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The Man Who Crashed The World


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>>There was a natural role for a blue-chip corporation with the highest credit rating to stand in the middle of swaps and long-term options and the other risk-spawning innovations. The traits required of this corporation were that it not be a bank—and thus subject to bank regulation and the need to reserve capital against the risky assets—and that it be willing and able to bury exotic risks on its balance sheet. There was no real reason that company had to be A.I.G.; it could have been any AAA-rated entity with a huge balance sheet. Berkshire Hathaway, for instance, or General Electric. A.I.G. just got there first.<<


Um, no. That wont wash. Lewis continually views buffett & his actions thru the prism of his own wallstreet, ex-trader mentality.


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<< He and the other traders had been required to defer about half of their pay for years, and intertwine their long-term interests with their firm’s. The people who lost the most when A.I.G. F.P. went down were the employees of A.I.G. F.P.: DeSantis himself had just watched more than half of what he’d made over the previous nine years vanish. The incentive system at A.I.G. F.P., created in the mid-1990s, wasn’t the short-term-oriented racket that helped doom the Wall Street investment bank as we knew it. It was the very system that U.S. Treasury secretary Timothy Geithner, among others, had proposed as a solution to the problem of Wall Street pay.>>


interesting take on the compensation policy, but too pat by itself. would a similar comp policy at New century mortgage, for instance, have changed their path, their ultimate fate? i doubt it. because that comp policy would have still been grounded in a culture that rewarded employees for selling MORE subprime mortgages at ridiculously inadequate prices. what about risk control, stress testing, & the kind of healthy skepticism that seeks out realistic price discovery & conservative value estimations?


and lewis says nothing about persistent allegations that AIG routinely cooked its books. the comp policy he cites above, as rational as it sounds in isolation, would do nothing to solve a sort of institutional imperative to "dress to impress" on the financial reporting front.

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<<And so this was before Jake DeSantis and his colleagues found themselves suburban-Connecticut outcasts, before their first death threats, before the House of Representatives passed a bill because of them (taxing 90 percent of their large bonuses), before New York attorney general Andrew Cuomo announced he was going after their paychecks, and before Iowa senator Charles Grassley said that A.I.G.’s leaders should follow the Japanese example and “either do one of two things, resign or go commit suicide.”>>


overall, this piece by michael lewis represents a more balanced portrayal of AIG financial product division than most. but the level of societal anger & political posturing will be difficult to tame.


and articles like this one are frightening in their rabid anger & indignation towards wallstreet & its legion of masters of the universe:


snippet  <<I keep hearing people say, “Well, so what — it’s only fair that Goldman got paid off for its deals with AIG. After all, AIG was contractually obligated to Goldman. Goldman deserves that money, because it was doing the right thing in buying insurance from AIG in the first place.”


That’s bullshit, too. As Rich Bennett over at the hilarious monkey business blog pointed out to me the other day, Goldman was insane and reckless in making those deals with AIG. Goldman wasn’t removing risk from its books by buying CDS protection from AIG, they were exchanging one kind of risk for another kind of risk, counterparty risk. “If you have too much risk to one entity and they go bust, you’re shit outta luck,” Rich says. “They took AIG for a ride, and when the music stopped, they and their partners were going to be taking up the proverbial tookus.”


So to review: Goldman makes insane bets, runs wild on AIGFP’s house idiot Joe Cassano for a while, sticking him with $20 billion in risk, and when it all went to shit — as it inevitably had to — they drove a big stake through AIG’s heart and got the government to step in and pay them off using our money. How’s that for market capitalism? Just like Adam Smith drew it up, right? They’re just smart guys!





one of the best articles i've seen recently on the madness of wallstreet innovation & bully-lobbying efforts to maintain the status quo is this:


<<A few months back, The Audit’s Elinore Longobardi took a a long look at how the press failed in its coverage of a 1994 report on derivatives regulation from the Government Accountability Office, the nonpartisan investigative arm of Congress.


The study, headed by James L. Bothwell, then director of financial institutions and markets issues at the GAO, came on the heels of a series of disasters, including the bankruptcy of Orange County, California, in the fast-growing derivatives markets. The report flashed red about the need to regulate what was (and would, alas, remain) a veritable Wild West of financial “innovation”:


Much OTC derivatives activity in the United States is concentrated among 15 major U.S. dealers that are extensively linked to one another, end-users, and the exchange-traded markets…



This combination of global involvement, concentration, and linkages means that the sudden failure or abrupt withdrawal from trading of any of these large dealers could cause liquidity problems in the markets and could also pose risks to the others, including federally insured banks and the financial system as a whole.>>


and <<I caught up with Bothwell, who now owns Financial Market Strategies LLC, over lunch in Alexandria, Virginia, to talk about his hard-hitting, clear-eyed report, the reaction to it, and the similarities to today’s crisis.




THE AUDIT: I was just reading the new Gillian Tett book about the genesis of credit-default swaps at JP Morgan, and she calls the failure to regulate derivatives in 1994 “one of the most startling triumphs for a Wall Street lobbying campaign in the twentieth century.” What happened?


JAMES L. BOTHWELL: This report created a firestorm of industry and regulatory backlash after it was issued. The industry financed and formed a tremendous backlash to defeat our legislative recommendations. This consumed me for almost twelve to eighteen months, talking about this report and defending its recommendations.


TA: We’re just now coming out of three decades where a zealot like Alan Greenspan was considered mainstream, celebrated as an oracle, the “maestro”—a financial god, essentially. That’s the environment that your report came out into. Did you think you’d face the resistance that you did from people in power, especially from the Clinton administration? They campaigned in ‘92 as sort of anti-Wall Street.


JB: They started lobbying me before the report came out. I knew exactly the extreme resistance we were going to get.>>



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more great stuff from "Audit Interview: James L. Bothwell

The author of a definitive ‘94 GAO derivatives report talks about industry pushback and financial-press complacency" [hope i'm not eating up too much board space with this]



<<You saw a marketplace there that was highly concentrated in six major dealers. You saw a marketplace where there was no transparency. Those dealers knew who their counterparties were, but did not know who their counterparties’ counterparties were. There was nobody with the overall view of what that credit concentration and credit risk was.


That’s what we were calling for regulation to do—to get information about all these counterparties’ exposures. Who was exposed to whom? It was obvious to me. We have this system of bank examiners—I don’t mean to disparage bank examiners, but they can be focused on the minutiae: “Are these forms being filled out correctly?” and they just miss the big picture of the big risk exposure and the functioning of a bank and its risk management. And the central banks allowing the capital to be set by the banks’ own internal models is just incredible.


TA: What would have happened had your recommendations been implemented in ‘94?


JB: AIG wouldn’t have happened.


TA: If AIG hadn’t happened—they were taking much of the super-senior risk and concentrating it in one place, you can follow it down the line, you would have much less lending to subprime housing, for instance. But you guys at that point were talking about interest-rate swaps:


JB: The credit-derivatives market was just being developed as we issued our report. We knew about it and we knew about AIG. Matter of fact, when you read about the regulatory gaps with the insurance companies, that’s what we had in mind.


We went up to meet with (CEO) Hank Greenberg up at his office at AIG to talk about our report and what we were recommending. He said “You can’t tell me anything about risk management. I’ve got control of this. It was out of control, but I’ve got control of it now. I have nothing to learn from you.”


The other thing that kills me—after our report came out and I was director of this group of about 120 people—some people in New York, Chicago, San Francisco—most in Washington. They did an amazing amount of work in the four or five years I headed that group. When Republicans took over the House, they cut GAO’s budget like 40 percent, partly I think as payback. They pretty much gutted the GAO’s ability to do this kind of work.


TA: Has it ever recovered?


JB: No.


TA: So if you were at GAO right now and were asked to do this kind of report you couldn’t do it?


JB: No, I don’t think you could do it, unfortunately.


One of the immediate fallouts from the big budget cut of the GAO was that we lost the New York office. I lost the people up there who helped do a lot of this work. I always gave them two directions: one, we want to be focusing on where the assets are—the big markets—and two, we want to focus on where the risk is. And that’s the way this derivatives report came about. It was growing rapidly, lot of exposure and big risk that no one was looking at.


TA: What do you think about how the press covers regulation?


JB: I think over the years the press, with a couple of key exceptions, the finance press is heavily influenced by industry. They take their side. To write their stories, financial reporters need to develop and maintain knowledgeable sources willing to speak on the record. These sources almost all come from the industry and naturally present the industry’s point of view. It is much more difficult for reporters to find informed, unbiased analysts willing to speak on the record. There is usually nothing in it for them to do so.


TA: Is the press more or less influenced than the regulators? Regulators from the last couple of administrations have identified with the industry and come from the industry…


JB: And this administration, too.


You get Larry Summers. You get Gary Gensler, who is actually the one who actively put in the deregulatory measure (Gensler, along with Phil Gramm, pushed the infamous Commodity Futures Modernization Act, which prevented the regulation of derivatives, most crucially the credit-default swaps that helped create the financial crisis). Then you’ve got their understudies. You’ve got Geithner. And then to take Geithner’s place at the Federal Reserve Bank of New York you get (William C.) Dudley. Well, Dudley is a former chief economist at Goldman Sachs.


President Obama needs to get away from this Wall Street-captured stuff.


TA: If the press identifies too much with the industry, what stories should it be doing now? What’s it missing?


JB: I think they’re concentrating too much on the proposals du jour without understanding or pointing out the fact that no one really understands what caused this financial collapse in this country and this incredible loss of wealth and this pain. And until you understand those causes you’re not going to be able to craft the correct solution.


But I don’t think the press can get at it. Unless you can get some examiner at Citigroup to talk on the record about “My God, we knew this place was a disaster, but Comptroller Dugan wouldn’t let us do anything about it.


TA: Which is unlikely.


JB: Extremely unlikely.


TA: Inside these agencies are people afraid to speak out?


JB: Oh, sure. You can pay a big price.


TA: How optimistic are you that the necessary reforms will be made?


JB: I think the same thing that happened (back in 1994), is going to be the same thing that’s going to happen now. The industry is already fighting back against anything really meaningful, but they’ll—as they did back then—they’ll form a study group and come up with some marginal stuff that won’t impinge upon their fees and upon their profitability. And that will be it.>>


ok, i've highjacked enough of this thread. but i keep thinking of patrick byrne & his deep capture sories as i link to these articles, & how much more what he & his staff there write about increasingly resonates!


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