Last night's 60 Minutes segment suggesting people run for Congress to profit from insider trading was pretty puffy in a number of ways. It seems, for example, pretty stupid to suggest Nancy Pelosi benefited from an IPO investment in Visa in 2005 when she was instrumental in pushing through credit card industry regulation in 2009 as Speaker of the House. Likewise, John Boehner most certainly reaped more benefit from passing out checks from tobacco industry lobbyists on the House floor than he did with any insider trading on stock deals to defeat the public option.

But there is definitely one Congressman who has profited much from inside deals: Rep. Spencer Bachus (R-AL), current Chairman of the House Financial Services committee. Bachus has been unrelenting on his opposition to any derivatives regulation and why not?

Pat Garafalo at ThinkProgress reports that Bachus was hedging on the failure of the economy in 2008 while receiving confidential briefings about it.

Bachus, who was the ranking member of the Financial Services committee at the time (since the Democrats held the house) made about 200 trades as the financial crisis peaked, netting about $28,000. “What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and Treasury Secretary,” said Peter Schweitzer, a fellow at the conservative Hoover Institution, whose work was the basis for CBS’ report. “I mean, talk about a stock tip.”

Continue reading »

Let me get this out of the way first: I believe Bank of America is evil and does unspeakably evil things. This post does not in any way change my mind on that nor is it intended to change yours. However, I do believe facts matter, and in the case of the mind-boggling "scare everyone half to death" headlines surrounding the Bank of America derivatives transfer, a few facts were left out that substantially change what has actually transpired. Without question, it should not be this difficult for anyone to report facts and actually understand what is going on. It is certainly an indictment of our complex and byzantine financial industry that it was this difficult and that it was reported incompletely and often hysterically.

In September, Moodys downgraded several big banks, including BofA. The downgrade was specifically on projections that these big banks would not be rescued by the federal government even if they were so exposed they posed a risk of failure.

Why no bailout? Because Dodd-Frank set procedures in place for failing banks -- particularly failing banks that might pose systemic risk to the economy -- to be unwound on an orderly basis and liquidated. Quoting Moodys:

The government is "more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute," the ratings agency said.

Because some derivatives contracts carry a requirement that they be liquidated if ratings drop, there was a very real concern that a demand for liquidation could stress the investment banking side. So falling into line alongside Merrill Lynch, Citibank and others, BofA moved their remaining derivatives over to their retail banking subsidiary where deposits are, in fact, insured by the FDIC.

The astronomical number stated in headlines -- $75 trillion -- was tossed all over the Internet as the mind-boggling amount the FDIC and Fed would cover in the event of a run or other wobble in BofA's stability. Only, that number means less than nothing, particularly in the world of bank "rescues". The $75 trillion number is a statement of "notional value." Notional value does not represent the exposure a bank might have, nor does it even represent the value of the derivatives contracts. It is a number which represents the total amount of money a small amount of money might control. Via DesertBeacon:

Notional value is: “The total value of a leveraged position’s assets. This term is used commonly in the options, futures, and currency markets to describe how a very small amount of invested money can control a large position (and have a large consequence for the trader).” [FinDict] Here’s where the going got sticky — “a small amount of money controlling a large position.”

In the case of derivatives which have been carved up and sold to many parties, each party has a stake in the notional value of all parties.

Investopedia offers an example: “As an example, one S&P 500 Index futures contract obligates the buyer for 250 units of the S&P 500 Index. If the index is trading at $1,000, the futures contract is the equivalent to investing $250,000 (250 × $1,000). Therefore, $250,000 is the notional value underlying the futures contract.” [FinDict] I think we can all figure out where this is going. If the notional value can be calculated like the S&P Index, since we can all look at the television set or check online to see the price of S&P Index trading, then life is good, the transaction has a predictable value. If, however, the swap is being made on something-anything-everything for which a notional value cannot be readily determined — oh, say something like the value of securitized asset vehicles sliced diced and tranched out of home mortgage paper — then what we have is not managed risk but layered risk.

Continue reading »

And this is why we've been screaming about regulating derivatives! I kind of think that the Occupy movement is going to have something to say about this corporate sleight of hand that came to light earlier this week. Do they really think we're going to look the other way and let them stick us with a $74 trillion bill -- just to let good old "too big to fail" Bank of America off the hook? I don't think so:

If you have any doubt that Bank of America is in trouble, this development should settle it. I’m late to this important story broken [...] by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America’s management.

The short form via Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.

And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated.

Continue reading »

Great ad. I was wondering when the Dems were going to go on the offensive with this Club For Growth wingnut weasel, because Sestak will need all the help he can get against this bozo:

The Democratic Senatorial Campaign Committee launched its first television advertisement of the general election today, introducing former Wall Street derivatives trader and Republican Senate candidate Pat Toomey to Pennsylvania voters.

Millionaire Pat Toomey did “pioneering work” with derivatives as a freewheeling Wall Street trader in the 1980s, even praising derivatives as an “enormous good.” After leaving Wall Street, Toomey moved to Washington, where as a Congressman he wrote legislation to weaken oversight of Wall Street, which contributed to the meltdown of our economy. Now, as a Senate candidate, Toomey advocates for the same freewheeling, reckless policies that led to economic collapse, all while taking in more than $1.6 million in campaign contributions from Wall Street and other financial special interests.

“Democrats are not going to let former Wall Street derivatives trader Pat Toomey get away with failing to mention his decades of service to Wall Street,” said DSCC National Press Secretary Deirdre Murphy. “Pennsylvania voters should know that Toomey has fought for Wall Street his entire life, first as a freewheeling derivatives trader, then as a Congressman writing legislation to weaken oversight of Wall Street, and finally as president of the Wall Street-backed Club for Growth. As a Senate candidate, Toomey might be right for Wall Street but he’s flat out wrong for Pennsylvania families.”

Oh dear God, I hate admitting it when anyone over at the Corner is right about something but... AAAAAAAARRRRRRRRGGGGGHHHH... Nicole Gelinas is right:

The financial system's failures made themselves obvious starting in 2007 in part because legislators and regulators thought that they could conjure up on command not only wisdom and competence but omniscience.

In the years leading up to the financial crisis, regulators allowed financial firms such as AIG to create derivatives that evaded the old-fashioned limits on borrowing and trading. The people in charge figured that the financial guys had figured out every angle and made these things perfectly safe.

Regulators, too, allowed banks to borrow far more than old-fashioned rules would have allowed on mortgage-related securities and other instruments rated AAA — because competent people had determined that such securities could never fail.

Finally, regulators allowed people to buy houses with no money down — even though we learned in the 1920s that it's not a good idea to let people borrow limitlessly to speculate that the price of something will continue to rise.

The lesson to be learned here is that we need borrowing and trading rules that apply to everyone and everything for those times when bankers, regulators, and tens of millions of ordinary Americans aren't right.

The bill offers no evidence that anyone in Congress has learned this lesson.

The essential problem with the financial reform package the Democrats have put together is that it relies far too much on the discrepancy of regulators and not enough on hard law. So instead of breaking up banks whose assets exceed a certain level of GDP, we have merely given regulators the ability to break up banks if and when they pose grave risks to the economy. As anyone who has followed the wacky hijinks of our government during the Bush years knows, regulators often suck, especially when they're sleeping with the people they're supposed to be regulating.

So here's how it's going to play out: At some point in the future, we will have a Republican president who will appoint Levi Johnston to head up the SEC or Treasury or the Fed. Levi will have all kinds of powers at his disposal, whether it's breaking up big banks, raising interest rates to curtail asset bubbles or enforcing strict leverage requirements. But instead of utilizing any of the vast powers at his disposal, Levi smokes dope and pleasures himself while watching porn all day long. Five days after taking office, the economy crashes again and Levi is trotted out in front of the cameras to tell us that "nobody could have predicted" this sort of thing would ever happen.

This is the sort of thing that happens when you put your faith in the competence of regulators rather than creating hard law. A real financial reform package would have held the banks to strict leverage requirements, would have forced them to stop prop trading if they wanted to retain access to the Fed's discount window and would have broken up the largest financial institutions. Instead we have a large complex nightmare that is riddled with loopholes that will allow the banks to behave just as irresponsibly as they've done in the past.

So take comfort, America. The only thing now saving us from another financial crisis is the wisdom and competence of Federal Reserve Chairman Levi Johnston. Huzzah!

Judd Gregg strode to the Senate floor yesterday and denounced the provision in the Dodd bill to remove derivatives from banks and put them on their own exchange in the sunlight for everyone to see. Remarkably, he centered his argument around the irrationality of populist anger, which he likened to Argentina in the 50s and the Peron years.

You know, I have really been trying to figure out what's behind this type of language [derivatives sunlight], because it's so destructive to our competitiveness as a nation, really.

I mean, this is the type of thing, as I said earlier, you would have seen in Argentina that -- Argentina in the 1950s -- bashing on entities simply because they're large and because obviously there's a populist feeling against them, which ends up, by the way, significantly affecting Main Street in a negative way.

Look at Argentina in 1945 - 1937, somewhere in that period. They were the seventh-best economy in the world. 7th most prosperous in the world. Now they're like 54th or something.

It is because of this populist movement which has driven basically their ability to be competitive offshore.

So now we have this huge populist movement here. I'm trying to think, what really is the rationale here other than just rampant pandering to populism?

He follows that with this:

Is there anything in this country that gets broken up because there is an attitude that big is bad, whether it contributes or not, unless you happen to be big and union, in which case you get saved, as the UAW was able to work out for GM and Chrysler.

Senator Gregg is either arguing for a corrupt extreme right regime or he has not studied Argentina's history lately. Here's a quick review. Argentina's economy followed other emerging countries in the early 1900s. In 1920, it was the 7th largest economy in the world, but the Wall Street crash took a deep toll.

Unfortunately, the 1930s witnessed a reversal in the legitimacy of the rule of law in Argentina. To stay in power in the 1930s, the Conservatives in the Pampas resorted to electoral fraud, which neither the legislative, executive, or judicial branches checked. The decade of unchecked electoral fraud lead to the support of citizens for the populism of President Juan Peron and the impeachment of the majority of the Supreme Court. The aftermath of Peron has been political and economic instability, which partially accounts for the fall of Argentina from the top ten of income per capita countries in the world. Read more...(PDF)

Did Senator Gregg really intend to self-indict conservatives in our time and country by comparing today's populist anger to Argentinian populist anger?

There are many, many parallels between Argentine conservatives of the 1930s and American conservatives of today. None of them are complimentary and all of them imply a severe indictment on the corruption, money and greed that seems to drive conservative legislators.

What really stands out, though, is the utter cynicism of a conservative senator criticizing populist anger while his party is spending millions upon millions to capitalize on that same populist anger.

In an interview on This Week with Jake Tapper, President Bill Clinton said he made a mistake listening to Bob Rubin and Larry Summers on derivatives, and said he should have tried to regulate them, despite Republican opposition:

TAPPER: One of the things that President Obama is pushing for is regulation of derivatives, and also with a thing called the Volcker rule, he’s trying to separate commercial banking interests from investment banking interests. These were things that were the opposite policies of Treasury Security Rubin and Summers at that time, do you think in retrospect they gave you bad advice on these issues?

CLINTON: Well, I think on the derivatives – before the Glass-Steagall Act was repealed, it had been breached. There was already a total merger practically of commercial and investment banking, and really the main thing that the Glass-Steagall Act did was to give us some power to regulate it – the repeal. And also to give old fashion traditional banks in all over America the right to take an investment interest if they wanted to forestall bankruptcy. Sadly none of them did that. Mostly it was just the continued blurring of the lines, but only about a third of all the money loaned today is loaned through traditional banking channels and that was well underway before that legislation was signed. So I don’t feel the same way about that.

I think what happened was the SEC and the whole regulatory apparatus after I left office was just let go. I think if Arthur Levitt had been on the job at the SEC, my last SEC commissioner, an enormous percentage of what we’ve been through in the last eight or nine years would not have happened. I feel very strongly about it. I think it’s important to have vigorous oversight.

Now, on derivatives, yeah I think they were wrong and I think I was wrong to take it because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don’t need any extra protection, and any extra transparency. The money they’re putting up guarantees them transparency. And the flaw in that argument was that first of all sometimes people with a lot of money make stupid decisions and make it without transparency.

And secondly, the most important flaw was even if less than 1 percent of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect a 100 percent of the investments, and indeed a 100 percent of the citizens in countries, not investors, and I was wrong about that. I’ve said that all along. Now, I think if I had tried to regulate them because the Republicans were the majority in the Congress, they would have stopped it. But I wish I should have been caught trying. I mean, that was a mistake I made.

No More Mister Nice Blog: Things that normal people are opposed to on principle, conservatives are opposed to only when they are happening to the "wrong people" or done for the "wrong reasons."

Washington's Blog: The woman who invented credit default swaps is one of the key architects of carbon derivatives, which would be at the very center of cap and trade

The Liberal OC: Stay classy, wingnut

Bitter Lawyer: The Profane, Pornographic, Anti-Glenn Beck World of Marc Randazza

his vorpal sword: Pearl Harbor Day + 68

OFF THE BEATEN PATH: BTC News, plain view, Petulant Rumblings, bastard.logic