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Re: The One Percent Pt. 2

Unread postPosted: Sat 29 Dec 2018, 21:51:45
by dolanbaker
Yes Merkel is on the way out, but her legacy is clear to see and will affect the EU for many years to come.
She endorsed the "growth in non-negotiable" maxim and did all that the "masters" requested to increase the national population to ensure that growth continued.

Re: The One Percent Pt. 2

Unread postPosted: Sat 29 Dec 2018, 22:15:08
by Outcast_Searcher
vtsnowedin wrote:
Newfie wrote:What will Drive it is what crashes all Ponzi schemes. When you can’t find enough converts to prop up the fake earnings.

I don’t expect to convience you, nor you me.


Perhaps you meant convince?
Dam you auto correct!!! :)

Since when does auto correct choose a string of letters which isn't a word?

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 03:26:01
by Pops
ralfy wrote:In any event, I think anyone will have a lot of difficulty explaining how present credit levels can be backed up by physical assets.

I realize this is an old conversation but thought I'd just chime in and try for a simple definition.
Derivatives are contracts whose value is derived from an underlying asset but which otherwise have no connection or claim on that asset.

Let's say you loan someone money @10% to buy a car. You keep the title as security, it's a securitized loan.
But you are worried rates may rise. So to hedge your risk that the cost of money might rise above say 8%, you make a contract with a different party who will pay you some amount if rates rise. In return you pay some set fee every month or whatever. That person has no claim on the car directly, no involvement in the original loan whatsoever, the whole contract is derived from an interest rate benchmark. it's insurance. It's a bet.

Whatever you call it, it's not backed by anything except the contract. The reason there can be such a ridiculous total value of 1,600T or whatever is these bets can be made on anything, oil futures, the weather, stock options exchange rates. And they can all be stacked one atop the other, the car loan can be hedged, swapped, futured... then those contracts can be used in trances to be combined or split and hedged again until nothing recognizable remains of the original transaction. Who would even know how many bets that one car loan is the focus of?

I think that's how it works

Read The Big Short by Michael Lewis, really great book about how the subprime banks lost their ass selling swaps.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 07:04:33
by Newfie
And it’s all bets, not real money, no?

So when the whole thing goes POOF, no one is actually loosing money, just getting stuffed on bets they made.

Is that not substantially correct?

But also, the “value” of these bests is just the nominal value of the water. Like some drunk bettin $100,000 he can crush a beer fan with his forehead. Neither bettor has the money to pay in the first place.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 07:18:49
by Cog
Not exactly. With a credit default swap there is liability when the underlying security or bond fails. AIG sold CDS which basically guaranteed that the banks that bought this protection would be made good. When subprime mortgages began to default they could not make the banks good on the CDS they sold them.

Not just AIG was involved in CDS. Everyone was. Banks, insurance companies, even pensions. You couldn't lose money as long as you never had to pay off if a bond or security didn't default. CDS was not a market regulated by the SEC or anyone else.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 07:29:19
by Cog
CDS works like this. Let's say Newfie buys a corporate bond in Apple with a return of 6%. But Newfie is nervous that Apple can't pay that 6% or even worse defaults completely on paying back Newfie principal. Cog says for a small monthly payment I will make you whole if Apple defaults. That is all well and good up to point that Apple does default and Cog doesn't really have the money to make Newfie good.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 07:42:42
by Cog
But here is the good news on derivatives and CDS. Most corporate bonds, municipal bonds, and mortgage backed securities do not default. They are paid as agreed to both the buyer and seller. So the CDS And derivatives doomers over inflate the risk of what is truly in play here.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 07:52:07
by vtsnowedin
Cog wrote:CDS works like this. Let's say Newfie buys a corporate bond in Apple with a return of 6%. But Newfie is nervous that Apple can't pay that 6% or even worse defaults completely on paying back Newfie principal. Cog says for a small monthly payment I will make you whole if Apple defaults. That is all well and good up to point that Apple does default and Cog doesn't really have the money to make Newfie good.
The problem is that the CDCs are available not only to Newfie in your example but to anyone that thinks Newfi's bond is a bad risk. It is akin to selling fire insurance to people other then the owners of a building. Once thousands of people have placed their bets in the form of CDCs someone lights a match and the issuers of the CDCs have to pay for not one house but thousands.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 08:00:28
by Cog
This is true, which is why there are now restrictions on CDS and reserve requirements in place now that we're not in place in 2007. Stress tests on banks are a good example.

CDS exposure has fallen from 61 trillion in 2007 to 9 trillion in 2017.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 08:39:28
by vtsnowedin
Cog wrote:This is true, which is why there are now restrictions on CDS and reserve requirements in place now that we're not in place in 2007. Stress tests on banks are a good example.

CDS exposure has fallen from 61 trillion in 2007 to 9 trillion in 2017.
I don't know all the particulars of "stress tests" for banks but I think a simple requirement that you hold the bond to be able to buy a CDC against it would suffice.
This and other derivatives markets have been set up as a casino where players place their bets daily which is all well and good for the financial firms that are the players but they should not be allowed to bet the deposits of their customers which are in large part our retirement investments.
They should be forced to go back and make money the "old fashioned way" :)

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 09:26:13
by ralfy
Pops wrote:I realize this is an old conversation but thought I'd just chime in and try for a simple definition.
Derivatives are contracts whose value is derived from an underlying asset but which otherwise have no connection or claim on that asset.

Let's say you loan someone money @10% to buy a car. You keep the title as security, it's a securitized loan.
But you are worried rates may rise. So to hedge your risk that the cost of money might rise above say 8%, you make a contract with a different party who will pay you some amount if rates rise. In return you pay some set fee every month or whatever. That person has no claim on the car directly, no involvement in the original loan whatsoever, the whole contract is derived from an interest rate benchmark. it's insurance. It's a bet.

Whatever you call it, it's not backed by anything except the contract. The reason there can be such a ridiculous total value of 1,600T or whatever is these bets can be made on anything, oil futures, the weather, stock options exchange rates. And they can all be stacked one atop the other, the car loan can be hedged, swapped, futured... then those contracts can be used in trances to be combined or split and hedged again until nothing recognizable remains of the original transaction. Who would even know how many bets that one car loan is the focus of?

I think that's how it works

Read The Big Short by Michael Lewis, really great book about how the subprime banks lost their ass selling swaps.


I'm aware of that. Now, guess who's been covering losses.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 09:30:35
by Cog
I know that banks, at least, are not allowed to use depositors money as a reserve towards covering a credit default swap. That has changed since the 2007 recession.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 11:48:25
by vtsnowedin
This was written before Trumps inauguration and was guessing what his administration might change. I haven't yet found a current status report but this at least gives a reader an sense of the complexity of the issues and the influence the banks have in the regulation process.
.............
Certain reforms, however, remain controversial. Still others are not yet implemented, or are still in the process of implementation. The leadership of the regulatory agencies responsible for the Dodd-Frank reforms will change in the new administration, and may reconsider or halt new or expanded regulations that have not yet been implemented, or delay the timing of some reforms. In addition, regulators may also seek to not impose, or to roll back, other more controversial changes.

Regulation AT. The CFTC’s proposed regulations relating to high-frequency and other electronic trading, known as Regulation AT, have been controversial and criticized by many market participants. It seems likely that this regulation may be delayed, withdrawn or significantly watered down, especially regarding the most debated aspects of the proposal, such as the requirement to submit source code to the CFTC.[1]
Position Limits. The CFTC has sought for several years to impose new, more restrictive position limits on a range of commodity futures contracts, in the face of significant opposition from market participants. Such an expansion of position limits may be less likely in the new administration. Recently, the CFTC has reproposed these rules, opening up a new comment period that will extend beyond the inauguration and grant the new administration significant influence over the final version of the rule, if any.
Swap Dealer Threshold. Under Dodd-Frank and current CFTC regulations, the current “de minimis” exception from swap dealer registration of $8 billion is scheduled to be significantly reduced at the end of 2018 to $3 billion. It may now be more likely that the current exemption level is extended or established as the permanent threshold.
Regulation of Security-Based Swaps. To date, the SEC has not implemented most of the Dodd-Frank reforms relating to security-based swaps. It is not clear whether the new leadership at the SEC will be interested in completing such reforms, and if so on what timetable. At a minimum, the SEC may need to take action as exemptions previously granted from the application of the securities laws to security-based swaps expire.
Margin for Uncleared Swaps. Implementation of new margin requirements for uncleared swaps continues, with an upcoming March 1, 2017 deadline in the US and other major jurisdictions for required posting of variation margin in transactions with financial entities. In a recent speech, CFTC Commissioner Giancarlo called the deadline “unrealistic” and asked his fellow regulators to consider the “market’s readiness and help ease the transition” to ensure the market’s continuing functionality.[2] In light of the numerous regulators involved, the prospects for any delay in these requirements are uncertain.
International Cooperation, Conflicts, and Harmonization. Dodd-Frank was enacted in the wake of the financial crisis and commitments among the G-20 countries to implement certain financial reforms. The implementation of Dodd-Frank, particularly the derivatives reforms, has generated a significant amount of conflict and complaints from other countries, and from internationally active institutions, over suggestions that the US requirements have gone too far and have an excessive extraterritorial effect. During the implementation process, there have in particular been disagreements between the US and EU over equivalence of their respective regulatory regimes and cross-border recognition of registrants. Rolling back Dodd-Frank requirements may reduce some of this conflict, but may also raise new questions as to whether US requirements are equivalent to those of other jurisdictions. It may also cause other countries to reconsider aspects of their own regulations. Market participants will worry about whether such changes undermine existing equivalence and/or substituted compliance, or will make it more difficult to obtain equivalence and/or substituted compliance in the future.
Resolution and Recovery. Congressional Republicans and others have suggested the repeal of Title II of Dodd-Frank, which established an “orderly liquidation authority” under which the FDIC would be authorized to wind-down systemically important institutions, outside of the normal Bankruptcy Code process. Title II reflects the US’s implementation of the goal among regulators in major market jurisdictions of ensuring the orderly resolution of global systematically important financial institutions. While never used, this authority has been criticized as potentially putting taxpayers at risk of supporting “too big to fail” institutions, although that assessment is not universally shared. A related question would be whether amendments could be made to the Bankruptcy Code to facilitate bankruptcy proceedings involving large, systemically important institutions.

Bank regulators in major jurisdictions have required (or proposed to require) changes in derivatives documentation to take into account stays on close-out rights under Title II and other special resolution regimes. (In the US, the banking regulators have proposed but not yet adopted rules of this type.) Market participants have developed resolution stay protocols and other documentation changes to implement such regulations. Those rules may be reconsidered under the new administration, and, accordingly, the protocols and other implementing documentation may need to be delayed or reconsidered as well.

Trading Requirements. The regime for swap execution facilities, including both the regulatory requirements for such facilities and the mandatory use of such facilities for certain types of derivatives, has, in the view of many market participants, not been entirely successful. Concerns have been raised about market disruption, market fragmentation and onerous regulatory requirements, amid questions about whether the facilities achieve the goals of pre-trade transparency and greater liquidity. The new administration may seek to rethink aspects of these requirements.[3]
Regulation of Clearing Organizations and Financial Market Infrastructure. The regulation of clearing organizations and other financial market infrastructure has been the focus of significant attention recently in the US and abroad, in light of the requirements to clear many derivatives and concerns about concentration of risk in clearing organizations. Particular focus has been on resolution, recovery and wind-down of such institutions. It is possible the new administration will take different views on some of these issues, perhaps as part of broader consideration of “too-big-to-fail” financial institutions more generally. Although the topic has been less widely discussed, some in Congress have suggested that the Dodd-Frank authority under Title VIII for the enhanced supervision of financial market infrastructures (including clearing organizations and payment systems), as well as the access of such entities to certain Federal Reserve services, could also be reconsidered.
........

http://clsbluesky.law.columbia.edu/2017 ... der-trump/

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 12:01:53
by onlooker
The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. ... That created the financial crisis that led to the Great Recession.

So the Dodd Frank Act was intended to introduce more regulations to curb these excesses that led to the Great Recession.
But now they have rolled back these important controls on Banks. Found this article which is quite revealing because of the initial negative effect on Bank Stocks right after th legislation was passed.

https://www.thestreet.com/investing/sto ... k-14599468

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 12:02:53
by Newfie
Cog wrote:CDS works like this. Let's say Newfie buys a corporate bond in Apple with a return of 6%. But Newfie is nervous that Apple can't pay that 6% or even worse defaults completely on paying back Newfie principal. Cog says for a small monthly payment I will make you whole if Apple defaults. That is all well and good up to point that Apple does default and Cog doesn't really have the money to make Newfie good.


But here is the point I’m trying to make.

The only “real” money in this mess is the original investment I made in Apple. All the rest are simply wagers on whether or not the bond will be paid back at 6%.

So I have 100k to loose. I worked for decades to save that. That loss is the loss of my time and buying power. That was money I earned. All else are just bets. They are not “real” money, they are BS and bluster.

In a “real world”, let’s say bar poolroom, Newfie says he can beat Cog at pool. We agree to a bet of $100. Then each of us antes up $100 and some neutral, Ibon, holds the money until the contest is decided.

If there is no money in the post it’s all BS and bluster. Either party can walk out and renege on the bet. Even if the bet is honored no money is “lost” in the system, it’s a zero sum game, money is simply transfered between parties. The money spent in the premiums was “lost” to the guy covering the bet. But again, not to the system.

So when someone says $x trillion was lost in derivatives I yawn.

Not true?

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 12:14:18
by Pops
Unless your investment was borrowed to begin with...

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 13:17:08
by Cog
Good point Pops and a lot of the borrowed money was then leveraged to the hilt.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 13:28:18
by Cog
Something to remember about the subprime crisis and potential banking defaults. Treasury Secretary Paulson warned the Senate that if Tarp wasn't passed then martial law and tanks in the street would happen.

Now some of that was a bit of hyperbole to get the votes to pass it but not completely. Liquidity and the credit markets were frozen. You couldn't lend to another bank or other financial institution because you had no idea how exposed they were to CDS risk. Lehman was allowed to go down and Bears Stearns was going to be next. AIG, Fannie, and Freddie would have all collapsed and defaulted. The Fed and Treasury saw this happening sooner rather than later. So they intervened.

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 13:43:26
by onlooker
Cog, exactly what was TARP?

Re: The One Percent Pt. 2

Unread postPosted: Sun 30 Dec 2018, 13:50:59
by Cog
Troubled asset relief program. Basically it was the government buying up toxic mortgages from the banks while taking an equity position in the banks.

A lot of this money went to AIG who was heavily involved in credit swaps with commercial banks.