PEB

From my Friend-Some Interesting Questions

Ok , lets cut to the chase , I want to know what the hell Derivatives have to do with the Government & the average American? 

The sums of money traded are truly staggering and moreover, everyone is involved. For instance AIG the insurance company now being operated by the Treasury and Fed, hold the pension money for many state employees up and down the country. That means money for Teachers, Police, Fire and Health Workers. 

AIG (London) had positions in the Credit Default Swaps (CDS) with Lehman London. When Lehman went bankrupt AIG hit a liquidity problem. Their money was tied up in the now defunct Lehman and lenders who provided the leverage to fund the positions were asking AIG to supply more collateral. It could not pay up and had to be bailed out by the authorities.  In the end AIG were strangled by a liquidity constraint brought on by a derivative bet gone wrong.

The end result of all of this for the average American means among other things a declining value in their 401K's (see yesterday's post). That simply means many people with have to work for longer. Student loans are already harder to get. Auto loans too, in fact any kind of loan for all consumer and investment purposes will contract. If businessman don't get loans, it becomes harder to invest, without investment there can be no growth in GDP and therefore no growth in employment. If consumer cant get loans they cant buy (or not as easily) the products made by the businessman. 

So these are the ways the average American is impacted by the crisis. All of that gives the government of the day a huge problem. It has to be running around putting out fires as the authorities have been doing.

Teresa Ghilarducci

Op-Ed Contributor

Save Pensions

By TERESA GHILARDUCCI

Published: September 26, 2008

THE meltdown in the financial industry isn’t merely a housing story populated by panicked home owners. Near retirees’ and retirees’ lives have been turned upside down, too, as their risky 401(k) savings accounts erode.

It’s too bad that, in their plan to bail out investment firms, Treasury Secretary Henry Paulson and the Federal Reserve chairman, Ben Bernanke, do not address the problems of older workers and retirees. The Treasury-Federal Reserve proposal should give not only investment banks but also retirees and those close to retirement the option to clear the junk — bad mortgage-based securities and their derivatives — out of their 401(k) accounts and invest in government-guaranteed bonds.

Then, once the current losses are stemmed, the federal government should protect Americans from further risks to the savings they set aside for their old age by creating a more secure system of investments for retirement accounts.

For the past 20 years, traditional pension plans, which paid benefits based on an employee’s years of service and pay, have been gradually replaced by individual accounts loaded with stocks and more exotic holdings, which provide benefits based on fluctuations in the financial markets. Today, only 18 percent of the work force, at most, including government workers and most private unionized workers, still have old-fashioned “defined benefit” plans.

This transformation has largely been the result of government policies that have encouraged, through tax breaks, the creation of 401(k)-type plans and promoted an approach to investing that favors risky stocks and bonds held in high-fee commercial accounts.

As the financial market implodes, the risks of this approach are becoming all too clear.

Policymakers in Washington should help Americans replace their risky accounts with new pensions more like the old kind with defined, predictable benefits. How would they do this? By setting up government-managed retirement accounts for every worker who does not already have an old-fashioned pension. Here’s how it would work: Each person would contribute 5 percent of his or her pay. And the government would provide an annual deposit of, say, $600, and also guarantee a 3 percent return, added to the inflation rate. (In a year with 4 percent inflation, for example, the guarantee would be 7 percent.) The account would begin to pay out in fixed intervals when a worker began to collect Social Security benefits.

The government would pool the proceeds from all the accounts into a sovereign wealth fund, and get its 3 percent rate of return (probably more) by investing in a diversified portfolio of both safe and risky assets. The government is large enough to handle this risk.

By getting rid of tax breaks for those 401(k)’s (most of which are set up for wage earners in the top 20 percent), the federal government could save at least $80 billion. That would easily cover the $600 contributions to pension accounts.

Such accounts would help the people who need help the most — the 50 percent of American workers with no pensions or even a 401(k) or similar plan. All workers need and deserve access to secure pension savings, protected from unforeseen ups and downs in the American economy and colossal messes in financial markets.

Teresa Ghilarducci, a professor of economics at the New School for Social Research, is the author of “When I’m 64: The Plot Against Pensions and the Plan to Save Them.”

More Articles in Opinion » A version of this article appeared in print on September 27, 2008, on page A21 of the New York edition.

 

Greenspans Legacy

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.”Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal ReserveChairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.

Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.

Read more here.

Did poor teaching lead to crash?

Business academics are accused of ignoring social and political questions. Zoe Corbyn reports

Business academics should take some blame for the global financial crisis because they have ignored fundamental social and political questions in favour of "narrow" teaching and scholarship.

This is the view of Stefano Harney, a reader in strategy and director of global learning at the School of Business and Management, Queen Mary, University of London, who has completed a study of more than 2,300 leading research papers in the field.

This week, he criticised leading business and management researchers, saying their work tended to focus on solving "small technical problems" such as product placement and supply chains. He said they had failed to examine the larger social and political questions that could provide fundamental answers on how to create a better world.

He also hit out at teaching in business schools for failing to deliver a cadre of professionals who cared about ethical and social issues.

Poor Teaching

Greenspan's Testimony - He says he blew it!

Interesting Reading

Interesting Listening: "Yes I have found a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he “made a mistake” in trusting that free markets could regulate themselves without government oversight.

Related

Dealbook: Liveblogging the Financial Hearings

 CNBC Video: Greenspan Testimony

Greenspan Prepared Remarks

A fervent proponent of deregulation during his 18-year tenure at the Fed’s helm, Mr. Greenspan has faced mounting criticism this year for having refused to consider cracking down on credit derivatives, an unchecked market whose excesses partly led to the current financial crisis.

Although he defended the use of derivatives in general, Mr. Greenspan, who left his post in 2006, told members of the House Committee on Oversight and Government Reform that he was “partially” wrong in not having tried to regulate the market for credit-default swaps.

But in a tense exchange with Representative Henry A. Waxman, the California Democrat who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.

Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Ideology was wrong.

Kimberly Christiansen on the Financial Crists

PURCHASE College SUNY; FINANCIAL CRISIS PANEL, Oct 15, Red Room, Student Services Building

Set the current financial crisis in context.            

I. Increasing bifurcation of income in this country. Resulting in (1)greater debt for majority of Americans & (2)enormous pools of capital looking for quick profits.

 

Average CEO now makes 344 X average line worker. Higher than any time in our history

Combined with real wages of vast majority of Americans have stagnated since 1970s. Despite near doubling of productivity (up 94%) and longer work hours.

 

REASONS FOR BIFURCATION of incomes:

1) Destruction of union movement.

Now have less than 8% private sector workforce unionized, down from 35% in 1960s (was more than that in wage-structure-setting heavy industry).

 

[Reasons for decline of union movement are complex.

--Incredibly anti-labor legislation (Taft-Hartley – worst legacy of Cold War)

--Changed climate (90% firms facing unionization hire “management consultants.”

--Stupid mistakes of unions (race, gender, lack of internal democracy, lack of broader political vision – not unrelated to Cold War – purging of Communists – also purged most radical organizers, those with vision of unions as more than business unions)]

           

2) Erosion of minimum wage (set floor under wages) (not COLA’d)

Even with recent increases, real value (deflated) not up to mid-1960s.

 

3)Regressive changes in tax structure.

Used to have progressive tax system – the more you make, the higher percent you pay. No longer do.

Decreased reliance on forms of taxation – capital gains tax, estate tax, etc. – that rich disproportionately pay and increased reliance on payroll taxes (FICA, etc.) that working people, poor disproportionately pay.

Bush ended estate tax (never applied to anyone with estate under $2m). Combined with high-end tax cuts of recent years.

 

4)Explosion of pay for CEOs and other high-end management.

2004-2007 CEOs of top seven investments banks made $3.6 Billion, despite fact their firms failing. (5/7 now out of business.)

 

End result of all this – average Americans’ pay stagnant or falling.

Combined with real price increases for food, fuel, housing, other necessities.

Average American maintaining his/her lifestyle by living on debt.

Explosion of debt in past 25 years. Most of this private debt.

 

ALSO means extremely wealthy have money looking to invest.

Big pool of capital sloshing around the globe looking for investment opportunities.

 

II. Enormous increases in public debt (gov’t deficit)

Unlike some economists, not particularly troubled by deficit spending IF it is used to purchase things that will lead to greater productivity in the future.

e.g., reams of evidence that deficit spending undertaken to fund GI bill resulted in much greater productivity in LR. Same true for infrastructure- or education-enhancing projects.

 

Now have record levels of current deficit and record national deficit.

But has NOT been used for anything that will enhance productivity.

Been used primarily for two things:

--fund an oil war in Iraq that they didn’t want to tax for; knew it would be politically unpopular if people had to pay for it; [peak production]

--give aforementioned high-end tax cuts to rich.

Neither of these productivity-enhancing.

 

Enormous amount of public debt greatly constrains the options of policy-makers.

E.g., frequent solution to current recession – deficit spending – pay for infrastructure, etc.

In principle, agree with public works projects. Bridges collapsing, etc.

Already have record levels of debt – sets limits on how much deficit spending we can do..

 

III. Financialization/Securitization of Economy

Growth of financial sector as profit source in US economy.

When I was doing my dissertation in 1980’s, financial sector (FIRE – finance, insurance, real estate) less then 10% of US corporate profits. Perceived to be secondary sector. Followed trends in “real” economy.

Dramatic changes since then. FIRE now responsible for 20% of GDP but nearly 40% corporate profits. Central engine of growth in US economy.

Exacerbates income bifurcation. Also dramatically increases instability.

 

Several reasons for this.

--Globalization fundamentally changed relationship of US economy to world economy.

Hollowing-out of heavy manufacturing industry in US (Fordist model) as more goods produced using low-wage labor in countries with few environmental or safety regulations. Including by US corporations. (Ford engines made in Brazil)

--Globalization – finance capital able to take advantage of opportunities around the globe as they appear. Not bogged down owning bunch of autobody plants in Flint, Michigan. Can move around the globe with click of computer key, to take advantage of deregulated markets (including currency markets) around the globe.

--Americans now more tied into, dependent on financial markets. When I was young, defined benefit pensions were the norm. (After retire, get $X/yr. for life). Now defined contribution. (TIAA-CREF). Makes whole economy, incl. consumer spending, much more dependent on state of financial markets.

--Change in nature of finance. Went from having primary relationships with nonfinancial corporations (lending money to GM, Ford, Crysler) to making money on own through speculation, etc. Casino economy.

 

But, as became more prominent and more profitable. Also harder to regulate. Very volatility that makes them profitable – able to run around the globe with push of computer key – makes them more unstable. Tied to whole world. When mortgages in US go under – felt on Asian stock markets.

 

Profitable, but unstable. Exacerbated by next factor – deregulation mania.

 

IV. Market fundamentalism as dominant economic ideology since 1980;

Exacerbated Income Bifurcation mentioned above. But also:

Resulting in (1)Increasingly Risky Behavior by Major Commercial Banks;

(2)Growth of Shadow/Parallel Banking System

 

Fundamentalism – truly a religion. Belief that markets are always superior to gov’t.

Not empirically-based hypothesis, but quasi-religious belief. 

 

Markets do many things well. Based on certain assumptions/preconditions:

perhaps most important is low-cost and accurate information.

Not think they work particularly well in health care. (How do you know if you really need an MRI?)  or in areas there have significant externalities (pollution, etc.).

Certainly hasn’t worked in financial services, where instruments too complicated for even econometricians to understand. Krugman: not understand CDOs: knew we were screwed.

 

Mantra since 1980 – “Deregulate, Deregulate, it is Moses and the prophets!”

Particularly true in financial markets, where efficient markets hypothesis dominant theory. EMH says that markets will effectively take into account all available information about riskiness, profitability of asset. If riskier, will cost less. Rick taken into account in price.

 

Repeal of Glass-Stegall and other banking legislation passed in 1930s to avoid over-leverage, avoid under-capitalization of insured deposits, etc. Situation we’re in now.

 

Don’t have time to go into great detail here. Few highlights –

Under Federal Reserve Act of 1913 and subsequent banking legislation, commercial banks registered with Fed (all national banks & bigger state banks) required to hold certain percent of their outstanding loans as high-quality reserves (cash, credit with Fed, gold, etc.). Audited on regular basis to make sure holding these reserves.

 

Glass-Steagall Act of 1933 regulated banks. Among other things, established FDIC (insures deposits – then up to $5000, more recently up to $100,000; now up to $250,000), built firewall between commercial banks & investment banks. Prohibited investment banks from receiving deposits and prohibited commercial banks from engaging in speculation.

 

Glass Steagall progressively watered down, particularly under Fed Chair Greenspan. Allowed temporary waivers to major provisions.

Glass Steagall repealed by Gramm-Leach-Bliley Act of 1999. (Point out – Phil Gramm – economic advisor to John McCain.)

Allowed above the board, non-temporary mergers of investment banks & commercial banks, banks & insurance companies.

Allowed permanent merger of Traveler’s with Citibank – form Citigroup. Allowed AIG.

(Still can’t own NFC or merge if most recent CRA rating not acceptable.)

Paved way for growth of mega-financial corporations with hands in both commercial (insured) and investment (uninsired) banking.

[QUOTE re: Citi]

 

Since about 1980s, partly as result of deregulated climate, witnessed growth of parallel banking system, both attached to commercial banking system & outside it.

Attached to – many commercial banks associated themselves with mortgage brokers, finance houses, etc. Citibank associated with CitiFinancial – one of largest, most aggressive subprime brokers.

These associated units not subject to same reserve regulations as commercial banks.

Not hold as much (anything!) as reserves. Could use low-quality reserves (CDOs).

[But, I would argue, used good name & expertise of banks, to attract customers.]

Many of these operations were “off-books” (not on the official balance sheets) for banks.

Not reported on their audits to regulators. But greatly increased vulnerability of banks.

 

Also witnessed exponential growth of investment banks (Lehman, Bear Sterns), hedge funds. Very lightly regulated; not have to hold solid reserves. Often highly leveraged.

Hold small asset – maybe of shaky quality (CDO) – use it to make stock purchases, loans, etc. Average leverage ratio 30/1. All of these unregulated, semi-regulated entities – make up parallel, shadow banking system.

 

Shadow banking more profitable than regulated commercial banking.

Not have to hold onto nearly as many (if any) assets as reserves. Can use shaky assets.

Not audited according to standard accounting practices.

More profitable – but also much more shaky.

High level of leverage – once, e.g., housing prices start to fall, whole thing can collapse.

 

Early signs of problems with deregulation –

S & L crisis of late 1980s, Long Term Capital Management Fund meltdown in late 1990s, Enron scandal of 2001.

 

TRIGGERS

In this context (bifurcation of income, private debt. public debt, financialization, deregulation), get specific problems that triggered this crisis. Mortgage backed securities.

 

Mortgage brokers. Made fees from volume.  Push complicated mortgage “products,” sometimes onto vulnerable populations.

Only 10% of these were first-time home buyers. Mostly refinancing.

(Sister – lives on SSI, married to disabled Vietnam Vet – got home equity loan worth half value of her house. No way on earth she could afford to pay it back.) 

Encouraged people (wages stagnating) think of their homes as ATMs.

 

Some of this not inaccurately characterized as predatory lending.

1. Mortgage products extremely complicated.

ARM’s (low, teaser interest rates – jump after 2, 3 years). Interest only loans.

Loans where not even pay interest – interest builds up and is folded into the principal you owe. Could make mortgage payments for years & owe more than you started out owing.

 

2. Quit requiring documentation of income. Low- or no-doc, Liar’s loans. Ninja loans.

 

3. Vulnerable populations.

Anita Hill article – “A former loan officer testified about how she marketed subprime mortgages. “If someone appeared uneducated, inarticulate, was a minority, a women, or was particularly old or young, I would try to include all of the additional costs Citifinancial offered.”

 

Evidence that people eligible for standard loans – given subprime loans. Higher interest rates. Mortgage brokers make more on commission on higher rate loans.

 

4. Enormous pre-payment penalties. (makes refinancing impossible.)

 

5. Many cases – outright fraud. AG of Ohio (foreclosure disaster) – outright legal fraud in 60% cases. Pages omitted from closing documents, etc. People lied to about how much mortgage payments would rise when ATMs reset, told housing prices rising; would have enough equity in home to refinance at lower rate (clearly not true).

States with requirement of buyer’s lawyer at closing – much lower foreclosure rates.

 

Result of all this - Black community stands to lose 71-92B home based wealth. (average 1/10 white)

 

Mortgage brokers failed at due diligence.

Why could they do this? Wouldn’t they be hurt when people not able to pay? No.

OK because not keep mortgages – sold on secondary markets. (principal agent problem)

 

Have long had secondary mortgage markets in this country.

Not just Fannie Mae, Freddie Mac

Mortgage-backed securities long regarded as boring, low-earning but stable forms of debt. Bought by pension funds, etc. “widows & orphans”

 

Major banks combined these mortgages into mortgage--backed securities (complicated packages  of assets - CDOs, etc.)

Clear that many of the banks not understand what was in these things, how shaky they were.

Banks failed at due diligence.

 

Had them certified as AAA rated by Moody’s, Standard & Poors, etc.

Another piece of this – ratings agencies.

Failed at due diligence. Not understand these instruments either.

Conflict of interest – ratings agencies paid by sellers, own asset they want rated – bias towards higher ratings.

 

Sell them on open market.

These CDOs look great. Mortgage-backed securities have always been safe bet.

Rated AAA by top ratings agencies. Sold by major banks.

 

Bought up by pension funds (TIAA CREF, mutual funds, etc.)

Bought by sovereign funds – national funds from other countries.

Bought up by insurance companies, banks all over the globe.

Failure of due diligence by buyers. Lack of transparency.

 

[instruments bet on whether co’s go out of business – credit default swaps, $45tr]

 

Why a problem – about 20% mortgages subprime, another 20% Alt A

(decent income but bad credit)

when mortgages start to default – all these institutions, including banks holding trillions of dollars’ worth of bad CDO debt – come up short.

 

When banks come up short, can’t make loans.

When they can’t make loans, economy starts to go to hell in a handbasket.

 

Biggest problem not even the losses in pension funds, etc. – though, god knows, horrible enough. (one day stock market – lost $1.2 trillion in wealth)

Even worse is credit crunch – banks not making loans.

Small business already had to close.

Other businesses can’t get loans for expansions, replacing machinery, etc.

Even states – California recently had to borrow money from Fed – couldn’t meet payroll.

 

 

PROPOSALS

Agree something had/has to be done. Real chance of 1930-type depression here.

Idea let markets take care of it irresponsible.

Markets will take care of it in long run. Keynes – in long run, we’re all dead.

 

1. $700b bailout TARP troubled assets recovery program

US gov’t buy the CDOs (bad debt) from the banks, etc.

Idea is that that will relieve anxiety about banks’ positions – free up credit, etc.

Big problems:

--gives enormous amount of power to Treasury Secretary Hank Paulson and Fed chair Ben Bernanke. (Bernanke - Dissertation on banking in Great Depression).

--How are they going to decide which CDOs to buy and from whom?

$700b not make a dent in the amount of CDO debt out there.

--Even if do it, not clear if will free up credit markets. Dow fell 500 points after bill passed. Banks might use money to shore up asset positions & not make loans.

[--Other problems others have pointed out – insufficient caps on CEO compensation (AIG after enormous gov’t bailout – CEO got $400,000. Blew it so badly gov’t had to bail out his company – walked away a rich man.)

--Moral hazard. Why have to regulate. So moral hazard not a problem.]

 

2. Gordon Brown solution: inject funds directly into banks by buying equity in the banks.

Partial nationalization. Does seem to be a surer, more direct way to go.

More of a chance banks start to loan. Reduce credit crunch.

Also more of a chance get some money back in LR as banks recover.

 

CONSIDER more radical proposals: Address problem from bottom up.

 

3. HOLC Home Owners’ Loan Corporation

Fed open mortgage bank. Like in great Depression.

Bought up mortgages from families facing foreclosure. Restructured terms of loan so could pay  back. In end, gov’t made money on HOLC.

Think we need something like this again. De-toxify much of mortgage debt.

Also help those who really need help – those who will be homeless without assistance.

Some of them stupid? Yeah. They were stupid.

No more stupid – a lot less power - than risk assessors at Morgan Stanley, at Bear Sterns, etc. Those people walking away with multi-million dollar bonuses, not homeless.

 

4. SR – gov’t serve as banker of last resort – give bridge loans to companies that need them.

Not just for state of California, but for small businesses, others who need loans.

Over time, as banks recover, could transfer these assets back to the banks.

In SR, would prevent financial crisis from becoming true economic crisis.

 

Clear – any of these proposals going to be inflationary.

Currently money supply growing at 11%/ye. Much faster than real economy (shrinking)

Alternative is depression, take some inflation.

LR – seriously consider several issues:

1. Reducing income bifurcation in this country – reduce reliance on debt.

Raise minimum wage & index it to inflation. Would have to be $9.50/hr to equal level of mid-1960s. Contrary to neoclassical theory, last increase in minimum wage – not associated with any increase in unemployment. Unemployment fell.

Employment much more related to demand conditions than changes in minimum wage.

Can also increase EITC. (Not like subsidizing low-wage employers like Wal-Mart, but better than poverty for working poor.)

 

2. Rethink our tax structure. Less reliance on payroll taxes, sales taxes, other taxes that disproportionately hit the working class & poor; more reliance on estate tax, capital gains tax, etc. that impact the wealthy.

 

3. Get serious about financial regulation. Get out of this cycle. Crisis – everyone is Keynesian/Minskian. In good times, everyone is neoclassical – deregulate, let the good times roll. Brings another crisis. Real question this time whether get out of it.

 

FINANCIAL REGULATION: (Epstein, Crotty)

POINT - Bring shadow banking system under regulatory system.

If it looks like a bank, walks like a bank, and quacks like a bank, it’s a bank!

Investment banks, hedge funds, private eq. funds brought under umbrella of banking reg.

Includes:

--All banks of whatever types must hold reserves against all investments.

--No more off-the-balance-sheet transactions for banks. Must hold reserves. (Spain – required this; not hurt nearly as badly by crisis)

--Eliminate OTC sales (all sales go through markets; mark to market, not make-believe)

--Require due diligence at all levels of a transaction.

--Up to the originating bank or mortgage broker to determine the fair market value of an asset and the owner of the asset.

--Then up to rating agency to determine fair market value.

(BTW, eliminate conflict of interest for ratings agencies; should be paid by buyers, not sellers. Buying a house – trust an inspection done by the sellers?)

--Then up to institutional buyers (TIAA CREF, pension funds, etc.) to practice due diligence and certify market value of asset.

Due diligence all the way through the chain of sellers & buyers.

Eliminate perverse incentives go a long way.

--Bailout fund, funded not by taxpayers but by Wall St. firms engaged in these transactions. FDIC funded by participating commercial banks. Why can’t you tax Wall St. firms making billions from these transactions, set up bailout fund to be used in crises?

 

None of this will work w/o change in ideology. Had efficient-market-based deregulation since 1980. Brought us S & L debacle, various debt crises, Enron, etc.

Need to resurrect the crucial work of Keynes & Minsky about interaction of financial system and real economy. Need to structure the environment in which banks operate so that they operate in best interest of entire economy, not just their shareholders & CEO’s.

 

Wither the Hedge Fund?

The gilded age of hedge funds is losing its luster. The funds, pools of fast money that defined the era of Wall Street hyper-wealth, are in the throes of an unprecedented shakeout. Even some industry stars are falling back to earth.

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Jodi Hilton for The New York Times

Robert Dennis, investment director of the Massachusetts pension oversight commission, still extols the results of hedge funds.

Related

Times Topics: Credit Crisis — The Essentials

Times Topics: Hedge Funds

This unregulated, at times volatile corner of finance — which is supposed to make money in bull and bear markets — lost $180 billion during the last three months. Investors, particularly wealthy individuals, are heading for the exits.

As the stock market plunged again on Wednesday, with the Dow Jones industrial average sinking 514 points, or 5.7 percent, the travails of the $1.7 trillion hedge fund industry loomed large. Some funds dumped stocks in September as their investors fled, and other funds could follow suit, contributing to the market plummet.

No one knows how much more hedge funds might have to sell to meet a rush of redemptions. But as the industry’s woes deepen, money managers fear hundreds or even thousands of funds could be driven out of business.

The implications stretch far beyond Manhattan and Greenwich, Conn., those moneyed redoubts of hedge-fund lords. That is because hedge funds are not just for the rich anymore. In recent years, public pension funds, foundations and endowments poured billions of dollars into these private partnerships. Now, in the midst of one of the deepest bear markets in generations, many of those investments are souring.

Granted, hedge funds are not going to disappear. In fact, some are still thriving. Even many of the ones that have stumbled this year are doing better than the mutual fund industry, which has also been hit with withdrawals that have forced their managers to sell.

Hedge Funds

Wall Street - Tens of thousands more job losses

Wall Street could face tens of thousands more job losses as a result of the banking crisis and see average pay drop by more than a quarter, a report from the New York Federal Reserve suggested on Wednesday.

In a comparison with previous financial sector downturns, the report said the current crisis shared characteristics with market problems in the late eighties and early years of this century.

Wall Street

TIAA-CREF Stands Tall

TIAA-CREF Stands Tall

Wither the Mutual Fund?

Fed offers $540bn to prop up money funds

By James Politi in Washington and Michael Mackenzie in New York

Published: October 21 2008 16:25 | Last updated: October 21 2008 20:57

The US Federal Reserve on Tuesday said it would finance up to $540bn (€410bn) in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system.

Money market funds have faced severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by scaling back their short-term lending to banks and selling their holdings of commercial paper.

EDITOR’S CHOICE

Full coverage: Global financial crisis - Oct-08

Lex: Money markets - Oct-21

Practicalities the only limit on Fed action - Oct-21

Martin Wolf: The world wakes from the wish-dream of de-coupling - Oct-21

Insight: Shattered illusions of liquidity - Oct-21

Overview: Spectre of recession haunts investors - Oct-21

This retreat has contributed both to a freeze in the interbank market and a steep decline in activity in the commercial paper market, which has made it difficult for banks and companies to raise short-term funds.

The Fed move highlights the extent to which policymakers are concerned about US money markets, even as conditions have improved, with interbank rates dropping. Policymakers are also worried that moves to prop up US banks may have undermined money funds, which compete with bank savings accounts.

"The short-term debt markets have been under considerable stress in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed says.