The Blanche Lincoln version of derrivative regulation would be a windfall to investment houses and harm companies who used them wisely to limit risk. They would be hit right when they may have started recovering for hundreds of billions collectively. Which party is the party of Wall Street over mainstreet?
From the Wall Street Journal:
The legislation under consideration would require certain companies to put up a chunk of cash, known as collateral, when they enter such contracts to cover possible losses. The legislation could require that derivatives trade more like stocks or bonds—on exchanges, instead of in private deals.
Berkshire has argued Congress doesn’t have authority to make it redo existing contracts, especially since the company is sitting on about $20 billion in cash. Mr. Buffett has said he rarely has to post collateral, which is why for Berkshire the new rules could hurt.
Berkshire representatives declined to comment. But the company’s position, said a person close to Berkshire, is that the new language will aid the majority of companies that legitimately use derivatives to insure against risks. Under the original wording, hundreds of major U.S. businesses, not just Berkshire, might have been hurt by the requirement that collateral be posted for existing contracts, said the person close to Berkshire. If the language isn’t amended, the big beneficiaries would be Wall Street firms that create the derivatives. That’s because if the businesses have to post collateral, the Wall Street firms can dispense with buying their own insurance against a default on the instruments
When the President spoke to Wall Street last week he noted derivatives as a complicated area where the need of legitimate users should be carefully considered, while at the same time bringing transparence to this now opaque market. Nobody is trying to screw anybody here. The job is to fix the hole in the roof that let all this rain in. I trust they will get it right and anything damaging will be amended as the years go by.
There is little need to protect anything when you tell the banks, no bailout of any kind in the future-none.
Mike Protack
They fooled around for two years. I would like them to slow down and get a sensible, bipartisan bill now. Let’s not mess things up for two or 5 years then fix it. Get as much right now that we can. We need some reform. I do not quivel with that. This bill is so bad they can’t get all the Democrats and no Republicans. It doesn’t poll a majority of the people.
Financial reform should be extremely popular, if it were done right. They have a chance to do something good if they stop trying to score points and govern.
A Depression does a great job at clearing the decks without a bail out, but I prefer not to go that route. Let’s admit that we made some mistakes in 2000 when we repealed the wall between banks and brokerage houses. We also need to admit that mark to market is a mistake. We also need to admit that the mortgage reform was wrong which pushed loans people couldn’t afford. Finally, we need to admit that we need to allow judges to have the authority they did 30 some years ago to adjust mortgages.
Require at least 20% down on some of these derivatives like we used to 10 years ago. Give the experts in the FDIC more authority.
Go back to the future. We made some changes and it hurt us. We know some of what works. Let’s do that and experiment on the rest.
Sounds sensible David. One of the problems with all this stuff is the politics. First we had death panels, now we have prominent leaders in Congress calling a fund intended to dissolve failing entities a “bailout fund” just for the sport of it I guess. Much of this stuff is a bit (way) over my head. All I can do is depend on good leadership. Try to separate the posers from the problem solvers. No legislation is ever perfect on first pass. We are alway tweaking as we go along. Government has to adapt to changing times just like the private sector.
Mike needs to consider this is not so much about banks. We have ways to deal with banks. This is about the new hybrid institutions that do not fall under FDIC type laws. We are constructing new methods for dealing with new kinds of mega institutions. The five leading maga institutions control somewhere around $6 trillion. That a good chunk of everything. Hopefully good new rules will guide us in this new Age.
Rewind. Sounds sensible David. I am marking this day on my calender. LOL
I would be in favor of saying derivatives cannot be purchased on margin. Other than that, messing with derivatives could be really harmful to people and corporations who are using them to hedge responsibly.
It is a matter of degree. When you let people play with little of their own money, you are asking for trouble. I think we had a good balance at one time. The Bush administration erred when they messed with it.
I dont understand what you just wrote. If people want to invest money they actually have, they should be allowed to. If they lose it all, that’s too bad. Their failed investment was someone’s gain.
Derivative markets is the part nobody understands, nobody can explain, and nobody can see. Washington is trying to figure out how to make it transparent, set up an exchange, sort it all out so it is not this dark pit that only five guys understand while the rest of us can be taken down by it.
I read somewhere that when gasoline went to $4, totally defying supply and demand, it was discovered Goldman and others had so tricked up oil futures trading that a barrel of oil would change hands 20 times from well head to refinery yielding huge profits on each trade while the public was paying $85 to fill the tank. Nobody really understood what the hell was going on. Except the players. Something is way wrong when so much of that which controls our destiny is known only to so very few. It’s not just a financial issue. It’s a national security. It’s our economic freedom. We control the system not the other way around. I am cheering the reformers on. All we can do is trust they are on our side.
So we should strangle the free market because you cant be bothered to educate yourself? Just because you don’t understand what’s going on doesnt mean that anything shady is happening. Derivatives are an amazingly useful tool. Don’t project your ignorance onto everyone else. YOU don’t understand straddles, strangles, butterfly spreads, bear spreads, options, swaps, or swaptions, but some of us do. The worst thing we can do is allow people who have no idea about derivatives to start regulating them, or howling to their legislators that they dont understand how the world can be round and we ought to outlaw anything we dont understand.
Phil, are you the “some of us” fast talking traders we just bailed out because your house of cards fell down on you?
Greenspan, Buffet, Paulson, Bernake et al – they all testified even they do not understand some of the opaque secret society financial instruments. Unfettered, Buffet calls them “weapons of mass financial destruction”. Apparently you know it all. Congratulations! Personally I never trust know it alls.
I don’t know how to build a nuclear power plant either. That’s why I depend on regulators. Do you know how to make an airplane? Do you want airplane construction to be carefully regulated? Are you ignorant as you accuse me of being? The main thing we know about derivatives at the moment is they cost us an arm and a leg in taxpayer money.
Please stop with the overreacting to everything. Nobody is going to “strangle” you or the free market. The people putting the legislation together understand there’s good and bad. We are chasing the bad. Okay?
phil does not get it. He’s says people who lose money investing well too bad. He does not get that we are talking phony investment scams stamped AAA by people we are supposed to trust.
Is he says if somebody certified by all the highest level of our financial hierarchy cons you, well shame on us for getting conned. I detect zero moral compass here.
I have been out and unable to clarify. Phil, I am basically agreeing that if you let the margin be to small of a fraction, it creates problems. I don’t know that I would ban it, but when it people don’t have to risk their own funds, they take a lot more risk and can build a house of cards that we buy. That is why I am in basic agreement that we need to go back to 20 or 30% down.
Derivatives are regulated. If people or firms lied about the risk profiles of certain investment vehicles, then those people should be prosecuted. The point is those regulations already exist. Much like gun laws, tighter restrictions would only hinder the dealings of an honest broker.
That’s why the honest brokers should have been blowing the whistle. People on the street knew what was up. Far as I can tell Dems and Repubs all agree, there needs to be a new set up.
Phil, those regulations do not exist. There is a truckload of regulations regarding stock trading. My understanding is these new invented instruments are traded outside existing safeguards. it’s not just new regulation that is being proposed. It’s a new kind of transparency where these heretofore mystery instruments will be traded on a newly created open exchange, where everybody gets to see what’s going on.
One thing for sure, nobody is trying to ruin the flow of capital. The premise is that Wall Street is there to direct the flow of investment capital to where it is most efficiently belongs. Wall Street is not there for the purpose of gaming the system so certain individuals profit at our expense.
The laws can’t be okay already. I don’t see anybody being much prosecuted. We are talking about systemic reform. Glass Stegall kind of measures. Something like the FDIC for hybrid non bank institutions like AIG. A method to let too big fail without killing us. A method to limit how big is too big. We have not done much since 1930s. The times call for some modern day systems. Done in cooperation with all the vested interests.
Phil does get it; most of you don’t. Margin trading gives insiders disproportionate clout. For example, do you think a casino would allow you to bet $100,000 on a football game by putting only $10,000 down? Of course not; but margin trading does.
Do any of Phil’s detractors know what a ‘hedge’ really is? For example, why would a corn farmer be involved with the futures market (Chicago Board of Trade)?
I also believe in the complete transparency of all markets, even the most obscure.
The Federal Reserve has the authority to set margin requirements for equities, currently at 50%.
One of the incentives for creating these derivatives and exotic financial products is to get around those margin requirements – to make bets on stocks using OPM without actually owning the stocks.
A simple fix would be to bring the derivatives under the authority of the Fed margin requirements.
I was watching the hearings. Seems everybody agrees commodity hedging is a basic good necessary way to manage risk. Everybody get that. Nobody is after corn or pig belly.
They are presently focusing on this new genre of betting and how it came to be that bundles of mortgages known as “buyers word” mortgages where the ability to repay was based only on the the word of the borrower, with no credit checks – how these sub-prime minus junk loans could be bundled, stamped AAA, then sold to pension funds – all the while the people who were selling the junk as AAA – they were placing bets the bundles would go bad. If you listen to the young Turks from Goldman, they say everything is copacetic. When asked if they had an obligation to work in the best interest of the clients – they started double talking.
Most pension funds can only purchase AAA investments. They have all kinds of stipulations against buying high risk. That is why packaging junk as AAA is an egregious crime against the people.
I am with you on that one. The ratings agencies had interest in the companies that made the funds. That stinks and should be dealt with. The ratings used to be an important part of my investment decision because they have the resources to know if the companies are playing games. Now I don’t know who to trust.