Well,
Oil has dropped significantly at the same time credit has dried up.
It makes me wonder if speculation did drive the price of oil up to record levels. The inference being that oil was high when futures trading was high. Credit has dried up which makes it harder to engage in massively leveraged futures deals. Oil prices drop.
Entirely circumstantial, and does not look at other variables, but it makes you wonder...
Monday, October 27, 2008
Friday, October 3, 2008
Is there any other option?
Lot's of the "debate" around the bill amounts to House members saying "it's not perfect, but we have to do something."
Of course the "something" is authorizing the Treasury to use federal funds to buy up billions of dollars of assets for which there is no known value and no market.
The goal, as I see it, is to clean up the balance sheets of firms who purposely took on liabilities which they did not have to report. No one will lend money to anyone else (among large financial institutions) because these mystery positions are unknown. The person you lend to today could declare a massive writedown tomorrow and go bankrupt, leaving you with the bag.
So, the plan goes, the United States will purchase these bad assets so that lenders will not be afraid of hidden toxic assets on borrower's balance sheets. Frozen credit markets will thaw.
Okay......not a bad idea. But, if the end goal is freeing up credit and not bailing out individual firms, another way to do this would be to legislate a requirement that these off-the-books over the counter transactions would have to be revealed. Then, lenders would know who was exposed and who was safe. Credit would flow to those worthy of it, and those who took (massive) risks would be responsible for their own fate.
What is the end goal of the bailout? Restore credit markets? Bailout individual firms (AIG but not Lehman)? Protect retirement money in the market?
What is the most narrowly tailored method available to achieve the goal?
Of course the "something" is authorizing the Treasury to use federal funds to buy up billions of dollars of assets for which there is no known value and no market.
The goal, as I see it, is to clean up the balance sheets of firms who purposely took on liabilities which they did not have to report. No one will lend money to anyone else (among large financial institutions) because these mystery positions are unknown. The person you lend to today could declare a massive writedown tomorrow and go bankrupt, leaving you with the bag.
So, the plan goes, the United States will purchase these bad assets so that lenders will not be afraid of hidden toxic assets on borrower's balance sheets. Frozen credit markets will thaw.
Okay......not a bad idea. But, if the end goal is freeing up credit and not bailing out individual firms, another way to do this would be to legislate a requirement that these off-the-books over the counter transactions would have to be revealed. Then, lenders would know who was exposed and who was safe. Credit would flow to those worthy of it, and those who took (massive) risks would be responsible for their own fate.
What is the end goal of the bailout? Restore credit markets? Bailout individual firms (AIG but not Lehman)? Protect retirement money in the market?
What is the most narrowly tailored method available to achieve the goal?
Tuesday, September 30, 2008
Financial Regulation through Patents
One reason this meltdown has been so bad is because every financial institution has been affected. They all are exposed to instruments linked to mortgages, and all are severely leveraged. I have seen numbers that there are $1 trillion in mortgages tied up in this meltdown, but that there is $62 trillion in paper linked to the performance of those mortgages. Leverage.
Now imagine if only Bear Sterns was exposed. Lehman, Merrill, Goldman, etc. had no exposure. Or only exposure as a counterparty to Bear. Would we be in this mess? No. There would be diversification across the industry.
Convergence of strategy, mimicry of products, and correlation of assets magnify and to some degree create unsound market conditions. One firm develops a hot new product, e.g. Mortgage Backed Securities or Credit Default Swaps. It rakes in great returns and collects huge fees. Everyone else copies that firm, drives down the margins, and over saturates the market. That particular market collapses, and people move on to the next hot new financial product.
Now let's re-imagine that only Bear Sterns had a particular mortgage backed financial product, and further that no one else could sell that product. Get rid of convergence and mimicry and reduce correlation. But how can do this?
Business Method Patents.
Yes, the much laughed at Business Method Patent. So now, when Bear develops its great new financial product tied to mortgages, they patent it so that no one else can copy it. Goodbye convergence. Goodbye correlation.
Three great things come out of this: (1) Other firms have to develop their own products, encouraging competition, (2) The market for this product is effectively capped, and (3) If this product tanks (or the market underlying the product tanks), damage to the macro-economy is limited (because the market has been capped).
As always, the devil is in the details, e.g. defining the product in a narrow enough sense that it doesn't cover all products tied to mortgages but broad enough that it reduces convergence and correlation.
I will try to check with an inside source at the USPTO for his or her thoughts.
Now imagine if only Bear Sterns was exposed. Lehman, Merrill, Goldman, etc. had no exposure. Or only exposure as a counterparty to Bear. Would we be in this mess? No. There would be diversification across the industry.
Convergence of strategy, mimicry of products, and correlation of assets magnify and to some degree create unsound market conditions. One firm develops a hot new product, e.g. Mortgage Backed Securities or Credit Default Swaps. It rakes in great returns and collects huge fees. Everyone else copies that firm, drives down the margins, and over saturates the market. That particular market collapses, and people move on to the next hot new financial product.
Now let's re-imagine that only Bear Sterns had a particular mortgage backed financial product, and further that no one else could sell that product. Get rid of convergence and mimicry and reduce correlation. But how can do this?
Business Method Patents.
Yes, the much laughed at Business Method Patent. So now, when Bear develops its great new financial product tied to mortgages, they patent it so that no one else can copy it. Goodbye convergence. Goodbye correlation.
Three great things come out of this: (1) Other firms have to develop their own products, encouraging competition, (2) The market for this product is effectively capped, and (3) If this product tanks (or the market underlying the product tanks), damage to the macro-economy is limited (because the market has been capped).
As always, the devil is in the details, e.g. defining the product in a narrow enough sense that it doesn't cover all products tied to mortgages but broad enough that it reduces convergence and correlation.
I will try to check with an inside source at the USPTO for his or her thoughts.
Sunday, September 28, 2008
Bailout Mysteries (probably) Solved
As I previously blogged, two looming questions in the Bailout are: (1) how to value the assets the Treasury will purchase and (2) who are the beneficial counterparties to the nominal bailout beneficiaries.
The Treasury has put forth its answer on the former (greater than market prices) and the answer to latter is apparently Goldman Sachs.
In a story by Julie Creswell and Ben White in today's NYTimes, it was reported that:
Goldman was A.I.G.'s largest trading partner, according to several people close to A.I.G. who requested anonymity because of confidentiality agreements.
So, under my theory, it is Goldman as opposed to A.I.G. who is being bailed out because without the infusion of Treasury money, A.I.G. would not be able to settle the contracts it had with Goldman, who would then be unable to settle contracts it had with (insert name), and so on....
In other words, systemic risk (this is one of the positions of the Treasury).
Just a reminder that every derivative contract has a winner and a loser, and that a lot of the money the government plans on investing in the losers will be transferred directly to the winners, including, apparently, Goldman Sachs.
Wednesday, September 24, 2008
All Bailout, All the Time
The best concrete proposals for limitations and conditions yet.
James K. Galbraith and William K. Black at TheNation.com provide 8 points to consider.
Naomi Klein on the Bailout
Naomi Klein (The Shock Doctrine) posted a column at CommonDreams.org that captures a lot of the spirit surrounding the bailout, at least from those who think that Main Street should not bail out Wall Street.
A choice quote reflective of a lot of public sentiment:
A choice quote reflective of a lot of public sentiment:
This spectacle necessarily raises the question: if the state can intervene to save corporations that took reckless risks in the housing markets, why can't it intervene to prevent millions of Americans from imminent foreclosure? By the same token, if $85bn can be made instantly available to buy the insurance giant AIG, why is single-payer health care - which would protect Americans from the predatory practices of health-care insurance companies - seemingly such an unattainable dream? And if ever more corporations need taxpayer funds to stay afloat, why can't taxpayers make demands in return - like caps on executive pay, and a guarantee against more job losses?
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