Tuesday, March 17, 2009

Thanks 2000 Congress, Clinton & Greenspan, for AIG!

MSNBC has this nice piece, courtesy of Dr. Desert Flower. The republican congress, lame duck Bill, and all-my-money-is-in-T-bonds-Greenspan enabled AIG to be the worthless derivative trading, credit default swapping monster it is today.


  1. I do not know why we didn't just give mortgage holders a few hundred billion.

    The way we did it bailed out two of the three groups that needed bailing out. The bailout helped banks and bank bondholders, and some holders of derivatives, but not the American public. They are still going to face a huge economic crisis.

  2. I am very ignorant about the 2nd group. Why do holders of derivatives need bailing out? If banks & bond holders are secured, why can't all the derivative holders universally hold hands, and march into the sea? there's probably a very good explanation like "then the banks would collapse" but me, in my real-goods-manufacturing-actually-making-tangible-material-goods-not-some-invented-financial-scheme-mislabeled-as-a-real-product paradigm can't grasp what benefit derivatives have for me, or my underwater-by-50% mortgage. If I was a financial trader or analyst I assume it would be very obviously bad, and probably catastrophic for all the derivative holders in the world to simultaneously become part of continental shelf's sediment, but I R an engineer, and I don't get it. Perhaps someone much smarter (like you or Ron) can s'plain to me why "we don't need no stinkin derivatives".

    I subscribe to Jon Stewart's view point - when a derivative goes bad or the company goes bankrupt, you're left with a worthless piece of paper. When a car company goes bankrupt, you're still left with a car - maybe a crappy car, but it's still a usable, tangible car.

  3. Unless you work at a car company, or one of the many suppliers, in which case you're left with no job.

    I think Mike said *some* holders of derivatives. I don't think he'd say all of them. But the lesser of evils is not destabilizing the entire mechanism of finance.

    Greenspan does have a lot to answer for.

    I personally am befuddled why the big banks that are worthless (Citibank, I'm looking at you) have not been nationalized. Wipe out the shareholders. I don't understand why the shareholders keep getting gifted government money. The "slippery slope" argument makes no sense. Smaller banks that are bankrupt get nationalized whenever needed.

  4. Shitty Bank (as Bill Maher refers to them), they hold my under-water mortgage! How fitting.

    On the car comment, I was trying to differentiate on how the car is something tangible and useful. What use is a derivative from a bankrupt company that issued / sold / bet-on it? That, I still do not understand.

  5. I don't understand your question. If your health insurance company goes bankrupt, what good is your policy? It's no longer any good, but that doesn't mean that health insurance itself it worthless (just your policy from a now defunct company). Are you saying all derivatives are worthless? Or that people should only buy durable goods that retain some residual value in the event of catastrophe? Or what?

  6. the multinational I work for is self insured... if they go bankrupt, I am out of a job. My home and car insurance are with my cousin's large US company, where he is an agent here in PHX - and it is not AIG.

    I am saying I do not understand derivatives enough to know why they are important. If every derivative held by every betting broker, and every betting broker who derived all of their income and self worth from said derivatives were suddenly Raptured and taken off the face of the Earth (or teleported into space, widest dispersal possible Scottie), how would it hurt me, Joe Taxpayer? I KNOW it would confuse people... and cause chaos... but would it lead to utter financial collapse? Is the whole system built so thoroughly upon 35:1 leveraged bad bets, that REAL Industries, that MAKE real Tangible Things, is a pale shadow in comparison? I don't know.

    I am hoping you or Mike or anyone less Financially ignorant than I am can fill me in.

    Sorry to be so difficult, and seriously uninformed.

  7. My point on insurance wasn't AIG. It was that insurance is not a physical good. It is not like a car. You can accept that the concept of insurance has value, even if your insurance, unlike a car, no longer has value if the issuer disappears (like derivatives).

    "Derivatives" covers a huge array of things. And now people have painted them with a ginormous brush. So when someone says "derivatives", I'm no longer clear what they mean.

    Lots of companies, including yours, use derivatives for really mundane aspects of running their businesses, such as managing exposure to currency fluctuations, securing predictably priced supplies of energy, and managing interest rate fluctuations on their debt. Not all derivatives are leveraged 35:1. Not all derivatives are simply bought and sold by hedge funds and banks to each other. There is a lot of criticism of all this activity that is perfectly valid, but they're not all bad, either.

    The what if they all disappeared scenario: well, I feel no one would benefit by ginormous wealth destruction and huge increase in unemployment. I'm not convinced that derivs holders should've been bailed out, though. But on one level that's like asking "how would I, a non-accounting person, be affected if all accountants and tax layers disappeared off the face of the earth." Is it a thought experiment or just some ill will-fueled fantasy?

    I don't know if I'm up to the task of explaining derivatives. I can try to give a few examples though, of how some derivatives might be useful.

    Suppose the population of Myrtle Beach has lots of savers but no young people looking for house loans. Suppose Pittsburgh has a lot of new young professionals moving in, needing loans, but there are not a lot of savings locally. Myrtle Beach savings can be used for Pittsburgh loans by the use of derivatives. (Assume the loanholders are all high-credit worthy, employed, buying houses less than 3x their income, with 20% down, to avoid degenerating into a subprime talk. I'm not talking about subprime.)

    Assume you start an engineering consulting firm and you've got working for you 10 people in the US and 10 people in France. The French you pay in EUR. You have paying clients in France (EUR), Switzerland (CHF), the US (USD), and Canada (CAD). Assume, though, that the EUR-billed proportion of work is much smaller than the size of your team, and most of your income is in USD. Your pay to the French workers is somewhat fixed in EUR terms but due to exchange rates can vary a lot. If you want to minimize the risk of EUR strenghtening via the dollar, you can do that, month by month, quarter by quarter, or year by year. Of if you'd like to, for any year, simply end up paying the average exchange rate for the year, you can do that. If you'd just like a little "insurance" against a huge move against you in EURUSD, fairly cheaply, but let your cashflows float otherwise, you can do that, too. Those are all derivatives.

    If your business has cash inflows, for whatever reason, at 45-day intervals, but have bills to pay at 30-day intervals, you can use derivatives to sync those up.

    Not to say that most derivs trading was some virtuous and helpful activity, just saying that not all derivatives are some sort of evil black magic.

  8. Thank you sir, for taking the time and effort to explain. I understand now that not all derivatives are evil juju, and many are used on the mundane day-to-day. I did not mean to lump these day-to-day versions in with the overly-leveraged, we-bought-and-sold-these-many-times-even-though-we-never-owned-them speculations that unregulated giants like AIG manipulated to concentrate obscene amounts of wealth in fewer and fewer corporate hands.

    I do appreciate your insights, and your taking time to help the uninformed. I've lead a very sheltered (from financial tools) life so far, I guess.

  9. This won't do much to explain derivatives, but here are some good pieces.

    First, a good article by the author of Liar's Poker, Michael Lewis.

    Second, and you've probably already listened to this because I'm sure I've plugged it already, but it's a classic -- a must-listen episode of This American Life -- The Giant Pool of Money.

    There have been a couple followups to that one, which are probably good as well, but I haven't listened to them yet.


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