The Problem is Not TBTF, but TDTR

Robert Johnson, former chief economist to the Senate Banking Committee, submitted testimony to a House Financial Services Committee hearing on OTC derivatives. His written testimony is to be posted today.

While his remarks are worth reading in their entirety, one bit that caught my attention was his discussion of TDTR, or “Too Difficult to Resolve.” Many readers and economists such as Willem Buiter have argued, forcefully, that it is essential to develop what Buiter calls a “special resolution regime,” which is a fancy way of saying a specific set of rules and practices for putting big financial players into bankruptcy.

I expressed concerns about dealing with the difficulties of Too Big Too Fail institutions yesterday, saying (in effect) that many of the appealing-sounding ideas (including some I had favored, like putting credit default swaps on an exchange) were not workable or would not solve the problem (for instance, as Satyajit Das explained at some length, the amount of initial margin it would take to deal with “jump to default” risk would make credit default swaps uneconomic. No one is willing to kill CDS, which would be the effect of such measures. An undercapitalized exchange creates a concentrated point of failure, an AIG waiting to happen. And even though we would love to shut that casino down overnight, having looked into it is some depth, the cure would probably be at least as bad, if not worse than the disease. The best of the bad choices on offer is to regulate them like insurance, ideally more intrusively, and take affirmative measures to contain the market, particularly restricting the writing of “naked” short exposures).

Many readers were unhappy, but shooting the messenger does not change the fact that this is an even bigger problem to tackle than most realize.

From Johnson (note the link is not live yet, for some reason; Johnson was updating his testimony):

It would not be too strong to say that the architecture of derivatives regulation and market structure is the heart of Too Big to Fail policy.

Absent a drastic simplification of derivative exposures and a transparent and comprehensive improvement in the monitoring of those positions when imbedded in large firms, complex derivatives render these behemoth institutions Too Difficult to Resolve (TDTR). I say that because, the policies of resolving troubled financial institutions, so- called enhanced resolution powers, cannot be invoked unless government authorities have the capacity to assess and understand the entanglements of derivatives exposures throughout the financial sector and the economy at large. Resolution powers themselves can be quite useful and should be passed into law as a part of the financial reform you are considering. The ability to undertake “prompt corrective action” vis a vis bank holding companies and financial services holding companies, as the FDIC can now do vis a vis failing banks, would diminish the probabilities of a cascading bankruptcy or other disruptive panic.

Yet opaque, complex entangled derivatives exposures would serve to deter the authorities from invoking those powers and taking over a failing institution for fear of setting off a system wide calamity of magnitudes that policy officials can dread but not understand or estimate. Complex entanglements through derivatives exposures discourage government officials who are the risk managers on behalf of the citizens of our nation from invoking and using those powers. The spider web of complex opaque derivatives renders enhanced resolution powers impotent.

It is in this respect that complex and opaque derivatives exposures at large financial institutions contributed mightily to a policy of induced forbearance, as we witnessed in the first quarter of 2009. That experience, as we have seen, was very demoralizing to our citizens who have put their faith in philosophies that emphasize the use of markets as a mechanism for achieving social goals. The inhibitions that authorities experience in applying market discipline to large financial institutions and their managements tend to undermine belief in the use of markets.

What makes induced forbearance of TDTR institutions even more troubling is that their potential creditors would understand that they will not have their debts restructured when government officials are deterred by complex derivative exposures from taking a TDTR institution into receivership and restructuring the entity. This would create the perverse impact of reducing the risk premium on the unsecured debt of these institutions, lowering their funding costs, and giving them incentive to take more risk. It would also create a competitive advantage for TDTR firms that encourages an increase in their market share relative to those firms who had to pay more for funding because their creditors would fear that their bonds could be restructured in the event of solvency problems. TDTR financial institutions are enabled to get larger and larger by wrapping themselves in a spider web of complex derivatives and thereby inducing authorities to make ever-larger scale gambles on forbearance. Forbearance is a two-sided coin. Firms can continue to lose money rather than return to health. This is not a tolerable state of affairs for taxpayers who are held hostage by the fear of resolving complex intertwined institutions.

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  1. craazyman

    Mr. Johnson’s comments are excellent and inspiring.

    Hopefully our elected officials will hear more testimony like that from folks with his credentials.

    Just reading his testimony actually reduces my anxiety-ridden and rage-filled fears of a nightmare collapse of our 234-year-old republic into a state of Hobbesian insanity.

    I am not sure if my improved mental state is the last delusional fantasy of redemption before a foreordained and headlong plunge into hell — or whether it represents the stirring of some underlying sane and balanced rationality that will quiet the riot of moiling mind-cinema-circus demons raging from the collectively neurotic unconscious.

    Of course, that one’s always a tough call.:)

  2. wally

    “No one is willing to kill CDS, which would be the effect of such measures.”

    That’s the root of the problem; when you think you can ‘insure’ risk, you take it. Risk ex risk is an illusion.

    1. DownSouth


      I picked up on that sentence too.

      I am very much in agreement with Brookley Born’s concluding statement on the PBS Frontline program that Ed Harrison linked yesterday. She said all these derivatives are still floating around out there and are no less dangerous now than they were two or three years ago. She said we will continue to experience economic disasters similar to what we did over the past couple of years “until we learn.”

    2. carol

      I picked up on that sentence too.

      CDS came into existence around 1990. Can we agree there was a function market before 1990? If yes, then the world can live w/o CDS.
      So, then the question arises: are we as a society better of with a capital market with CDS or w/o CDS?

      * First: let´s agree to prohibit naked CDS (comparable to buying/selling life insurance on employees (as per Moore´s latest documentary), and comparable to buying a fire insurance on someone else´s house (BTW both are illegal in many countries).

      * CDS as insurance – however as per S. Das, doing it properly, would make them prohibitively expensive. That suggests that the premise of ´risk reduction’ or ´risk on better bearer´s shoulders´ might be wrong. Yields of company bonds will have to rise, to get more in line with the perceived risk-reward. The cost of capital for companies will rise. However, this negative effect on companies is much more tolerable for society as a whole than the impact when CDS´s blow up.

      BTW, I read a banker calling King´s proposal to separate banking functions ´provocative´.
      Hmm, King/Paulson/Johnson et al. might be on the right track.

      1. i on the ball patriot

        DownSouth, regarding this;

        “I am very much in agreement with Brookley Born’s concluding statement on the PBS Frontline program that Ed Harrison linked yesterday. She said all these derivatives are still floating around out there and are no less dangerous now than they were two or three years ago. She said we will continue to experience economic disasters similar to what we did over the past couple of years “until we learn.””

        What we need to learn is that PBS stands for Propaganda Broadcasting System and Frontline would be better named Deflectionline.

        The real thrust, and deflective focus, of that scam softball show was to present ruling elite gangster puppets — Rubin, Summers, Greenspan, et al, who were engaged in a gang rape of the public till and really deserve to be shot — as well meaning public servants engaged in a simple ideological struggle of ‘free markets’ against ‘regulation’. To her credit Brookley Born resigned, but she did it with a whimper, “until we learn.”

        We will continue to experience economic disasters until we rewrite the scamerican constitution. Election boycotts are in order.

        Deception is the strongest political force on the planet.

  3. rd

    I believe this issue is at the heart of the problems at AIG where it is believed that folks sold off assets to other parties at inappropriate prices in order to curry favor with potential future employers. If the regulators and auditors don’t to know how to properly check prices of assets becasue they are too complex, then they are too complex to exist at any signfiicant scale.

  4. Swedish Lex

    “Living wills” for banks is like having a really, really efficient emergency service to deal with the fallout of nuclear disasters. Good but wholly insufficient. I agree that the matter has to be addressed much more up-stream, of not at the source.

  5. Siggy

    Derivatives are typically contingent contracts. This happens, I do thus and you do so. Buying insurance to mitigate credit risk is a rational act. Selling insurance that you cannot honor is a fraud. It’s a damm felony! Das’s comments point to the fallacy of the CDS trade. If you priced the contract properly and the contract provided for adequate performance collateral, the damm things wouldn’t get sold.

    This is a first loss is the best loss situation. Demand that CDS be exchange traded. Declare unenforceable any and all derivatives that are beyond the capacity of the parties to perform. What do you get? You get zombie institutions in the grave, lets cover them up quickly lest the stench foul our lungs!

  6. ronald

    Debt driven GDP growth is the driver for CDS and other option contracts. Changing CDS rules means a complete rewrite for current banking capital requirements and various financial proxy firms such as GE. The net result would be a significant financial sector decline as a percentage of GDP requiring the shop till you drop consumer to accept a significant immediate downturn in lifestyle. Not going to happen!

  7. psychohistorian

    All this speculation that the cure for derivatives is worse than the disease is just fear mongering. It is way past time to bring all the shit into the open and resolve what is criminal, what is gambling and just what small percentage is justifiable as a financial instrument.

    If there are financial instruments that are too difficult to resolve then they must be eliminated from our economic system and should have never been allowed to exist in the first place.

    Ongoing efforts to pearl clutch and hand wring around confronting the derivative mess shows that we are still digging a deeper hole. The longer we wait the worse it will be.

  8. RootieKazootie

    Buffett has called CDSs “financial instruments of mass destruction.” Siggy (here) identified them as fraud. Both statements are correct. Others here, also correct, have pointed out in so many words that they are a mathematically very elegant device that have the ability to produce tremendous results. But, just like a nuclear warhead, it’s also demonstrated that in the wrong hands the destruction and waste they cause is staggering.

    Time for disarmament.

  9. fresno dan

    I think S. Das makes it clear that CDS’s are not truly economic, i.e., they truly are not priced appropriately to what they deliver – kind of hard to reimburse someone for when the world blows up because…well, there’s just no income stream from condos on the moon.
    Kind of reminds me when I left the Air Force and started working for the IRS, when the IRS was planning for its tax collection activities after a nuclear war…
    they never would address how we were to handle the radioactive cannibals barter income of human flesh.

  10. fresno dan

    Please excuse the second post by me – “The unpalatable reality that few, self interested industry participants are prepared to admit is that much of what passes for financial innovation is specifically designed to conceal risk, obfuscate investors and reduce transparency. The process is entirely deliberate. Efficiency and transparency is not consistent with the high profit margins on Wall Street and the City. Financial products need to be opaque and priced inefficiently to produce excessive profits.”

    It is tough to look at one’s self and admit your a rube, but better to admit one’s dumb and keep your money. Why should I contribute to a 401k, when it gets smaller and smaller despite all the money I put into it?

  11. scott

    I thought TDTR meant Too Difficult To Regulate?

    It is a excellent point by Johnson – WAMU was the 2nd largest bank failure (after Lehman) yet it was done without terrible fuss and wasn’t Too Difficult To Resolve. WAMU was plain old dumb.

    Haven’t read the DAS piece but still not sure why CDS can’t be treated like exchange traded commodity or financial futures. We have day limits in commodity pits and there aren’t usually that many ‘jumps’ to default overnight ie even WAMU and Lehman had CDS gradually moving higher over a period of time that would have enabled collateral positing. If it is expensive then that will limit their use to those who find value in doing so.

    1. Yves Smith Post author

      You are forgetting several key points:

      1. WAMU is a conventional bank, This is not a matter of size, but integrated counterparty exposures. It did not have a big book of complex derivatives.

      2. WAMU had willing buyers, in fact a fight broke out over it.

      3. By contrast, no one was willing to buy a TBTR firm (as Lehman and Bear and in the end Merrill attest) without a backstop/bribe from the authorities.

      I’m not a fan of credit default swaps. Das most certainly is not. But you need to be realistic about what is involved here. Unrealistic ideas play into the hands of the industry. They assure any proposals along those lines either are not implemented or are whittled down to nothing. Look at what has happened to the bill on OTC derivatives, which calls merely for clearing. It’s a farce.

      1. Michael C

        I’d like to see a pause in the debate about what should be done to regulate/not regulate CDS. This complex issue is being earnestly debated but with very poor information supporting either side.

        Instead, I think a more fruitful project would be to fast track a disclosure project using DTCC data.


        Require US regulated financial institution with a CDS portfolio to authorize DTCC to publish, on their behalf, critical exposure data on a periodic (i.e. monthly)basis.

        For example, for JPM, publish summary information on current exposure to other US regulated finacial institutions, European Financial institutions, Non Financial Institutions, etc. No need to name counterparty names at this point, just provide summary stats.
        If the exposure to US fin institutional counterparties at each of the top US banks nets close to zero,then regulating that risk among the US banks might not call for the establishment of an exchange, but would call for a different approach.
        If the US banks systemic risk results from large exposures to financial instituions outside the US, then regulating those exposures would require a different, globally coordinated response.
        If the systemic risk arises from counterparties outside the non regulated US financial instituition, think AIG,hedge funds,separate regulation, or at a minimum, disclosure requirements, can be crafted for those industries.

        Trying to shut down the CDS market is a non starter and just plays into the hands of the players holding us hostage to their systemic risk extortion.

        We need to think like accountants for a minute. We know CDS poses systemic risks. But the exposures net to zero in total, so who is the most vulnerable? We can answer that critical question very easily. Once we have that answer, then the debate becomes more productive.

        Remember, 95% of the positions are in the 5 top banks. DTCC has the information on all the exposures, globally.

        We should be starting there.

        Something like this (simplified w made up #s to be prepared by FED)

        Current Expos JPM GS Citi MS BOA Other tot
        exposure to us banks 100 200 100 -100 -100 -200 0
        Exposure to Non US bks 100 100 100 100 100 0 500
        Exposure to Hedge funds 50 50 50 50 50 0 250
        Exposure to Non Fin US 10 10 10 10 10 10 60

        Totals 260 360 260 60 60 -210 810

  12. rfreud

    i think it would be more effective to “tax” credit default swaps and certain other derivatives than to regulate them. If they were somewhat less profitable, the market would shrink. It’s the size of the thing that makes it seem uncontrollable and threatening. It wouldn’t be a bad idea to set up an international agency to regulate the market. Then proceeds of the tax would go into a special insurance fund along the FDIC model, where the regulatory power stems from the insurer’s rights of subrogation. Brooksley Born correctly diagnosed a threat, but her proposed solution involved a fundamental change in the transaction. Transparency may not be necessary.

    On the other hand, we are not seeking our TBTF banks clearly, not because of a lack of transparency or at any rate disclosure per financial reports, etc. The analytical focus is on capital, from which one backs into loan quality. Capital adequacy is really a matter of asset coverage. We need to know the extent to which good assets cover FDIC liabilities, for starters. By good assets, I mean loans that are not adversely classified, not on any watchlist, not deemed substandard in bank examiner parlance, not carried at an impaired value or with a specific reserve assessment. In other words, loans and securities that can be refinanced or sold within 90 days.

    i think these figures out to be widely publicized. I think that banks that put the FDIC at risk should be assessed higher insurance premiums or face a reduction in the level of deposit insurance.

    Of all the forms of impunity banks enjoy, guaranteed deposits is in some ways the most egregious and an inheritance from the Depression that needs to be reconsidered. Imagine the wake up call to bankers if their failure to maintain sound assets were to be regulated by a market of depositors who would naturally migrate to the sounder institutions or demand more for their loans to riskier ones.

  13. csissoko

    A resolution authority would allow regulators to move all derivative contracts to a bridge bank. In fall 2008 this authority could have been used to strip most of the TBTF banks of their derivatives (since they were pretty much all insolvent) and consolidate them into a single government run entity. This would have greatly reduced the complexity. While cross border issues would have remained they could have been dealt with at the governmental level.

    Because the resolution authority was not put into place when it was needed, we may have lost the window where it would have been effective.

    While it would not necessarily solve the current mess, preventing future problems requires two actions:

    (i) Prohibit large financial entities from posting collateral on derivative contracts. (No more AIGs.)

    (ii) Repeal the repo related bankruptcy amendments that were passed in 2005. This will put an end to repos on illiquid assets. (No more Bear/Lehmans.)

  14. Yves Smith Post author

    csissoko, david,

    You can’t just “move them over.” They trade in relationship to cash markets, and most are hedged dynamically, meaning positions are adjusted several times a day. And the derivatives are used to manage risks in the cash books. Banks and financial firms would have to sell a simply enormous amount of cash positions if they could not lay off risks via derivatives.

    This would be like trying to remove someone’s colon using a hacksaw with no anesthesia.

    You’d need a bigger balance sheet than that of all the banks (ie, this becomes the biggest commitment of the central bank). You also need people to manage the positions, the trading tools, and the computer infrastructure to manage and monitor positions.

    And this causes havoc with customers.

    Another metaphor: consider what would happen if the FDA ascertained that all prescription drugs had long term negative genetic effects that were passed on to younger generations? Say they tried to limit drugs to a bare minimum they considered necessary (anaesthesia, antibiotics. Hormones are not drugs, so they are OK). Consider how the public would react.

    These risk management tools have become as important to users as Prozac and Lipitor are to the public. We have a MAJOR addiction problem here. Companies and investors do not know how to run their lives anymore without them.

    The only realistic approach I see is weaning people off this stuff by making it more costly and cumbersome, to force them to work down positions and use other approaches to manage risk. Trust me, this is a big nightmare.

    And simple sounding solutions that do not work or have very serious side effects play into the industry’s hands. I am not saying there is no solution, but ones that fail to recognize the difficulties of the situation assure nothing meaningful happens.

    1. csissoko


      Well, yes, you would have needed to put the resolved banks on a government lifeline (i.e. credit line) while you sort through the derivatives mess. And the government would have needed to hire financial professionals to manage the bridge bank. But remember the bridge bank would have had the authority to sell a derivative back to a bank that needed it as a hedge.

      The real value of a single bridge bank for all the resolved banks is that a huge number of contracts can cancel each other out — and the picture of the US derivatives market will become much clearer. The bridge bank is the central counterparty for all derivatives.

      On the other hand, I’m not arguing that this can work if the government can’t simultaneously resolve all of the major US derivatives dealers (i.e. the time is past for this solution.)

    2. Doug Terpstra

      By Jove, Yves, I think you’ve got it!

      “Banks and financial firms would have to sell a simply enormous amount of cash positions if they could not lay off risks via derivatives.”

      “This would be like trying to remove someone’s colon using a hacksaw with no anesthesia.”

      That sounds like exactly the right solution to me, just a strip of rawhide to bite down on and five guys to hold the bankster down. Need any volunteers?

    3. carol

      re your analogy: FDA – Consider how the public would react:

      in your analogy the damage from the drugs falls onto the grandchildren, i.e. hurts the people taking those drugs.
      People who do not take those medicines are not hurt (unless their child marries a drug-taker’s child, and get an affected grandchild).

      In the current fin. complex situation, benefits and damage fall onto different people.
      And the damage onto the many is much larger than the benefit to the few (the sum total of the writedowns is larger than the sum of the profits of the IB during the boom decade, plus the costs of job losses, unused factories, families suffering from foreclosure, debt servicing burdens, job anxiety, etc.).

      Companies are addicted and think they need the derivatives. But do they really need it?
      Just take this example:

      New Jersey taxpayers are paying GS protection against rising interest costs on bonds that the state redeemed more than a year ago! (swap contract runs till 2019)

      “This vividly shows the risk of entering into interest- rate swap agreements,… The world’s got to see what stupidity even the sophisticated investors like the transportation fund can get into.”

      Or the horror story revealed last week:

      “Harvard paid $497.6 million to investment banks during the fiscal year ended June 30 to get out of $1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects, the school’s annual report said. The university in Cambridge, Massachusetts, said it also agreed to pay $425 million over 30 to 40 years to offset an additional $764 million in swaps.”

      Even if it were beneficial for a few companies/municipalities/others, but detrimental to so many more (due to the intrinsic opacity and flaws), and the final risks fall onto taxpayers, then as a society we are worse of.

      Wall street made their ‘innovations’ and were freely allowed to experiment with their ‘innovations’. The experiment has clearly shown it does not work as advertised!

      So, as scottb writes below: let’s start by banning new derivatives

  15. i on the ball patriot

    “This would be like trying to remove someone’s colon using a hacksaw with no anesthesia.”

    Kind of like trying to get honest responsive government through the ballot box.

    Great line, may I borrow it?

    Deception is the strongest political force on the planet.

  16. Joe sixpack

    Proclamation on the Federal Reserve System of the United States of America
    March 2008

    WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”;

    WHEREAS, on December 23rd, 1913 the US Congress enacted the Federal Reserve System;

    WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;

    WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;

    WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;

    WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;

    WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;

    WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;

    WHEREAS, the United States and likely the entire world’s financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations’ currencies);

    WHEREAS, the US dollar, the “Federal Reserve Note” is declining in value due to these parasitical activites, as well as potentially other causes;

    WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;

    WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;

    WHEREAS, it is recognized that the current time is such a time of great difficulty;

    WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;

    WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;

    WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;

    WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;

    IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;

    WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.

    NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.

    IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;

    FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;

    WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.


    1. bob

      Whereas, it is recognized that at the first whereas everyone stopped reading.

      Whereas, the people who produce language like this usally have a stick up their whereas.

      IT MUST BE CONCLUDED, that the people who take the time to read though this are impressed by whereas.

  17. craazyman

    Peanut Gallery Time

    The Top 10 Translations of “TDTR”

    Number 10
    Trying Desperately To Rationalize

    Number 9
    Tone Deaf To Reason

    Number 8
    Triumphantly Demonstrating Their Repulsiveness

    Number 7
    Treasury Department To-the Rescue

    Number 6
    Trillions Down The Rathole

    Number 5
    Trying-to Detonate The Revolution

    Number 4
    Tossing Dollars To Reptiles

    Number 3
    The Definition (of) Toxic Reckage

    Number 2
    Tim Didn’t Tell, Right?

    and . . . drum roll please . . .

    Translation #1 of TDTR


    Booowhahahahah hahahaha ahahah!!!!!

  18. michael

    Yves – I can’t believe it!
    So now the wise men have convinced you as well that the best approach is to continue kicking the can down the road?
    Is this a sign of unconditional surrender or are you still hoping to find a way to disarm derivatives with less impact in the future??
    Sorry, but if Satyajit Das states that CDS with enough margin become uneconomic, then these products simply have no right to exist. Declare all of them null and void and then lets put our efforts in cleaning up the fallout.

    1. Skippy

      Yep looks like everyone is on board now.

      Why do I get the feeling that America is just one big Jones Town and Wall St. is mixing the cool-aid.

      Skippy…but Mommy I’m not thirsty…quiet child and drink it, it has vitamins that are good for you…whats that pain in my stomach Mommy…that means its working and soon we will all be happy and unburdened forever child.

  19. charles

    Warren Buffet experienced first hand the difficulty of unwinding GenRe transactions. Derivatives or Insurance is the same thing in this regards. Note that reinsurance contracts are as old as capitalism so nothing new under the sun here. No need to put the blame systematically on the D word.

    The real problem is that the difference of valuation between the buyer and seller of derivative is something that is not transparent in the system. A clearing house would be a good step forward to get this information out. It would also help to split in balance sheets level 3 valuation between what is valued by the other party – which is buy definition beyond dispute and would receive a level 1 blessing thanks to the clearing house- and the difference between buyer and seller, that should not only be level 3, but level 3 with a special level of attention. (level 4 if you like !)

  20. Siggy


    You raise some relevent and critical considerations, nonetheless, I say lets have a derivatives jubilee. Lets get to the point of that inorder to be a party to a derivatives contract you have to, at all times, be able to honor the contract. Focus on that and the problem becomes more tractable. The entire business of the credit crunch hinged on the idea of confidence, I don’t believe the potential counterparty can perform.

    Some good stuff here, sadly also a lot of crap. If you bot a CDO and you didn’t understand that it was an instrument of concentrated risk that has an expected value very near zero, well then, you get to achieve the god given right of every entrepreneur, you get go bankrupt.

  21. Skippy

    Like the biggest crooks in modern history are going to let go of the gun pointed at us, its the only thing keeping the mob from ripping them apart. Some big names (historical) with in America and Europe stand to become bums in their minds, think they are going to take a hit like that, really?

    Skippy…Its us or them, every thing else is *pandering* to the crowd.

  22. bold'un

    There are currently two markets for insuring bank liabilities: the compulsory fixed price deal run by the FDIC and the free-market method offered by the CDS market. One way to make sure the that banks don’t stretch themselves too thin is for the FDIC to develop a formula that (in small steps) tends towards a more mark-to-market pricing of the risks that Government underwrites. The rising cost of insurance will discipline banks.
    We cannot ignore a huge issue however: it is surely unsustainable for government agencies to remain the only source of mortgage collateralization. There is an urgent need for a reasonably bulletproof framework for private securitizations. My suspicion is that with government sponsorship private mortgage borrowers are getting too good a deal relative to industrial and commercial borrowers (not to speak of private savers). Any scheme to grant credit at subsidized rates is going to generate ‘too big / too difficult’ structures.

  23. Mike Dillon

    Stupid question…

    Instead of creating a whole slew of new legislation and regulation, why not simply start enforcing the legs and regs that we ALREADY have on the books? Once that ball got rolling then we could bring back some of the fun stuff that was actually working for us for awhile – like Glass – Steagall perhaps.

    I’m sure that somewhere out there, if it was absolutely necessary, someone could find a can of “new legislation smell” and spray everything down with it just for the illusion…

    I’m far from an expert on the topic but it seems to me that all the legs and regs in the world do absolutely zero good if no one is even remotely willing to execute enforcement and prosecution…

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