Post by jeffolie on Feb 15, 2012 10:29:50 GMT -6
MF Global reveals 'you are a sucker doomed to fail, but when?
Politics matter because the average American does not have enough money to pay ... bad debts, losses tranferred onto the taxpayers in the absorbing of bad banks, etc. But for the manipulated near zero interest on the bad debts now transferred to the FED and taxpayer, then the US would look like any other soveriegn that can not pay its interest and principal payments when they come due. So, as long as the world views the US government debt as a safe haven, then the near zero interest rates can go on until that changes when our currency will fail from the unwillingness of others to lend us more or from the unwillingness of our trading partners to accept Dollars at the same exchange rates, etc.
The below moralizing piece complains of the shift to the taxpayer the losses of failed gambles ... I agree.
Still the bigger issue is the accumilated transfer onto the taxpayer of the total debts that now are sustained by near zero interest rates.
Energy and ecology advocates often use the term sustainability to warn of the long term impact of exhausting the earth's ability to provide resources needed to continue our standard of living. Our total and growing debt has advocates warnings going back for decades such as boring charts by Ross Perot's predictions that in the decade of 2000 to 2009 which he cutely called the "o zone" ( a pun on the ozone levels), that the end of the financial world would come ... he obviously misjudged the ability of the financial world to 'kick the can down the road' with financial innovations that no average American could understand such as derivatives.
Mark Twain twisted the saying that 'those who ignore History are doomed to repeat it' by a saying attributed to Mark Twain that goes like 'History never repeats but sometimes it rhymes' which I like much better.
The below piece uses the term "Counter-Party" which comes from the financial language of derivatives. Barry Ritholtz assumes that you either understand the term "Counter-Party" or that you will learn its meaning. Ignoring the language and meaning of derivatives resulted in Obama transferring onto the taxpayer the huge losses from the AIG fiasco inorder to help the "Counter-Party" banks because the taxpayers paid 100% of the losses that AIG had from the derivatives it wrote and paid off the banks. That is real money but still not as important in size as the total debt now pushed onto the taxpayer's obligations, which the average taxpayer could not pay if interest rates rise just as, to make a comparison, a homeowner could not pay the rising mortgage payments of an adjustable rate mortgage.
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MFGlobal Reveals You Are A Bank Counter-Party
By Barry Ritholtz - February 15th, 2012
The esteemed former Fed Chairman, Paul Volcker, introduced a very simple regulatory concept that bears his name: The Volcker Rule. It was part of the Dodd-Frank regulatory reforms passed after the financial crisis of 2008-09.
There has been enormous pushback against what should be a simple piece of prophylactic rules on proprietary trading by depository banks (see this Jamie Dimon commentary as an example). Why? The profits of speculation goes to banks, driving bonuses and compensation; but the ultimate risk of loss lay with the FDIC and taxpayer. If the banks blow up, someone else besides the banker pays.
Privatized gains, socialized losses.
I want to take a few moments to briefly explain why this rule is so important to taxpayers, especially following the collapse of MF Global and the loss of billions of client assets.
Recall the basic facts of MFG: Management engaged in leveraged speculations with monies — whether it was their own or clients became irrelevant as the losses were so great as to wipe out much more capital than the bank actually had. Billions in losses meant MFG was insolvent and was wound down. On the winning sides of those trades were folks like JPM and George Soros. It is neither their duty nor obligation to verify whose money is on the other side of the trade — the clearing firms make sure the trade settles.
Those trade settlements are the only possible outcome. Why? Imagine a burglar robs a house of cash, goes to a casino and loses the money playing Roulette. The Casino settles that bet, it clears — and the burgled homeowner can never recover the money. Exchanges work the same way. They simply cannot validate the capital sources of every transaction. In the case of MFG, he money wasn’t even burgled — it was simply entrusted to an entity that became so insolvent thru excess speculation that even money in “Segregated accounts” was highly compromised.
And therein lay the dirty little secret of modern banking: THERE IS NO SUCH THING AS A SEGREGATED ACCOUNT. It is simply a helpful way to think about money and banking; it does not exist in the real world.
Consider your basic bank account — checking, savings, passbook, etc. We go through massive contortions to create an illusion that your money is yours, that its safe and sound in a bank with your name on it, in your own virtual safe deposit box. But that is simply not the reality of modern banking. What you perceive as “your money” is little more than an electronic journal on the banks accounting ledgers.
Fractional reserve banking means that the $100 you deposit is lent out — only $10 of your $100 is kept in reserve. Under normal circumstances, with thousands of depositors and millions of dollars, the banks have no trouble giving customers who ask for their money back the full amount at anytime. But it is not as if your money is sitting in an account waiting for you — you merely have a claim on those monies, and that claim is insured by the FDIC, and backed by taxpayers (theoretically).
You are, in fact, a counter-party to your bank.
In the old days, banks were boring. 3-6-3 banking meant borrowing at 3%, lending at 6%, be on the links at 3pm. It was simple. Banks were a utility, making reliable steady money, so long as they didn’t do anything too stupid to screw it up. Glass Seagall, the depression era legislation, prevented them from engaging in the sort of risky Wall Street speculation that caused so much trouble over the years. Think MFGlobal to get a better understanding of what is involved.
Thanks to the sheer ideological idiocy of Phil Gramm, enabled by the corruption of former Treasury Secretary Robert Rubin and the hubris of former Treasury Secretary Larry Summers, Glass Steagall was repealed. Thus, banks could be as stupid as they want to be — and you get to foot the bill.
What does all this have to do with the Volcker rule and MF Global? It is quite simple: Today’s post Glass Steagall repeal Bankers engage in leveraged speculation that potentially could blow the bank up. They did it to themselves with sub-prime mortgages; have no doubt that someone is working on the next ‘financial innovation’ whose losses will be even bigger and better than RMBS and CDOs.
When the next bank blows up — note I said when and not if — their depositors will become counter-parties. Those depositors are you, just like MF Global’s. Only, you as counter-part are not first in line with a claim on the monies — the folks on the other side of the trade get first dibs.
So this bank blows up, the trades settle, the counter party banks/brokers get paid, and whatever is left (if anything) goes to depositors. The FDIC will make good up to $250,000. FDIC’s budgets comes froma small fee on banks. If the losses are great enough, it will exceed their budget and so the taxpayer than fills int he difference.
The risks and rewards are to use a big word “asymmetric.” Hit a home run as a trader or banker, collect a huge bonus. Lose it all and then some, and the taxpayer is on the hook. Anyone who fails to see the simple math of this either spends their days shilling for banks or are acting as CEO mouthpieces.
Privatized gains, socialized losses.
www.ritholtz.com/blog/2012/02/volcker-rule-mfglobal-bankcounterparty/
Politics matter because the average American does not have enough money to pay ... bad debts, losses tranferred onto the taxpayers in the absorbing of bad banks, etc. But for the manipulated near zero interest on the bad debts now transferred to the FED and taxpayer, then the US would look like any other soveriegn that can not pay its interest and principal payments when they come due. So, as long as the world views the US government debt as a safe haven, then the near zero interest rates can go on until that changes when our currency will fail from the unwillingness of others to lend us more or from the unwillingness of our trading partners to accept Dollars at the same exchange rates, etc.
The below moralizing piece complains of the shift to the taxpayer the losses of failed gambles ... I agree.
Still the bigger issue is the accumilated transfer onto the taxpayer of the total debts that now are sustained by near zero interest rates.
Energy and ecology advocates often use the term sustainability to warn of the long term impact of exhausting the earth's ability to provide resources needed to continue our standard of living. Our total and growing debt has advocates warnings going back for decades such as boring charts by Ross Perot's predictions that in the decade of 2000 to 2009 which he cutely called the "o zone" ( a pun on the ozone levels), that the end of the financial world would come ... he obviously misjudged the ability of the financial world to 'kick the can down the road' with financial innovations that no average American could understand such as derivatives.
Mark Twain twisted the saying that 'those who ignore History are doomed to repeat it' by a saying attributed to Mark Twain that goes like 'History never repeats but sometimes it rhymes' which I like much better.
The below piece uses the term "Counter-Party" which comes from the financial language of derivatives. Barry Ritholtz assumes that you either understand the term "Counter-Party" or that you will learn its meaning. Ignoring the language and meaning of derivatives resulted in Obama transferring onto the taxpayer the huge losses from the AIG fiasco inorder to help the "Counter-Party" banks because the taxpayers paid 100% of the losses that AIG had from the derivatives it wrote and paid off the banks. That is real money but still not as important in size as the total debt now pushed onto the taxpayer's obligations, which the average taxpayer could not pay if interest rates rise just as, to make a comparison, a homeowner could not pay the rising mortgage payments of an adjustable rate mortgage.
================================================================
MFGlobal Reveals You Are A Bank Counter-Party
By Barry Ritholtz - February 15th, 2012
The esteemed former Fed Chairman, Paul Volcker, introduced a very simple regulatory concept that bears his name: The Volcker Rule. It was part of the Dodd-Frank regulatory reforms passed after the financial crisis of 2008-09.
There has been enormous pushback against what should be a simple piece of prophylactic rules on proprietary trading by depository banks (see this Jamie Dimon commentary as an example). Why? The profits of speculation goes to banks, driving bonuses and compensation; but the ultimate risk of loss lay with the FDIC and taxpayer. If the banks blow up, someone else besides the banker pays.
Privatized gains, socialized losses.
I want to take a few moments to briefly explain why this rule is so important to taxpayers, especially following the collapse of MF Global and the loss of billions of client assets.
Recall the basic facts of MFG: Management engaged in leveraged speculations with monies — whether it was their own or clients became irrelevant as the losses were so great as to wipe out much more capital than the bank actually had. Billions in losses meant MFG was insolvent and was wound down. On the winning sides of those trades were folks like JPM and George Soros. It is neither their duty nor obligation to verify whose money is on the other side of the trade — the clearing firms make sure the trade settles.
Those trade settlements are the only possible outcome. Why? Imagine a burglar robs a house of cash, goes to a casino and loses the money playing Roulette. The Casino settles that bet, it clears — and the burgled homeowner can never recover the money. Exchanges work the same way. They simply cannot validate the capital sources of every transaction. In the case of MFG, he money wasn’t even burgled — it was simply entrusted to an entity that became so insolvent thru excess speculation that even money in “Segregated accounts” was highly compromised.
And therein lay the dirty little secret of modern banking: THERE IS NO SUCH THING AS A SEGREGATED ACCOUNT. It is simply a helpful way to think about money and banking; it does not exist in the real world.
Consider your basic bank account — checking, savings, passbook, etc. We go through massive contortions to create an illusion that your money is yours, that its safe and sound in a bank with your name on it, in your own virtual safe deposit box. But that is simply not the reality of modern banking. What you perceive as “your money” is little more than an electronic journal on the banks accounting ledgers.
Fractional reserve banking means that the $100 you deposit is lent out — only $10 of your $100 is kept in reserve. Under normal circumstances, with thousands of depositors and millions of dollars, the banks have no trouble giving customers who ask for their money back the full amount at anytime. But it is not as if your money is sitting in an account waiting for you — you merely have a claim on those monies, and that claim is insured by the FDIC, and backed by taxpayers (theoretically).
You are, in fact, a counter-party to your bank.
In the old days, banks were boring. 3-6-3 banking meant borrowing at 3%, lending at 6%, be on the links at 3pm. It was simple. Banks were a utility, making reliable steady money, so long as they didn’t do anything too stupid to screw it up. Glass Seagall, the depression era legislation, prevented them from engaging in the sort of risky Wall Street speculation that caused so much trouble over the years. Think MFGlobal to get a better understanding of what is involved.
Thanks to the sheer ideological idiocy of Phil Gramm, enabled by the corruption of former Treasury Secretary Robert Rubin and the hubris of former Treasury Secretary Larry Summers, Glass Steagall was repealed. Thus, banks could be as stupid as they want to be — and you get to foot the bill.
What does all this have to do with the Volcker rule and MF Global? It is quite simple: Today’s post Glass Steagall repeal Bankers engage in leveraged speculation that potentially could blow the bank up. They did it to themselves with sub-prime mortgages; have no doubt that someone is working on the next ‘financial innovation’ whose losses will be even bigger and better than RMBS and CDOs.
When the next bank blows up — note I said when and not if — their depositors will become counter-parties. Those depositors are you, just like MF Global’s. Only, you as counter-part are not first in line with a claim on the monies — the folks on the other side of the trade get first dibs.
So this bank blows up, the trades settle, the counter party banks/brokers get paid, and whatever is left (if anything) goes to depositors. The FDIC will make good up to $250,000. FDIC’s budgets comes froma small fee on banks. If the losses are great enough, it will exceed their budget and so the taxpayer than fills int he difference.
The risks and rewards are to use a big word “asymmetric.” Hit a home run as a trader or banker, collect a huge bonus. Lose it all and then some, and the taxpayer is on the hook. Anyone who fails to see the simple math of this either spends their days shilling for banks or are acting as CEO mouthpieces.
Privatized gains, socialized losses.
www.ritholtz.com/blog/2012/02/volcker-rule-mfglobal-bankcounterparty/