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Lies, Damn Lies and LIBOR

londonbanker.blogspot.co.uk

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Re: Lies, Damn Lies and LIBOR

#121

Post by Dylan16807 »

olefoo wrote: post #99
Tycho wrote: post #71

Earlier quoted context omitted.

I've not been able to find any analyses about mortgage borrowers being adversely affected. Regardless, they are not the targets of the fraud, so the idea about libor rate fixers robbing the public is disingenuous.

Your savings account underperforming, or your adjustable rate mortgage being more expensive than it would be otherwise aren't obvious forms of theft... And the second order effects as businesses smaller than major banks attempt to make up for their losses are even less obvious forms of theft. And if the marks don't know they're being clipped, what's the harm, right?

Savings account underperforming and adjustable rate mortgage being LESS expensive.

Re: Lies, Damn Lies and LIBOR

#122

Post by intended »

Dylan16807 wrote: post #120
inthewoods wrote: post #115

Earlier quoted context omitted.

For the most part I completely agree with your analysis here - really well done. But at some point, does a product like this become such a toxic POS that it is obvious it shouldn't be in the market? We don't let people create and market, for instance, a phone that happens to explode on contact with air. We don't allow cars that, say, don't have brakes. Should there be some regulatory structure in place that looks at…

You can definitely make some kind of self-igniting phone as long as you warn the buyer. In fact it sounds like a completely reasonable piece of modern art. And you can make a car without brakes but you can't take it on the road. Maybe that could be an analogy for a financial instrument that you couldn't sell as a stock. There are few things that you can't sell with proper warning labels. And even these toxic packages…

Well using the art bucket to sell it is really really stretching the analogy to try and make the point, and the weakness does show.

An art product isn't going to sell or be sold as widely as a commodity or even a CDO.

And even under the auspices of art people won't let you sell toxic waste.

And Some of those toxic products made 0 money. You may have had some interest roll in from a tranche, but if it lost its value even before it reached market (some CDOs lost value between inception/assembly and final release on the market.)

The money that rolls in is irrelevant, since the net effect is wealth destruction.

Re: Lies, Damn Lies and LIBOR

#123

Post by alex_c »

Dylan16807 wrote: post #118
SkyMarshal wrote: post #93

Earlier quoted context omitted.

There's little to no comparison b/t the Silicon Valley model and current banking system model. In the banking system, risk is systemic, in the Silicon Valley model, risk is localized. The two models are the inverse of each other. In SV, many relatively small investments are spread over lots of startups, with the expectation that something like ~90% will fail, ~9% will just break even, 0.99% will do well, and 0.01% wi…

I don't understand your comparison. You're looking at individual startups failing vs. the entire banking system failing. If a small bank goes out of business nobody is going to care. If the tech industry went out of business we have to deal with the economic consequences of losing the entire Internet. What, other than scale, is different when you look at the collapse of a single company? Think of the havoc that would…

Can you think of systemic risks or circumstances that would cause a significant portion of the tech industry to fail simultaneously? I'm not saying they don't exist, but I can't think of a good example.

That is clearly not the case for the banking system.

Re: Lies, Damn Lies and LIBOR

#124

Post by Dylan16807 »

intended wrote: post #122
Dylan16807 wrote: post #120

Earlier quoted context omitted.

You can definitely make some kind of self-igniting phone as long as you warn the buyer. In fact it sounds like a completely reasonable piece of modern art. And you can make a car without brakes but you can't take it on the road. Maybe that could be an analogy for a financial instrument that you couldn't sell as a stock. There are few things that you can't sell with proper warning labels. And even these toxic packages…

Well using the art bucket to sell it is really really stretching the analogy to try and make the point, and the weakness does show. An art product isn't going to sell or be sold as widely as a commodity or even a CDO. And even under the auspices of art people won't let you sell toxic waste. And Some of those toxic products made 0 money. You may have had some interest roll in from a tranche, but if it lost its value e…

Well I was only using art to explain why it might be bought, not why it is possible to sell. Toxic waste is only restricted because it can leak out and harm the area. A bad bond is merely useless. You could sell broken blenders for scrap, for example.

Edit: wait, how is wealth destroyed? I don't see how selling bad bonds would inherently destroy wealth, such as if they cost a fair price of pennies, nor do I understand how overcharging would destroy wealth as opposed to taking wealth. Am I missing something?

Re: Lies, Damn Lies and LIBOR

#125

Post by intended »

ajtulloch wrote: post #117
intended wrote: post #102

Earlier quoted context omitted.

The OP did point out that even the "qualified investors" had no clue what they were doing. Just to make sure we both read it the same way. Also, and correct me If I am wrong - you've moved to discussing a quote from GS for a product (JPY/USD cross to be specific), and not CDOs in particular. This is in order to point out that: GS has no fiduciary duties to the buyer This point is reiterated in your last line as well…

I'm agreeing with svdad, who emphasized the role of caveat emptor in OTC derivative transactions. There's no significant distinction (IMO) between a trade on a 3m butterfly on the JPY/USD vs. a the 3%-7% tranche of Abacus - both are derivative transactions with well-defined risk/rewards, and you do your own research and come to your own conclusions on the value of the product. Sure, one is more liquid, more transpare…

Well the similarities between the two are sufficient for a caveat emptor argument.

But the distinctions are also important. With a CDO, you have the ability to stuff it with bad debt, which is what banks did.

When bankers are intentionally creating debt instruments which are going to explode, then it's different from just calling a bank to get their quote.

And at that juncture we can also ask, if a situation where mortgage payout =x, but banks are aiming for 30x by betting that the owner defaults - aren't the incentives off?

Also, when the bank is shorting the instrument and doesn't disclose it... Well generally that at the very least sounds like something most people here would want to disrupt, because it's well, not what regular people consider to be fair business.

The standard cabeat emptor defense also stands because we believe in the qualified investor aspect of the equation. And right now, not most investors are qualified for it. As svdad said - most investors aren't doing their diligence, and couldn't do it even if they tried. So perhaps that needs to be fixed, or we need a stronger regulator to gate entry.

(And reaching a situation where our regulators are not powered enough to grok the derivative, is just something we want the system to move away from over time.)

Edit: above is opinion, I'm open to listening, I do have a pretty firm idea, but work actively to dislodge it. Standard boiler plate. As I said before, I'm not the most eloquent.

Re: Lies, Damn Lies and LIBOR

#126

Post by intended »

tsotha wrote: post #119
intended wrote: post #101

Earlier quoted context omitted.

Since you are getting downvoted, a quick point - the reduction of regulations was what helped create the crisis - removal of glass steagal in 1999 in particular.

I hear people say that, but I don't believe it's true. The roots of the financial crisis were elsewhere, and it would have been just as bad either way.

belief? I mean ... Ok, what is your belief?

Re: Lies, Damn Lies and LIBOR

#127

Post by tptacek »

gruseom wrote: post #41
olalonde wrote: post #26

> We need to rethink as a society what banks are for, what exchanges are for, and what clearing houses are for. If they are for the profit of the few at the expense of the many now, that is because it is the business model we have permitted. Is that really true compared to Silicon Valley? Do banks concentrate wealth a lot more than a Google or a Facebook? If not, how would you feel about some random dude commenting o…

I'd be genuinely curious to know why it fails specifically for banks while it works wonders in other industries such as tech. Isn't that obvious? Capture of the political and regulatory process. As Senator Durbin said of Congress, banks "frankly own the place". Tech does not.

I think that's a little simplistic.

Whatever capture finance has achieved of Congress is possible largely because nobody truly understands what's happening in hardcore finance.

The very best reporters covering e.g. the credit default swap debacle still have only a surface level understanding of how and why swaps are traded and what their relevance is to the whole market.

So you have a situation in which there's two strong ambient forces --- regulate vs. deregulate --- and no comprehension, and so it's very easy to push e.g. pro-business economic- libertarian-leaning into their default position of "let's keep our hands off this stuff".

Yes, that's a product of undue influence by lobbyists and the financial industry, but it works mostly because of ignorance.

Re: Lies, Damn Lies and LIBOR

#128

Post by tsotha »

intended wrote: post #126
tsotha wrote: post #119

Earlier quoted context omitted.

I hear people say that, but I don't believe it's true. The roots of the financial crisis were elsewhere, and it would have been just as bad either way.

belief? I mean ... Ok, what is your belief?

The collapse was the result of a real estate bubble. Changes to the law in 1999 had no effect on something that was already underway at the time. The focus on Glass-Steagal is political and a distraction from actual causes.

There are a few things that could have been done to puncture the bubble before it got truly out of hand, but bubbles are a function of peoples' expectations more than any government policy, so we were in for a bad recession no matter what. And there's no way politicians are going to get blamed for a bad recession if someone else can be blamed for a worse one.

At this point the best thing that could happen is regulations simplified and streamlined to the point that Congressional aides (the people who actually write the laws when they're not just passing along something from a lobbyist) can understand them. Also, the GSEs should be recognized as a bad experiment and dealt with accordingly.

Re: Lies, Damn Lies and LIBOR

#129

Post by Variance »

pyoung wrote: post #77
Variance wrote: post #64

Earlier quoted context omitted.

That's your opinion of it. I can have a contrary opinion that's just as valid, and so opinions of the "ultimate" purpose of business are moot. Legally, the ultimate purpose of a business is to make money as well as legally possible; specifically, maximize shareholders' stake NPVs.

First of all, if I am the sole owner of a business, and I want to run it into the ground, that is my prerogative, and it is completely legal. Secondly, the 'maximize shareholder value' idea is a management principle, and it is not, and never has been, a legally binding requirement for corporations, public or not. Public corporations can be sued for purposefully or negligently destroying shareholder value, but not for…

The context was a publicly-traded for-profit company, like most large members of the banking system. And for those companies, you are indeed given a fiduciary duty to maximize profits (See eBay v Newmark, http://www.delawarelitigation.com/uploads/file/int51%281%29....). So they can indeed be theoretically sued for failing to maximize shareholder value to the best of their ability as a fiduciary: negligence includes knowingly failing to take action that would increase shareholder value, not just destroying it. After all, the two actions are the same thing.

Re: Lies, Damn Lies and LIBOR

#130

Post by gruseom »

tptacek wrote: post #127
gruseom wrote: post #41

Earlier quoted context omitted.

I'd be genuinely curious to know why it fails specifically for banks while it works wonders in other industries such as tech. Isn't that obvious? Capture of the political and regulatory process. As Senator Durbin said of Congress, banks "frankly own the place". Tech does not.

I think that's a little simplistic. Whatever capture finance has achieved of Congress is possible largely because nobody truly understands what's happening in hardcore finance. The very best reporters covering e.g. the credit default swap debacle still have only a surface level understanding of how and why swaps are traded and what their relevance is to the whole market. So you have a situation in which there's two s…

You describe the situation well up to the point that it blew up the economy. But what happens after the crisis is a different matter. Anyone with any sense can see that the "it's so complicated none of you can possibly understand it" defense hasn't a leg to stand on after it led to catastrophic failure. Regardless of whether one bought that before, financial engineering forfeited its right to call the shots when disaster struck. Yet there has been no fundamental reform, something that is easily explained by Durbin's remark, so I believe Occam is with me here.

There's close to a consensus among the sources I read (Simon Johnson, Nouriel Roubini, Martin Wolf, William K. Black and other apparently credible experts, as well as the usual muckrakers) that political influence is the reason why, for example, the too-big-to-fail banks are bigger than ever despite the systemic risk. Ron Suskind's book even claims that Obama ordered Geithner to wind down Citi and Geithner just ignored him.

It's not as if there weren't major players advocating for such radical ideas as "bondholders should take losses when an institution fails" (http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exit...). They just lost politically. No?

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