Category Archives: Moral hazard

Satyajit Das: In the Matter of Lehman Brothers – Part 2: Well Structured Messes

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

In this two part paper, the issues regarding settlement of complex derivatives arrangement revealed by the failure of Lehman Brothers is outlined. Many of the failures affect new regulatory proposals such as the rapid resolution regimes under consideration. The First Part dealt with terminating and settling derivative contracts. The Second Part deals with effects of the bankruptcy on structured products and collateral.

David Apgar: Between the Whirlpool of Riots and the Rocks of Default – Market-Based Debt Relief after Greece

By David Apgar, who just launched GoalScreen, a web app still in trials that lets investors test alternative price drivers of specific securities (free though the end of the year at www.goalscreen.com. He has been a manager at the Corporate Executive Board, McKinsey, the Office of the Comptroller of the Currency, and Lehman, and writes at www.goalscreen.com/blog.

So now we can all breathe easily again. After all, the bond markets have rid the world of a dynasty of prevaricating Greek prime ministers and a modern-day Il Duce reincarnated as a trousers-around-the-ankles buffoon. There is just one fly in the ointment. Investors may start serially mugging healthy countries. Sovereign borrowers have a defense, fortunately, if only they dare use it.

The End of Loser Liberalism: An Interview with Dean Baker Part I

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Dean Baker is co-founder of the Center for Economic and Policy Research. He previously was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University. He has a Ph.D. in economics from the University of Michigan. His latest book, The End of Loser Liberalism, has recently been released to download free of charge on the CEPR website.

Interview conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.

Philip Pilkington: The overarching thesis of your book The End of Loser Liberalism is quite a provocative one. This isn’t just a book about economics as such. Instead, if I were to venture using a term that appears to be coming back in fashion, it’s a work of political economy. You write that the current political debate – wherein the left are seen as restricting and constraining the ‘free market’ while the right are seen as letting it free to work – is completely skewed. You write that liberals and progressives need to take a different line on this. Could you explain this basic premise in a little more detail, please?

Dean Baker: The conventional view is that conservatives place a huge value on market outcomes. It is common for progressives or liberals to deride them as “market fundamentalists”, as though they worship the market as an end in itself. By contrast, liberals/progressives are supposedly prepared to use the hand of government to override market outcomes in order to promote goals like poverty reduction or equality. I argue in the book that this view is completely wrong, and worse that it plays into the hands of the right.

I argue that the right has quite deliberately structured markets in a way that have the effect of redistributing income upward. The upward redistribution of the last three decades did not just happen, it was engineered.

Taleb: End Bonuses at Too Big to Fail Banks

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The fact that the New York Times is running as its lead op-ed a piece by Nassim Nicholas Taleb arguing against any bank bonuses points to a hardening sentiment among the elites against the banks.

Satyajit Das: Central Counter Party Tranquilliser Solutions

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

This four part paper deals with a key element of derivative market reform – the CCP (Central Counter Party). The first part looked at the idea behind the CCP. This second part looked at the design of the CCP. The third part looked at the risk of the CCP itself and how that is managed. The last part looks at the market effects of the effects of the CCP on the market.

In the Renaissance, popes often annulled the marriages of Catholic monarchs. The annulment preserved, theoretically, both the authority of the Papacy and the sanctity of marriage. The CCP proposal is similar. It gives the impression that regulators and legislators are reasserting control over the wild beasts of finance. In reality, the proposal may not work or materially reduce the risks it is intended to address.

Marx Versus Capitalism Versus You

By Sell on News, a macro equities analyst. Cross posted from MacroBusiness

It is a measure of how un-self critical modern economics has been, that the Marxists are starting to appear to be making the most sense of the current crises. The supine acceptance that “the market is always right” — a truism only to traders and vested interests — means that there has been precious little understanding developed about how markets can go wrong. Or what is wrong, as well as right, with markets and the modern practices of capitalism. An article in the London Review of Books came to my attention recently by Benjamin Kunkel that shows how Marxist analysis is actually looking quite pertinent to the current mess.

Manufacturing inflation in a wage deflationary world

Edward here. Earlier in the month, I wrote how the currency is the real release valve for a credit based economy using a nonconvertible freely floating currency. It’s not about interest rates. If currency revulsion takes hold from negative real rates and people want to flee a country’s assets, this will be reflected in the […]

On Wall Street’s Private Police in NYPD Uniforms

We reported a bit more than a week ago on how JP Morgan had given a troublingly large donation of $4.6 million to the New York City Police Foundation. As we recounted, that foundation was established in 1971, which was when the city was sliding into its fiscal crisis, as a way for companies and individuals to bolster the NYPD’s budget. And even though in theory contributions go into a general coffer, one has to suspect in practice that big donors will get more attention from the cops. Even though this donation was the biggest the police foundation had ever received, it was still peanuts relative to the total NYPD budget. Nevertheless, as Richard Kline pointed out, the gesture was significant:

To me, the telltale with the JippyMo ‘donation’ is that it was _publicly_ announced. Jamie the Demon and his top heads want the public to know that the banksters LIKE the police, as opposed to those daft, sloppy, protestors.

The bankster/Kochster assault on unions was excruciatingly badly timed. It aims directly at public service unions. At their pensions. At their staffing levels. At their equipment. One of the most cogent remarks coming out of the intitial Wisconsin action (before the org-heads diverted it into failing to elect more Democrats) came from the police there, to the effect that lower staffing levels threatened _their_ safety. The local police were markedly sympathetic to the capitol building occupation in Madison. Some of this has clearly been whispered in the ear of the financial oligarchs by their paid consultants to the effect that alienating the police is not in the interests of the 1%. I don’t think that the sum of money is especially relevant or substantial. What matters is that it is a public demonstration that the banksters _like_ the police, with the implication that they will be prepared to drop a little more loose change on them if they’ll clap the rabble into Rikers like good fellows.

And it turns out that big financial service firms have also been buying protection via the NYPD. Literally.

More Proof of Federal Coverup of Mortgage Fraud: Robosigner-Equivalents Hired to Review Foreclosure Files in Required Audits

Georgetown law professor and securitization expert Adam Levitin has come upon a real doozy in terms of how banking regulators aren’t even bothering to mount a serious pretense that their much-touted efforts to rein in mortgage abuses are anything more than a coverup for the banks. And he is suitable irate.

Satyajit Das: Euro-Zone’s Leveraged Solution to Leverage

Yves here. This is as concise, accessible, and not surprisingly, not at all encouraging assessment of the latest Eurorescue ~~ruse~~ mechanism.

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk

If as Albert Einstein observed insanity is “doing the same thing over and over again and expecting different results”, then the latest proposal for resolving the Euro-zone debt crisis requires psychiatric rather than financial assessment.