patrick.net

I say junk the whole market. If hedge funds want to make money, let them invest in US companies, instead of betting they go broke.

I am frustrated at this kind of attitude. It is precisely why we are here in the first place.

Mal-investments must be liquidated. Why favor investment in a time of purge?

Annul these stupid things! THAT will give people the confidence to invest.

When policy makers start annulling private contracts based on their self-righteous judgment, people will LOSE all confidence to invest.

Do you admire Hugo Chavez?

All-right, lets take Peter' argumnet.
"Hi, I am in insurance comany. Pay me $1k a year and I will insure your $300k home."
However, the insurance company sets aside NO money to actually pay people. What it does is plays at the race track losing everything as fast as it comes in. No one cares since there are no fires for 8 years. Then, we get a big fire. It burns hundreds of thousands of homes.
And the inurance company laughs and simply goes out of business.

Look, regulation is there to ensre that insurance companies actually make real provisions for real risk based on real analaysis.

I keep wondering who would willingly be a countryparty to hedging debt bets? I mean, we ALL see massive debt loses coming. So who? Either their cost shold shoot way up (and they are, but still not enough) or the company is already bankrupt. It is willing to keep taking on bad CDS deals in the hope the new premiums will help it pay off its old bad bets and that eventually they will simply get lucky and stop having to pay out. Its like betting bigger andbigger at Vegas (until you go bankrupt).
OR the get the US governement to back them and then take on ay CDS deal out there, cuz' why not? Its just Unlce big bucks that cover pay outs.

Illegal contracts are anulled ALL THE TIME. IT IS A PART OF LAW! We frequently only lear later how some product is used in an unintended manner which has devestating consequences. CDS, since they are NOT tied to an interest in the actual Debt, and Since the Hedge can be many many times larger than the debt itself mke no econmic sense.

What we have is heigtened risk and heghtened volatility. The lesson lerned by these people is that the governement wll step in using its systemic risk clause. Heck, it is part of their business model. Dick Fuld admitted as much. "Why didn't I get MY bailout?"

If we had clear access to the worlds positions on CDS you would see the world - um sweat. Becuase you cannot even puish he bad guys. If you drive their stock to zero for their stupid positions, you suddenly discover that the debt of the stupid guys is backed by other stupid guys. And so on. For more than 10x world GDP. Since the bad cannot be punished, becasue everyone is bad, you must simply annull. The only other options is to asymetrically reward people in more ordinal positions.
For example, when we get runs on money market funds, at some threshold they HAVE to shut down a fund. The thinking is that the first people out the door get all of their money, and each person in turn less and less until evetually the last person (at the leverage limit) gets alomost nothing. To avoid self-fulfilling panicks we wite into law how to shudder funds. Just as we right into la how we annull unenforcable contracts.

I admire your purist views, Peter, but they are remarkably shallow in the context of how the world actaully works. The abuses of 'pure market forces' are amazing - and we have already seen the abuses.

Your snotty question about Chavez is beneath you and I will not respond in kind.

Strange, I find myself agreeing with Peter P alot lately.

Thanks, Lost Cause.

Insurance regulations protect consumers. Exotic financial instruments are not designed for consumers. They are intended for supposedly sophisticated institutions.

Every single book on financial risks talks about counter-party risks in derivatives (esp. OTC derivatives).

Regulating private transactions is not the answer.

Transparency is a much better step. We also need better risk management models. We will learn. And we have to learn faster than overzealous policy makers.

I am frustrated at this kind of attitude. It is precisely why we are here in the first place.

Absolutely not.

We are here because of the immutable nature of Gresham's law. Systemic fraud has overwhelmed the financial markets and all but driven out all the good money.

You do realize we are talking about fraudulent insurance against fraudulent loans graded with fraudulent ratings?

All thanks to de-regulation of the free market? How on earth could that be an argument for even *less* regulation?

Epic. F*cking. Fail.

You can't have transparency in unregulated markets. Fraudulent transactions need to be opaque in order to attract participants on the losing side. The only thing that can compete against fraud is more fraud, so the most successful instruments need an opacity approaching infinity. This is the situation we find ourselves in now.

They are intended for supposedly sophisticated institutions.

Like pension funds?

The government should bail out the most regulated public holders of CD's; let the hedge funds rot and then either ban swaps or regulate them like they do insurance (which is what they are).

Here's a brilliant idea; how about we divide the market up into regulated and unregulated securities. Regulated securities are implicitly backed by the government/taxpayer. Unregulated ones are not.

Let the market decide which one is the better investment.

If you even consider the possibility that this mess was partially caused by an imprudent interest rate policy than OVER-REGULATION could be the culprit.

Regulated securities are implicitly backed by the government/taxpayer. Unregulated ones are not.

No securities should be backed by the taxpayer.

Like pension funds?

Yes. Hopefully this spells the end of defined-benefit retirement plans.

Here is my proposal of the perfect retirement plan:

1. Abolish capital gains tax
2. Let people manage their own retirements in their previously "taxable" accounts
3. Scrap social security

Another Berkeley Hills Firestorm special.
7235 BUCKINGHAM BLVD
Sold: 9/21/2006 $1,500,000
Repossessed by bank on 6/25/2008 for $1,200,000.
Currently for sale for $1,072,900
Unfortunately, property shark doesn't have the loan info so we can't tell if there was a luck second lien holder.

Why should the government favor pension funds over hedge funds? Don't pension funds invest (at least partially) in hedge funds?

Why should the government favors pension funds over hedge funds? Don’t pension funds invest (at least partially) in hedge funds?

Pension funds are tightly regulated by the government and restricted as to their investment methodology. They have strict requirements regarding leverage and shorting, for example.

Hedge funds are almost entirely unregulated and have no such restrictions. Pension funds cannot invest in hedge funds. Hedge funds are only open to accredited investors (i.e. rich people).

Pension funds cannot invest in hedge funds.

Pension Officers Putting Billions Into Hedge Funds

http://www.nytimes.com/2005/11/27/business/yourmoney/27hedge.html

Hedge funds are only open to accredited investors (i.e. rich people).

Many pension funds are richer than most rich people. Besides, ever heard of Fund of funds?

In my opinion ONLY, an investment plan is unsound unless shorting is allowed.

Not investment advice

The concept of a liquidity trap is flawed. The theory that pumping money into the economy can somehow fix things is flawed. Japan is proof enough of this.

The simple solution to this imaginary "trap" is to do nothing.

Prices are too high and need to come down. Overcapacity needs to worked through. Resources need to be freed from unproductive activities.

It's that simple.

deflation says:
"The concept of a liquidity trap is flawed. The theory that pumping money into the economy can somehow fix things is flawed. Japan is proof enough of this.

Liquidity always helps if lack of it is causing the economy to function below its capacity.I don't know if that was the case in Japan.
I completely agree that throwing more liquidity at an economy functioning at full capacity will stoke inflation and do no good. classic text book case and fed is well aware of it.

BTW , Gold is down a lot. I hope we don't have many folks here who were victims of irrational Gloominess and thus bought at peak prices.

Many pension funds are richer than most rich people. Besides, ever heard of Fund of funds?

Thank you for reminding me why I moved out of New Jersey.

However, I will happily admit my error and appreciate the correction.

O.T.

Anyone care to freak out? See the latest from the Market Ticker.

http://market-ticker.denninger.net/

Comments?

Andrew Lahde: Now I'm out of the hedge fund business, I can finally enjoy myself

Andrew Lahde was the manager of a small US hedge fund that returned 866 per cent to investors in 2007. Last week, he closed down the fund. The following is an extract from his farewell letter...

Thursday, 23 October 2008

Recently, a hedge fund manager who was closing up a $300 million fund was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement.

I was in this game for the money. The low-hanging fruit, the idiots whose parents paid for prep school, Yale and then the Harvard MBA, who were there for the taking.

These people who were (often) truly not worthy of the education they had received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behaviour supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

I will no longer manage money for other people or institutions. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. I have enough of my own wealth to manage. I will let others try to amass nine, 10 or 11-figure net worths.

Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two-week vacation in January during which they will be glued to their Blackberries or other such devices.

What is the point? They will all be forgotten in 50 years anyway. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life. So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the sub-prime debacle.

kewp, don't worry...

Sometimes, I argue just for the sake of arguing :)

The market doesn't need nor want liquidity. I think it has made that very clear. Trying to force liquidity on the market is like "pushing on a string".
No amount of printing nor helicopter drops of money will resolve the problem. All they can do is delay the inevitable.

O.T.

Comments?

Doesn't pass the sniff test.

A couple comments:

We had a balanced budget during the Clinton years. We can have one again just by ending the Iraq boondoggle and reversing Bush's tax cuts for the wealthy.

I agree in general with what needs to be done, I just don't see where a stock market collapse figures into this.

I live in San Diego and I don't personally know any FB'ers, other than a friend who short-sold a year ago. I've lived like a pauper the last two years paying down CC debt. *I could care less* if everyone else in America enjoyed a lesser standard of living for the next 10-100 years. Cry me a river.

The dollar is strong, commodities and housing are getting cheaper by the day and unemployment is manageable. If you do meaningful work the fruits of your labor will buy you more over time, not less.

Doesn't strike me as something worth freaking out over, personally.

that thing above is the worlds smallest virtual violin to play for all the boomers who lost money in the stock market.

LOL!!!

I wonder what this downturn in the market will do to University endowments? Here is some data on how most endowment funds are invested:

http://www.nacubo.org/x2376.xml

It will be interesting to see how this affects research and academia in general. There will be less endowment income to pay for the programs and less to reinvest.

I don't see how research and academia are improving humanity anyway.

We had Tulipomania in Holland centuries ago.

We just had a housing bubble. Only now the effects are global and systemic. We remain who we are. Knowledge and technology just allow us to destroy ourselves faster.

Kewp:
We had a balanced budget during the Clinton years.

Nope:Treasury Numbers:

FYear Year Ending National Debt Deficit
FY1993 09/30/1993 $4.411488 trillion
FY1994 09/30/1994 $4.692749 trillion $281.26 billion
FY1995 09/29/1995 $4.973982 trillion $281.23 billion
FY1996 09/30/1996 $5.224810 trillion $250.83 billion
FY1997 09/30/1997 $5.413146 trillion $188.34 billion
FY1998 09/30/1998 $5.526193 trillion $113.05 billion
FY1999 09/30/1999 $5.656270 trillion $130.08 billion
FY2000 09/29/2000 $5.674178 trillion $17.91 billion
FY2001 09/28/2001 $5.807463 trillion $133.29 billion

Almost made it in 2000, but there was no mythical "Clinton Surplus." Most of the myth comes from Enron-like off-booking of Social Sec. deficits, with SS receipts going to make the "Discretionary Spending" look balanced or surplused. I.e. Clinton admin added $1.4T to the national debt not fighting any major wars to speak of, low inflation, "Peace Dividend", getting the reductions out of Welfare Reform, and having a huge peacetime expansion of the economy, they still ran up a $1.4T deficit, a 31% increase.

Ya'll ready for Obama? Hold onto your wallet.

I still don't understand why Silly Valley people want Obama to be the president.

Think tax.

Alas, brace for president Obama and his demo-con-gress.

Peter P wrote : Knowledge and technology just allow us to destroy ourselves faster.

I completely agree with that , especially for developed countries.
What is our goal as a nation ? our level of happiness has stagnated many decaded ago. GDP growth is no longer increasing average happiness because GDP growth is not related to happiness after certain standard of living is met in a nation. so what are we trying to achieve here except consuming more and more to satisfy the never ending need for hierachichal superiority in the society. Everybody is busy producing just to consume more.
In the end, i hope our history is not written as a species which used its brain power just to consume the resources on earth faster than other animals, eventually hastening its demise as a species.
Its high time , we get our priorities right and re-think our debt based ever expanding economy.

Its high time, we get our priorities right and re-think our debt based ever expanding economy.

Sadly, we will never do that. Humans tend to push the system right towards its breaking point. The future for humanity is very grim.

That said, we as individuals ought to be optimistic. Want beer? :)

Happiness is expectations matching reality.

So long as we have unsatisfied wants, we will remain unhappy. No amount of technology can change that. In fact, expectations of technology improving our lives will only lead to yet more disappointments.

Emotionally, we are doomed.

Interesting stat, since I thought I was alone in not being able to vote this time around. It turns out 25% of AOL users who answered a survey said they have already voted. I voted by mail about a week and a half ago.

Interesting, people can't wait. I think they can't wait to crucify their representatives for voting on the bailout plan.

Oops, I meant to say "not being able to wait to vote."

Yen is pushing its March 14 high. WHat do you guys think?

MST

Might want to run those numbers again as a % of GDP and % of GDP growth, which is really what matters with deficits.

In fact, run that back to Eisenhower and you might be surprised to find out there is no correlation between party affiliation and deficit handling capability. Both parties have done greater and lesser damage along the way.

Partisanship has a terrible tendency to fool people into thinking that there is always another side. Sometimes it just is what it is, regardless of demagoguery.

Pete:

Yen is the only major currency that wasn't internally engaged in CDO/MBS/CDS BS (since they already did that to themselves 15 years ago) so its strength relative to other currencies is (and was) predictable. As far as other factors, Japan is also not a commodities producer, so they're not in that camp either (look at Canada). Gonna be a bitch on their exports, though.

Relative currency strengths are only marking out who is in least-worst shape.

Thanks, MST.

De-leveraging may also be playing a part.

I guess the Japanese "lucked" out because they were still having hangover from the last bubble.

Do you think the export part will be a major issue this time around? They have been setting up factories in other countries (e.g. US, China) now.

Randy:

I thought I was "anti-partisanizing", simply against the "Clinton Surplus/Balanced Budget" bit. 'Taint true as a direct proposition, no matter what size the Deficit Vs. GDP, no matter which side of the partisan divide i fall on. I'm no fan of the Reagan Deficits, either. And OMG the GWBush Deficits.

My big issue is with deficit spending BS. (And here we go again! A little Keynsian stimulus for Christmas! yay! I can pay my heating bill. Maybe.) My second big issue is the off-budget accounting, which allows statements like Kewp's to be made. I'll just "off-budget" a portion of my income and see what the IRS thinks.

And GAO's public debt as a function of GDP chart puts GWB PD at about the same level as WJC PD in 1998/99: http://tinyurl.com/4km4k3
So that makes GWB's deficits OK? I don't think so.

O.T.

Doesn’t pass the sniff test.

Only if that sniffer is on the nose of a Yellow Dog Democrat.

The point of that piece was to not re-elect anyone, regardless of party, who sold out the public by voting for the bailout. To want to forgive the bailout crowd en mass, just because more Democrats than Republicans would be voted out, is simply partisan. If the bailout supporters were voted out, thier replacements would see a good reason to pay more attention to constituents than to lobbyists. It may even put a crack in the two party system.

I'm going to do the unpopular thing and speak up in favor of partisanship:

It appears that many folks, although not necessarily anyone in particular on THIS blog, have decided that "the problem with Washington" is a "lack of bipartisanship".

I could not disagree more.

The whole point of having more than one party is that the parties are there to represent different views. If they always agree we might as well cancel democracy and elect the President as the Kaiser of the United Reich.

Those who know me know where I'm going with this: The problem is not partisanship or lack of bipartisanship. The problem is the serious case of "bipolar government disorder" (yes, this is a pun on a well known psychological condition) which stems from political power always hovering around an unstable 50% mark.

The solution is to abandon our dysfunctional election system and create a proper election system with true proportional representation and support for >2 parties.

As a side note: When Republicans call for "bipartisanship", what they really mean is, "god damn it, do what the president says, he is the commander in chief and The Decider (TM)".

Thank god for partisanship. Without it we would be a dictatorship long ago.

You have a point.

If we had strict partisanship, no Republican would have voted for the bailout (nor would W had proposed it) and no Democrat would have voted to give W the power to take us to war.

Hear! Hear! for partisanship.

Bipartisanship leads to things actually getting done in Washington. God Forfend! My point above is that *facts* are non-partisan.

As a side note: When Republicans call for “bipartisanship”, what they really mean is, “god damn it, do what the president says, he is the commander in chief and The Decider (TM)”.

And vice versa. Please note that the first vote on the bailout ws "Republican Obstructionism (TM)" [and lets have an "Oo-rah!" for Republican Obstructionism then] even though 30% of the no votes were Democrats, and a Democrat Victory against those nasty Repubs, even though 30% of the votes came from that side. It's only bipartisan if you agree with Nancy Pelosi, and then only if they lose, otherwise it's a great moral victory for Dems.

Double standards are the only thing consistent about Washington.