A Secretive Banking Elite Rules Trading in Derivatives

[lamboguy]

my biggest problem as a taxpayer is that when a financial institution or corporation makes a profit i see no financial reward. when they lose, i have to share in the losses in the form of bailouts. this happened in our country and is happening right now in ireland, and i suspect it will happen in portugal and spain and probably alot of other places.

when my country prints up money to bail these guys out, it is making the value of the money that i am walking around with worth less.

i have to admit that i am not the most intelligent person in this world, i dropped out of college in my first term. but certain things don't make to much sense from where i am sitting, like bailing out these guys to begin with, and the banks having the pollition's in their back pockets no matter what party they are from.

i am not a righty or a lefty. i am an individual that doesn't like it when someone tries to push my buttons like these political parties and banks are doing at the present time.

[Saratoga_Mike]

Originally Posted by slewis

LOL... What everyone doesn't get Mike, and I've posted this previously, is that the rerason the derivative market grew so quickly is mainly because it is UNREGULATED. Plus, no "cash and carry".. which is a fancy term of no margin requirements for banks. Which means no reporting to the FED.

So for the big mouth know it all economists on PA, like Boxcrap, who in between his bible preaching tries to ram the "Govt stay out of everything" concept down our throats, this catch 22 exists. Just like the health care debate, where Health Ins corporations put profits ahead of peoples lives.

Similar concept, different industry. No Govt regulation=every man for himself=AIG=Govt bailout (or possible world war).

The stupidity of the PA experts.

Basel II, essentially government regulation, gave Triple-A rated paper, which in many cases turned out to be junk, the same standing in capital standards as US treasuries. If the government hadn't given a few select rating agencies special status, perhaps the crisis would have been more contained because buyers and sellers would have been more cautious when buying up various securities. I'm sure that's what Box was trying to communicate!

[boxcar]

Originally Posted by slewis

LOL... What everyone doesn't get Mike, and I've posted this previously, is that the rerason the derivative market grew so quickly is mainly because it is UNREGULATED. Plus, no "cash and carry".. which is a fancy term of no margin requirements for banks. Which means no reporting to the FED.

So for the big mouth know it all economists on PA, like Boxcrap, who in between his bible preaching tries to ram the "Govt stay out of everything" concept down our throats, this catch 22 exists. Just like the health care debate, where Health Ins corporations put profits ahead of peoples lives.

Similar concept, different industry. No Govt regulation=every man for himself=AIG=Govt bailout (or possible world war).

The stupidity of the PA experts.

I don't think rationing under ObamaCare is working too swell for you. Every few days, it appears, you're off your meds and go sociopathic on us. But other Marxist lovers here have preached that health care is beyond fantastic in the UK, Canada, etc. Might wanna check that out ASAP, lest you be accused of the very stupidity of which you so incessantly accuse everyone else of being guilty.

Boxcar

[delayjf]

So, given their potiential affect on ours and the worlds economy, why aren't they regulated??

[slewis]

Originally Posted by delayjf

So, given their potiential affect on ours and the worlds economy, why aren't they regulated??

Delay,

I want to answer both you and Lambo here. My first day on the job at a bank, we traded 30 million dollars of yen with another bank (we were lenders). I asked my boss "what guarantee do we have that we'll get the money back, plus the interest". He told me the international banking industry is unregulated. He said "the banks reputation" is all you need. If we EVER (or another bank) failed to make good on an obligation, we were done. NO ONE will ever trade with us again. It virtual doom for that institution.

It's a self regulating industry, due to the fact that so much prestiege and world reputation is at stake. The only industry profilactic are "credit limits". In other words, I'll lend you funds all day, every day, until I have what my credit dept deems "too much exposure". At this point, we can no longer lend to you (I can borrow, just cant lend) until previoius trades, some done many moons ago, roll off. This situation is a GLOBAL credit review, whereas, my london trading desk will also no longer be able to lend to you, and it stretches to many trading instruments, until things start rolling off.

The system works. Now there have been "rogue traders" who have "hidden trades" because they were losing money and felt they could "trade their way out of the mess", similarly to a gambler who starts doubling down.
You can google the name "Nick Leeson", as he's the guy who took down a mid sized Brittish Merchant bank this way.
But it only happens if upper executives at the bank get sloppy, and dont check traders positions on a daily basis. There are plenty of checks and balances banks use to prevent this.

But in the case of AIG (and in effect Goldman), it was greed. I use the example of a rogue insurance company that will write millions of hurricane insurance policies on properties in say, South Fla, without having the right amount of reserves to pay off in case a hurricane hit. That's why insurance carriers are regulated by state Govt, so they cant get away with that.
But in the Banking industry, bankers are not supposed to make investments (or trade) to a situation that would "take the bank down".

But what Goldman did was to increase their credit lines to AIG, probably overexposing themselves 20 or 30 times.
What AIG traders did was flat out stupid. They didn't trade. They gambled, like a dumb kid that steals $5000 out of is dad's drawer and goes to Atlantic City.

Now Lambo, you make the valid point about the bailout.
I told people when this all went down (and I posted it here as well), AIG traders knew EXACTLY what the risks were. But they also knew that if they did these deals, they stood to make 100's of millions for the institution.
These guys then make 10's of millions in bonus money.

To me, this is criminal. But go and find a law to prosecute. None exists.
What I was calling for when the Govt bailed them out was to permenantly ban every executive and trader at these firms from the banking or financial industry, for life. But instead, out polliticans get hoodwinked into believing that "these guys were needed to "un-wind" those positions. What a joke.
The American public was robbed, but the criminals were captured and are back on the job. I spoke to a friend the other day and he told me nothing has changed, everyone's making millions and bonuses are huge.

So as long as corporate America continues to have the politicians in their back pockets, you can expect more of the same.

But if you regulate, and prosecute, well then Boxcar calls you a Socialist and "anti business".

So which way do you guys prefer?

[cj's dad]

congrats on posting information which was clear and concise.

I say that because so many of your posts talk down to those of us who you deem to be beneath your intellectual level.

More informative posts such as the previous will be much appreciated.

[lamboguy]

i like his post's as well, and i certainly appreciate him sharing his knowledge of financial markets and sharing them with us.

[Robert Goren]

Slewis, could you explain exactly what a credit default swap and a derivative is? More exactly the ones trade/created by the London office of AIG. I am pretty sure I know, but I would like to see an good explaination of them.

[slewis]

Originally Posted by cj's dad

congrats on posting information which was clear and concise.

I say that because so many of your posts talk down to those of us who you deem to be beneath your intellectual level.

More informative posts such as the previous will be much appreciated.

I can PROMISE you (and others) that the LAST THING I ever think is that I'm intellectually above ANYONE and I'm not going to start pretending such on PACE ADVANTAGE.

[boxcar]

Originally Posted by slewis

I can PROMISE you (and others) that the LAST THING I ever think is that I'm intellectually above ANYONE and I'm not going to start pretending such on PACE ADVANTAGE.

Right. You just pretend that everyone else is intellectually beneath you. And this I can promise you with your long history of posts.

Boxcar
P.S. I'm glad to see you've been able to replenish your supply.

[johnhannibalsmith]

Not to be redundant, but before Boxcoche jumps in with his saga length rebuttal to Slewis - that was really an excellent post to capture the essence of your position, from your perspective.

[slewis]

Originally Posted by Robert Goren

Slewis, could you explain exactly what a credit default swap and a derivative is? More exactly the ones trade/created by the London office of AIG. I am pretty sure I know, but I would like to see an good explaination of them.

Wall St. is always looking to get higher yields for investors.



For the example I’ll try and use round numbers:



Banks, write mortgages. They need inflo of cash to continue writing more and more loans. You cant write unlimited loans. You must meet some reserve criteria.



Along comes the Mortgage Backed Security. What they do is BUY a bunch of loans from the Bank in exchange for CASH. The bank, if it sold the mortgages to homebuyers at say 6%, will offer the Mortgage backed Security people at say 4%. The bank has now locked in their profit and the loan is the responsibility of the Mortgage backed Security people, who, in turn, offer a security to investors at say 3% YIELD (which is higher then they are getting in a CD, etc). They “pool” a bunch of these loans together for these securities and what gives the investors their “yield” are the constant flow of homebuyers making their monthly mortgage payments.



But what should happen if the market turned sour and people default on the loans.

Well, a small number of “possible defaults” are built into the yield of the Mortgage Backed security through actuarial statistics and analysis.

No problem. But what happens if A WHOLE BUNCH of people default?



Hence, the “Credit Default Swap” is born.



It is a derivative (a fancy term for contract) which states something to the effect of “You pay me up front, “X number of dollars”, and I’ll take the liability from you should X Y and Z happen.

(Which in essence, was a WHOLE BUNCH OF HOMEBUYERS defaulting on their homes and the Real Estate Market collapsing).

In the case of the Credit Default Swap, it’s an insurance policy against such.

It provided the last bit of protection against the issuers of the Mortgage Backed Securities, making them easier to market.

I never traded them (CDS). I dont hink they existed when I was on Wall St. I traded interest rate swaps, mostly in Deutche Marks and Yen and that was back in the 90's when derivatives first came out.
So when all this went down with Credit Default Swaps, it was kinda new to me too.

[boxcar]

Originally Posted by johnhannibalsmith

Not to be redundant, but before Boxcoche jumps in with his saga length rebuttal to Slewis - that was really an excellent post to capture the essence of your position, from your perspective.

SL should have stuck with essay. But once he starts defending himself in a separate post, that bit of sophistry should not go unanswered.

I think SL could be suffering from a Good Cop, Bad Cop Syndrome -- all neatly gift-wrapped in one skull.

Boxcar

[slewis]

Originally Posted by boxcar

Right. You just pretend that everyone else is intellectually beneath you. And this I can promise you with your long history of posts.

Boxcar
P.S. I'm glad to see you've been able to replenish your supply.

You know Boxy, I once had a boss that told me "The reason why you're unpopular is because you can be a very intimidating person, look people square in the eye, and tell them the truth.
People dont want to know the truth, they cant face the reality, they're afraid.
You'd be a lot more popular and will go further in life if you "play the game" " he stated to me.
I told him God didn't put me put on this planet to "play the game".

Even your God can appreciate that.

[Robert Goren]

Slewis, thank you, that is what I understood. A credit default swap is a fancy term for an insurance policy.