Ignore those damned pessimistic engineers! What do they know about anything anyway? The reason Management is in charge is because they’re the people who know what they are doing…

..meanwhile, back in the real economy: shrub lost us 693,000 jobs lost in December. Go economy! Go shrub!

http://www.housingwire.com/200…..g-economy/

Love love love the photoshop!

Isnt that graphic a hoot?

Thanks masaccio for another super post – we’re beginning to get it, slowly.

Egregious gets credit for all graphics on my posts. I love this one.

If a financial system has a failure rate of 1 in 100, then it means it has a crash every 2 years on average. This would make it a “junk bond.”

Thanks for this, masaccio!

Forgive for the OT, but Reid caved, just like Jane said he would. She wins YET ANOTHER hand!
lol

oh, Jaaaane?????
We’re waiting for your post and comments to this………..

patiently, i might add.
:D

It will be junk for the average taxpayer, who isn’t reaping any reward from the system. It seems like a pretty good deal for the Financial Elites.

lovely. just lovely. gah.

Feynman! booyah!

Is there any way we can help to force Reid out as Majority Leader?

Also we should push for getting our 401K out tax free up to 100K. Quick money, no government cost but needs to be done ASAP before we lose all value.

Withdrawing money from your 401k now would be a really stupid thing to do. Sell low, buy high is the road to poverty.

Aren’t ICE and NYMEX coming up with their own plans for similar exchanges? Except to complicate matters each will have different rules and possibly different oversight agencies.

Since there has never been an exchange like this before and that it is created under the conditions of the meltdown make me wonder how it can possibly be “stress” tested.

I also have no idea how naked CDSs factor into this. Or why we should be trading these timebombs instead of doing away with them?

Finally, if the exchange accepts counterparty risk under these conditions, I think the CME has failed in its fiduciary responsibilities to its investors. Because as you point out this did not work out so well for AIG.

Well said.

“too big to fail” = “license to steal billions”

I know ICE is, but I haven’t seen anything from NYMEX. Say it splits evenly, three ways, then we have three entities that are too big to fail.

I don’t think it’s a good idea to pull retirement funds out of 401k plans, because a) you will still need the money in the future; b) generally, funds in 401k plans are exempt from claims of creditors, so if things get really bad and you have to file bankruptcy, no one can get your money; and c) if you don’t like the stock market, you could go to bonds, treasuries, money funds, or bank CDs in your Plan, so you can be as conservative and risk-averse as you want to be.

Isn’t it amazing what great financial minds can come up with? This particular move is pure and classic Larry Summers. Now I know why I learned to dislike Larry Summers.
The Financial Times has a positive article about Larry Summers this morning. The bottom line is he is credited with the government intervening in the Peso crisis of 94 to avoid a financial calamity.
I discovered Larry Summers theory on defeating Gibson’s paradox. (In an nutshell the theory is if government could suppress the price of gold then it could lower interest rates and print as many $’s as so desired). I can appreciate the fact that Larry Summers core belief is he is smarter than the markets and can fool it with government intervention Much like the CDS move. I think Larry Summers strong dollar II will turn out to be a disaster, possibly here and now. During strong dollar 1 in the 90’s, Americans and the rest of the world had confidence in the U.S. financial system; the belief that Free Market Capitalism is the best economic system discovered by man was at the core of this belief. Liars can get away with lies when they have credibility. Once this credibility has been lost no one will ever believe the lie again. Credibility in Wall Street and Washington is no longer at the level of the 90’s; too many people know and do not trust government intervention. Larry Summers, Timothy Geithner, Ben Bernanke and the rest of Wall Street are now selling President elect Obama a theory that we can monetize the greatest creation in debt in American history without causing inflation. Without trust this policy is doomed. As investors look at the facts and realize that a 0-2% rate of return on Treasuries is absurd, money will seek better returns. As people lose confidence in the $ they will seek safety. They will quietly begin protecting themselves as they realize this is just one more lie from another administration who believes in deceiving the markets to protect Wall Street. The 15 year social experiment in fooling the markets will blow. As this happens I expect Larry Summers scam based on Gibson’s Paradox will blow; a currency crisis is the logical result of this failure. The charts are saying the $U.S. and U.S. Treasury market are beginning to fail. The strong $ policy has stocks, bonds and the $ rising with Gold and commodities falling. It looks like this is changing. The bottom line is the suppression in Gold, the elevation in Treasury Bonds and the elevation in the $U.S. will all reverse if I am right. It is now a game of musical chairs. Who will be left standing? The question is when? The charts will hold the answer.

Excellent post, thank you.

Thanks masaccio.

I may have mentioned running into an Obama advisor economist and professor at the Tokyo airport last month. I asked him about the role of CDSes in the financial crisis, and was surprised to hear him say the whole problem with them is that people don’t know who has them and how much exposure they have, not the underlying fact that people have sometimes incredibly large CDS exposure. Being afraid because you don’t know is the problem. I asked if we couldn’t just outlaw CDSes, and he said well, we could only do that for the US, so they’d just go elsewhere, and besides there are some good reasons for having CDSes in some cases and so it would be an overreaction to do away with them completely. His solution idea was to establish an exchange for them, like any other security, so that everyone would know exactly what CDSes any given company actually had, so that lending decisions could be made on the basis of actual risks rather than the current situation where the fear of the possibility of excessive risk has frozen most all credit/lending.

So my two questions are: (1) Would CME Clearing be the only legal way to do CDS transactions in the US, or could a company still do one outside of the exchange? and (2) Would the CDSes created at CME Clearing be publicly reported? Because it seems like as long as you can go around the exchange, and/or if the exchange doesn’t make the details of the specific CDSes known to the public, then the policy goal of visibility that my economist lunch counter friend was after is not achieved.

“Fortunately, CME Clearing has marvelous risk management techniques, which include “stress testing”, and “concentration margining”.”

Well it should be obvious that they’ve assessed the risk and found it gargantuan, evidenced by the fact that they have backed up their clearinghouse with so little hard cash.

It’s as if they’re playing hot-potatoe and for the moment the CME has agreed to do the holding.

They are trying to convince the public that they are fixing something that they themselves think cannot be fixed. They’ve taken a shot at pouring our collective well-being down the rat-hole in an effort to stop the collapse of their schemes and the only result has been the confirmation that the cost of de-leveraging, in practical terms is infinite.

What they are actually doing now is stalling, while they wait to see where the real estate market lands so they once again can put a price on something.

They need a price to get the game going again.

Since they can’t decide how much my house is worth, they can’t decide if they’ve won yet.

As soon as they’re sure what the price of real estate is, they can hit the tabulate button and send out the letters demanding payment on all those Home Equity Loans.

You see they’ll never be able to find out who holds the primary paper, so there’s no one to ask about a compromise.

They’ll hem-and-haw until our collective real estate holdings are worth what they were in about 1990, and by then there won’t be a drop of TARP money or any other bail-out-bucks left and they’ll have no choice but foreclosing in order to keep those bonus checks coming.

It’s at that moment we’ll be expected to assume all blame and admit it was our addiction to Wal-Mart that caused the whole mess in the first place.

By that time we’ll all be so tired of arguing that we’ll just sign the truth-and-reconciliation papers admitting our guilt and becoming eligible for discounted oatmeal and free cardboard with which to build housing far superior to FEMA trailers.

As far as I know, use of CME Clearing is entirely voluntary.

As far as I can see, the ownership and trading in CDSs will not be public information.

The possibility that people will go abroad to create and trade CDSs if they are outlawed here is not a reason to outlaw them. If they are not legal here, how will the foreigners enforce them against US assets? Besides, making them illegal will mean that entities that use them will have a huge taint on their financial statements, maybe even a going concern note.

I wonder if the economist pointed to any of the good things CDSs bring, and has done a cost-benefit analysis that says that they are worth the risks they entail. I’d like to see it. I offer my thoughts in this diary, and this one.

It seems on the face of it that at some point in the last few months the big guys got together and decided they had to be seen doing something, so they decided to allow somebody to put together this clearinghouse thing because “It’s the least we can do.”

So they did, the least they could do.

Am I missing something?

I think that’s right.

The applicable regs require a statement in the self-certification about compliance with sharing of information:

Core Principle M: INFORMATION SHARING—The applicant shall (i) enter into and abide by the terms of all appropriate and applicable domestic and international information-sharing agreements; and (ii) use relevant information obtained from the agreements in carrying out the clearing organization’s risk management program.

The self-certification of CME Clearing doesn’t contain this such a statement.

Other provisions of the regs require disclosure of material to the public, and there is nothing in the self-certification that relates to any of those requirements, either. Oh well, that’s regulation in the modern world.

Ah masaccio, I see you’re still pushing wild conspiracy theories about the CDS market that have no basis in reality.

There are too many fundamental mistakes in this post to even begin to address, so I’ll point out just the most egregious mistakes.

First, the numbers upon which you base your entire argument — $14.79tn of “potential exposure” supported by $129 billion — aren’t even the right numbers for the argument you’re trying to make.

The $14.79tn gross notional CDS number is extremely misleading, because it doesn’t take into account netting (i.e., pairing up offsetting CDS that cancel each other out). Gross notional CDS outstanding is in no way a measure of risk exposure in the CDS market, so it’s simply false to say that there’s $14.79tn in “potential exposure.” I find it hard to believe that you don’t understand this already, given how many posts you’ve written on CDS.

The amount of money in CME’s “financial safeguards package,” which it estimates in its proposal to be $129 billion, doesn’t include the additional collateral that members will have to put up as security deposits in order to clear CDS. The numbers in CME’s proposal represent the collateral covering all the other derivatives CME clears, since CME is just adding CDS to the list of derivatives it clears.

So your comparison of $14.79tn in gross notional CDS to $129bn in collateral is actually wrong on both sides.

“[I]f there is a disaster, CME Clearing will dip into the collateral for all open positions, whatever that means.”

I don’t think you understand how central counterparties (CCPs) actually work. If Lehman had been a member of a CCP when it filed for bankruptcy, for example, the CCP would have guaranteed Lehman’s outstanding CDS, thus protecting Lehman’s counterparties from losses on the CDS contracts. But because CDS are marked-to-market and margined on a daily basis, and because they require counterparties to post progressively more collateral as their credit quality declines, then by the time Lehman filed for bankruptcy, it would have already posted collateral worth about 80 to 90 percent of each CDS. Lehman’s counterparties get to keep that collateral, so all the CCP is liable for is the difference between the value of the collateral Lehman posted and the total value of the CDS trade, which is usually only around 10% of the value of the CDS trade. So CME Clearing’s “financial safeguards package” only needs to cover about 10 to 20 percent of the face value of a member’s CDS, not the entire face value.

In other words, the CCP is liable only when a counterparty’s losses exceed the “collateral supporting open positions,” and in that case is still only liable for the amount by which the counterparty’s losses on the CDS trade exceed the collateral supporting open positions. Moreover, CCPs can force members to put more money into the default fund as the overall level of counterparty risk rises.

Finally, you assume, incorrectly, that CME will be clearing the entire single-name and index-linked CDS market. There are 4 central counterparties (CCPs) vying for the CDS market (CME, ICE Trust, NYSE Euronext, and Eurex), and ICE Trust will almost certainly be the dominant CCP once it gets regulatory approval. CME will be lucky if it gets to clear 20% of the single-name CDS market, and very lucky if it gets to clear any of the heavily-traded index CDS market (since the dealer banks already have licenses for the Markit indexes, and they’re backing ICE Trust).

Please, masaccio, for everyone’s sakes, do your homework before sounding the alarm about a market you don’t understand again. Focusing regulatory efforts on the CDS market uses up valuable political capital that could be used to regulate the real problem areas — CDOs, rating agencies, SIVs, offshore accounting tricks, etc.

“The $14.79tn gross notional CDS number is extremely misleading, because it doesn’t take into account netting (i.e., pairing up offsetting CDS that cancel each other out). Gross notional CDS outstanding is in no way a measure of risk exposure in the CDS market, so it’s simply false to say that there’s $14.79tn in “potential exposure.” I find it hard to believe that you don’t understand this already, given how many posts you’ve written on CDS.”

CME Chairman Terrence Duffy stated the gross number was $44tn just a couple of weeks ago, and further stated that that number could be netted down by a factor of 5x, that still yields a vary large number.

I can’t believe anyone is touting their risk management expertise at this point in the story, it’s clear that much of our current situation is due to excess faith in our abilty to understand the nature of the risk, let alone manage it effectively.

The whole industry is clearly spooked by the dawning realization that they cannot wait forever to address uncertainty/risk that the CDS/CDO brew poses to the market, and so someone has to do something.

CME, among others have stepped forward, but although there is a slight premium on being early to the game because the higher quality contracts (those posing lower risks) are bound to find the front of the line, I don’t think what we’re seeing is a rush to opportunity as much as an overdue start to a messy dangerous job.

Which brings us to;

” Focusing regulatory efforts on the CDS market uses up valuable political capital that could be used to regulate the real problem areas — CDOs, rating agencies, SIVs, offshore accounting tricks, etc.”

The real problem areas are more real, in part because the nature of the problems are better understood, meanwhile nobody wants to focus any sort of attention on the CDS issue for fear of what they’ll find.

I still believe that the Financial sector is waiting for the real estate market to resolve the price issue for them, which at ground level has the dual positive effects of convincing John Q. Public that it’s his fault, and diverting the focus from those real problems you mention.