Posts filed under “Financial Press”

Misunderstanding the Last Financial Crisis

I wanted to address a glaring error in a David Leonhardt NYT Sunday Magazine article, titled Heading Off the Next Financial Crisis,

In the column, Leonhardt wrote:

“But there was a fatal flaw in the new system. The banks’ new competitors received scant oversight. They were not directly bound by Roosevelt’s restrictions. “We had this entire system of outside banks that had no meaningful constraints on capital and leverage,” Geithner says. Investment banks like Lehman Brothers were able to make big profits in part by leveraging themselves more than traditional banks. To use the down-payment analogy again, it was as if Lehman were allowed to put down only 3 percent of a house’s purchase price while traditional banks were still making larger down payments. When the house’s value then rose by just 3 percent, Lehman doubled its investment. A.I.G., similarly, created a highly leveraged derivatives business that regulators essentially ignored…

The deregulation of the last few decades has come in for a lot of blame for the current financial crisis. It deserves some blame, too. If Citigroup and Bank of America were still operating under the New Deal rules, they might not have flirted with bankruptcy. But take a minute to think about which firms had the biggest problems. They were the shadow banks: stand-alone investment banks like Lehman, Bear Stearns and Merrill Lynch; and other firms, like A.I.G., that were not banks at all. They were never fully covered by the New Deal regulation, and they were not the ones most affected by the deregulation.” (emphasis added).

This is not precisely right.

And as applied to AIG, it is absolutely, totally wrong.

Thanks to the The Commodity Futures Modernization Act of 2000 (CFMA), the universe of structured derivatives were completely exempt from ALL regulation. Whether it was Collateralized Debt Obligations (CDOs) or Credit Default Swaps (CDSs), the CFMA put them into the world of shadow banking.

How? The CFMA mandated it.  No supervision was allowed, no reserve requirements for potential future payouts were mandated, no exchange listing requirements were put into effect, all capital minimums were legally ignored, there was no required disclosures of counter-parties. Derivatives were treated differently from every other financial asset — stocks, bonds, options, futures. They were uniquely unregulated.

Indeed, even state insurance regulators were prevented from oversight — including normal  reserve requirements. That was how AIG Financial Products was able to ramp up their derivative exposure to more than three trillion dollars.  This was directly due to radical deregulation.

Even the most basic reserves would have kept their derivative exposure to much more modest numbers. With absolutely zero capital requirements, AIG FP went wild. Tom Savage, the president of FP, summed up what the lack of reserve requirements meant to the firm: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy.”

To the tune of $3 trillion dollars.

All in all, this wasn’t so much a case of Washington DC failing to keep up with Wall Street, rather, it was a case of DC actively granting what Wall Street (Enron, AIG and other derivative traders) wanted — precisely zero oversight.

Hence, it was deregulation that made the AIG disaster possible.

As to the investment houses (Bear, LEH, MER, etc.), all you need to do is look one step upstream in the securitized mortgage process. There, you see the impact of the radical deregulation mindset.

Consider the mass of subprime loans that the investment houses were securitizing. The majority of these came from non-bank lenders. These were the firms that Fed Chair Alan Greenspan described as innovators.

He elected not to regulate them. I called this “Nonfeasance” in Bailout Nation. No lending standards: Zero income checks, ignore the debt load, eliminate LTV, even fail to do a simple simple FICO credit check. Just a lend-to-anyone-then-sell-to-securitizers business model.

Securitization wasn’t the problem, it was simply Garbage in, Garbage out. Had Greenspan required nonbank lenders to maintain normal lending standards (As was his official duty), much of the crisis could have been avoided. At the very least, all of the subprime related loans, derivatives, and default swaps built on top of these garbage mortgages would have been dramatically reduced.


Bottom line: Radical Deregulation is what allowed most of the worst actions to take place. This wasn’t a case of DC failing to keep up with Wall Street — its more accurate to observe that DC rolled over for Wall Street, and gave the Street precisely what it asked for.


Heading Off the Next Financial Crisis
NYT, March 22, 2010

Category: Bailouts, Derivatives, Financial Press, Really, really bad calls, Regulation

Well, Not Yet, Anyway

Cramer, late last week (prior to its passage), on health care reform: First, it is the single biggest impediment to the stock market going higher. As I write this (late Thursday morning), the market (S&P500) has tacked on ~1.3% so far this week, with healthcare, pharma, etc. — all the companies Obamacare was going to kill —…Read More

Category: Financial Press, Markets, Television

Wednesday Reads

Busy day (again) Here is what I saved for later in terms of reading material: • Short Sellers Do Work of Cops on Doughnut Break  (Bloomberg) • As Financial Reformer, Dodd, Again, Dogged by Appearance of Conflict (ABC News) Questions Over Wife’s Role on the Board of Futures Exchange That Could Benefit From Proposed Derivatives…Read More

Category: Financial Press

Tuesday Reads

Been out of pocket all afternoon — gotta catch up! Here are few items that I will be reading on the train home: Oh, and I am doing this in real time. You can watch this list come together (keep refreshing Done!) • Dow at New 17-Month High (WSJ) • Google Is Hiring Bond Traders…Read More

Category: Financial Press

Monday Links

Some interesting reading material for your Monday afternoon pleasure: • New York Fed Warehousing Junk Loans On Its Books: Examiner’s Report (Huff Po) • Sentiment’s dark cloud (Marketwatch) • Buh-Bye: Finra shuts down GunnAllen (Investment News) • Where Does U.S. Foreign Aid Go? (Economix) • High-End Repo Men (WSJ) We’ve discussed this topic before •…Read More

Category: Financial Press

Friday Linkage

Some links for today: • Rival Merrill warned regulators over Lehman (FT) • Federal Reserve Must Disclose Bank Bailout Records (Bloomberg) • Rosier Views + Easier Comps = Profit Growth (WSJ) • Martin Wolf: China and Germany unite to impose global deflation (FT) • S&P 500 in ‘Air Pocket,’ Could Reach 1,225: Technical Analysis (Bloomberg)…Read More

Category: Financial Press

Tuesday Linkage

These are the items that I found worth reading today: • Regulation two-fer: – – –Wall Street Loses as Small Banks Win (WSJ) – - -Reform Bill Adds Layers of Oversight (NYT) • 4 bln yanked from U.S. stock funds in February (Reuters) • Lehman Two-fer: – – -At Lehman, Watchdogs Saw It All (NYT)…Read More

Category: Financial Press

Monday Linkage

Some reading material you may find interesting: • Apple, Wal-mart, and the “Market Capitalization Bigger Than” Thing (Infectious Greed) • L.A. becomes a test case in battle to undo interest rate swap deals (LATimes) • Special Interest (New Yorker) The private-equity fund manager’s tax dodge • Our money laureate. (The Big Money) • No one…Read More

Category: Financial Press

Saturday Reads

Today’s most fascinating (non-Lehman) reads are: • Economists Credit Fed For Alleviating Crisis (WSJ) The $787 billion stimulus package was a good for the U.S. economy, but the Federal Reserve played the biggest role in rescuing the economy from the financial crisis; • US takeover defenses come tumbling down (FT) Only 28% of S&P1,500 companies…Read More

Category: Financial Press

Charlie Gasparino Owes David Einhorn (and me) an Apology

In the early days pre-meltdown, there were a handful of skeptics pointing to problems at firms like AIG, Fannie Mae, Bear Stearns and most especially Lehman Brothers.

It was not the media or the analyst community that identified the frauds, but the short sellers. In this sad tale of criminality and corruption, the shorts were the heroes. They employed an army of traders, forensic accountants, and non-cheer-leading analysts to kick the tires of the major firms where something smelled funny.

When it came to Lehman Brothers, foremost in the crowd of shorts was David Einhorn. There were many others (me included), but it was Einhorn who most completely critiqued Lehmans balance sheet, and most vocally called out the shenanigans there. he is the hero in this tale.

At the time, the media gave LEH the benefit of the doubt. And for his troubles, Einhorn was often criticized — even trashed — by various people. The most vocal criticism came from usually astute Charlie Gasparino (then at CNBC, now at Fox Business).

But when it came to Fuld, Gasparino was off his usual sharp game. Whether he was too close to Fuld personally, or it was simply another case of access journalism is unknown. As I warned, and Charlie acknowledged on the air, Fuld was using him. (He disagreed).

But the bottom line is Charlie blew this one big time. And as the video (after the jump) makes clear, he did so in way that made the character of the parties’ to the Lehman debate an issue.


“But you put up Dick Fuld versus Mr. Einhorn? Put up Dick Fuld versus Barry Ritholtz . . . ?

Its impossible to determine who is right and wrong . . . this is so muddy. But at some point, it comes down to the people: Dick Fuld, Einhorn, Dick Fuld, Barry Ritholtz.

Who do you believe?”


Well, it turns out that we now know who was right and who was wrong. Thanks to the yeoman’s job done by Anton Valukas, the bankruptcy examiner in the Lehman Estate, we know Lehman management was a fraud, they hid losses and leverage and played their balance sheet like a fiddle.

Not only do we know who was right and wrong, we also know that relying on the sturdy character of Investment Bank CEOs — especially this one  — was not the smartest way to make a bet.

And for that, you owe David Einhorn, myself and others an apology . . .

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Category: Bailouts, Financial Press, Legal