UPDATE #2: Here is an interesting discussion of the sources of the AIG meltdown and the contribution of CDSs.
Let’s start by looking back to the dot-com era, which also happened to be the era of the day trader. Remember them? A successful day trader in the late 1990s could gain a following over Internet chat then use that following to make money by becoming an alpha trader. He’d say “I’m selling this” or “I’m buying that” and copycat day traders would do the same. If enough of them acted they could influence the price down or up and – since the leader was leading – he could almost always liquidate his position with a profit. The quickest of his acolytes would make profits, too. Those who didn’t profit weren’t seen as exposing the inherent flaws of this system, they were just viewed as too slow.
To a certain extent, the heirs of day trading have taken the lessons of that earlier era and applied them with devastating effect in the Twitter Age.
If a bunch of wealthy traders get together at Starbucks and agree to short-sell a company or a financial instrument, driving down that price ideally to the point where it never recovers, well that’s against the law. But with trading automation and the Internet as a platform it is possible to accomplish this same end WITHOUT it being explicitly illegal. It is even possible that the perps don’t know the level of damage they are inflicting, though I doubt that’s true. The trick is to avoid communication. If there is no communication between traders there is no chain of causation, no conspiracy, just an unhappy accident.
Read the rest. Cringely is the best source of info on the computer industry.
UPDATE: The Wall Street Journal comments on the disastrous precendent being set with the punitive 90% tax on bonuses passed by the House.
The financial system will suffer in particular, just when the Obama Administration is desperately seeking more private capital to ride out future losses. Facing such limits on the ability to reward talent, every bank CEO will try to pay off the TARP as soon as possible, whether or not this leaves the bank with a weaker capital base. Hedge funds and other investors that Treasury needs for its new Public-Private Investment Program, or for the Federal Reserve’s TALF, will also be warier, if they’ll play at all. Treasury may promise nothing punitive for these programs, but that’s also what it said about the TARP.
The Washington Monthly crowd are excited at the prospect of secret votes on Obama’s legislative priorities. The plan is to deny the Republicans the opportunity to debate the bill by introducing it and voting it into law in secret.
Senior members of the Obama administration are pressing lawmakers to use a shortcut to drive the president’s signature initiatives on health care and energy through Congress without Republican votes, a move that many lawmakers say would fly in the face of President Obama’s pledge to restore bipartisanship to Washington.
Republicans are howling about the proposal to expand health coverage and tax greenhouse gas emissions without their input, warning that it could irrevocably damage relations with the new president.
“That would be the Chicago approach to governing: Strong-arm it through,” said Sen. Judd Gregg (R-N.H.), who briefly considered joining the Obama administration as commerce secretary. “You’re talking about the exact opposite of bipartisan. You’re talking about running over the minority, putting them in cement and throwing them in the Chicago River.”
The budget reconciliation process was devised to iron out differences in House and Senate versions of the same bill. The bills would originate in the respective committees, be debated and passed, first by the committee and then by the entire house.
With 58 Senate seats, Democrats need the support of at least two Republicans to block a filibuster. But they could pass a reconciliation bill without any Republican votes — and without the support of troublesome moderates in their own party.
Some moderate Democrats are arguing that reconciliation would empower their party’s liberal wing while undermining a critical aspect of Obama’s popular appeal — his promise to work across the aisle.
The “moderate Democrats” just happen to be the same ones up for election next year. That suggests how popular this is likely to be with voters.
It looks like fascism to me. And, if you doubt that, look at this.
With almost no public attention, both chambers of Congress in the past week advanced an alarming expansion of the Americorps national service plan, with the number of federally funded community service job increasing from 75,000 to 250,000 at a cost of $5.7 billion. Lurking behind the feel-good rhetoric spouted by the measure’s advocates is a bill that on closer inspection reveals multiple provisions that together create a strong odor of creepy authoritarianism. The House passed the measure overwhelmingly, while only 14 senators had the sense and courage to vote against it on a key procedural motion. Every legislator who either voted for this bill or didn’t vote at all has some serious explaining to do.
Last summer, then-candidate Barack Obama threw civil liberties to the wind when he proposed “a civilian national security force that’s just as powerful, just as strong, just as well-funded” as the regular military. The expanded Americorps is not quite so disturbing, but a number of provisions in the bill raise serious concerns.
But he plans to cut Defense to “reduce the deficit.”
Here’s another thing besides the Cabinet nomination debacle that I’ve been holding against Gregg ever since his name started to be bantered about nationally. I’m still suspicious since he is a politician after all, but it is encouraging to see his recent remarks get air time. At minimum, at some point the remarks will be great material for the “see, I told you” election soundbites. Yet part of me hesitates because his latest stance sure does smack of the Dems when they were for the war before they were against it. Whatever, I’m glad he’s part of the pushback gaining momentum.
“Gregg championed TARP 1.0 in front of an I.O.U.S.A. audience at the New Hampshire Film Festival when Bush was still in office. Now, curiously, he’s concerned deficits could pose a problem for the country down the road.”
Gregg says he isn’t running for reelection. What Geithner has just rolled out is the original TARP plan slightly modified to include risk-free private investment. It may not work because the Congress yahoos have scared all private capital off with the 90% tax and payment caps. What they should do is suspend mark-to-market and auction them off.
Ha. Then how would all the insiders divvy up the spoils and leave the trash for the taxpayers? This is essentially not much more than an updated, gussied up RTC. And we know how exactly how the insiders did with that arrangement. Plus, the guvmint still gets to slide their greasy fingers all over the deals probably with inscrutable fine print in the front loading and back loading of the transactions. No, I’m afraid an auction is just too transparent and hard to control.
I just read that Countrywide had a bunch of regulators gunning for them in the latter days. But…and I did not know this…they were able to ‘select’ a different regulator to come in and ‘regulate’ them. The regulator in question was the Office of Thrift Supervision [OTS] which came to their rescue in spring 2007. OTS is the agency that basically created the option ARM loan in conjunction with the larger thrifts back in the Carter days. Probably with good intentions originally like most every innocent but crackpot fix these govt people come up with. And this agency was the one which allowed their regulated banks to up their loan to reserve ratios to absurd levels. The deeper you dig into the alphabet agencies, the sicker it gets. This is where the corruption is sanitized, if not legalized. It goes on no matter which party is dominant. Spoils is spoils.
My ex-wife worked for the RTC and is now working for the FDIC winding up failed banks. She briefly worked for Countrywide years ago and said it was as crooked as a dog’s hind leg even then. The hard part is dealing with bad loans and bonds when the bank has not failed, or is not allowed to fail. The RTC simply sold off those assets that had value and wrote off the junk. Now, the risk is that the bank will sell the government the junk and keep the better assets. That’s OK but how do you value the junk ? One way would be an auction but the Congress has screwed that up by going on a French Revolution-type rant about bankers. Now, who wants to deal with them ? Geithner seems to have finally settled on the auction model but it is at least six months late.
Not sure how I managed to navigate to this page… but anyway, I like what I see, so keep it up