Re: OT Pelosi is going down


"Jon Anderson" <janders1957@xxxxxxxxxxx> wrote in message
news:Qc3Pl.279088$BR.116684@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
John R. Carroll wrote:

If anyone is really curious I'll post a complete treatment here. I'd be
surprised if that sort of curiosity exists here.
Why shoiuld it? It doesn't exist much in the general population.

I read your posts here on that topic and you were so close to what
happened and when, I was tempted to ask you to pick some Lotto numbers for
me...<G>

I won't even pretend I'd understand it all, but if you want to post, I
will read it.


Imagine the following question:
Do you have confidence in this economy?

My answer?
No, and I won't until I see Congress step up and put a company like GM, or
really GM for starters, out of business..
There isn't a single reason America ought to go on the hook to create jobs
in China, Mexico or anywhere else. Not in the numbers GM's
latestrestructuring plan indicates. That plan says only one thing to me. GM
just doesn't get it and that means they really are too stupid to survive.

Then it will be time to release the productive capital of the 19 banks just
stress tested back to the market. This is a step that absolutely must happen
and if it doesn't we will be continuing a pattern of privatizing gains and
socializing losses. That's capitalism turned upside down, and what we've
been doing for the last 30 years. This is especially true during Republican
administrations but isn't exclusive to one party or the other.
We have a mechanism to do what's required and that mechanism, for better or
worse, has been prevented from working.
Bankruptcy is the way Americans free talent and resources back to the market
for productive use, and it works.

Congress, the Obama administration and the American public need to just suck
it up,quit crying like a bunch of Nancy boys and get the on with it.

I'd start with a non-bank, AIG. Have Congress pass the necessary
legistlation poste haste, authorize the money with new legistlation and then
just BK AIG the way we sieze a bank and reorganize it. By failing to do so,
we are encouraging the notion that the America's laws and regulations really
don't work. It's a direct attack on the integrity of our system of
government, our country, and doesn't inspire "confidence".

Somethig worth saying as that American's are not the ones that need a
confidence transplant, it's the banking and financial services giants. The
confidence that Citi and the rest need to have is that when they mess up
big, the American taxpayer is going to come in, sieze and sell their stuff,
kill the men, rape the women and then burn what's left to the ground without
batting an eye and move forward. Were the 19 "Stress Tested" banks to
believe that this might be their fate, they would probably alter their
conduct in the direction of prudent behavior. The banking business might
then go back to being as completely dull as it was in the 40's and 50's.
That would be entirely appropriate.

The financial services industry has been sucking more than six hundred
billion dollars per year from the real economy since the turn of the
century, more or less, and you can't remove that much zero return capital
without consequences. This needs to stop right now but it's worth
considering how financial services became so "exciting" in the first place.
"Exciting", BTW, is the term used in the banking and financial services
industries for clerical help that recieves a $90,000.00 bonus ar a junior
account executive geting a milion bucks. That would excite me.

We started down this road not in August of 2008, but in March of 1981, IIRC,
and the habit has become ingrained - even systemic.

The initial S&L crisis was dealt with using tax policy. The advantage over
having the Fedral government just write a check is that nobody understands
tax law. The benefits can be substantial but they are indirect. It's easy to
pass a tax cut and very hard to put money directly into someones hands.

Long term debt, mortgages returning six percent, was being supported by
short term borrowings a rates well above six percent. Mortgages didn't have
to default in order to be toxic assets. Usury laws prevented interest rates
on short term debt from exceeding certain levels - about 18 percent - but
these were State, not Federal, laws. The Fed jacked up interest rates under
Paul Volker to get inflation under control and the cost of money when it was
avaiable at all, skyrocketed. Prime plus one meant 21 percent interest in
1982. You couldn't get a mortgage at all really and the economy suffered
with high unemployment.
Savings and Loans were collapsing. The solution under the Reagan
administration, was to allow S&L's to sell off mortgages with low returns,
sustain the losses, and then apply those losses directly - as a tax
credit - against taxes paid to the Federal government over the preceeding
ten years. Initially, there was neither a mechanism to accomplish the sale
or a means to dispose of the revalued mortgages. This defect was corrected
by the creation of the mortgage backed security. The sale of these
instruments to Federally chartered banks, BTW, was illegal initially and had
been for 50 years but that was rectified in short order. Fannie and Freddie
promptly blessed the things. The S&L industry didn't just get well, they
made a lot of profit on these tax abetted transactions. S&L's were chock
full of money in an environment where demand for their product, mortgages,
was low and before anyone could say "Boo", entire mortgage portfolios had
been sold and the IRS/Treasury Department nad filled the coffers with
yesterdays tax payments.. This is where the money came to fund the explosive
growth of the next bubble and bust - High Yield Bonds. That "boom" busted
out and the taxpayers bailed out the S&L's with actual cash at that point
through the FSLIC and REITC.

That cycle has repeated several time since. The financial services sector
sucks one vein dry only to move on the the next, and with a larger bore
needle for each subsequent vein, always with the support of bought and paid
for politicians ( on both sides of the aisle ) and in the full knoweledge
that the Republican Party had adopted the pattern as one of its formal,
underlying policies. If only the markets were truly free, so went the
mantra, and beginning in 1999, they were so freed, or at least the major
impediments removed.
The repeal of Glass-Steagal was the first. By the end of the first Bush
term, banking rules and regulations had been rewritten to allow pensions to
invest directly in hedge funds, hedge funds to own nanks, investment banks
to own chartered banks and hedge funds and so forth. This was something that
had been completely illegal - for the obvious reason. Congress had passed
the Graham ammendment to the Comodity Futures Trading Act with language that
specifically precluded the government or any regulatory agency from either
regulating, in any way, or even asking about derivatives. It was literally
against the law, for example, for the SEC to ask AIG what was going on
inside their financial products subsidiary. Halleluja Brother and AMEN!!!
Can I get an AMEN?
LMAO
This is the very definition of a license to steal.

The single remaining bastion was The Social Security Trust fund.
That money would have provided a frsh vein - the additional fuel to keep
what is really a giant Ponzi scheme, rolling.
Unfortunately for Mr. Bush and his band of criminals, Americans were
beginning to understand that they had been repeatedly played for fools.
Thank the diety of your choice that the administration of George W. Bush had
incompetence and deciet as it's hallmarks. The Bush administration's plan to
privatize SS was met with what can only be called a resounding THUD, largely
because the President of the United States wasn't trusted to tell anything
resembling the truth, a good thing on the one hand and a terrible comment on
the other. As a practical matter, it isn't even a political judgement on my
part, it's just the truth.
None the less, America dodged a bullet.

At this point, American's needn't worry that the guys running the show are
Wall Street insiders colluding with their peers. They are not.
They are, however, the product of the culture of bail outs that has grown up
over 30 years or so. Given that the only tool they know and can use is a
hammer, every problemlooks like a nail. Bernanke, Paulson, Geithner and
Kashkari run around forcefully making the case that there was nothing else
to do when the real truth is that there wasn't anything else that THEY knew
how to do.
They're response has been entirely Pavlovian.

The peasant class has also responded in kind. The failure of the domestic
automobile industry was said to be due to the costs of union labor and
pension benefit overhead.
What this analysis overlooks is the $2,500.00 per vehicle dissadvantage GM
had which would only have dropped to $1,000.00 or so if the labor and cost
differential were removed completely.
In other words, they still wouldn't have made money on sales of the vehicles
people wanted to buy in the face of $4.50 per gallon gasoline. In fact, the
losses would have continued at a grand per vehicle and the costs that they
had divested would just have been shifted to the State and Federal
government. The other consequence is that the American standard of living
would have taken another hit. Taken to it's logical conclusion, the last
thing GM or anyone else ought to be cheering is labor cost reductions to the
point of profitability. You end up looking just like Chinese then, and
everyone knows Chinese, in China, can't afford cars at all. This is where
Ronald Reagan's firing of the striking Air Traffic Contoller's has lead us.

In order to understand what's happened in the current context, you have to
look at guys like Dave Li, whom I have refered to a couple of times as
patient zero. These Quants are actually the reference point at ground zero.
Dave is a smart guy but hardly an intellectual. Educated at MIT, he's a
mathematician and it's a shame he went to work on Wall Street instead of
Mound Road but you know, when you offer a guy a choice between Wall Street
"Shooting Star" and working for the auto industry and having your friends
ask you "What went wrong?" at class reunions, you go with the money and
prestige. Dave did, and you can hardly fault his choice.

Mathematically modeling the financial universe is as old as mankind. So is
fortune telling. Both are undertaken by ametuers with an interest or reason
and professional mathematicians, like David Li, and economists like Nick
Taleb. The goal, at least in his case, is to precisely estimate risk. Doing
so is especially important if what you want to do is sell unregulated risk
that isn't backed up with a reserve. You absolutely must properly value
default products correctly because you only really get one bite at the apple
if the risk market fails.

The model Dave created went further even, than that. It supported the
proposition that you could not only resolve risk down to a single value, but
that you could use the model to test pools of risk and formulate securities
for which risk had been driven to zero. It's the greatest thing if you can
do this because you get to charge by the individual risk product but never
have to PAY anything. It's not "like" free money, it IS free money. I saw
the Li model while it was being written because I was working on something
similar but using different topology . I only had a couple of comments and I
was pretty pleased to meet Dave and his boss as well as extremely flattered.
Somebody at that level expressing interest in what I had to say was a little
unusual. Anyway, I pointed out that thinking that you could express
something complex as a single value seemed unlikely and that any risk
analysis that excluded a behavioral component was crazy. This was the reason
I was using a fractal based model for what I was doing. I even showed it,
and the underlying studies and data to them and, as I later learned, that
was the actual reason anyone was interested in what I was doing - Fractal
geometric economic modelling. Some guys tinker with old cars.

In the end, they finished their work and I gave up on mine. I thought at the
time that my model didn't work and I didn't know how to get it fixed. What I
know now is that it was working, it just didn't produce the result I was
interested in seeing. My model kept crashing my virtual economy.
Well, no ***. As it turns out, the real world behaved in a similar manner
and I just didn't draw the appropriate conclusion.
LOL

The David Li model, on the other hand, did seem to work and was rolled out
as the "Gaussian Cupola". That model, and its clones and derivatives, was
what gave the government, as well as the financial "Masters of the
Universe", the confidence to remove the barriers previously in place that
barred certain asset pools and cash flows from being invested
innapropriately. Some of the worlds best economists looked the Gaussian
Cupola and called bull ***. The mathematics, however, were sound and could
be demonstrated. That was the road show and it was persuasive enough to
steam roll the econ weenies. Mathatematics is a science, economics is
guessing. The math Geeks ruled the day, largely because they had produced
equations that supported something that was highly desired.

Credit Default Swaps, BTW, are an excellent tool and a way needs to be found
to continue their use.
In their simplest form, CDS's are insurance against loss. You take out a
mortgage and obtain private mortgage insurance. Lenders take your mortgage
and others, put a "wrapper" on them and sell these securities as bonds to
private investors. Those investors protect themselves from loss by
purchasing a CDS which pays off in the event the bond defaults. One
difference between your private mortgage insurance policy and a CDS is that
when you contract for mortgage insurance, the insurer has o place money in
reserve to cover a possible loss. A CDS has no such requirement and is just
a promise to pay. That is a poor idea and we know from history that the
result is failure - we've been through this more than once. That is why we
regulate insurance companies.
This is a real good place to remember that a Republican House, Senate, and
President passed/signed a law specifically forbidding regulation or
oversight of products like Credit Default Swaps. They aren't called
insurance, even though they really are, and it's against the law to regulate
them, by an Act of Congress no less.
Furthermore, to add a little gasoline to the fire, Henry Paulson restated
the regulatory cap on leverage as one of his first acts as Secretary of the
Treasury. What had previously been capped at $1 dollar in cash for $10 in
borrowed money was officially raised to $1dollar in cash or assets to $35
dollars in borrowed money and these ratios were just guidance. Some people
went as high as 60:1 without having a regualtor complain. The rational, once
again, was that markets would self correct if things got out of hand or,
stated another way, *** out - we know what we are doing.

Even these transgressions would have been pretty straightforward to adress,
What came next isn't.

A CDS that is on the other side of a mortgage is tolerable. You have a
mortgage of $X and a CDS with a face value of $X as insurance. The amounts
are at least known. Using the Gaussian Cupola, however, people started
creating and selling unlimited credit default swaps on the same debt
instruments. In some cases, $X in face value for a mortgage backed bond
generated $1,000X dollars in CDS notional value and groups of CDS's were
bundled together with other things to close the loop on the Gaussian Cupola.
These are called CDO's, or Collateralized Debt Obligations.This only
happened because issuers began to actively trade these thngs in an
unsupervised and unregulated market. Because you run out of counter trade
when there is more CDS involved that bond value, these things (CDO's and
CDS's) became purely speculative. They were just bets in the simplest form.
A billion dollar GM bond might end up supporting 100 billion dollars in
"insurance" and none of that insurance was backed up with even a little bit
of real money that way actual insurance would have been.

That doesn't mean the owners won't expect to be paid if GM defaults. They
will, and a one billion dollar default will trigger one hundred billion
dollars in payments if there is enough money around, and that is the rub.
There isn't any requirement for money to, in fact, be anywhere and it just
isn't. What you end up with is a lot of unpaid insurance claims.

The economy of the United States generates $13 trillion dollars per year in
value. We call this our Gross Domestic Product. Reasonable estimates put the
notional value of existing CDS's and CDO's at $62 Trillion dollars on the
low side, and $255 trillion dollars on the high and remember, there isn't a
single thin dime backing them up. This is the real reason that the judge in
the Chrysler bankruptcy forced the minority bond holders to take the
settlement they were offered. Their billion dollars in Chrysler bonds could
very well be supporting a trillion dollars in insurance that has no reserve
to cover payment. Those "insurance policies" didn't pay because the bond
holders cut a deal and the bonds, therefore, didn't actually default.
That's pretty slick and was only necessary because David Li's model said
risk could be driven to zero if you were smart enough. People bought huge
amounts of CDS's and CDO's on Chrysler bonds - HOPING that Chrysler would
default.

Increasing reserves and stress testing by Daddy Warbucks is really just
tinkering around the edges. Financial institutions can't bring themselves to
face their situation head on and so far, they haven't had to. The American
economy can't work without the secondary credit markets. Two thirds, at
least, of lending is supported there. That market, and the banks that hold
linked derivative products won't work again until all of the flaky, zero
risk products are isolated and the wealth destruction they represent
monetized.
Period.
Everything so far has been an effort to keep the patient alive long enough
to figure out how to do the surgery. Everyone knows what to cut off but
since this limb can't be seen, what isn't certain is how big a piece we'd be
amputating and it could be ten times the size of the body.
Everyone is wondering how to dispose of a huge piece of biohazardous waste
that might be the size of New York.

Siezing the banks would make the entire reality impossible to avoid. You
couldn't just show part of your hand and ask for help with a specific
problem and in the end, Americans are going to be on the hook for the losses
anyway, it's unavoidable, so we ought just to get on with it. It's a bill
our kids will have to pay, like it or not. That will be easier for them to
do if we leave them a vibrant and growing economy to do it with and the
sooner the better.

You will know something is going to happen when Bernanke, Geithner and our
President start to use the phrase "Hold to Maturity", a lenght of time as
long as forty years in some cases. That is what we are going to have to do
because Li was wrong, the risk coefficient can be preordained but peoples
perceptions can't and that, in the end, is what counts.

The Treasury Department is beginning to put forth a program to oversee and
regulate derivative products and the derivatives market. That is necessary.
What I'll be interested in learning, and what is important, is how they
adress the tremendous quantity of these things already in existence through
the current unregulated system. Even a modest reserve requirement might
break the financial system. Nobody knows.

JC




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