Barney Frank, should be...

[xyzer]

You have a point Max..

Although credit default swaps don't approach the level of "personal criminality" that Fannie/Freddie does, isn't it clear that sweeping, common sense changes need to be made to regulate these instruments in addition to changes that need to be made in the mortgage bundling market? IMO we need to stop allowing the reselling of obligations, both mortgage and CDSs without careful oversight to insure that proper cash reserves are met to cover losses. In addition there needs to be sweeping changes in regulation of derivatives by the SEC. This isn't a left/right issue any more than bank fraud is.

I can see the impact of this extreme risk taking. Insuring against credit
defaults and then peddling the liability is devious at best and seems to me hides the original transaction, thereby raising risk. I hope I'm interpreting this correctly. However, risk taking is part of the financial business. Investors seek profit on their investments and are happy to pass the risk on to someone else who will pay them for it. I guess there is a 'sucker' born every minute?Though I decry government intervention this is apparently a practice that needs some legally imposed limits. Not being an expert I can't tell you what they should be.

The interesting part is that mortgage loans became entangled in this type financial chicanery? Who suffers? All of us, I'm afraid.

[lsbskins1]

Quote by: jb_1430 Nothing there of these efforts by Democrats to regulate credit default swaps. And it didnt create the market, it already existed. And none of the regulations that were proposed, would have done anything to prevent the current crisis. Primarily they were concerned with market manipulation, such as was the case with Enron in California. The Mortgage market has experienced no such manipulation.

HR 5660 did not create the market, it deregulated the market, and that was the problem. Here is a summary of that piece of legislative deregulation:

H.R. 5660 [106th] - Summary: Commodity Futures Modernization Act of 2000 (GovTrack.us)


And attempting to attack the "Enron Loophole" is attempting to attack the legislation that produced it, that is HR 5660. Thank you Phil Graham, for sliding this into an appropriations bill that if it wasn't passed and signed, would have shut down large portions of the government at Christmas time. Lovely, how the Republicans liked to play those kind of games.

[jb_1430]

Quote by: lsbskins1 The act it speaks of is HR 5660, part of HR 4577. That created the unregulated credit default swap market.

Quote by: jb_1430 And it didnt create the market, it already existed.

Quote by: lsbskins1 HR 5660 did not create the market,

Thats what I said

Quote by: lsbskins1 it deregulated the market, and that was the problem. Here is a summary of that piece of legislative deregulation:

Credit Default swaps were first used in 97. In 2000 they were not regulated by the Commodity futures Commission because, well, there were no commodities or futures involved.

[maximdewinter]

Quote by: xyzer You have a point Max.. I can see the impact of this extreme risk taking. Insuring against credit defaults and then peddling the liability is devious at best and seems to me hides the original transaction, thereby raising risk. I hope I'm interpreting this correctly. However, risk taking is part of the financial business. Investors seek profit on their investments and are happy to pass the risk on to someone else who will pay them for it. I guess there is a 'sucker' born every minute?Though I decry government intervention this is apparently a practice that needs some legally imposed limits. Not being an expert I can't tell you what they should be. The interesting part is that mortgage loans became entangled in this type financial chicanery? Who suffers? All of us, I'm afraid.

If I may add: This has become a finger pointing exercise by politicians with a false dicotomy pitting regulation against deregulation. (The Right is for deregulation and the Left against it.) But the question should be "What kind of regulation?" I think the most headstrong Libertarian would say that if I write a check to someone, regulations should exist that they cannot sell my account number on the check to a third party. Or that my bank can't arbitrarily sell my mortgage to a Chinese bank. They would not tolerate it nor call it a "free market."


IMO the regulation/deregulation "issue" is nonsense. I think any type of regulation that strengthens the transparency of contracts (thereby sparing consumers the need to sue) is good regulation. Any regulation of transactions that increases confidence between two parties or secures the consumers' safety in their money accounts is also good regulation. Also regs to promote the proper assessment of risk (rating) in securities is necessary. I've got nothing against "junk investments" being sold but I do have a problem with junk being sold as A rated.

[lsbskins1]

jb -

May I ask why you feel you are making a valid point?

I never said what you imply I said (as your quoting of me shows) and the issue is not the existence of "credit swaps" so much as it is the existence of unregulated credit swaps. And if HR 5660 did not effect this market how do you explain this:


Title IV - Regulatory Responsibility for Bank Products
Legal Certainty for Bank Products Act of 2000 - Excludes specified banking products and swap agreements from Commodity Futures Exchange Commission coverage.


Why would you need to legally exclude from coverage what is not, in fact, covered?


I would agree with Max (something Max and I are likely just as shocked by) that it is silly to argue over regulation v. deregulation. If this current economic meltdown does not prove to you that a certain amount of government regulation is necessary, you are beyond the reach of evidence based reasoning.

[jb_1430]

Quote by: lsbskins1 jb - May I ask why you feel you are making a valid point? I never said what you imply

I didnt imply anything. I quoted you.

[lsbskins1]

Quote by: jb_1430 Nothing there of these efforts by Democrats to regulate credit default swaps. And it didnt create the market, it already existed. And none of the regulations that were proposed, would have done anything to prevent the current crisis. Primarily they were concerned with market manipulation, such as was the case with Enron in California. The Mortgage market has experienced no such manipulation.

I got the impression you were saying I claimed that the legislation "created" credit swaps", not that it deregulated that market. If that is not what you meant, what did you mean? I clearly said it created the unregulated market, not the vehicle itself. What was your point if I have misunderstood it?

[jb_1430]

GEEEZUZ H Criste!! The "unregulated credit default swap market" WAS NOT "created" by "HR 5660, part of HR 4577". The market already existed, and it was unregulated before HR 5660. 5660 only insured that it continued that way in spite of Brooksley Born, head of the CFTC at the time who was calling for regulation by the CFTC. 1993 the CFTC exempted credit derivatives and other swaps. The market was created in an unregulated enviroment in the 90s. HR5660 changed nothing. It merely cleared up the long running dispute as to whether the CFTC even had the authority to regulate credit default swaps. A dispute that became irrelevant back in 1993 when derivatives were exempted from CFTC regulation by the CFTC. Made relevant again by Brooksley's efforts to impose regulations.

[lsbskins1]

OK, so lets go with your logic. Though I would say it is faulty in the way saying "guns don't kill people, people kill people" is faulty when you consider that guns make people much more efficent and effective killers, and therefore whatever logical truth exists in the first statement is more than made moot by the logic and truth of the second contention.

But, that being said, if the market pre-existed the law, the law still opened the door to the unregulated mess we now face. The law needs to be changed and liberals and democrats believe in rational and needed regulation, and would never slide such legislation in under the radar like good ol' Philly Boy did.

Would they slide a law that rasied teacher pay into emergency funding bills that were otherwise unrelated? Sure. I'm not saying they would not play that game. I am saying they play the game in ways that I don't believe would hurt people. That is why I am a registered Democrat.

[jb_1430]

WTF! A credit default swap involves a mutually agreed to exchange between two people, a gun does not.
The door was already opened, the law wasnt required.
I havent even heard anyone even try to put forth a rational arguement as to how Credit default swaps have lead to this "mess". And the law you speak of is not "unrelated" to the Commodity Futures Modernization Act.

[maximdewinter]

Quote by: jb_1430 WTF! A credit default swap involves a mutually agreed to exchange between two people, a gun does not. The door was already opened, the law wasnt required. I havent even heard anyone even try to put forth a rational arguement as to how Credit default swaps have lead to this "mess". And the law you speak of is not "unrelated" to the Commodity Futures Modernization Act.

I don't think credit default swaps led to this mess. I think the concept is sound. You take out a policy from an insurer to cover the possibility of a bed debt. My reading is that it is the reselling and trading of these instruments that caused the mess.

Insurance companies have ratings just like bonds do (AAA, AA, etc.) . But once you start trading these credit default contracts and removing them further and further from the original interested parties, it seems to me you get the same kind of mess you do bundling and securitizing sub-prime, zero down NINJAs (No Income, No Job or Assets) with other higher quality mortgages.

If I have my car insurance with Allstate and I chose them for their quality rating, I don't want them trading my policy with another company and then trading to the next one I've never heard of who has no assets. Incidentally my wife and I years ago decided to get our mortgage from the local savings & loan precisely because they don't recycle and bundle mortgages---- so this isn't a new thing.

Don't you think that there needs to be a return to the era that is more in line with the Glass Steagall Act and put an end to all these "creative investments" .....especially if we are going to end up bailing them out when they are "too big to fail?"

[jb_1430]

Quote by: maximdewinter I don't think credit default swaps led to this mess. I think the concept is sound. You take out a policy from an insurer to cover the possibility of a bed debt. My reading is that it is the reselling and trading of these instruments that caused the mess.

How so? Had AIG done more reselling, they wouldnt have been in the trouble they found themselves in.
A mortgage goes bad somebody loses. Had it not been AIG it would have been the mortgage holder who ends up with the loss.

[maximdewinter]

Quote by: jb_1430 How so? Had AIG done more reselling, they wouldnt have been in the trouble they found themselves in. A mortgage goes bad somebody loses. Had it not been AIG it would have been the mortgage holder who ends up with the loss.

True, but I don't understand the advantage of playing musical chairs with multi trillions of investor dollars at risk and ultimately the taxpayer holding the bag when the music stops and nobody beside government has the cash reserves to cover the bets. (Actually the government doesn't have the cash reserves but issues IOUs with more gravitas.)

Of course AIG could have resold to someone and then that someone could have resold to someone else... but that would have just put another layer on the house of cards that was doomed because all the promises to pay had no hard cash foundation, only IOUs.

[lsbskins1]

Take into consideration, too, that often these credit default swaps were sold as futures bets on companies, so that not only do you have the cost of the initial failure, you have the cost of everyones bets on the failure. That is why the mess is as big as it is. AIG was selling swaps on things they had not interest in. So John buys a house, his morgage is sold and bundled and ON TOP OF THAT, anyone who wanted to could buy a futures bet on that portion of the bundle that was with Bank of America or Citicorp or whoever.. AIG sells Richard an insurance policy (excuse me, credit default swap) that they do not have to have reserves to cover, betting that Bank of America will stay healthy. Neither Richard or AIG has any part of the original transaction. It was a way for the banks and Wall Street firms to raise revenue, pure and simple. That is the magnification process. When John defaulted on his house, he hurt all those holding the split and bundled loans, but AIG sold so many lotery tickets on Bank of America not failing, that they owed 100 times the actual value of John's failed morgage.

[xyzer]

Max you post "IMO the regulation/deregulation "issue" is nonsense. I think any type of regulation that strengthens the transparency of contracts (thereby sparing consumers the need to sue) is good regulation. Any regulation of transactions that increases confidence between two parties or secures the consumers' safety in their money accounts is also good regulation. Also regs to promote the proper assessment of risk (rating) in securities is necessary. I've got nothing against "junk investments" being sold but I do have a problem with junk being sold as A rated."

Well said! I agree, regulation(in the form of rules) does not necessarily mean complete prohibition. It means limiting the actions of potential scallywags who seek underhanded and devious schemes. e.g. I can see limiting the number of credit swap transactions to provide more transparency and reduce risk.
Even in the mortgage loan area wouldn't reducing the bundling of transactions help prevent buyers from getting stuck with sub prime assets or passing them off on others at similar interest rates?

[maximdewinter]

Quote by: xyzer Even in the mortgage loan area wouldn't reducing the bundling of transactions help prevent buyers from getting stuck with sub prime assets or passing them off on others at similar interest rates?

I don't even think that is necessary. For instance, you can still buy penny stocks (even though they are now up to $5) and everybody knows that you don't put your retirement funds into them. They are low-cap and highly volatile... trading outside the usual wall street indexes and they are a long shot gamble. Their rating is close to nil. Like penny stocks, if you buy NINJA mortgage bundles be prepared to win or lose.

The problem with bundling sub prime mortgages in this mess was that they weren't bundled "in kind" and were mixed in with sound paper. IMO that was the beginning of the end. Frankly I would call it fraud, however the stats of the questionable mortgages were probably buried in one those 125 page fine print prospecti you get before April 15. I think many investors knew about the adulterated securities but didn't worry as much because the money was government guaranteed.

Since I am self employed, I had to save and put down 23% to buy my first house. It took a lot of self-discipline because I made a vow to live on half my pay for the three years it took to get up the money. I don't think it is asking too much for any government guaranteed mortgage to require 10% down. But if the government is going to insist on handing out zero down mortgages and then packaging them in blocks, they should be separated from all other paper like "junk bonds" are.

[Sweet Katie]

Quote by: GHook93 ...immediately kicked out of Congress, brought up on charges of corruption and since his corruption has out the whole country at risk he should addition be brought up on treason charges, then we should toss him in a max security prison, where he becomes a favor in the showers! Why do I say this? I can already hear the response, this is neo-con GHook and his rightwing attack on a liberal douc%*bag, who even sounds like an a$$hole (OK you might leave off the last part)! Why am I so angry? Fannie Mae and Freddie Mac have helped kill America! This scum of the earth, sold America out them. For the very very very very very generous campaign contribution, numnutz did everything he could to protect FM & FM! He did so in a disguise of providing affordable housing for all (a paradox itself)! In reality he did it to get the campaign dollars he needed in order to get elected (and he needed every dollar he could get since he when he talks he sounds like a complete a$$hole). This is also a true testament to how stupid the liberals in MA are. How could a moron like Barney Dumba$$ get elected to anything to anything! His protection of FM & FM for campaign contribution amounts to nothing less than bribery and corruption. It is so devastating that it even amounts to treason! To hear this A$$HOLE take a cheap shot at McCain for doing what he can to help solve the economic crisis makes me so mad. How can a guy like Frank have the ballz to say anything when he is one of the main reasons for the mess. McCain on the other hand tried to prevent FM & FM from getting as large as they became back in I think 2002! Barney Frank has to be glad he is not a politician in Russia or China, because they would have already taken him out in the back alley and shot him! Barney's Rubble - WSJ.com

I like the way you think!