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View Full Version : Economics Warren Buffett: "The world *did* almost come to a stop in September"


jAZ
04-10-2009, 12:49 AM
Was watching an hour-long interview he's giving on CNBC and he made an offhand comment as part of an answer to another question that seemed to re-confirm what several other people have said rather discreetly up to now.

That the reports that we barely averted a worldwide financial system collapse unlike anything we've ever seen before are in fact accurate.

Amazing to think how close it seems we were to a second great depression.

WoodDraw
04-10-2009, 01:53 AM
People complain about the massive bailouts, but I'm convinced SOME of them were needed to keep the economy from crashing. If you look at the amount of money AIG has dished out to other companies from government funds, just imagine if they went into Chapt. 7. Creating a moral hazard is never good, but neither is watching your top financial companies collapse one by one.

Taco John
04-10-2009, 02:03 AM
If we'd only give more of our children's children's money to rich bankers, maybe we could avoid a KOTASTROFEEY!

BigRedChief
04-10-2009, 07:30 AM
There have been several reports from many key figures in a broad scope across america that afternoon in September almost collapsed the whole economy/financial onto the tops of our heads and would have been another 1930's type depression.

We seem to have averted that. Obama's policies seem to be working and or people have confidence that they will work to get us out of the economic ditch.

This is the lesson that should be learned here. Allowing private companies to become so big that they can't be allowed to fail or it hurts us all financially, is too big of a company. Or at the minimum must have some kind of "real" regulation in place so that we can forsee the failure coming.

Those who don't remember the past are doomed to repeat it.
/some famous old guy

petegz28
04-10-2009, 07:38 AM
Did they ask Warren why he spent the better part of the Bush Admin's time in office shorting the $?

Amnorix
04-10-2009, 07:49 AM
Did they ask Warren why he spent the better part of the Bush Admin's time in office shorting the $?

if America is going to adopt stupid, short-sighted policies that will almost certainly result in currency value going down, then why shouldn't smart people realize and take advantage of that?

petegz28
04-10-2009, 08:07 AM
if America is going to adopt stupid, short-sighted policies that will almost certainly result in currency value going down, then why shouldn't smart people realize and take advantage of that?

Yea, and now we are where we are.

And a lot of those same people are now fleecing us for our tax $'s.

You're on top of things, as usual.

BucEyedPea
04-10-2009, 08:15 AM
Warren Buffet is a carpetbagger and chief govt shill.

KC native
04-10-2009, 09:33 AM
Did they ask Warren why he spent the better part of the Bush Admin's time in office shorting the $?

You can't short the dollar as a US citizen. You can take positions in other currencies that you expect to appreciate relative to the dollar but out and out shorting of the dollar is prohibited by securities law.

What Warren did was diversify some of his holdings from dollar denominated assets because of our risk for depreciation of our currency. It was a very shrewd move on his part and benefited him in the end.

jAZ
04-10-2009, 09:40 AM
You can't short the dollar as a US citizen. You can take positions in other currencies that you expect to appreciate relative to the dollar but out and out shorting of the dollar is prohibited by securities law.

What Warren did was diversify some of his holdings from dollar denominated assets because of our risk for depreciation of our currency. It was a very shrewd move on his part and benefited him in the end.
And he did talk about that.

He held up a box of candy (presumably a company he owns) and said, it doesn't matter whether it's $3/box or $15/box... if a person is willing to spend 15 minutes of labor to buy the box of candy he'll do it at either price. You could be using sharks teeth for currency and it doesn't matter.

And went on to say that great products (and thus human talent leading to great products) are the best hedge against inflation. Invest in good things and they will sell at an adjusted price not matter inflation.

KC native
04-10-2009, 09:44 AM
And he did talk about that.

He held up a box of candy (presumably a company he owns) and said, it doesn't matter whether it's $3/box or $15/box... if a person is willing to spend 15 minutes of labor to buy the box of candy he'll do it at either price. You could be using sharks teeth for currency and it doesn't matter.

And went on to say that great products (and thus human talent leading to great products) are the best hedge against inflation. Invest in good things and they will sell at an adjusted price not matter inflation.

Yes, Buffet is a very smart man. Just reading his annual reports you can learn a ton about investing and how he approaches it. I catch interviews with him on occasion but usually anytime he does something significant we end up discussing here at work.

patteeu
04-10-2009, 10:32 AM
There have been several reports from many key figures in a broad scope across america that afternoon in September almost collapsed the whole economy/financial onto the tops of our heads and would have been another 1930's type depression.

We seem to have averted that. Obama's policies seem to be working and or people have confidence that they will work to get us out of the economic ditch.

This is the lesson that should be learned here. Allowing private companies to become so big that they can't be allowed to fail or it hurts us all financially, is too big of a company. Or at the minimum must have some kind of "real" regulation in place so that we can forsee the failure coming.

Those who don't remember the past are doomed to repeat it.
/some famous old guy

FYI, Obama wasn't POTUS in September.

Taco John
04-10-2009, 10:39 AM
FYI, Obama wasn't POTUS in September.

He might as well have been considering the stuff Bush was advocating and doing at the time.

penchief
04-10-2009, 11:03 AM
If we'd only give more of our children's children's money to rich bankers, maybe we could avoid a KOTASTROFEEY!

Maybe we should have rules and regulations that prevent the kind of fraud that led to the collapse.

KC native
04-10-2009, 11:05 AM
Maybe we should have rules and regulations that prevent the kind of fraud that led to the collapse.

Ding, ding, ding, we have a winner.

petegz28
04-10-2009, 11:13 AM
You can't short the dollar as a US citizen. You can take positions in other currencies that you expect to appreciate relative to the dollar but out and out shorting of the dollar is prohibited by securities law.

What Warren did was diversify some of his holdings from dollar denominated assets because of our risk for depreciation of our currency. It was a very shrewd move on his part and benefited him in the end.

I can buy a spread right now that sells the US$ and buys another currenct. Same impact.

BigRedChief
04-10-2009, 11:15 AM
FYI, Obama wasn't POTUS in September.
It was obvious I was talking about the polices set in motion to get us out of the ditch not what happened on the September afternoon.

And if this does work, are you going to be eating some crow or say that the economy would have recovered on its own anyway?

jAZ
04-10-2009, 11:17 AM
Ding, ding, ding, we have a winner.

No, no, no!!! It's a conspiratorial coincidence that we never had a financial system never collapse between 1933 and 1999, but 10 years after repealing much of Glass-Steagall, our finacial system nearly destroys itself.

Just bad luck, really.

KC native
04-10-2009, 11:47 AM
I can buy a spread right now that sells the US$ and buys another currenct. Same impact.

Yea, you're specifically betting that the foreign currency is going to appreciate relative to the dollar. A straight short sale would involve selling dollars and attempting to purchase them back at a lower value. It effectively accomplishes the same thing but you have to look at the relative values of the currency because the dollar doesn't move in the same way against every currency. Recently, the dollar has been stronger against almost every other currency because the rest of the world is realizing they have the same problems we do.

KC native
04-10-2009, 11:49 AM
No, no, no!!! It's a conspiratorial coincidence that we never had a financial system never collapse between 1933 and 1999, but 10 years after repealing much of Glass-Steagall, our finacial system nearly destroys itself.

Just bad luck, really.
:doh!: what was I thinking. I guess those Austrians were right all along. :evil:

Brock
04-10-2009, 12:03 PM
This is the lesson that should be learned here. Allowing private companies to become so big that they can't be allowed to fail or it hurts us all financially, is too big of a company. Or at the minimum must have some kind of "real" regulation in place so that we can forsee the failure coming.


No, the lesson here is bailing them out in the first place just encourages them to keep doing the same thing.

HonestChieffan
04-10-2009, 12:05 PM
The real lesson is to vote the congressmen out who are allowing all this to happen in the first place.

BigRedChief
04-10-2009, 12:19 PM
No, the lesson here is bailing them out in the first place just encourages them to keep doing the same thing.
I'm no economic guru but it seems to me that the vast majority of economists are and were saying that if we don't bail out these A-holes that we could have had a depression. A real 1930's depression. Now, whether thats BS or not I'm not qualified to determine. But, what if they were right and we just sat on our hands and let them fail? America would be history. No way this country can survive another depression.

stevieray
04-10-2009, 12:29 PM
No, the lesson here is bailing them out in the first place just encourages them to keep doing the same thing.

that always turns out well.


...especially when six out of ten democrats don't prefer Capitalism.

Brock
04-10-2009, 12:31 PM
I'm no economic guru but it seems to me that the vast majority of economists are and were saying that if we don't bail out these A-holes that we could have had a depression. A real 1930's depression. Now, whether thats BS or not I'm not qualified to determine. But, what if they were right and we just sat on our hands and let them fail? America would be history. No way this country can survive another depression.

I don't buy into alarmist bullshit. To compare this to the great depression is to not understand what the great depression was.

jAZ
04-10-2009, 12:52 PM
I don't buy into alarmist bullshit. To compare this to the great depression is to not understand what the great depression was.

I think you miss the point. The comparison is that we might in a depression/deep-recession, but it's not a great depression. But just about everyone I read seems to be saying more and more explicitly that it wasn't the "alarmist... bs" that it might be assumed it was at the time.

Brock
04-10-2009, 01:44 PM
I think you miss the point. The comparison is that we might in a depression/deep-recession, but it's not a great depression. But just about everyone I read seems to be saying more and more explicitly that it wasn't the "alarmist... bs" that it might be assumed it was at the time.

Then why did you say how amazing it was how close we came to "a....second....great.....depression"?

eazyb81
04-10-2009, 01:49 PM
No, the lesson here is bailing them out in the first place just encourages them to keep doing the same thing.

Who? The greedy dipshit homeowners that signed up for mortgages they knew they couldn't afford? Yeah, I agree.

eazyb81
04-10-2009, 01:52 PM
I've gotta say, it's pretty comical that we are STILL trying to convince some people that the global financial system was on the brink of collapse at that time. It's not just some weird coincidence that the LIBOR-OIS spread, TED spread, VIX, etc. were all at unheard of levels.

Brock
04-10-2009, 01:52 PM
Who? The greedy dipshit homeowners that signed up for mortgages they knew they couldn't afford? Yeah, I agree.

Them, and the dipshit companies that lent them the money in the first place.

eazyb81
04-10-2009, 01:54 PM
Them, and the dipshit companies that lent them the money in the first place.

and then throw in the politicians that promoted it and the rating agencies that rated the mortage pools as AAA.

Many entities have egg on their face.

Brock
04-10-2009, 01:58 PM
and then throw in the politicians that promoted it and the rating agencies that rated the mortage pools as AAA.

Many entities have egg on their face.

Sure. Point being, I'm saying that if you got money to bail yourself out, you should not have. At this point, companies and individuals have no incentive to change their behavior.

patteeu
04-10-2009, 02:10 PM
It was obvious I was talking about the polices set in motion to get us out of the ditch not what happened on the September afternoon.

As Taco John pointed out, the economic bailout approach started under GWBush. Obama has arguably taken it to new levels and may have added his own sick twists (e.g. refusing to accept TARP returns), but any credit (or blame) for the approach should be shared between both men. Your post was notably one-sided.

And if this does work, are you going to be eating some crow or say that the economy would have recovered on its own anyway?

It depends on what you mean by "work". I've already said that I fully expect the US economy to recover in some fashion, so no, a mere return to economic growth will not lead to me eating any crow. The real question is whether or not Obama can lead us to a point where the present economic difficulties are just a hiccup in the middle of long term prosperity or whether long term damage remains (e.g. semi-permanently expanded deficits, high inflation, decreased standards of living, new tough to break dependencies on government, etc.). We already know that Obama policies come with a huge price tag. What we don't know is whether they've bought us something of value or just a really, really expensive pig in a poke. It's not looking too good for your guy at this point, IMO.

Dave Lane
04-10-2009, 02:15 PM
:doh!: what was I thinking. I guess those Austrians were right all along. :evil:

All hail the Austrians heroes of all things financial!!

And able to raise the dead, or so I'm told... :)

chiefzilla1501
04-10-2009, 02:29 PM
Maybe we should have rules and regulations that prevent the kind of fraud that led to the collapse.

"Fraud" is an inaccurate word. The economic collapse revolves completely around one derivative called a credit default swap that was deemed to be a silver bullet, but it turned out to be incredibly flawed.

As for deregulation, what's so interesting about that is that it was drafted by Republicans and signed by a Democratic President.

Personally, I think people are looking for a person to blame. Both parties are at fault, and I think almost as equally. And I think a lot of this crisis is the result of factors outside of either party's control. Most notably, many attribute a huge chunk of the crisis to a flawed formula that was used to price mortgage-backed securities.

eazyb81
04-10-2009, 02:37 PM
"Fraud" is an inaccurate word. The economic collapse revolves completely around one derivative called a credit default swap that was deemed to be a silver bullet, but it turned out to be incredibly flawed.

As for deregulation, what's so interesting about that is that it was drafted by Republicans and signed by a Democratic President.

Personally, I think people are looking for a person to blame. Both parties are at fault, and I think almost as equally. And I think a lot of this crisis is the result of factors outside of either party's control. Most notably, many attribute a huge chunk of the crisis to a flawed formula that was used to price mortgage-backed securities.

Um, no. The downturn in the economy started with the residential real estate collapse, which hurt normal people because of defaults and lower home prices and hurt financial institutions because they held massive amounts of mortgage backed securities on their balance sheet.

It's amazing to me how so many people have latched on to credit default swaps as even a primary factor of the downturn. I'm not even convinced we'll see a CDS exchange after all of this. A CDS is nothing more than insurance - it is not the devil so many portray it to be.

KC native
04-10-2009, 03:50 PM
Um, no. The downturn in the economy started with the residential real estate collapse, which hurt normal people because of defaults and lower home prices and hurt financial institutions because they held massive amounts of mortgage backed securities on their balance sheet.

It's amazing to me how so many people have latched on to credit default swaps as even a primary factor of the downturn. I'm not even convinced we'll see a CDS exchange after all of this. A CDS is nothing more than insurance - it is not the devil so many portray it to be.

Except it is when the company you bought it from put up no collateral and due to their other exposures can't pay you while you were holding that as a profitable security on your balance.

This crisis has been the perfect storm of events. You had an unprecedented real estate boom fueled by lax regulation, cheap money, and leverage. That naturally exploded at the same time you have math experts trying to model risk and ignoring the tail risk when it's the tail risk that really bites you in the ass. Combine this with the hostile attitude towards regulation and oversight of the previous administration and it all melts together in a perfect clusterfuck.

SBK
04-10-2009, 03:56 PM
I'm probably nuts but:

This meltdown that came from billions and billions of dollars being moved away from banks one afternoon is probably THE event that put Obama over the edge. As soon as the economy (which started with this) hit the skids hardcore the election was over for McCain.

Was this a planned event by a group of people that wanted to put Obama in office? George Soros types, extremely rich, extremely liberal?

It'll never come out, but it'd be interesting to see the evidence either way.

Taco John
04-10-2009, 04:05 PM
Maybe we should have rules and regulations that prevent the kind of fraud that led to the collapse.


Like what? Requiring banks to require people to have 20% to put down on a house loan? That kind of regulation?

Taco John
04-10-2009, 04:06 PM
I'm probably nuts but:

This meltdown that came from billions and billions of dollars being moved away from banks one afternoon is probably THE event that put Obama over the edge. As soon as the economy (which started with this) hit the skids hardcore the election was over for McCain.

Was this a planned event by a group of people that wanted to put Obama in office? George Soros types, extremely rich, extremely liberal?

It'll never come out, but it'd be interesting to see the evidence either way.


You can't blame Soros for the Republican party's (and McCain's) lack of a coherent economic message.

SBK
04-10-2009, 04:13 PM
You can't blame Soros for the Republican party's (and McCain's) lack of a coherent economic message.

I'm not. McCain sucked as a candidate.

I just wonder if this collapse wasn't a planned political event by a group of very rich folks. That's all.

jAZ
04-10-2009, 04:51 PM
Then why did you say how amazing it was how close we came to "a....second....great.....depression"?

Difference between where we are now (=deep recession or mild depression) vs what almost happened but didn't because of the response of the Bush Administration, etc.

All indicators are we (narrowly) avoided a world-wide bank panic that would have resulted in a full-blow, world wide great depression 2.

But that didn't happen.

jAZ
04-10-2009, 04:53 PM
Sure. Point being, I'm saying that if you got money to bail yourself out, you should not have. At this point, companies and individuals have no incentive to change their behavior.

Regulation changes behavior.

eazyb81
04-10-2009, 04:53 PM
Except it is when the company you bought it from put up no collateral and due to their other exposures can't pay you while you were holding that as a profitable security on your balance.

This crisis has been the perfect storm of events. You had an unprecedented real estate boom fueled by lax regulation, cheap money, and leverage. That naturally exploded at the same time you have math experts trying to model risk and ignoring the tail risk when it's the tail risk that really bites you in the ass. Combine this with the hostile attitude towards regulation and oversight of the previous administration and it all melts together in a perfect cluster****.

Investment risk is a bitch, eh? A CDS is a way to hedge a position, but they are not without risk. Same as FX or interest rate swaps.

My original point stands. Pointing to the CDS market as the cause of this crisis is absurd. Hell, the CDS market is not even 10% of the total OTC derivatives market.

jAZ
04-10-2009, 04:55 PM
I'm probably nuts but:

This meltdown that came from billions and billions of dollars being moved away from banks one afternoon is probably THE event that put Obama over the edge. As soon as the economy (which started with this) hit the skids hardcore the election was over for McCain.

Was this a planned event by a group of people that wanted to put Obama in office? George Soros types, extremely rich, extremely liberal?

It'll never come out, but it'd be interesting to see the evidence either way.

Why couldn't it come out? The money has a trail. I think your assessement is right, but I agree that you are probably nuts to think this was planned. Everyone is losing in the process.

But I don't dismiss your point out of hand. I thin the evidence is there to say it's wrong.

banyon
04-10-2009, 04:56 PM
Warren Buffet is a carpetbagger and chief govt shill.

Great argument. Shouldn't you call him a socialist while you are at it?

chiefzilla1501
04-10-2009, 05:18 PM
Um, no. The downturn in the economy started with the residential real estate collapse, which hurt normal people because of defaults and lower home prices and hurt financial institutions because they held massive amounts of mortgage backed securities on their balance sheet.

It's amazing to me how so many people have latched on to credit default swaps as even a primary factor of the downturn. I'm not even convinced we'll see a CDS exchange after all of this. A CDS is nothing more than insurance - it is not the devil so many portray it to be.

Saying CDS's are "insurance" is an oversimplification. Insurance is a very, very heavily regulated industry. When you buy insurance on your home, you have to have a house as an asset to back it. More importantly, insurance companies are required by law to hold a certain level of reserves because an insurance policy holder MUST have the confidence that if he/she has a claim that needs settlement, the insurance company has the money in their reserves to pay out on that claim. There was no such regulation on CDS's. And so guess what happened? The CDS market grew to $45.5 trillion and mega-companies like AIG were issuing out a whole ton of CDS "insurance", even though they didn't have the capability to pay out on them. Why do you think the government's biggest priority has been bailing out AIG?

If the insurance industry allowed insurers to take on way more risk than they were capable of handling and if policies revolved around a mathematical model so complex that the people issuing out the insurance had no idea how to use it properly, then you can bet that insurance would cause a crisis too. CDS's are important and valuable derivatives. But they got wildly out of control because nobody was regulating it.

And when you speak about mortgages, realize that the reason why financial institutions were able to dress up toxic assets is because they were dressed up through CDS'. And so even in the mortgage market, you're talking about way too much risk being doled out on an extremely flawed security. And then you have banks who are insuring against this flawed insurance. And so, almost every financial institution were somehow linked to these flawed securities--to no surprise, the financial institution was hit by a sledgehammer.

I agree with you that it's oversimplifying to say that CDS's were the only cause of the financial crisis. But there are many who believe that financial institutions would have been able to survive the housing meltdown. I agree with that. The housing market created a short-term crisis. The wild use of ultra-risky, unregulated CDS's is what almost led to a global financial meltdown.

eazyb81
04-10-2009, 06:01 PM
Saying CDS's are "insurance" is an oversimplification. Insurance is a very, very heavily regulated industry. When you buy insurance on your home, you have to have a house as an asset to back it. More importantly, insurance companies are required by law to hold a certain level of reserves because an insurance policy holder MUST have the confidence that if he/she has a claim that needs settlement, the insurance company has the money in their reserves to pay out on that claim. There was no such regulation on CDS's. And so guess what happened? The CDS market grew to $45.5 trillion and mega-companies like AIG were issuing out a whole ton of CDS "insurance", even though they didn't have the capability to pay out on them. Why do you think the government's biggest priority has been bailing out AIG?

Sure it's a simplification, but it's an apt description for a discussion on an internet message board. In most instances, investors buy a CDS contract on a company when they have purchased a large amount of the company's debt, which makes the investor extremely vulnerable to the company defaulting on their debt.

Just because AIG was a complete and total cluster**** of a company does not mean that we desperately need regulation in the CDS market. A CDS is a contract between two parties. What specifically do you think regulation would provide? Less CDS contracts? Why is that necessarily a good thing, if you agree that CDS contracts are basically insurance? Again, I don't think you can just look at the AIG situation and come to the conclusion that the CDS market requires regulation - believe me, AIG did a lot of things wrong. Hell, AIG was supposedly regulated by the Office of Thrift and Supervision - what good do that do? By that token, should we also ban short selling? Should we ban all futures and forward contracts?

If the insurance industry allowed insurers to take on way more risk than they were capable of handling and if policies revolved around a mathematical model so complex that the people issuing out the insurance had no idea how to use it properly, then you can bet that insurance would cause a crisis too. CDS's are important and valuable derivatives. But they got wildly out of control because nobody was regulating it.

And when you speak about mortgages, realize that the reason why financial institutions were able to dress up toxic assets is because they were dressed up through CDS'. And so even in the mortgage market, you're talking about way too much risk being doled out on an extremely flawed security. And then you have banks who are insuring against this flawed insurance. And so, almost every financial institution were somehow linked to these flawed securities--to no surprise, the financial institution was hit by a sledgehammer.

I agree with you that it's oversimplifying to say that CDS's were the only cause of the financial crisis. But there are many who believe that financial institutions would have been able to survive the housing meltdown. I agree with that. The housing market created a short-term crisis. The wild use of ultra-risky, unregulated CDS's is what almost led to a global financial meltdown.

I completely disagree with your last paragraph. The financial institutions were so overlevered and had such large investments in the US residential real estate market, either directly or indirectly, that it was just a matter of time before things unraveled. I have seen no evidence that the financial institutions would have been fine if they just weren't involved in CDS contracts, and I'm sure I never will see any evidence because I don't think a rational argument can be made.

Did naked CDS contracts contribute to this crisis? Yeah, probably. But were they a prominent factor? Not in my book. The downfall of the residential real estate market crushed consumer confidence, destroyed a massive amount of wealth, and brought this country to its knees. The CDS market is only 10% of the total OTC derivatives market, while interest rate swaps are over 50%. Do you believe they should also be regulated? What specifically do you think regulation will solve? Will it prevent companies from making stupid investment decisions? CDS contracts are unique because they are non-standardized and tailored to a specific client; i'm not convinced that a CDS clearinghouse would even work.

I don't really have a strong opinion either way on the subject, but I have yet to see a strong argument that sways me to the regulation side. Either way, overall credit default swaps are a positive addition to financial markets when done correctly.

chiefzilla1501
04-10-2009, 07:08 PM
Sure it's a simplification, but it's an apt description for a discussion on an internet message board. In most instances, investors buy a CDS contract on a company when they have purchased a large amount of the company's debt, which makes the investor extremely vulnerable to the company defaulting on their debt.

Just because AIG was a complete and total cluster**** of a company does not mean that we desperately need regulation in the CDS market. A CDS is a contract between two parties. What specifically do you think regulation would provide? Less CDS contracts? Why is that necessarily a good thing, if you agree that CDS contracts are basically insurance? Again, I don't think you can just look at the AIG situation and come to the conclusion that the CDS market requires regulation - believe me, AIG did a lot of things wrong. Hell, AIG was supposedly regulated by the Office of Thrift and Supervision - what good do that do? By that token, should we also ban short selling? Should we ban all futures and forward contracts?



I completely disagree with your last paragraph. The financial institutions were so overlevered and had such large investments in the US residential real estate market, either directly or indirectly, that it was just a matter of time before things unraveled. I have seen no evidence that the financial institutions would have been fine if they just weren't involved in CDS contracts, and I'm sure I never will see any evidence because I don't think a rational argument can be made.

Did naked CDS contracts contribute to this crisis? Yeah, probably. But were they a prominent factor? Not in my book. The downfall of the residential real estate market crushed consumer confidence, destroyed a massive amount of wealth, and brought this country to its knees. The CDS market is only 10% of the total OTC derivatives market, while interest rate swaps are over 50%. Do you believe they should also be regulated? What specifically do you think regulation will solve? Will it prevent companies from making stupid investment decisions? CDS contracts are unique because they are non-standardized and tailored to a specific client; i'm not convinced that a CDS clearinghouse would even work.

I don't really have a strong opinion either way on the subject, but I have yet to see a strong argument that sways me to the regulation side. Either way, overall credit default swaps are a positive addition to financial markets when done correctly.

Credit default swaps are most definitely a great derivative tool, but as is, it encourages dangerous gambling of investments that have a very tangled web of entities that will get dragged down if you do. Given that it's "insurance", why isn't there a regulation that requires a certain reserve for it? At the very least, it would force insurers to be more cautious about the amount of risk they're willing to take on. Or can regulation help to provide more transparency to who's in the market? Right now, the whole market thrives on speculation.

CDS's as is are basically encouraging mass speculation. And while they are usually a good thing, because they are such a high-risk, high-reward tool, there is always an attractive option for mega-insurers like AIG to take on way more risk than they are capable of handling. They are gambling away money and there is nothing in place right now to discourage them from doing so. And what makes these derivatives especially dangerous is how quickly it can tangle with banks, who are often offering insurance to insure these insurances. So basically when AIG gets caught with their pants down, they drag a whole ton of banks down with them.

I don't know the exact answer. But I can't buy into the fact that we don't do something about it. There's got to be some kind of regulation. Unfortunately, I think you're assuming that all major companies are rational. If there's anything we've learned, it's that companies will continue to make the same stupid mistakes until there is something in place to discourage them from doing it (and even then, many companies will still ignore it).

Redrum_69
04-10-2009, 10:10 PM
Was watching an hour-long interview he's giving on CNBC and he made an offhand comment as part of an answer to another question that seemed to re-confirm what several other people have said rather discreetly up to now.

That the reports that we barely averted a worldwide financial system collapse unlike anything we've ever seen before are in fact accurate.

Amazing to think how close it seems we were to a second great depression.


why does everything always have to start and end with Tom Brady getting knocked out in the opener...

SBK
04-10-2009, 11:29 PM
Why couldn't it come out? The money has a trail. I think your assessement is right, but I agree that you are probably nuts to think this was planned. Everyone is losing in the process.

But I don't dismiss your point out of hand. I thin the evidence is there to say it's wrong.

Not everyone is losing money, people can bet against the market and make money that way. If I recall Soros recently came out and said he was making a lot of money right now. He's the only one that comes to mind.

I'm sure there'd be a paper trail of who took the money out, but the paper trail of why wouldn't be there.

Mostly I'd be interested to see if people saw something scary coming, or if they chose to create something scary....

I think some day we'll know exactly what happened, but it'll be a long time off.

(now I'll take my tin foil hat off)

SBK
04-10-2009, 11:30 PM
Maybe the better question is that I'd like to know why all that money was pulled out of the banks in such a short time?

That's probably a better way to ask it without sounding crazy.

Hydrae
04-11-2009, 10:30 AM
Credit default swaps are most definitely a great derivative tool, but as is, it encourages dangerous gambling of investments that have a very tangled web of entities that will get dragged down if you do. Given that it's "insurance", why isn't there a regulation that requires a certain reserve for it? At the very least, it would force insurers to be more cautious about the amount of risk they're willing to take on. Or can regulation help to provide more transparency to who's in the market? Right now, the whole market thrives on speculation.

CDS's as is are basically encouraging mass speculation. And while they are usually a good thing, because they are such a high-risk, high-reward tool, there is always an attractive option for mega-insurers like AIG to take on way more risk than they are capable of handling. They are gambling away money and there is nothing in place right now to discourage them from doing so. And what makes these derivatives especially dangerous is how quickly it can tangle with banks, who are often offering insurance to insure these insurances. So basically when AIG gets caught with their pants down, they drag a whole ton of banks down with them.

I don't know the exact answer. But I can't buy into the fact that we don't do something about it. There's got to be some kind of regulation. Unfortunately, I think you're assuming that all major companies are rational. If there's anything we've learned, it's that companies will continue to make the same stupid mistakes until there is something in place to discourage them from doing it (and even then, many companies will still ignore it).

You mean like allowing them to fail and thus having to close thier doors? Sounds like a solid incentive to stay away from these problems to me. Right now we don't even use that incentive, we bail their asses out and we all get to pay for their stupidity. The answer is not more regulation that will, get this, cost each of us more money yet again! It should be, you fuck up you pay the price. Not, you fuck up and I pay the price!

KC native
04-11-2009, 01:44 PM
Credit default swaps are most definitely a great derivative tool, but as is, it encourages dangerous gambling of investments that have a very tangled web of entities that will get dragged down if you do. Given that it's "insurance", why isn't there a regulation that requires a certain reserve for it? At the very least, it would force insurers to be more cautious about the amount of risk they're willing to take on. Or can regulation help to provide more transparency to who's in the market? Right now, the whole market thrives on speculation.

CDS's as is are basically encouraging mass speculation. And while they are usually a good thing, because they are such a high-risk, high-reward tool, there is always an attractive option for mega-insurers like AIG to take on way more risk than they are capable of handling. They are gambling away money and there is nothing in place right now to discourage them from doing so. And what makes these derivatives especially dangerous is how quickly it can tangle with banks, who are often offering insurance to insure these insurances. So basically when AIG gets caught with their pants down, they drag a whole ton of banks down with them.

I don't know the exact answer. But I can't buy into the fact that we don't do something about it. There's got to be some kind of regulation. Unfortunately, I think you're assuming that all major companies are rational. If there's anything we've learned, it's that companies will continue to make the same stupid mistakes until there is something in place to discourage them from doing it (and even then, many companies will still ignore it).

If the writers of CDS contracts were required to post collateral and disclose their positions then that would be sufficient to reign in this market. That's all the regulation they need. If counter parties can see where these writers exposure is then they can diversify they counter party risk and CDS's become a non-issue again.

KC native
04-11-2009, 01:49 PM
Sure it's a simplification, but it's an apt description for a discussion on an internet message board. In most instances, investors buy a CDS contract on a company when they have purchased a large amount of the company's debt, which makes the investor extremely vulnerable to the company defaulting on their debt.

Just because AIG was a complete and total cluster**** of a company does not mean that we desperately need regulation in the CDS market. A CDS is a contract between two parties. What specifically do you think regulation would provide? Less CDS contracts? Why is that necessarily a good thing, if you agree that CDS contracts are basically insurance? Again, I don't think you can just look at the AIG situation and come to the conclusion that the CDS market requires regulation - believe me, AIG did a lot of things wrong. Hell, AIG was supposedly regulated by the Office of Thrift and Supervision - what good do that do? By that token, should we also ban short selling? Should we ban all futures and forward contracts?



I completely disagree with your last paragraph. The financial institutions were so overlevered and had such large investments in the US residential real estate market, either directly or indirectly, that it was just a matter of time before things unraveled. I have seen no evidence that the financial institutions would have been fine if they just weren't involved in CDS contracts, and I'm sure I never will see any evidence because I don't think a rational argument can be made.

Did naked CDS contracts contribute to this crisis? Yeah, probably. But were they a prominent factor? Not in my book. The downfall of the residential real estate market crushed consumer confidence, destroyed a massive amount of wealth, and brought this country to its knees. The CDS market is only 10% of the total OTC derivatives market, while interest rate swaps are over 50%. Do you believe they should also be regulated? What specifically do you think regulation will solve? Will it prevent companies from making stupid investment decisions? CDS contracts are unique because they are non-standardized and tailored to a specific client; i'm not convinced that a CDS clearinghouse would even work.

I don't really have a strong opinion either way on the subject, but I have yet to see a strong argument that sways me to the regulation side. Either way, overall credit default swaps are a positive addition to financial markets when done correctly.

See my above post about the regulation.

Interest rate swaps are a bigger portion of the derivative market but they have been around for decades and are much more standardized. To compare them to CDS's isn't a good comparison. CDS's have a much higher payout than simple interest rate swaps. If your counter party fails in a swap you still have the underlying cash flows of your asset. They may be higher or lower than you had planned for however they are still there. With a CDS you have a completely different ball game. If you buy one to hedge the debt you bought and that company defaults and then you CDS counter party can't pay you are completely f*cked.

splatbass
04-11-2009, 02:16 PM
Um, no. The downturn in the economy started with the residential real estate collapse, which hurt normal people because of defaults and lower home prices and hurt financial institutions because they held massive amounts of mortgage backed securities on their balance sheet.

It's amazing to me how so many people have latched on to credit default swaps as even a primary factor of the downturn. I'm not even convinced we'll see a CDS exchange after all of this. A CDS is nothing more than insurance - it is not the devil so many portray it to be.

Those things are related. Credit Default Swaps were fine while housing sales were booming, but when they collapsed the banks issuing the CDS didn't have the money to pay them off. This is what nearly caused the collapse of the banking industry. The amount of money owed on CDS is more than the entire US national debt. You can't seperate them and say the real estate collapse caused it, not the CDS, because the CDS were a big part of the real estate collapse.

patteeu
04-11-2009, 02:20 PM
Those things are related. Credit Default Swaps were fine while housing sales were booming, but when they collapsed the banks issuing the CDS didn't have the money to pay them off. This is what nearly caused the collapse of the banking industry. The amount of money owed on CDS is more than the entire US national debt. You can't seperate them and say the real estate collapse caused it, not the CDS, because the CDS were a big part of the real estate collapse.

How were the CDS a part of the real estate collapse?

splatbass
04-11-2009, 02:52 PM
How were the CDS a part of the real estate collapse?

Credit Default Swaps were sold as insurance on bundled mortgages. They sold trillions of dollars worth of this "insurance", much more money than they had. They were betting that the real estate market would never collapse (a stupid bet). When the market did collapse they didn't have the money to pay off the CDSs. If the real estate boom had continued AIG and the other banks would have been fine with their CDS, and the failure of the banks would not have happened. If they hadn't sold CDS there wouldn't have been nearly as much of a problem with the real estate collapse, it would not have destroyed so many banks.

Warren Buffett himself blames CDS for the recession. I heard him say it in an interview.

Some links:

http://economictimes.indiatimes.com/articleshow/3500577.cms

http://wannanetwork.com/guaranteedloanmodification/2009/04/04/credit-default-swaps-explained/

Even Ben Stein blames them:

http://finance.yahoo.com/expert/article/yourlife/109609

The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.

The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)

These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.

Because these giant financial companies never dreamed that the subprime mortgage securities could fall as far as they did, they did not enter a potential liability for these CDS policies anywhere near their true liability - which again, is virtually bottomless. They do not have a countervailing asset to pay off the liability.

patteeu
04-11-2009, 03:00 PM
Credit Default Swaps were sold as insurance on bundled mortgages. They sold trillions of dollars worth of this "insurance", much more money than they had. They were betting that the real estate market would never collapse (a stupid bet). When the market did collapse they didn't have the money to pay off the CDSs. If the real estate boom had continued AIG and the other banks would have been fine with their CDS, and the failure of the banks would not have happened. If they hadn't sold CDS there wouldn't have been nearly as much of a problem with the real estate collapse, it would not have destroyed so many banks.

Warren Buffett himself blames CDS for the recession. I heard him say it in an interview.

So you misspoke. They weren't a part of the real estate collapse.

splatbass
04-11-2009, 03:04 PM
So you misspoke. They weren't a part of the real estate collapse.

I never said they were the cause of the real estate collapse, but they are the big reason why the collapse has caused the banking collapse. I edited my post above with some links explaining it. Please read them.

Since they were tied directly to the real estate collapse they are CLEARLY a part of the real estate collapse. Why can't you see that?

banyon
04-11-2009, 03:09 PM
So you misspoke. They weren't a part of the real estate collapse.

"part" in the sense he was using the term isn't "cause". You're being a little nit picky for the weekend aren't you?

googlegoogle
04-11-2009, 03:25 PM
Warren Buffet is a carpetbagger and chief govt shill.

exactly. If he's so in love with government then he should donate his money to the government for all the money he's made.

Nope. Wont do it. He would rather do crappy overseas aid for African countries to try and buy some good pub like Bill Gates.{Gates foundation.}

Calcountry
04-11-2009, 04:34 PM
Was watching an hour-long interview he's giving on CNBC and he made an offhand comment as part of an answer to another question that seemed to re-confirm what several other people have said rather discreetly up to now.

That the reports that we barely averted a worldwide financial system collapse unlike anything we've ever seen before are in fact accurate.

Amazing to think how close it seems we were to a second great depression.But, the Bush administration averted it, yes?

Calcountry
04-11-2009, 04:41 PM
It was obvious I was talking about the polices set in motion to get us out of the ditch not what happened on the September afternoon.

And if this does work, are you going to be eating some crow or say that the economy would have recovered on its own anyway?Yes, the 0 % fed funds target, effectively allowing banks to borrow money for free, then loan it out for 5 % is what is healing the Banks.

Wells Fargo reported a 3 billion dollar profit the other day.

Nothing in Obama's trillion dollar stimulus has hit the economy yet. When it does, we will have hyper inflation.

I hope you are not on fixed income dude, it's gonna suck to be such a person.

eazyb81
04-11-2009, 04:41 PM
Credit default swaps are most definitely a great derivative tool, but as is, it encourages dangerous gambling of investments that have a very tangled web of entities that will get dragged down if you do. Given that it's "insurance", why isn't there a regulation that requires a certain reserve for it? At the very least, it would force insurers to be more cautious about the amount of risk they're willing to take on. Or can regulation help to provide more transparency to who's in the market? Right now, the whole market thrives on speculation.

CDS's as is are basically encouraging mass speculation. And while they are usually a good thing, because they are such a high-risk, high-reward tool, there is always an attractive option for mega-insurers like AIG to take on way more risk than they are capable of handling. They are gambling away money and there is nothing in place right now to discourage them from doing so. And what makes these derivatives especially dangerous is how quickly it can tangle with banks, who are often offering insurance to insure these insurances. So basically when AIG gets caught with their pants down, they drag a whole ton of banks down with them.

I don't know the exact answer. But I can't buy into the fact that we don't do something about it. There's got to be some kind of regulation. Unfortunately, I think you're assuming that all major companies are rational. If there's anything we've learned, it's that companies will continue to make the same stupid mistakes until there is something in place to discourage them from doing it (and even then, many companies will still ignore it).

Eh, it looks like we're just going in a circle here. If the threat of CDS contracts not being honored is so great, where are the statistics to back the claim up? Where is the swarm of investors that have been burned?

If CDS contracts are not being honored on a routine basis, wouldn't the market correct itself by seeing less investors indulge in these contracts? CDS contracts were never meant to eliminate risk, they are just used to diversify away some risk. They are a zero sum game.

I still have yet to see a good argument as to why this is anything more than simple investment risk, and apparently Geithner feels the same way since he has said he doesn't see any need to regulate the CDS market.

Calcountry
04-11-2009, 04:48 PM
Credit Default Swaps were sold as insurance on bundled mortgages. They sold trillions of dollars worth of this "insurance", much more money than they had. They were betting that the real estate market would never collapse (a stupid bet). When the market did collapse they didn't have the money to pay off the CDSs. If the real estate boom had continued AIG and the other banks would have been fine with their CDS, and the failure of the banks would not have happened. If they hadn't sold CDS there wouldn't have been nearly as much of a problem with the real estate collapse, it would not have destroyed so many banks.

Warren Buffett himself blames CDS for the recession. I heard him say it in an interview.

Some links:

http://economictimes.indiatimes.com/articleshow/3500577.cms

http://wannanetwork.com/guaranteedloanmodification/2009/04/04/credit-default-swaps-explained/

Even Ben Stein blames them:

http://finance.yahoo.com/expert/article/yourlife/109609

The risk premium was way too low for the amount of risk they were insuring. They were effectively insuring systemic risk loads. They should have priced them high enough to make the buyers hesitant.

patteeu
04-11-2009, 05:28 PM
I never said they were the cause of the real estate collapse, but they are the big reason why the collapse has caused the banking collapse. I edited my post above with some links explaining it. Please read them.

Since they were tied directly to the real estate collapse they are CLEARLY a part of the real estate collapse. Why can't you see that?


"part" in the sense he was using the term isn't "cause". You're being a little nit picky for the weekend aren't you?

Nit picky or not, I used the same word he did ("part", not "cause") when he said "because the CDS were a big part of the real estate collapse". I didn't accuse him of lying, but instead I merely accused him of saying something he didn't really mean. I suppose you could say that the broader financial crisis that was enabled at least in part by the use of CDS has had a feedback effect that has worsened the real estate collapse, but the main role of CDS was as an accelerant that turned what would have been a real estate correction with localized areas of hardship into a global financial crisis.

splatbass
04-11-2009, 08:01 PM
I suppose you could say that the broader financial crisis that was enabled at least in part by the use of CDS has had a feedback effect that has worsened the real estate collapse, but the main role of CDS was as an accelerant that turned what would have been a real estate correction with localized areas of hardship into a global financial crisis.

Which is what I said.

mlyonsd
04-11-2009, 08:24 PM
I work for Warren at a power company. First directive is to cut 20% operating costs.

Better that then including labor. The guy knows business.

I apologize in advance for any power disruptions. :)

patteeu
04-11-2009, 11:50 PM
Which is what I said.

Sure you did.