Tag: Credit Default Swaps

Jim Brown: Louisiana joins in giving bailouts to Wall Street

Thursday, January 29th, 2015
Baton Rouge, Louisiana

LOUISIANA JOINS IN GIVING BAILOUTS TO WALL STREET!

Well, here we go again. Big banks and major insurance companies are “high-fiving” each other after they won big in Washington last month. We thought lawmakers had learned an expensive lesson after the financial crash in 2008 that led to massive bailouts at taxpayer’s expense. Back then, the financial industry was allowed to carry on high stakes gambling with your money. And now, it’s déjà vu as congress has reopened the casino doors.

Following the 2008 financial meltdown, congress used a little common sense and passed legislation known as Dodd-Frank, that limited banks and insurance companies from engaging in risking investments backed up by the taxpayer. “Go ahead and gamble on high-risk investments if you want, but don’t expect a bailout,” so the logical reasoning went.

High-risk derivatives were one of the major financial culprits that led to the financial reforms. Insurance companies like A.I.G. were insuring risky Wall Street investments, knowing full well that if things went bad, old Uncle Sam would be there to pay for the damage done. And since insurance companies like A.I.G. are regulated at the state level, regulators in Washington paid little attention.

Here’s what happened that caused the financial crisis. Insurance regulators had for years allowed A.I.G and other insurance companies to privatize the gains but socialize the losses. The fat cats at A.I.G. got multi-million dollar bonuses year after year, but when the losses had to be paid, it was the taxpayer, you and me, that were called on to cover all the wild-eyed spending spree that regulators allowed to take place. Continue Reading…………..

The Warning: The Incredible Story of Brooksley Born. How the Financial Crisis Might Have Been Averted.

One week ago Tuesday I sat in front of my Television spellbound watching PBS Frontline’s profile of Brooksley Born, a former Clinton Administration agency head who has since been termed the “Credit Crisis Cassandra” by the media. As the show ended all of my questions regarding the ineptitude of Obama’s economic team were answered and then some. Before we get to the answers we must first explore how Ms Born, as head of a sleepy federal agency in the Commodity Futures Trading Commission, tried to rein in and regulate over the counter derivatives of the same kind that imploded our financial system back in late 90’s. Lets begin with a story the Washington Post ran on the subject last May for the background:

A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America. Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers — the same Larry Summers who is now a key economic adviser to President Obama.

She was the head of a tiny government agency who wanted to regulate the derivatives. They were the men who stopped her.

The same class of derivatives that preoccupied Born — including the now-infamous “credit-default swaps” — have been blamed for accelerating last fall’s financial implosion. But from 1996 to 1999, when Born was the chairman of the Commodity Futures Trading Commission, the U.S. economy was roaring and she was getting nowhere with predictions of doom.

So, upstairs in the big house in Kalorama, Born tossed and turned. She woke repeatedly “in a cold sweat,” agonizing that a financial calamity was coming, she recalled one recent afternoon.

“I was really terribly worried,” she said. Continue reading “The Warning: The Incredible Story of Brooksley Born. How the Financial Crisis Might Have Been Averted.”

Hot Breaking News! New York AG subpoenas AIG on CDS contracts UPDATED

According to reader Steve,  this breaking news is hot – so here’s the story (h/t  Steve).

American International Group Inc (NYSE:AIG – News), which has received $180 billion in U.S. taxpayer money, was subpoenaed on Thursday by New York’s top legal officer for information on its credit default swaps contracts, sources familiar with the matter said.

Details were being sought on the contracts going back seven months, including those that have been wound down by AIG’s Financial Products unit and those that have not, involving billions of dollars, one of the sources said.

A spokesman for AIG declined to comment.

The request stems from New York Attorney General Andrew Cuomo’s investigation into $165 million paid to employees at the unit in retention bonuses this month.

On Thursday, Cuomo did not comment on the subpoena, but he said in a statement that “CDS contracts were at the heart of AIG’s meltdown.

“The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayers dollars to capitalize banks all over the world.” Continue reading “Hot Breaking News! New York AG subpoenas AIG on CDS contracts UPDATED”

Is it possible Berkshire Hathaway is insolvent? Warren Buffett, Oracle of Omaha and Media Darling, Welcome to Slabbed

A market economy creates some lopsided payoffs to participants. The right endowment of vocal chords, anatomical structure, physical strength, or mental powers can produce enormous piles of claim checks (stocks, bonds, and other forms of capital) on future national output. Proper selection of ancestors similarly can result in lifetime supplies of such tickets upon birth. If zero real investment returns diverted a bit greater portion of the national output from such stockholders to equally worthy and hardworking citizens lacking jackpot-producing talents, it would seem unlikely to pose such an insult to an equitable world as to risk Divine Intervention.

How Inflation Swindles the Equity Investor by Warren E. Buffett, Fortune May 1977

As the current CDO/MBS meltdown manifests itself in varying ways throughout our financial system we’ve seen Mr Buffett’s name with increasing regularity in the financial press. His recent 2008 shareholder letter was widely cited early last week in the press for instance, especially the paragraph that attempts to put current events in a historical perspective. I was drawn to the paragraph two above that one:

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

I immediately wondered what he meant by ‘They”. “They won’t leave willingly”. And is this the same “they” that brought us this disaster? Did anyone at CNBC, the Wall Street Journal or the New York Times read Buffett’s letter with a critical eye? I’ll warn our readers now this will be a long post by necessity.

First we’ll start with a blog entry from Seeking Alpha that appeared yesterday on our Hartford Bankruptcy Watch RSS feed. The entry and commentary, which we will explore in some detail, is stunning in both detail and human psychology. I don’t buy the author’s conclusions as a closer look at his data suggests something entirely different but let’s start with the numbers which are indisputable: Continue reading “Is it possible Berkshire Hathaway is insolvent? Warren Buffett, Oracle of Omaha and Media Darling, Welcome to Slabbed”

WaPo – AIG a fulcrum of the global financial crisis

Downgrades and Downfall, the last story in a three-part series on AIG,  published today in the Washington Post  makes for some great reading between ballgames.

The contracts were flying out of AIG Financial Products. Hardly anyone outside Wall Street had ever heard of credit-default swaps, but by early 2005, investment banks were snapping them up to insure all kinds of deals in case of default, fueling one of the great financial booms in U.S. history.

During twice-monthly conference calls that originated from the company’s headquarters in Wilton, Conn., president Joseph Cassano would listen as marketing executive Alan Frost listed the latest swap transactions for associates in the firm’s offices in London, Paris and Tokyo.

Once a small part of the firm’s business, the increasingly popular contracts had helped boost the company’s profits to record levels. The company’s computer models continued to show only a minute chance that the firm would ever pay out a dime on the contracts, and it turned down deals that didn’t meet its standards. (emphasis added) Continue reading “WaPo – AIG a fulcrum of the global financial crisis”

Sam Friedman on “Casino Capitalism”

National Underwriter Editor in Chief Sam Friedman’s blog entry concerning last Sunday’s 60 minute piece about speculation in Credit Default Swaps and their role in the recent implosions on Wall Street is excellent. I highly encourage our readers to pay Sam a visit and read the entire entry.  I don’t necessarily agree with his conclusions that state regulators would have had any impact curbing the abuses but I thought the overall entry was excellent.  Here is a snippet:

As CBS noted, once players packaged and passed along millions of shaky subprime mortgage loans in the form of collateralized debt obligations, buyers seeking to hedge their bets bought credit default swaps to transfer the risk of failure to others–such as AIG’s ill-fated Financial Products Division. This was essentially an insurance deal on AIG’s part, but no state regulator was permitted to oversee or restrict such transactions, and Uncle Sam didn’t interfere, either.

That meant there were no reserving standards, so AIG was allowed to become heavily exposed without having any real funds on hand if they ever had to pay off on these big-time bets. Continue reading “Sam Friedman on “Casino Capitalism””

Sam Friedman on "Casino Capitalism"

National Underwriter Editor in Chief Sam Friedman’s blog entry concerning last Sunday’s 60 minute piece about speculation in Credit Default Swaps and their role in the recent implosions on Wall Street is excellent. I highly encourage our readers to pay Sam a visit and read the entire entry.  I don’t necessarily agree with his conclusions that state regulators would have had any impact curbing the abuses but I thought the overall entry was excellent.  Here is a snippet:

As CBS noted, once players packaged and passed along millions of shaky subprime mortgage loans in the form of collateralized debt obligations, buyers seeking to hedge their bets bought credit default swaps to transfer the risk of failure to others–such as AIG’s ill-fated Financial Products Division. This was essentially an insurance deal on AIG’s part, but no state regulator was permitted to oversee or restrict such transactions, and Uncle Sam didn’t interfere, either.

That meant there were no reserving standards, so AIG was allowed to become heavily exposed without having any real funds on hand if they ever had to pay off on these big-time bets. Continue reading “Sam Friedman on "Casino Capitalism"”

Congress advised to duck regulation of credit swaps – quack, quack

The Senate Agriculture Committee must have sounded like Old McDonald’s Howey’s Farm given the news from the hearing reported by the National Underwriter.

New York State Superintendent of Insurance Eric Dinallo…appearing before the Senate Agriculture Committee…explained that credit default swaps can be divided into two categories. The first he noted are transactions in which the holder of an obligation, such as a bond, “swaps” the risk of default with another party, who guarantees it for a fee.

That transaction, he noted, can be seen as similar in nature to an insurance transaction.

Similar? If it looks like a duck, acts like a duck, and sounds like a duck it must be a duck.

A second form, which Mr. Dinallo referred to as a “naked credit default swap” differs in that no party involved has ownership of the obligation, and is effectively a “directional bet,” he said.

However, regardless of what was said, naked or fully dressed, if a transaction meets the three-part test established  in SEC v Howey (1946), the duck is a security and subject to regulation accordingly: Continue reading “Congress advised to duck regulation of credit swaps – quack, quack”

Jim Grant on the Financial Crisis: A Full Blown Financial Storm

Bellesouth sent me an email mentioning Jim Grant appeared on 60 minutes Sunday night. I’ve mentioned Jim Grant several times of late since he has been out front of this financial crisis for quite a long time.

Jim knew what the implosion of our financial system would mean and steered his subscribers to safer ground including short positions in certain financial services indices.   As you can see from the story transcript he doesn’t mince words. Here are some highlights:

It started out 16 months ago as a mortgage crisis, and then slowly evolved into a credit crisis. Now it’s something entirely different and much more serious.

What kind of crisis it is today?

“This is a full-blown financial storm and one that comes around perhaps once every 50 or 100 years. This is the real thing,” says Jim Grant, the editor of “Grant’s Interest Rate Observer.” Continue reading “Jim Grant on the Financial Crisis: A Full Blown Financial Storm”