Quote :

"I don't know all the details, but AIG writing policies that it had no way of making good on and banks using this as collateral against their MBS is a good start."

So you believe each of the above-mentioned regulators, in addition AIG's multiple counterparties, knew AIG would not be able to post enough collateral should default probabilities sufficiently rise? If so, are you assuming this occurred because the hundreds* of employees at these regulatory agencies who were familiar with AIG's positions all shared a common anti-regulation ideology?


*while there are thousands of employees, not all would have been privy to AIG's positions

[Edited on June 18, 2009 at 8:06 PM. Reason : /]

6/18/2009 7:54:06 PM

Quote :

"So you believe each of the above-mentioned regulators knew AIG would not be able to post enough collateral in the face of rising default probabilities?"

You mean the OTS, their only regulator? It's entirely possible that OTS wasn't the proper regulator for the job. Since AIG could shop around, they obviously are going to pick the most clueless one. That's a hole that needs to be fixed.

Quote :

"If so, was this because the hundreds* of employees at these regulatory agencies who knew AIG's positions all shared a common hands-off belief?"

Was it even hundreds? From what I understand, the OTS didn't know what the hell was going on and just went on AIGs word that they had everything under control.

6/18/2009 8:05:11 PM

Quote :

" You mean the OTS, their only regulator? It's entirely possible that OTS wasn't the proper regulator for the job. Since AIG could shop around, they obviously are going to pick the most clueless one. That's a hole that needs to be fixed. Was it even hundreds? From what I understand, the OTS didn't know what the hell was going on and just went on AIGs word that they had everything under control."

See my previous post from a previous post...

Quote :

""5) As far as CDS being unregulated, they are already regulated in various ways. Federal bank regulators have full oversight authority. For commercial banks, the Office of the Comptroller of the Currency (OCC) has oversight. They can do daily examinations of CDS trading and review its books for stability. The Fed also has authority and was very much involved with CDS in 2005 (albeit, more to do with outstanding trade confirmations). I-banks not registered as a broker-dealer were subject to indirect oversight by the SEC at the consolidated-entity level. Thrift holding companies, such as AIG and GE Capital, are under the supervision of the Office of Thrift Supervision (OTS). To sum up, the regulatory framework was/is in place. Some will disagree, but my explanation for why they were not more active in identifying risk was that they were using the same risk-evaluation techniques as those they regulated. Most used Value-at-Risk (VaR), which assumes a Gaussian distribution and thus vastly underestimates the occurrence of rare market events. As a matter of fact, the SEC institutionalized the use of VaR. Ex post, it is clear this was foolish. Ex ante, legitimate arguments could be used for its use. Like I mentioned above, we seem to forget that regulators are no better at identifying systemic risk than the thousands of market participants with their own money at risk."""

To rehash, CDS were under the purview of multiple regulators. To suggest they all shared a hands-off ideology and thus decided not to intervene in the face of what you assume to be obvious excess risk is highly unlikely. The sad fact is that regulators did not intervene because they were using the same risk-measurement tools as AIG and AIG's counterparties. What seems so obvious ex post was not so clear ex ante. It is mere wishful thinking to suggest regulators are any better at measuring risk than everyone else.

If you do wish to make this suggestion, I will gladly review any tenable evidence you provide.

[Edited on June 18, 2009 at 8:17 PM. Reason : ,]

6/18/2009 8:14:45 PM

Quote :

"It is mere wishful thinking to suggest regulators are any better at measuring risk than everyone else. "

I guess you have a point. As a regulator, why would you look at a system like Basel II and question home prices increasing into perpetuity if its your duty to question things like that.

6/18/2009 8:49:02 PM

Which regulator assumed prices would rise in perpetuity?

Regarding Basel II, I'm not sure I understand your assertion.

6/18/2009 8:56:13 PM

Quote :

"Which regulator assumed prices would rise in perpetuity?"

Apparently ALL OF THEM DID.

Stop fucking skating around what you're trying to do. If you want to make a case that the regulator couldn't do any better of a job than your garden variety investor...LETS SEE YOUR CASE. Just because they apparently didn't, doesn't mean they couldn't.

6/19/2009 7:53:01 AM

Quote :

"you keep saying that the "boom and bust cycle was worse before the Fed," but it really wasn't. Inflation was fairly non-existent. You had deflation at times, which can be a bad thing, but it mainly happened after times of high gov't spending (war) or after other major calamities."

so inflation was "non-existent" before 1913? A dollar saved in 1800 was worth the same in 1900?

right, right.....

6/19/2009 9:34:45 AM

That is exactly right. The argument being made here by me is that in a market with minimal separation between congress and finance the system will work better because the herding behavior that is natural for humans will be separated from the statuting behavior of congress. A herd behavior is bad, it mis-prices for a time being. But statuting behavior does exactly the same thing. By combining the two, the system produces worse outcomes.

I understand the ideal, what we would want is to have statute to push against the wind. As investors herd into housing, congress slaps on a housing tax. But under what theory of human behavior would this be the outcome? Afterall, investors are human beings, so are legislators and their regulators, they all read the same damn newspapers. As such, when investors are bullish on housing, congressmen will be also. As such, any sensible legal impediments to the bubble go out the window, to be replaced with subsidy, but only when a bubble is brewing. Once the bubble is over and the horse has left the barn, the regulators clamp down and close the door. As such, I argue it would be better to either have restrictions and subsidies that cannot be taken away or to not have them at all.

Where am I wrong?

Also, the Great Depression far and away dwarfs any previous American recession. I meant what I said, the Federal Reserve has done a good job with monetary policy. But this discussion is not about monetary policy, since I see no useful changes that can be made there; but I damn sure see useful changes that can be made to the interface between congress and the economy.

^ "What cost $1 in 1800 would cost $0.49 in 1900."
"What cost $1 in 1900 would cost $20.63 in 2000."

[Edited on June 19, 2009 at 9:53 AM. Reason : ^]

6/19/2009 9:52:04 AM

Quote :

"If you want to make a case that the regulator couldn't do any better of a job than your garden variety investor...LETS SEE YOUR CASE. Just because they apparently didn't, doesn't mean they couldn't."

I have made my case in this and other threads. I have not seen any evidence for the case that regulators are able to measure risk more accurately than investors.

[Edited on June 19, 2009 at 12:33 PM. Reason : .]

6/19/2009 12:32:50 PM

Quote :

"But under what theory of human behavior would this be the outcome?"

A system is created where a group is incentivized for managing risk. It sounds obtuse but if you can let someone be very well compensated for keeping the risk in check, I imagine they'll do a better job. I bet the folks at the SEC are paid so poorly that they just don't give a damn to do any real work or make any problems for themselves. However, if you tell them they'll get bonuses for finding companies that have overstepped risked, or you give them bonuses for finding cracks in the system (such as housing prices going up in perpetuity), then I can imagine risk will be better managed.

Quote :

"As such, when investors are bullish on housing, congressmen will be also."

When investors are bullish on getting even richer, they'll pay plenty of money to make sure congressmen don't get in the way.

Quote :

"As such, any sensible legal impediments to the bubble go out the window, to be replaced with subsidy, but only when a bubble is brewing. Once the bubble is over and the horse has left the barn, the regulators clamp down and close the door. As such, I argue it would be better to either have restrictions and subsidies that cannot be taken away or to not have them at all"

I don't pay very close attention, but I don't think you've ever acknowledged that it was the actual removal of at least one piece of regulation that played a key part in keeping things in check that helped blow the bubble up. No need for new regulation if the old stuff would have been left alone.

6/19/2009 3:31:54 PM

Quote :

"It sounds obtuse but if you can let someone be very well compensated for keeping the risk in check, I imagine they'll do a better job."

That works so well for our CEOs, doesn't it?

Quote :

"However, if you tell them they'll get bonuses for finding companies that have overstepped risked"

If you do that, then you can be guaranteed to have witch hunts every time a regulator wants a new boat

6/19/2009 4:37:27 PM

Quote :

"That works so well for our CEOs, doesn't it?"

You know, I think you're an inflammatory guy with everything you post, but you generally have an idea of whats going on. Except...with that remark. Or maybe you were being sarcastic and didn't realize it?

Quote :

"If you do that, then you can be guaranteed to have witch hunts every time a regulator wants a new boat"

So? I'm sure you'll agree if it means not having to fork over unfathomably sums of taxpayer dollars and avoid economic catastrophes like this one then it will absolutely be worth it. Let them go on which hunts, what are the two outcomes? They find nothing which is great for the economy or they find something (well early) which is great for the economy.

6/19/2009 4:55:56 PM

Quote :

"So? I'm sure you'll agree if it means not having to fork over unfathomably sums of taxpayer dollars and avoid economic catastrophes like this one then it will absolutely be worth it."

bull shit. They'll bring down perfectly sound companies that are acting legally. They would become little more than a federal extortion ring.

6/19/2009 5:01:40 PM

Quote :

"bull shit. They'll bring down perfectly sound companies that are acting legally. They would become little more than a federal extortion ring."

Are you kidding? This would be like a cop pulling you over looking for pot and you have none. And hell, if they happen to find shady practices while looking, then fuck em on that too.

You sound like the guy saying Bear Sterns was toppled because of short sellers. Bear Sterns was toppled because their balance sheet was shit and investors smelled it.

6/19/2009 5:04:53 PM

Quote :

"Are you kidding? This would be like a cop pulling you over looking for pot and you have none. And hell, if they happen to find shady practices while looking, then fuck em on that too."

no, it's more like the cop pulling you over, finding money in the car and saying it is drug money, then stealing that money from you.

6/19/2009 5:06:34 PM

That's the most retarded thing I have ever heard. On a scale of 1 to dnl level retarded, your comment was his twin brother who died in the womb from complications. Regulators already exist that have the power to step in to banks that are about to be in trouble (ie, they fucked up the risk). They just aren't incentivized for it. Of the 35 banks FDIC'd this year, how many complainants have there been that where impropriety was done in shutting them down?

NOT

A

GOD

DAMN

ONE

6/20/2009 8:35:14 AM

Quote :

"It sounds obtuse but if you can let someone be very well compensated for keeping the risk in check, I imagine they'll do a better job. I bet the folks at the SEC are paid so poorly that they just don't give a damn to do any real work or make any problems for themselves. However, if you tell them they'll get bonuses for finding companies that have overstepped risked, or you give them bonuses for finding cracks in the system (such as housing prices going up in perpetuity), then I can imagine risk will be better managed."

Yes, that will happen once. Then they will be dragged in front of Congress and cursed for fucking up a politically influential business venture. Try to remember, the SEC is staffed by people with careers, which tend to end when you get a bunch fo congressmen angry with you. Sure, they won't be fired, but they will never be re-appointed to anything else once their tenure is over.

That said, just like the Justice Department and anti-trust cases, competitors of politically influential businesses will find themselves dragged in for investigation. At least, of course, until they can set up their own Washington lobbying foundations.

6/20/2009 5:20:14 PM

^^ nice ad hominem. I guess you have admitted defeat

6/21/2009 8:38:18 PM

Quote :

"^^ nice ad hominem. I guess you have admitted defeat"

Your analogy didn't even make DOA, it died in the womb. And it wasn't an ad hominem as it wasn't an attack on you.

Think about what you posted. If we extend that analogy back to a regulator, you're essentially saying that the regulator will be able to go into a huge probably multinational company and be able to shut it down while the world is watching on some trumped up shit.

It will never happen. This isn't like some vigilante cop stealing 1 persons money on the side of the road and then that person being more or less powerless to do anything about it. The whole world would be watching. High powered lawyers would be watching. Everyone would be watching. The analogy was terrible. Try again.

Quote :

"Then they will be dragged in front of Congress and cursed for fucking up a politically influential business venture."

Yes, a nation still licking it's wounds from their 401ks turned 101ks in back to back bubbles destroyed will be upset when they find out a business was leashed after it appeared they were getting out of hand...again. Not everyone in congress is a schmuck.

Quote :

"That said, just like the Justice Department and anti-trust cases, competitors of politically influential businesses will find themselves dragged in for investigation. At least, of course, until they can set up their own Washington lobbying foundations."

Yeah, in lieu of any real argument it's always easy to just fall back to the tin hat government is always bad absolutely argument.

6/21/2009 9:35:36 PM

Quote :

"Yes, a nation still licking it's wounds from their 401ks turned 101ks in back to back bubbles destroyed will be upset when they find out a business was leashed after it appeared they were getting out of hand...again. Not everyone in congress is a schmuck."

You seem to be trying to regulate the system in the short term. But it is a waste of time to ban unsound financial decisions right now: investors are watching every friggin' step bankers make. What government needs to do is establish the regulatory environment that will rule fifty years from now when the average investor and regulator was not even alive in 2007. And from that perspective, my criticism of your proposals is conclusive.

Quote :

"Yeah, in lieu of any real argument it's always easy to just fall back to the tin hat government is always bad absolutely argument."

I said no such thing. I'm certain the Justice Department has brought anti-trust charges against at least one actual monopolist in its long history. Just because I cannot think of any occurance does not negate the possibility of its occurance. And I see nothing in your rebuttal to suggest that your politically appointed body will somehow act in complete disregard to the politics of the time, in complete contradiction to both history and incentives. Unless you are suggesting that this time the political process will produce perfect disinterested angels to staff these offices?

6/21/2009 10:19:01 PM

Quote :

"It will never happen. This isn't like some vigilante cop stealing 1 persons money on the side of the road and then that person being more or less powerless to do anything about it. The whole world would be watching. High powered lawyers would be watching. Everyone would be watching. The analogy was terrible. Try again. "

All of that was true for this disaster of a bail out and rewriting of years of bankruptcy law and standards yet here we are with a shit ton of tax payer money flushed down the toilet and politically unfavored pensioners up shit's creek while favored parties who should have gotten nothing are walking away with a hell of a deal. We live in a country where people are so unable to take charge of their own lives that they need to pass laws to keep them from stuffing their own faces with lard burgers, what in the world makes you think as a society we could keep on top of some pissant regulators going after a big bad "evil company who will rape your 401k while taking millions in bonuses"? And if you think that sort of exaggeration and hyperbole won't happen, I refer you to the private jet fiasco.

6/21/2009 10:22:57 PM

Quote :

"investors are watching every friggin' step bankers make."

Oh, so when it was convenient for your argument you site the herd theory, but now it isn't convenient so you are claiming investors are doing due diligence? You can take one look at the current price of crude to know that isn't true.

Quote :

"What government needs to do is establish the regulatory environment that will rule fifty years from now when the average investor and regulator was not even alive in 2007."

Ultimately, as long as Wall Street is powerful enough to get whatever they want whenever, it doesn't matter what we enact.

Quote :

"I'm certain the Justice Department has brought anti-trust charges against at least one actual monopolist in its long history. Just because I cannot think of any occurance does not negate the possibility of its occurance."

Jesus Christ, really?

http://en.wikipedia.org/wiki/Bell_System_divestiture

Quote :

"your politically appointed body will somehow act in complete disregard to the politics of the time"

They'll act like every other actor in the economy, with regard to their wallet. Like I said, your mistrusts of the government generally runs deeper than warranted when you believe that every single institution of the Fed would somehow be used explicitly as a tool for whoever needed it at the time.

Quote :

", in complete contradiction to both history and incentives"

What time in history has there been an institution as equally incenvitized at managing risk as those that are incentivized in profit? I'm not as well versed in econ as you, but I'm going to guess never and feel good about my chances.

Quote :

"Unless you are suggesting that this time the political process will produce perfect disinterested angels to staff these offices?"

No system is perfect. Fortunately, pretty good will suffice.

Quote :

"All of that was true for this disaster of a bail out and rewriting of years of bankruptcy law and standards yet here we are with a shit ton of tax payer money flushed down the toilet and politically unfavored pensioners up shit's creek while favored parties who should have gotten nothing are walking away with a hell of a deal."

The Supreme Court ruled and they know a helluva lot more about the law than you do. I don't agree with all of it, but I guess I'm not terribly devastated the employees are getting to keep their job for a little while over the bondholders who won't get quite as much as they would under a full Chapter 7.

Quote :

"what in the world makes you think as a society we could keep on top of some pissant regulators going after a big bad "evil company who will rape your 401k while taking millions in bonuses"?"

What in the world makes you think our society would be any different under your libertarian nirvana? The reality is that interests smarter than you and more powerful than you'll ever be (likely the same ones running the show now) will 'tax' you just as much as the government does now. And you'll do the same thing about it you've been doing for years...whine on a message board not particularly noted for scholarly thought.

6/21/2009 10:52:40 PM

Quote :

"Oh, so when it was convenient for your argument you site the herd theory, but now it isn't convenient so you are claiming investors are doing due diligence? You can take one look at the current price of crude to know that isn't true."

Again, I said no such thing. It is irrational the level investors are watching banks. It is herd behavior in reverse: from irrational exhuberance to irrational pessimism. As such, laws designed to clamp exhuberance being imposed during a time of pessimism is worse than a waste of time, which is what I was complaining about: the government gets pessimistic at exactly the same time wall-street does, amplifying the boom/bust cycle.

Quote :

"Ultimately, as long as Wall Street is powerful enough to get whatever they want whenever, it doesn't matter what we enact."

Not true at all. Washington existed for well over a century without bailing out a single wall-street bank, and I'm sure many of the tried. If the ability to interfere is removed, then bankers will invest their lobbying dollars elsewhere, problem solved.

Quote :

"What time in history has there been an institution as equally incenvitized at managing risk as those that are incentivized in profit? I'm not as well versed in econ as you, but I'm going to guess never and feel good about my chances."

I was talking about self interested regulators, what are you talking about?

If you are asking who has better incentives than a government regulator, it is individuals investing their own money in their own projects. If it turns out that investment banking is a poor organizer due to its inability to sufficiently address the principle-agent problem, then self organizing behavior has an answer: joint-partnerships. Back in the day people refused to invest their own money into a venture unless the venture managers had a large chunk of their own money invested. Hence why the 19th century was ripe with owner-operated corporations. If manager-operated corporations show themselves to be untrustworthy, there is nothing to prevent a return to the captains of industry model.

Quote :

"The Supreme Court ruled and they know a helluva lot more about the law than you do. I don't agree with all of it, but I guess I'm not terribly devastated the employees are getting to keep their job for a little while over the bondholders who won't get quite as much as they would under a full Chapter 7."

The Supreme Court made an opinion determination, no different than when Congress passes a bill. In my opinion, the Supreme Court as constituted today operates largely as a politically appointed for life legislature. They even have the ability to make new law. As such, whether the laws in question were constitutional had very little to do with the ruling in question. Whatever they say is legal, is. That does not make their opinion any better than either yours or mine.

6/22/2009 12:55:57 AM

Quote :

"It is irrational the level investors are watching banks. It is herd behavior in reverse: from irrational exhuberance to irrational pessimism."

The gains of some of the junkiest banks off their March lows versus the better banks trounces this argument.

Quote :

"As such, laws designed to clamp exhuberance being imposed during a time of pessimism is worse than a waste of time, which is what I was complaining about: the government gets pessimistic at exactly the same time wall-street does, amplifying the boom/bust cycle."

I disagree. Maybe in 1930, but the Fed and Treasury have 70 years worth of studying in an attempt to avoid those mistakes. If anything, any new regulation they might come up with will be neutered at best as Wall Street will continue to have them by the balls.

Quote :

"Washington existed for well over a century without bailing out a single wall-street bank, and I'm sure many of the tried. "

You're the same guy that argued that the Fed has provided more stability. You can't have it both ways.

Quote :

"The Supreme Court made an opinion determination, no different than when Congress passes a bill. In my opinion, the Supreme Court as constituted today operates largely as a politically appointed for life legislature. They even have the ability to make new law. As such, whether the laws in question were constitutional had very little to do with the ruling in question. Whatever they say is legal, is. That does not make their opinion any better than either yours or mine."

I'm shocked that you'd come to this conclusion. I could have never predicted it.

6/22/2009 10:28:29 AM