I then burn down my house, and it’s criminal if someone other than me buys such a contract because they would have an incentive to burn down my house. But with CDS neither of these conditions apply, either now or under what I currently understand as the proposed rules.
Why does CDS need to exist as a separate entity at all? Why not call it insurance, and fold it under current laws regarding insurance?
I’m happy Obama’s doing something, I’m just not clear why CDS needs to be treated any differently than any other form of insurance.
Thankovsky
@asiangrrlMN:
Yeah, well, the beauty of it all is that Obama doesn’t need the public to understand every nuance of the financial reforms he’s proposing; all he needs is for them to be sufficiently angry at financial institutions in general. Populist rage is a blunt instrument, but this seems like a situation in which it could be effectively utilized.
J. Michael Neal
This is probably where it should end up, but it really isn’t any different than selling a put option on that bond. Of course, most corporate bonds are too thinly traded to have options, so they do this instead. In the end, I’m fine with making it exchange traded. It’s probably not as good as regulating them as insurance, but it’ll do the job.
There are a lot of things I like in here. Making stuff exchange traded prevents the biggest abuses. When you trade something on an exchange, the exchange guarantees to make you whole if a counter-party can’t pay out, so they require significant margin positions. AIG couldn’t sell CDS like they did on an exchange.
Making a central registry for non-standard derivatives is a good idea. I’d like it to have some sort of mechanism for forcing standardization and exchange trading if a particular type of derivative becomes too popular. Still, this is a nice move.
The capital requirements is something where we’re going to have to see the details before we know how good the proposal is.
J. Michael Neal
The problem is that, if no one understands it, then it’s really hard to mobilize public opinion when it starts getting chopped up in committee. In the end, I suspect that this is what did cramdowns in. They’re a good idea, but it’s not something you can explain quickly and clearly enough to be able to produce outrage when it gets cut.
Fulcanelli
The UK has a tax on stock trading which I believe funds regulative processes and it doesn’t seem to have killed them yet.
J. Michael Neal
There are already exchange fees. Part of what you are paying for with your brokerage charges are the fees. They are very, very small for shares of stock, more for options.
jcricket
Obama better get out of my way then. He keeps standing between the banksters and the pitchforks :-)
burnspbesq
I’m waiting for Amity Shlaes to come out and say that because credit default swaps are just like insurance, the McCarran-Ferguson Act applies, and they can’t be regulated at the Federal level, only by the states.
Terrible
Judging from the way things have been going I think it’s safe to say this is just to make it appear that there are efforts to regulate and nothing of the sort will happen. Just like moving forward on reforming health care – now we’re told that isn’t going to happen. Just like moving forward on accountability for war crimes – now we’re told that isn’t going to happen. Anyone who thinks this administration is going to regulate banking or the stock market hasn’t been paying attention the past 100+ days.
Mnemosyne
@Left Coast Tom:
Unless I’m misremembering, CDSs are like insurance that your neighbor can take out on your house, so while you may have a vested interest in not burning down your house for the insurance money (what with you living there and all), your neighbor doesn’t have the same interest. In some cases, he may decide that burning down your house himself so he can collect the insurance is in his best interest even if it leaves you penniless, and his best interest is the only thing that matters on Wall Street.
Mnemosyne
@Terrible:
Where are you getting that from? The AP has a long story today about the House Democrats’ health care proposal.
grumpy realist
One of the major differences between insurance and CDSs is the former is much more regulated and requires far more $$$ to be held to cover losses. CDSs? Up to now, zilch.
One of the other reasons to make the stuff listed et al. is the possibility of canceling out equal but opposite trades when both parties agree.
(One of the problems Russia had after the Soviet breakup was round-robin circles of debt: on Debt 1, A owed B, but couldn’t get the money from C; on Debt 2, B owed C, but couldn’t get the money from A; on Debt 3, C owed A, but couldn’t get the money from B. All these debts couldn’t get canceled out until they got listed somewhere.)
Maude
CDS is: for a fee, the investor can take out insurance on the investment, do if it goes south, the investor collects the insurance. The problem is if there isn’t enough money to cover the pay out by the insurer, the seller of the insurance is SOL.
I heard that they are going to put tracers on the derivatives. The derivatives are here to stay and now they are in the dark. The tracers will record the transaction.
I heard one of the hedge fund guys whining on Bloomberg about being shoved lower in the Chrysler bakruptcy proceedings. Ah, the poor guy.
The Commodities rip off of 2000 is going to be modified. The cheaters are going to cry about free markets.